Financial Crisis Inquiry Commission Hearings

by Dollars and Sense

The hearings for the Financial Crisis Inquiry Commission are going on right now. Zachery Kouwe of the New York Times' blog Dealbook is "live-blogging" the hearing right now (how's that for an example of compound-transitive-verbing?!).

Meanwhile, today's NYT op-ed section has a nice survey of questions some experts would like to ask the bankers in the hearings. My favorites are from Simon Johnson of MIT and Yves Smith of Naked Capitalism:

1. Describe in detail the three worst investments your bank made in 2007 and 2008—that is, those transactions on which you lost the most money. How much did the bank lose in each case?

2. What was the total compensation of each manager or executive supervising those three transactions—including yourself—in 2007 and 2008?

3. Are those executives still with your bank? What investments do they supervise today? How much will they be paid for 2009, including their bonuses?

—SIMON JOHNSON, a professor at the M.I.T. Sloan School of Management and a senior fellow at the Peterson Institute for International Economics

Some of your firms received payouts on credit-default swap contracts with American International Group. Most of those guarantees resulted from hedging supposedly safe investments (they had AAA ratings, after all) with A.I.G. or other insurers. This hedging allowed traders to book "profits" that had not yet been earned—profits that would be counted in calculating their bonuses.

However, this insurance was likely to fail, as your risk managers surely knew. It involved so-called wrong-way risk: the guarantor (A.I.G.) was certain to be damaged by the same event (the housing market collapse) that would lead you to seek payment on the insurance. The insurance was effective only because the government stepped in, theoretically on the taxpayers' behalf, and made payments for A.I.G., an otherwise bankrupt firm. Since employees' bonuses, and ultimately yours, were based on these fraudulent profits, my questions are these:

1. How much profit did your firm record for bonus purposes on these trades that ultimately delivered huge losses? How much of those bogus profits were paid out in bonuses?

2. Have you made any effort to recover the bonuses? If not, why not?

—YVES SMITH, the head of Aurora Advisors, a management consulting firm, and the author of the blog Naked Capitalism and the forthcoming book "Econned: How Unenlightened Self-Interest Undermined Democracy and Corrupted Capitalism"

Read the full list of questions.

Speaking of Yves Smith, she had some interesting things to say today about something that is looming behind today's hearings: the Obama administration's recent talk of levying some kind of tax/fine on the big banks--separate from the tax on transactions that many have been calling for, and from the idea of a special tax on bankers' bonuses. (A NYT editorial today (? or yesterday--I can't tell) came out in favor of the new tax/fine, but called for a tax on bonuses on top of that.) But according to Yves, the O. admin. will come out with a more concrete proposal today:

Obama to Announce $120 Billion TARP Fee

Ah, the machinations that Faustian bargains produce!

The Obama Administration is now caught in its own machinations and is having to backpedal fast and hard from its bankster friendly posture, or at least have the public believe it is executing that maneuver.

While I cannot fathom the logic, Team Obama clearly decided to throw in its hat with the industry from the beginning, supporting a whole raft of tricks to keep banks from recognizing losses (heavens, might expose that some were bankrupt and require that incumbents be given the heave ho!). It also assisted in the “talk up the bank stocks” effort, since goosing prices would allow some banks to sell shares and save the new Administration the unpleasant task of figuring out how to resolve and recapitalize the sickest bank. It never seemed to occur to them that the best time for a President to take unpopular but productive action is at the start of his tenure. Nor did they anticipate that the public was not as dumb and inattentive as they assumed, and has taken notice of how the Administration has hitched its wagon to that of the plutocrats.

Now some readers might argue that, gee, things look better than the did in March, surely this Team Obama program was not such a bad idea. Well, actually, it was and is. The record of serious financial crises shows that regulatory forbearance (which is letting banks soldier on with the hope they will earn their way out of their messes over time) is more costly than forcing them to recognize losses and recapitlize them. Not only are the ultimate bailout costs higher with the "let 'em off easy" approach, but economic recovery is weaker too.

Team Obama is now having the contradictions in its stance exposed. If the banks were really healthier due to their own efforts, the salvos against them would be unwarranted. Here they had gone over the brink, pulled themselves up by their bootstraps. All these complaints about their earnings and bonuses are mere class jealousy. But no one save the banksters themselves believe that tripe. The banks got massive subsidies during and after the crisis; they continue now with the Fed's super low rates and continued intervention in the mortgage markets (theoretically ending in March, but most informed observers expect the central bank to blink).

But Team Obama does not want to play up the extent to which the industry has benefitted from public munificence; that only stokes the deserved and correct public anger, which includes the Administration for cutting such a crappy deal with the industry. So it has the PR conundrum of having it be beneficial for political reasons for them to beat up on the financiers, but now being so deeply aligned with them as to make that impossible, save perhaps on a few narrow issues that it hopes will have sufficient peasant-appeasement value. Any full-bore attack would represent an embarrassing change from the Administration's past fawning posture, and would also require the sacrifice of a senior head or two, presumably starting with Timothy Geithner, to look credible. But Obama seems constitutionally incapable of firing anyone, no matter how much it would serve him to do so.

The sketchy announcement du jour, that Obama will announce a $120 billion TARP fee this week (hhm, conveniently timed to distract attention from the start of the hearings into the crisis and Wall Street bonus announcements) illustrates the bizarre position the Administration is in. Alert readers may recall that Obama was touting the performance of the TARP at his Lehman anniversary speech in September. It repeated that palaver in December.

Read the rest of the post.

We will be on the lookout for the best analyses of and commentaries on the testimony in today's hearings. If you find something particularly cogent, let us know.

Labels: Financial Crisis Inquiry Commission, investment banks, Obama administration, Simon Johnson, TARP program, Yves Smith

 

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1/13/2010 11:08:00 AM 0 comments links to this post

 

Change Wall Street can believe in (Holly Sklar)

by Dollars and Sense

Hat-tip to Mike P.

By Holly Sklar
Distributed by McClatchy Tribune News Service, 11/6/09
Copyright 2009 Holly Sklar

Wall Street is doing to America what private equity firms did to Simmons Bedding and many other productive companies. Taking control with borrowed money, stripping assets, slashing jobs and cashing out.

Taxpayer bailouts saved Wall Street from choking on its own greed. Now, as the Wall Street Journal reports, "Major U.S. banks and securities firms are on pace to pay their employees about $140 billion this year -- a record high."

$140 billion is more than the combined budgets of the U.S. Departments of Commerce, Education, Energy, Housing and Urban Development, the National Science Foundation and the Environmental Protection Agency.

Typical workers, meanwhile, make less today adjusting for inflation than they did in the 1970s. Wall Street rewarded CEOs who cut employee wages and benefits and offshored manufacturing, services, and research and development; feasted on Bush's tax cuts; turned mortgages into loan sharking; and vacuumed up home equity, college funds, retirement funds and other private and public investments into their rigged casino.

Goldman Sachs, for example, "peddled billions of dollars in shaky securities tied to subprime mortgages on unsuspecting pension funds, insurance companies and other investors when it concluded that the housing bubble would burst," McClatchy reports in a new investigative series.

The Great Depression gave way to the New Deal. The Great Recession has become the Great Ripoff.

The TARP inspector general's latest report to Congress says, "The firms that were 'too big to fail' ... are in many cases bigger still, many as a result of Government-supported and -sponsored mergers and acquisitions; the inherently conflicted rating agencies that failed to warn of the risks leading up to the financial crisis are still just as conflicted; and the recent rebound in big bank stock prices risks removing the urgency of dealing with the system's fundamental problems."

Enabled by the Bush and Obama administrations, the megabanks are lending less and gambling more -- using taxpayer money to pay bonuses, float a new stock market bubble and make even riskier bets.

The U.S. Treasury and Federal Reserve have become Wall Street's ATMs, while unemployment, foreclosures and homelessness rise, states slash public services, and small businesses are starved of credit.

Outside the TARP, trillions of dollars are flowing to the banksters in the form of near-zero interest loans, bond guarantees and extreme leverage for toxic assets. You can follow the money at www.nomiprins.com. Nomi Prins, a former managing director at Goldman Sachs, is author of "It Takes a Pillage."

The megabanks are not too big to fail. They're too big and irresponsible to exist.

Just months after taking office in 1933, President Roosevelt signed into law the Glass-Steagall Act, which separated the commercial banking of savings, checking and loans from investment banks doing underwriting and speculative trading. The former got depositor insurance, not the latter.

Glass-Steagall lasted until Citigroup and other power players killed it in 1999 through the Financial Services Modernization Act, taking us back to the pre-New Deal casino economy on steroids. Now former Citigroup CEO John Reed has joined the growing call to split commercial banking and investment.

In 2000, Congress passed the Commodity Futures Modernization Act, ignoring the warnings of Commodity Futures Trading Commission head Brooksley Born who said that unregulated trading in derivatives could "threaten our regulated markets or, indeed, our economy."

By 2002, the four largest bank holding companies -- Bank of America, JP Morgan Chase, Wells Fargo and Citigroup -- had 27 percent of FDIC-insured bank assets. Now, reports the Economic Policy Institute, they have nearly half. They overlap with the biggest derivatives dealers -- JP Morgan, Goldman Sachs, Bank of America, Morgan Stanley and Citigroup.

The government heavily subsidizes the megabanks, but it's the small banks that provide higher savings interest, lower fees, lower loan and credit card rates, and do much of the lending to small business, who in turn create most new jobs.

Behind their Main Street rhetoric, Congress and the Obama administration have so far been the change Wall Street can believe in. The administration and Federal Reserve are loaded with revolving door Wall Streeters and their proteges. Campaign donors and lobbyists are working Congress to minimize and distort reform.

Make your voices heard. We need to enact tough regulations and bust the banks who busted our economy -- before they do it again.

Holly Sklar is the author of "Raising the Minimum Wage in Hard Times" (www.letjusticeroll.org) and "Raise the Floor: Wages and Policies That Work for All of Us."

Labels: bailout, financial crisis, Holly Sklar, Nomi Prins, TARP program, Wall Street

 

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11/10/2009 11:37:00 AM 0 comments links to this post

 

Civil Rights Movement for the Middle Class

by Dollars and Sense

A guest post on Naked Capitalism. Hat-tip to Ben C.

A New Civil Rights Movement is Afoot for the Middle Class

By John Bougearel, Director of Futures and Equity Research at Structural Logic.
Tuesday, October 21 2009

The core of America is the middle class. And Harvard Law Professor and chair of the Congressional Oversight Panel COP (the COP is to oversee TARP, the Troubled Assets Relief Program) Elizabeth Warren tells us that the core of America is being carved up, hollowed out. In her words, "I Believe Middle Class is Under Terrific Assault...Middle class became the turkey at the Thanksgiving dinner" of the financial elite. Elizabeth Warren is more than just right.

Call it for what it is. It has more names than Satan. Call it plundering. Call it pillaging. Call it extortion, Call it fraud. Call it racketeering. Call it the financial raping of the middle class. Call it criminal. Consider the following. Middle class never consented to this financial rape. They vehemently protested it when the gov't first proposed a $700 bailout of the financial system called TARP in Septermber 2008. Yet what did Congress and our government do? They went ahead and did it anyway. This boils down to one thing, taxation without representation. Our votes do not matter anymore.

This is happening because the US government is allowing it to happen. It is one thing for the government to raise the social safety nets for the poor, elderly and such. It is entirely another to raise the social safety nets for the financial elitists at taxpayer expense. But that is exactly what the government has done in the past year. They have rescued a financial system at the expense of everyone else. Mythical constructs and messages that financial companies are Too Big to Fail, systemic risk is too great, No More Lehman Brothers have been created by the powers that be. And it is in the name of No More Lehman Brothers and Too Big to Fail that Middle Class America is being carved up and hollowed out.

Appearing in Michael Moore's "Capitalism: A Love Story, Michael Moore asks Elizabeth Warren (regarding the $700 billion dollar taxpayer funded bailout of the financial elite) "Where's are money? And Warren takes a deep breath, looks briefly over her left shoulder (as if she might find it there), and exhales "I don't know."

Washington Post's Lois Romano asked Elizabeth Warren, "Why don't you know?"

WARREN: We don't know where the $700 billion dollars is because the system was initially designed to make sure that we didn't know. When Secretary Paulson first put this money out into the banks, he didn't ask for ‘what are you going to do with it.' He didn't put any restrictions on it. He didn't put any tabs on where it was going to go. In other words, he didn't ask...

US Secretary of the Treasury Hank Paulson did not ask the banks what they were going to do with our taxpayer money. The US treasury, given Congressional blessing, simply gave the banksters hundreds of billions of taxpayer dollars with no questions asked. This is wholesale taxation without representation.

So Romano asks Warren, "Are we, as an [economy] are we better off systemically now? Have we put things in place to prevent this from happening?" Warren replies "This really has me worried." And it should have Warren worried because our Humpty Dumpty financial system had a great fall, and Humpty was put together again by all the King's horses (read the US Treasury and Congress) and all the King's men (read Uncle Sam's taxpayers), Yet, Humpty Dumpty is still the same old fragile egg he was when he sat on a wall right before he had his great fall.

WARREN: A year ago the big concern was systemic risk and how to deal with 'too big to fail' firms...the big are bigger, we wiped out a lot of small folks and there's more concentration" in the banking system.

And it is not just the Humpty Dumpty financial system that is so fragile.

WARREN: The way I see it is that the financial system itself is quite fragile, and that the underlying economy, the real economy, jobs, housing, household wealth, is still in a very perilous state.

So Lois Romano asks Warren, "Are we going to look back in two or three years at this TARP expenditure and say well, it worked."

WARREN: "What is so astonishing about the first expenditures under TARP was that taxpayer dollars were put into financial institutions that were still, um, left all of their shareholders intact, that were still paying dividends, that paid their creditors 100 cents on the dollar. We put taxpayer money in without saying ‘you've got to use up everyone else's money first.' And once that's the case, I don't know how you ever put the genie back in the bottle. I don't know how you ever persuade either a large corporation or the wider marketplace that if you can just get big enough and tie yourself to enough other important people, institutions, that if something goes wrong, the taxpayer will be behind you.

That's a game-changer. That is a whole different approach than any we've ever used before.

ROMANO: What more can we be doing to protect the middle class, to protect what Michael Moore refers to as the American Dream?

WARREN: "You know, the answer is we're in trouble on so many fronts. In the 1950s and the 1960s, coming out of World War II, we said as a government and as a people, 'what can we do to support the middle class?' That's what, FHA was to help people get into homes, right? VA, uh, G.I. loans on education. We looked at policies by whether they strengthened and support the middle class. Somewhere that began to change in the late 1970s and early 1980s, and the middle class instead became like a resource to be pulled from. They became the turkey at the Thanksgiving dinner. Who could carve off a piece, who could get this little piece, who could make a profit from this piece and that piece or squeeze down on the wages? And, the middle class has gotten shakier and shakier, hollowed out.

The consequences of that are far more than economic. The middle class is what makes us who we are. It affects the poor. A strong and vital middle class is a middle class that can offer a helping hand to the poor. A strong and vital middle class is a middle class that has room, is creating new jobs to, basically to suck the poor up out of poverty and into middle class positions. The middle class is what gives us political stability. It's what gives us an America that's all bought in to the whole process. That what we do is not just about a handful of folks at the top who profit from it. We all profit from it. And that's why we work, and that's why we vote, and that's why we accept the outcome of elections, and, that's why we're safe to walk our streets, because we have a middle class for which this ultimately works, this country.

And every time we hollow that out. Every time we take away a little piece of that. We run the risk that some of what we understood as America, some of what we know as America, begins to die.

That's what scares me.

Aaron Task interviewed Elizabeth Warren at The Economist's Oct 15-16 "Buttonwood Gathering" In that interview, Warren says,

The big banks always get what they want. They have all the money, all the lobbyists. And boy is that true on this one. There's just not a lobby on the other side.

This is a moment when all around the country people are saying we've had it about up to here with these large financial institutions that want to write the rule then take our money. I find it astonishing that they have the nerve to show up and say, 'I'm a big financial institution. I took your money. And now I'm going to lobby against anything that might offer some protection to ordinary families in this marketplace.

This might be the time that the rules change.

The Buttonwood Gathering event took place over the weekend following Q3 earnings announcements from the big banks. Because of the taxpayer bailout of these big banks, some of them, namely JPM and GS are now enjoying record profits and will enjoy record bonuses this season. The irony is overwhelming that this is happening in 2009. Because of the failure of the financial system, more than 7 million middle class jobs have been lost, and the US economy is confronting double digit unemployment for the first time since 1982. Without taxpayer dollars, these record profits and record bonuses in 2009 would not even be possible for the big banks. Hell, without taxpayer dollars zombifying them with congressional and White House sanctioning, they'd have gone the way of the dinosaurs, the way of the buggy whips. That is the way history should have gone. But no, that is counterfactual now. There is something very wrong in America, the very way it is being run by government, and run over by the big banks. It is high time for middle class America to push back, precisely because our elected officials have not only failed to do so, but have legislated all of this to make it happen. Our government has become an active agent in the gutting of the middle class.
Commenting on Wall Street' record 2009 bonuses Elizabeth Warren says she is

Wordless, Speechless. I do not understand how financial institutions could think they could take taxpayer money and turn around and act like it's business as usual...I don't understand how they can't see that the world has changed in a fundamental way—it's not business as usual.

Read the rest of the post.

Labels: Elizabeth Warren, financial regulation, John Bougearel, middle class, Naked Capitalism, TARP program

 

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10/21/2009 03:33:00 PM 0 comments links to this post

 

On the Profitability of the TARP

by Dollars and Sense

Two views.

First, Daniel Gross.

Then, Yves Smith.

I'm with Smith. Even if *some* pecuniary benefit eventually accrues to the government's balace sheet, huge losses still loom, and the system remains dependent on us bailing out those responsible for the crisis, in effect enabling them to screw us again.

Labels: Daniel Gross, financial crisis bailout, TARP program, Yves Smith

 

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8/31/2009 10:52:00 AM 0 comments links to this post

 

They Haven't Gone Away Yet...

by Dollars and Sense

And there's a commercial lending bust just round the corner that might deplete the capital the banks have raised despite them (and despite the fact that certain of the stress test criteria have already been broached). I'm talking about banks' toxic assets, of course. From today's New York Times:

Troubled Assets May Still Pose Risk
New York Times
By EDMUND L. ANDREWS
Published: August 11, 2009

WASHINGTON The Treasury Department's $700 billion bailout program has stabilized the banking system, but it has done little to prod banks to fully deal with the troubled loans on their books, a Congressional oversight panel said in a report to be released Tuesday.

The Troubled Asset Relief Program was originally conceived as a program for the government to buy troubled and unsalable mortgages and mortgage-backed securities.

But the Treasury has never actually used the program to buy assets, in part because it was faster to invest money directly into the nation's banks and in part because banks have not wanted to sell their problem loans and book the loss in their value.

"The nation's banks continue to hold on their books billions of dollars in assets about whose proper valuation there is a dispute and that are very difficult to sell," the panel said in its latest monthly report.

As a result, it warned, many banks could find themselves short of capital if the economy suffered another downturn and their losses on troubled loans soared.

In an encouraging note, the panel said 18 of the 19 biggest bank holding companies would probably have enough capital even if economic and financial conditions deteriorated more than they have already. That conclusion essentially backed up the results of the Federal Reserve’s stress tests in April.

But it warned that thousands of small and medium-size banks, which it defined as those with assets of $600 million to $100 billion, might find themselves short a total of $21 billion if the conditions matched its worst-case assumptions.

Read the rest of the article

Labels: bailout, financial crisis, TARP program, toxic assets, Treasury Department

 

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8/11/2009 07:46:00 PM 0 comments links to this post

 

New Bank Scam: Buy Discount TARP Warrants

by Dollars and Sense

The federal panel investigating the TARP bank bailout has announced that nearly a dozen banks have been buying back government-issued warrants at a steep discount from their face value. Banks that received emergency government funding were required to give the government warrants to purchase the company's stock at a certain price in the future. The banks are now buying back these warrants at only two-thirds of their face value. So far, the transactions have resulted in a loss of $10 million in revenue to taxpayers.

Some on the panel are considering a proposal to mandate the sale of the warrants on the open market to maximize the benefit to taxpayers.

Link to story in the Wall Street Journal.

Labels: baillout, banking industry, banking system, TARP program

 

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7/10/2009 12:39:00 PM 3 comments links to this post

 

'Sham' Bailouts Help Speculators

by Dollars and Sense

Naked Capitalism has a couple of nice posts about comments made by Michael Patterson, head of a private equity firm, to the Telegraph that reflect very poorly on TARP. Here is the story from the Telegraph (which has since been yanked from their site, apparently because Patterson objected to it; it is preserved at zerohedge.blogspot.com):

US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson

The US Treasury's effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.

"The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside," said Mark Patterson, chairman of MatlinPatterson Advisers.

The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP's matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.

Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.

Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.

"It's a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they're doing this for the greater good of society," he said, speaking at the Qatar Global Investment Forum.

Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. "At least the British are not hiding the bail-out," he said.

MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.

"This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We're going to see a catastrophic increase in the number of LBO's (leveraged buyouts) going into default because they're knee-deep in debt and no solution exists since they can't refinance," he said.

"Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well," he said.

Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.

"The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed's balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road," he said.

Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. "We shorted the equity rally because we thought it was lunatic. We've kept adding positions seven times, and we're still holding," he said. Ouch!

Here's what Yves Smith at Naked Capitalism had to say about the piece:

The TARP elicited a firestorm of criticism at its inception, and at various points of its short existence, particularly the repeated injections into "too big to fail" Citigroup and Bank of America, plus the charade of Paulson forcing TARP funds onto banks who were eager to take them once the terms were revealed. Now, however, conventional wisdom on the program might be summarized as, "it's flawed, but still better than doing nothing."

That of course is a false polarity. Having the TARP, particularly given the amount of funds committed, precluded quite a few other courses of action. And the TARP was part of a strategy to avoid resolving sick banks, when the history of banking crises shows that speedy action to clean up dud banks and restructure or write off bad debt (both of the bank and to the bank) is the fastest course to economic recovery.

So far, the beneficiaries of the handouts equity injections have complained only about the Obama Adminstation's occasional efforts to act like a substantial shareholder and exercise some influence over the companies' affaris. We are the first to acknowledge that these too often have involved matters of appearance (executive pay) as opposed to substance (risk taking on the taxpayer dime for the benefit of shareholders and employees).

But now we have a salvo from an unexpected source: an investor who used TARP funds to buy a bank, and thinks taxpayers are getting ripped off. Mark Patterson, of MartnPatterson Advisers, used TARP matching funds to buy a Michigan bank. This by no means was a large transaction, but the point is that someone that one would expect to praise the process (after all, he benefitted from its largesse) is a pointed critic.

And this more recent post (from a larger project she has of showing how the business press airbrushes negative economic news):

We posted last night on a Telegraph story, in which one Michael Patterson, head of a private equity firm that used TARP funds to buy a Michigan bank, said some less than positive things about it at an conference.

If you go to the link to the story now, guess what? The Telegraph has yanked it.

Tyler Durden had the presence of mind to put up the entire piece on his blog. Patterson has been issuing requests for retraction, claiming "factual errors" and the Telly complied. Patterson has had his "representatives" which I assume means attorneys, send a copy of the letter that Patterson sent to the Telegraph effectively disclaiming the entire content of the artice. . Durden has said he is willing to correct any factual errors (as opposed to deep sixing the entire story).

Patterson spoke at the Qatar Investment Forum. He has no reason to expect confidentiality; the remarks were made in a public forum with no restrictions placed on the attendees. Durden is soliciting input from fellow panelists and attendees as to what Patterson really said.

—cs

Labels: Naked Capitalism, private equity, TARP program, Telegraph, Timothy Geithner, Yves Smith

 

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5/15/2009 02:50:00 PM 0 comments links to this post

 

Thievery Under TARP

by Dollars and Sense

From Truthdig:

By Robert Scheer

We are being robbed big-time, but you can't say we haven't been warned. Not after the release Tuesday of a scathing report by the Treasury Department's special inspector general, who charged that the aptly named Troubled Asset Relief Program is rife with mismanagement and potential for fraud. The IG's office already has opened 20 criminal fraud investigations into the $700 billion program, which is now well on its way to a $3 trillion obligation, and the IG predicts many more are coming.

Special Inspector General Neil M. Barofsky charged that the TARP program from its inception was designed to trust the Wall Street recipients of the bailout funds to act responsibly on their own, without accountability to the government that gave them the money.

He pointed to the example of AIG, which has acted as a conduit of funds to the banks it had insured without being required to tell the government what it is doing: "Failure to impose this requirement with respect to the injection of yet another $30 billion into AIG would not only be a failure of oversight, but could call into question the credibility of the government's efforts."

AIG is just one example in a bailout that has left the financial conglomerates unsupervised as they spend taxpayer money in what the report termed a government program of "unprecedented scope, scale and complexity," putting the public and the Treasury Department in the dark as to how the money is being used by the very tycoons who got us into this mess. "The American people have a right to know how their tax dollars are being used," Barofsky wrote in the report, which sharply criticized the government for failing to hold financial institutions accountable.

For all of its criticism of the original program, designed by the Bush administration, the report was equally severe in denouncing the Obama administration's plan to partner with hedge funds and other private capital groups to buy up the "toxic" holdings of the banks. Charging that the plan carries "significant fraud risks," the inspector general's report pointed out that almost all of the risk in this new trillion-dollar plan is being borne by the taxpayers. The so-called private investors would be able to put up money they borrowed from the Fed through "nonrecourse" loans, meaning if the toxic assets purchased prove too toxic and the scheme failed, the private investors could just walk away without repaying the Fed for those loans.

The reason those loans may prove even more toxic than expected and the price paid by this government-underwritten partnership far too high is that the government is purchasing the most suspect of the banks' mortgage packages. In addition, the plan is to accept at face value the evaluation of those packages by the very same credit-rating firms whose absurdly wrong estimates of the dollar worth of these securities helped create the problem that now haunts the world's economy. "Arguably, the wholesale failure of the credit rating agencies to rate adequately such securities is at the heart of the securitization market collapse, if not the primary cause of the current credit crisis," the report found.

As with the entire banking bailout, the new plan of Obama's treasury secretary, Timothy Geithner, is likely to enrich the very folks who impoverished the rest of us, as the report notes: "The significant government-financed leverage presents a great incentive for collusion between the buyer and seller of the asset, or the buyer and other buyers, whereby, once again, the taxpayer takes a significant loss while others profit."

At the heart of this potentially massive fraud was the original decision of Henry Paulson, President Bush's treasury secretary and a former Goldman Sachs chairman, to not require the recipients of the bailout, such as his old firm, to account for how the money was spent. Unfortunately, President Obama's administration continued that practice.

The only difference is that the amount of public money being put at risk is now far greater, and the hedge funds, which are totally unregulated, have been brought in as the central players. One of the largest of those hedge funds, D.E. Shaw, carried Obama's top economic adviser, Lawrence Summers, on its payroll to the tune of $5.2 million last year. He may have reason to trust these secretive enterprises that operate beyond the law, but the public does not.

Labels: Corporate Fraud, Robert Scheer, TARP program, Truthdig

 

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4/23/2009 05:02:00 PM 0 comments links to this post

 

Big Corps Using Bailout Bucks For Lobbying

by Dollars and Sense

It's the best game in town. Get taxpayer bailout billions and spend some of the spare cash on lobbyists to press Congressional Reps and Senators into giving more money and ending onerous conditions like limiting executive compensation.

There oughta be a law...

--df

From the Washington Post:

Major recipients of federal bailout money spent more than $10 million to lobby lawmakers in the first three months of 2009, including arguing against pay limits for corporate executives, according to newly filed disclosure records.

The biggest spenders among major financial firms and automakers included General Motors, which spent nearly $1 million a month on lobbying so far this year, and Citigroup and J.P. Morgan Chase & Co., which together spent more than $2.5 million in their efforts to sway lawmakers and Obama administration officials on a wide range of financial issues.

The new statistics revive objections from public-interest groups and some lawmakers who argue it is improper for companies to be lobbying against stricter oversight and other regulations at the same time that they are benefiting from the government's massive Troubled Assets Relief Program, or TARP.

"Taxpayers are subsidizing a legislative agenda that is inimical to their interests and offensive to what the whole TARP program is about," said William Patterson, executive director of CtW Investment Group, an activist group affiliated with a coalition of labor unions. "It's business as usual with taxpayers picking up the bill."

Labels: bailout, Citigroup, Daniel Fireside, financial crisis bailout, General Motors, JP Morgan Chase, lobbyists, TARP program

 

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4/21/2009 03:39:00 PM 0 comments links to this post

 

Stiglitz: Wall Street Lobbying Will Doom Rescue

by Dollars and Sense

From Bloomberg:

The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.

"All the ingredients they have so far are weak, and there are several missing ingredients," Stiglitz said in an interview yesterday. The people who designed the plans are "either in the pocket of the banks or they’re incompetent."

The Troubled Asset Relief Program, or TARP, isn't large enough to recapitalize the banking system, and the administration hasn't been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama's advisers have close ties to Wall Street.

"We don’t have enough money, they don't want to go back to Congress, and they don't want to do it in an open way and they don’t want to get control" of the banks, a set of constraints that will guarantee failure, Stiglitz said.

The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. "The bank restructuring has been an absolute mess."

Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.

Nobel Prize

Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don't have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database.

Financial shares have rallied in the past month as Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. all reported better-than-expected earnings in the first quarter. The Standard & Poor's 500 Financials Index has soared 91 percent from its low of 78.45 on March 6.

The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, "is a really bad program," Stiglitz said. It won't accomplish the administration's goal of establishing a price for illiquid assets clogging banks' balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.

Bailing Out Investors

"You’re really bailing out the shareholders and the bondholders," he said. "Some of the people likely to be involved in this, like Pimco, are big bondholders," he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.

Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.

"The statement from Sheila Bair that there’s no risk is absurd," he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.

Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had "zero expected cost" from the program.

Redistribution

"We're going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks," Stiglitz said. "It's a real redistribution and a tax on all American savers."

Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.

"America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street," he said. "Even if there is no quid pro quo, that is not the issue. The issue is the mindset."

Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.

Critical of Stimulus

Stiglitz was also critical of Obama’s other economic rescue programs.

He called the $787 billion stimulus program necessary but "flawed" because too much spending comes after 2009, and because it devotes too much of the money to tax cuts "which aren't likely to work very effectively."

"It's really a peculiar policy, I think," he said.

The $75 billion mortgage relief program, meanwhile, doesn't do enough to help Americans who can't afford to make their monthly payments, he said. It doesn't reduce principal, doesn't make changes in bankruptcy law that would help people work out debts, and doesn't change the incentive to simply stop making payments once a mortgage is greater than the value of a house.

Read the rest of the interview here.

Labels: bad banks proposal, Joseph Stiglitz, TARP program

 

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4/17/2009 03:50:00 PM 0 comments links to this post

 

More on AIG Bailout and Goldman's Earnings

by Dollars and Sense

Sent in by our long-lost collective member Faisal Chaudhry:

Fresh on the heels of the euphoria in the financial press about Goldman Sachs reported first quarter earnings of $1.66 billion, a recent entry on our blog (Questions About Goldman's Great Quarter) asked how much of the current profit is a result of Goldman's getting full payment for its previous financial bets from AIG.

While the answer is not clear yet (and likely will remain so), the Monday edition of Bloomberg's "On the Economy" radio program with Tom Keene and Pim Fox (access the audio here) provided a fascinating look into what Wall Street's take on the matter is. The passage from nonplussed nonchalance to equivocating chagrinned concession that Gary Townsend of Hill Townsend Capital undertakes in the space of two plus minutes is priceless for what it reveals about how these questions are regarded, parsed, and set aside by the lords of finance. (Jump to the 11m 6 sec mark .)

With a barely subdued glow, Townsend's monotone first points to Goldman's go getter attitude in proposing to use the newfound confidence it has earned in the eyes of the market by rolling up its sleeves and raising $5 billion in equity through sales of its shares in order to "unpartner" itself from its pesky and "unhappy" TARP-induced relationship with the government. He next lodges his "personal" opinion that the companies "who were not particularly interested in accepting the TARP" funds should not be faced now with any restrictions whatsoever on when they can repay the bailout money and "get out" of said pesky relationship. When faced with the obvious next question from Fox about whether Goldman's first quarter would have been as good as they were had it not taken the TARP money it supposedly "never wanted" in the first place, Townsend's swagger starts fading as he lunges towards evasion by highlighting the "additional expense" from the preferred dividend that Goldman has had to pay out to the government already and that has "presumably, worsened the [first] quarter [earnings]" now being reported already.

As if it wasn't curious enough to be apparently unable to parse the type of catastrophic cost Goldman's bottom line might have suffered had the "unwanted" bailout money never been poured into its coffers in the first place, things only get worse when Fox asks Townsend what role the credit default swaps paid out during the quarter to Goldman by AIG (via the "unwanted" moneys the government foisted upon that company) played in the $1.6 billion first quarter. You can hear Townsend start folding under the weight of his own inconsistencies (at the 12m30sec mark) after he is left little choice but to concede that the answer to the "very interesting question" he first suggests awaits more data must certainly be in the affirmative. As he grudgingly concedes "what seems to have happened is that the Government is fulfilling the obligation to Goldman and others on the other side of the CDS's" . Alas, he must let drop that "indeed, the government has provided that value [of the AIG bailout] to Goldman." He is sure, however, to ask rhetorically before closing "[but] isn't that rather obvious?". It would seem that a mere two minutes earlier, of course, it was not, at least, to Townsend's mind. As for Wall Street's collective mind, we won't hold our breath.
--FC

Labels: AIG, bailout, Bloomberg, Faisal Chaudhry, Goldman Sachs, TARP program, Wall Street

 

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4/16/2009 12:37:00 AM 2 comments links to this post

 

Questions About Goldman's Great Quarter

by Dollars and Sense

Interesting times at Goldman Sachs.

In September of 2008 it became part of the US banking system (now the country's fifth largest bank), making it eligible for TARP funds, but also putting itself under much greater regulatory scrutiny. Lately that has also meant facing some limits on executive compensation.

The company reported that it earned $1.66 billion in the first quarter of 2009.

The company is now frantically raising capital to try to repay $5-10 billion of the $28 billion of TARP money it has received.

A few questions:

What happened in December? Or more precisely, what happened to December? It seems that the company has decided that instead of starting its fiscal year on December 1, as it has traditionally done, it will now start it on January 1st. That means that December 2008, its worst month in history (about $1.3 billion in pre-tax losses), is missing from the official reports.

How is it making so much money? The company says it's because it's one of the only players left to handle everyone's trades. But some analysts find it more likely that the company is making increasingly risky investments with its own money -- the kind that brought the entire financial system crashing down in first place. Even though it should be under greater regulatory scrutiny now, the regulators are still playing catch-up.

From Reuters:

Some analysts believe that argument and say that Goldman is playing an important role in buying and selling client assets now even as competitors are not. Spokesman van Praag notes that banks are under enormous pressure to keep financing markets open and liquid, which Goldman is doing.

But to many investors, the combination of a 5 percent increase in assets during the quarter and the jump in value-at-risk, a measure of risk, signal that Goldman is likely trading more of its own funds.

"I've never seen such high value-at-risk figures out of Goldman before, even in 2006. I would be astonished if they weren't taking more risk," said one hedge fund manager who requested anonymity because he is not authorized to speak to the media.

Goldman is maintaining a $164 billion pool of available funds that it said could be used to buy assets, signaling to many investors that the bank is still willing to snatch up assets with its own funds.

CATCHING UP

If so, regulators may balk. The bank has nearly $1 trillion of assets and it became a bank holding company rather than an investment bank in September, meaning it should face much more government supervision, particularly when it comes to risk taking.

"As long as their bets are paying off, and regulators are still figuring them out, they won't have to change," said Karen Shaw Petrou, managing partner at regulatory consulting and research firm Federal Financial Analytics in Washington. "But the regulators will eventually catch up with them," Petrou added.

Finally, how much of their current profit is a result of getting full payment for its previous financial bets from AIG? The failed insurer and recipient of some $167 billion in taxpayer dollars has so far paid Goldman Sachs $12.9 billion since the government bailout.

As Elliot Spitzer asked,

But wait a moment, aren't we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won't be laid off. Why can't Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn't we already give Goldman a $25 billion capital infusion, and aren't they sitting on more than $100 billion in cash? Haven't we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn't they have accepted a discount, and couldn't they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?

The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.

--DF

Labels: AIG, Daniel Fireside, Goldman Sachs, TARP program

 

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4/14/2009 07:14:00 PM 0 comments links to this post

 

Taxpayers On the Hook For Up To $10.9 Trillion

by Dollars and Sense

Although the final bill will probably be less, Reuters has pulled together all the current and potential (i.e. authorized but not enacted) bailout liabilities so far. The amounts for most items are the total that the taxpayers would be on the hook for if the loans completely failed, which is unlikely. But hey, that's what they used to say about Bear Stearns collapsing.

Original link is here.

April 7 (Reuters) - The U.S. government has launched an
unprecedented array of actions to salvage the economy and
stabilize the financial sector that could put up to $10.903
trillion of taxpayers' money at risk.

However, much less has been disbursed and a considerable
amount of those funds could be recouped.

Following is a rundown of the total amount of known public
funds that could be at risk -- either spent, loaned, allocated
or pledged, based on the programs' upper limits. Some programs
have no specified limit; in these instances, the total reflects
amounts actually pledged, loaned or disbursed.

The total does not include a potential $750 billion in new
aid to banks that was in President Barack Obama's budget plan
on Feb. 26 but not formally requested.

FEDERAL DEPOSIT INSURANCE CORP GUARANTEES

* Up to about $1.9 trillion in Federal Deposit Insurance
Corp guarantees for banks, including $1.4 trillion in senior
unsecured debt issued by banks and $500 billion in
transaction deposit accounts typically used by businesses to
pay employees and vendors.

FED SUPPORT FOR MORTGAGE, CONSUMER CREDIT MARKETS

* Up to $1.6 trillion in Fed support for mortgage and
consumer credit markets, including purchases of up to $600
billion in debt and mortgage-backed securities issued by
government-sponsored enterprises. The Fed is now launching,
with U.S. Treasury backing, a $200 billion loan facility to
support consumer credit, such as auto, credit card and student
loans, that is expected to grow to $1 trillion.

FED COMMERCIAL PAPER FUNDING FACILITY (CPFF)

* Up to about $1.8 trillion in Fed purchases of top-rated
U.S. dollar commercial paper under a facility launched in
October. The Fed said it does not intend to buy anywhere near
this amount, which represents what eligible issuers could sell
at up to $1 billion per issuer. As of April 2, the Fed's
holdings in this facility were $249.73 billion.

FED DISCOUNT WINDOW LENDING COMMITMENTS

* Unlimited commitments to lend through discount window to
banks and broker dealers. Credit extended under these
facilities totaled $133.08 billion on April 2.

FED MONEY MARKET INVESTOR FUNDING FACILITY

* Up to $600 billion in Fed purchases of U.S. dollar
commercial paper and certificates of deposit under a Money
Market Investor Funding Facility. As of April 2, the Fed held
nothing in this facility.

FED TERM AUCTION FACILITY LOANS

* Up to $600 billion in Fed Term Auction Facility loans are
offered through twice-monthly $150 billion auctions. On April
2, $467.28 billion in TAF credit was outstanding.

FED TERM SECURITIES LENDING FACILITY (TSLF)

* Up to $200 billion in loans to primary dealers for up to
28 days against all investment-grade debt securities as
collateral. The Fed plans to auction this amount through seven
auctions in April.

FED CURRENCY SWAP LINES

* Unlimited temporary Fed currency swap lines with the
European Central Bank and central banks in England, Japan and
Switzerland. The Fed also maintains swap lines with 10 other
central banks. On April 2, the Fed held $308.79 billion in
foreign currency under these agreements.

OBAMA FISCAL STIMULUS PROGRAM

* Obama signed into law on Feb. 17 a $787 billion fiscal
stimulus plan, including $287 billion in temporary tax breaks
and $500 billion in spending on infrastructure, research
facilities, energy projects and aid to states, the unemployed
and the poor.

TREASURY TROUBLED ASSET RELIEF PROGRAM (TARP)

* $700 billion for the U.S. Treasury to shore up the
financial system: Nearly $200 billion in bank preferred stock
investments, $29.8 billion in aid to automakers, their
suppliers and their finance companies, and $110 billion in
additional rescues for American International Group (AIG.N),
Citigroup (C.N) and Bank of America (BAC.N). For details, click
on [ID:nN05338459].

AIG LOAN SUPPORT (NON-TARP)

* In addition to $70 billion in capital investments under
TARP, AIG has been granted a $60 billion government credit line
and up to $52 billion in loans for assets shifted to the Fed's
balance sheet.

TREASURY-LED PUBLIC-PRIVATE INVESTMENT FUND

* The Treasury intends to launch a public-private
investment fund that would buy $500 billion to $1 trillion in
distressed assets from banks, establishing benchmark prices.
Details are still being developed, but officials have said the
government would provide loans to private investment funds to
buy the assets.

FANNIE MAE/FREDDIE MAC SUPPORT

* Up to $400 billion to backstop Fannie Mae (FNM.N) (FNM.P)
and Freddie Mac (FRE.N) (FRE.P). The Treasury will inject up to
$200 billion into each institution as needed to maintain a
positive net worth. Freddie's capital draw is expected to grow
to as much as $49 billion in coming weeks, while Fannie has
said it will draw $15.2 billion.

* Expansion of loan portfolios to allow Fannie and Freddie
to increase MBS purchases by up to $244 billion since the
government took control of them in September 2008.

* The Treasury has directly purchased at least $106.89
billion in Fannie/Freddie mortgage-backed securities since
September to aid the housing market. It has pledged to continue
these purchases.

HOUSING SUPPORT

* $300 billion for the Federal Housing Administration to
refinance failing mortgages into new, reduced-principal loans
with a federal guarantee, passed in July 2008.

* $25 billion modification costs for loans held directly by
Fannie Mae and Freddie Mac as part of a foreclosure prevention
plan that also uses $50 billion in TARP funds.

* $6 billion in grants and "stabilization funds" to local
communities to help them buy and repair homes abandoned due to
mortgage foreclosures.

* $1.5 billion in relocation aid for renters displaced by
foreclosures.

MONEY MARKET FUND GUARANTEES

* Up to $50 billion from the Great Depression-era Exchange
Stabilization Fund to guarantee principal in money market
mutual funds to boost confidence in them. The Treasury collects
premium payments from participating funds.

BEAR STEARNS SALE SUPPORT

* $29 billion in Fed financing for JPMorgan Chase's (JPM.N)
government-brokered buyout of Bear Stearns & Co in March. The
Fed agreed to take $30 billion in questionable Bear assets as
collateral, making JPMorgan liable for the first $1 billion in
losses, while agreeing to shoulder any further losses.
(Compiled by David Lawder; Editing by James Dalgleish)

Labels: bailout, financial crisis bailout, TARP program

 

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4/08/2009 02:03:00 PM 0 comments links to this post

 

Tarp for Failing Insurers But Not for Car Cos

by Dollars and Sense

Although the Treasury Dept won't be extending TARP financing to troubled automakers Chrysler and GM because they cannot be certified as "financially viable," a different set of standards appears to apply to life insurance companies at death's door.

The life insurance companies' troubles don't extend from a sudden increase in mortality, but rather a combination of selling annuities with unsustainable rates and excessive bad bets in real estate and the stock market the companies made with premiums. As their portfolios have plummeted, so too have their credit ratings, in turn making it harder for them to raise further capital.

Since TARP funding is only available to certain types of financial institutions, many insurance companies have been buying up the odd bank here and there in order to qualify.

Although stocks of troubled insurance companies have jumped with this news, it remains far from clear that an infusion of capital will resolve the underlying structural problems.

From the Wall Street Journal:

"An injection of capital similar to the banks would provide enough capital for even the most thinly capitalized institutions to weather a prolonged and protracted credit cycle," Credit Suisse analyst Thomas Gallagher told clients in a note Wednesday. He added "one major caveat," however: an assumption that the S&P 500 does not drop materially below the 600 level.

Why the largess with insurers but not with carmakers?

Insurers hold major stakes in bonds, up to 18% of all outstanding corporate bonds, according to the American Council of Life Insurers. As insurers have hoarded cash in the wake of the financial meltdown, they have held off buying new bonds.

Labels: auto industry, insurance industry, TARP program

 

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4/08/2009 01:07:00 PM 0 comments links to this post

 

No May Loans for GM and Chrysler

by Dollars and Sense

GM and Chrysler were not deemed "financially viable" by the Energy Department, a critical benchmarks that makes them ineligible for next month's disbursement of TARP funds.

From the Washington Post:

Next month, $25 billion in loans aimed at producing more fuel-efficient cars will start flowing to suppliers and automakers -- just not to the two companies most in need of funding, General Motors and Chrysler.

The Energy Department program dictates that companies must be "financially viable" to receive the loans. And last week, the Obama administration ruled that, at least for now, both GM and Chrysler cannot meet that benchmark.

The president gave GM 60 days to rework its restructuring plan by negotiating concessions from the United Auto Workers union and its bondholders. In 30 days, Chrysler must do the same, plus complete its proposed alliance with Fiat.

"We don't see this as a denial of our application," GM spokesman Kerry Christopher said. "Until the determination that we're a viable company can be made, we're not going to be given the loans."

Energy spokeswoman Stephanie Mueller said the department could not comment on individual applications.

GM has applied for $10.3 billion to fund projects such as the Chevrolet Volt, its plug-in electric car. Chrysler is seeking about $8 billion to build hybrids and other battery-powered vehicles.

Ford, which may be the only domestic automaker that qualifies, applied for $5 billion in direct loans by 2011.

After lawmakers protested that these critical loans weren't moving fast enough to help the struggling auto industry, Energy Secretary Steven Chu said the first round of loans would be granted in May.

"We're still on track to meet the secretary's time line of offering loans within the next few weeks," Mueller said.

Labels: Chrysler, GM, TARP program

 

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4/08/2009 12:57:00 PM 0 comments links to this post

 

Elizabeth Warren on TARP on YouTube

by Dollars and Sense

Labels: bailout, Elizabeth Warren, financial crisis, PPiP, TARP program

 

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4/07/2009 02:10:00 PM 0 comments links to this post

 

Insolvent Banks and Imaginary Firesale?

by Dollars and Sense

An interesting article on an interesting academic paper, and at least one blog post expressing reservations about the paper's conclusions. First, the article (I like "crap assets" as an alternative to "toxic assets": far preferable to the ridiculous "legacy assets"):

Geithner Wrong, Crap Assets Correctly Priced, Say Harvard And Princeton Profs

John Carney | The Business Insider | Apr. 6, 2009

The government's official view that toxic assets are incorrectly priced due to illiquidity "fire sales" is wrong, a new study by Harvard and Princeton finance professors suggests.

... The striking conclusion is that the low prices of toxic assets actually reflect the fundamentals, rather than being driven by an illiquidity discount.

"The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing."

This contrasts sharply with the analysis that underlies most of the financial rescue programs launched by the Federal Reserve and the Treasury Department. The white paper released to support the Private-Public Investment Partnerships, the program that seeks to encourage private firms to buy toxic assets with government subsidized loans, took the opposite point of view.

"Troubled real estate-related assets comprised of legacy loans and securities, are at the center of the problems currently impacting the U.S. financial system...The resulting need to reduce risk triggered a wide-scale deleveraging in these markets and led to fire sales," the Treasury and the Fed claimed.

Many prominent economists--including such diverse types as Anna Schwartz and Paul Krugman--have taken with this official view, saying the government was mistaking a solvency crisis for a liquidity crisis. This latest paper effectively demolishes the "fire sale" view. It draws three important conclusions.

* Many banks are now insolvent. "...many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities."

* Supporting markets in toxic assets has no purpose other than transfering money from taxpayers to banks. "...any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities."

* We're making it worse. "...policies that attempt to prevent a widespread mark-down in the value of credit-sensitive assets are likely to only delay—and perhaps even worsen—the day of reckoning."

In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors. The alternative--allowing the insolvent banks to fail, seizing the assets, wiping out shareholders, giving bond holders a serious haircut--is still not on the official agenda.

Next, the interesting paragraphs from the academic paper (which appears to be online only in pdf form--I had to do some reformatting/retyping; this might be the first place where a good chunk of it appears in searchable html form, though I could be wrong):

Policymakers are rapidly moving towards using TARP money to purchase toxic assets—primarily tranches of collateralized debt obligations (CDOs)—from banks, with the aim of supporting secondary markets and increasing bank lending. The key premise of current policies is that the prices for these assets have become artificially depressed by banks and other investors trying to unload their holdings in an illiquid market, such that they no longer reflect their true hold-to-maturity value. By purchasing or insuring a large quantity of bank assets, the government can restore liquidity to credit markets and solvency to the banking sector.

The analysis of this paper suggests that recent credit market prices are actually highly consistent with fundamentals. A structural framework confirms that bonds and credit derivatives should have experienced a significant repricing in 2008 as the economic outlook darkened and volatility increased. The analysis also confirms that severe mispricing existed in the structured credit tranches prior to the crisis and that a large part of the dramatic rise in spreads has been the elimination of this mispricing.

If prices currently coming out of credit markets are actually correct, and not reflecting fire sales, this has several important implications. First, correct prices in the secondary market for these assets essentially imply that many major US banks are now legitimately insolvent. This insolvency can no longer be viewed as an artifact of bank assets being marked to artificially depressed prices coming out of an illiquid market. It means that bank assets are being fairly priced at valuations that sum to less than bank liabilities. In turn, any positive valuation assigned by shareholders to their equity claim arises solely from their anticipation of value transfer from firm debtholders or resource transfers from US taxpayers.

Second, if current market prices are fair, any taxpayer dollars allocated to supporting these markets will simply transfer wealth to the current owners of these securities. To the extent that these assets reside in banks that are now insolvent, the owners are essentially the bondholders of these banks. The reason their bonds are currently trading far below par is that the assets backing up their claim are just not worth enough (nor expected to become worth enough when their bonds mature) to repay them. And so while they will be cheered by any government overpayment for the toxic assets backing up their claims, their happiness will be at the taxpayers' expense since—to the extent that current prices are fair—they will be receiving more than fair value for their investments. Similarly, using government resources to support these markets by insuring assets against further losses amounts to providing insurance at premia that are significantly below what is fair for the risks that the US taxpayer will now bear.

Third, the market for securitized claims is not going to operate the same way it did in the past. Investors in these assets are setting prices in the secondary market that reflect both the high expected losses of the securities and the highly systematic nature of these expected losses. And while the pricing of these securities is dramatically different from the way it was a year or two ago, this is because it was wrong then, not now. Efforts to restart this market are focused on resuming the flawed pricing of the past, when there was no charge for risk and investors relied on the accuracy of ratings. Investors have learned from their mistakes and now seem to be pricing these securities in accordance with their true risks.

Read the full paper.

Finally, a sharply dissenting view from the blog Economics of Contempt; his point is that the paper's analysis is not of mortgage-backed securities, yet it claims to draw conclusions about them:

The introduction states:

On March 23, 2009, the Treasury announced that the TALF plan will commit up to $1 trillion to purchase legacy structured credit products. The government's view is that a disappearance of liquidity has caused credit market prices to no longer reflect fundamentals. ... The main objective of this paper is to determine whether …fire sales are required to explain prices currently observed in credit markets.

Sounds like the paper is going to examine the prices of the toxic assets that the Treasury is planning to buy, right?

Wrong. Instead, the authors examine investment grade corporate credit risk, using the CDX.NA.IG index. But ABS and CDOs backed by investment grade corporate bonds are not eligible for either the TALF or the PPIP. In other words, investment grade corporate bonds aren't considered "toxic assets."

The authors conclude that market prices of investment grade corporate credit risk are accurate—which isn't surprising, seeing as the CDX.NA.IG is the most liquid contract in the CDS market. Amazingly, however, the authors use this to conclude that the Treasury's plan to buy up the banks' toxic assets is misguided ...

Are they serious? The Treasury is arguing that the prices for mortgage-related securities are artificially depressed because of illiquidity and fire sales. No one is arguing that investment grade corporates are underpriced due to illiquidity and fire sales. That's why ABS and CDOs backed by investment grade corporates aren't eligible for the TALF or the PPIP. The fact that prices for tranches of CDOs backed by investment grade corporates are accurate is completely irrelevant to whether prices for mortgage-related securities are accurate.

Read the full blog post (though I've given you most of it).

The criticism seems sound, but what's interesting is the very suggestion that the "firesale" scenario is imaginary. If they are right (even if the blogger is right that their evidence doesn't support their conclusion), then the bailout represents a huge transfer of wealth from ordinary folks (I hate the term "taxpayers") to shareholders and bondholders. If anyone has a better grip on this than I do, please leave enlightening comments.

Labels: bailout, financial crisis, PPiP, TALF, TARP program, Timothy Geithner, toxic assets

 

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4/07/2009 11:45:00 AM 0 comments links to this post

 

Elizabeth Warren: Sack Bank Execs

by Dollars and Sense

Elizabeth Warren, who has been on top of this crisis since way back, is also calling for shareholders' equity to be wiped out. Too bad she's only the TARP watchdog and not in charge entirely. I like especially where she says she doesn't want to be too hard on Geithner, but essentially calls his approach "preposterous." We wish she'd say what she really thinks!

US watchdog calls for bank executives to be sacked

James Doran | Sunday 5 April 2009

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions that have received government funds in a damning report that will question the administration's approach to saving the financial system from collapse.

Warren, a Harvard law professor and chair of the congressional oversight committee monitoring the government's Troubled Asset Relief Program (Tarp), is also set to call for shareholders in those institutions to be "wiped out". "It is crucial for these things to happen," she said. "Japan tried to avoid them and just offered subsidy with little or no consequences for management or equity investors, and this is why Japan suffered a lost decade." She declined to give more detail but confirmed that she would refer to insurance group AIG, which has received $173bn in bailout money, and banking giant Citigroup, which has had $45bn in funds and more than $316bn of loan guarantees.

Warren also believes there are "dangers inherent" in the approach taken by treasury secretary Tim Geithner, who she says has offered "open-ended subsidies" to some of the world's biggest financial institutions without adequately weighing potential pitfalls. "We want to ensure that the treasury gives the public an alternative approach," she said, adding that she was worried that banks would not recover while they were being fed subsidies. "When are they going to say, enough?" she said.

She said she did not want to be too hard on Geithner but that he must address the issues in the report. "The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

Labels: bailout, Elizabeth Warren, financial crisis, TARP program, Timothy Geithner

 

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4/06/2009 02:41:00 PM 0 comments links to this post

 

FDIC Bill Attempt To Bypass TARP battle

by Dollars and Sense

From The Wall Street Journal:

MARCH 7, 2009

FDIC Bill Dodges a New TARP Fight

Wall Street Journal
By DAMIAN PALETTA

WASHINGTON A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program.

The legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand.

The FDIC can presently only borrow $30 billion from Treasury. The bill would permanently raise that level to $100 billion, which the FDIC could tap without prior approval from the Fed and Treasury.

Mr. Dodd, a Connecticut Democrat, already has four Republican co-sponsors for the bill and it could quickly gain momentum, in part because of strong backing by community bankers.

Read the rest of the article

Labels: bailout, Christopher Dodd, FDIC, financial crisis, Sheila Bair, TARP program

 

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3/07/2009 02:55:00 PM 0 comments links to this post

 

Sen Sanders: Fed Must Name Banks

by Dollars and Sense

In a Senate hearing on Tuesday, Sen. Bernie Sanders (Socialist-VT) asked Federal Reserve Chairman Ben Bernanke the following:

"My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?"

Bernanke's answer? "No."

From Reuters:

WASHINGTON, March 3 (Reuters) - A U.S. senator berated Federal Reserve Chairman Ben Bernanke on Tuesday for refusing to name banks that borrow from the central bank and introduced legislation that would require public disclosure.

In a testy exchange at a hearing before the Senate Budget Committee, Vermont Sen. Bernie Sanders, an independent who usually votes with the Democrats, said he found it "unacceptable" that the central bank risked taxpayer money without detailing where the funds went.

"My question to you is, will you tell the American people to whom you lent $2.2 trillion of their dollars?" Sanders asked, referring to the size of the Fed's balance sheet.

Bernanke responded that the Fed explains the various lending programs on its website, and details the terms and collateral requirements.

When Sanders pressed on whether Bernanke would name the firms that borrowed from the Fed, the central bank chairman replied, "No," and started to say that doing so risked stigmatizing banks and discouraging them from borrowing from the central bank.

"Isn't that too bad," Sanders interrupted, cutting him off. "They took the money but they don't want to be public about the fact that they received it."

According to the text of the proposed legislation, e-mailed by Sanders' staff, he wants the central bank to identify any firm that has received financial assistance since March 24, 2008, including details on the type of borrowing, amount, date, terms and the Fed's rationale for lending.

Sanders wants the Fed to publish those details on its website and update them at least every 30 days.

Rest of the story here.

Labels: bailout, Ben Bernanke, Bernie Sanders, financial crisis bailout, TARP program

 

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3/04/2009 02:37:00 AM 2 comments links to this post

 

AMEX Takes Bailout, Boots Customers

by Dollars and Sense

Like other credit card companies that have received bailout billions, AMEX is hiking fees, penalties, and interest rates. Now the company, which received over $3 billion in TARP money, is taking the added step of offering $300 vouchers if customers cancel their accounts. Most financial analysts caution that it is a bad deal for cardholders.

From the Wall Street Journal:

It used to be that credit-card companies lured customers with cash rewards. Now American Express Co. is paying to get rid of them. The card issuer is offering selected customers a $300 AmEx prepaid gift card if they pay off their balances and close their accounts.

The unusual move underscores how quickly conditions have deteriorated in the credit-card market. The current economic morass was provoked by spiking mortgage defaults. But as the economic crisis widens and unemployment climbs, there is growing concern that credit-card defaults will soar into the stratosphere as well.

...

Closing a line of credit generally hurts customer credit scores, even if the customers do it themselves. As soon as eligible AmEx customers sign up for the offer, they lose all Membership Reward points accumulated while they were customers, Ms. Faust says. That means customers should use up their points before agreeing to the offer.

Full story here.

Labels: American Express, AMEX, Credit card industry, TARP program

 

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2/24/2009 04:34:00 PM 0 comments links to this post

 

Greenspan (!): Nationalize the Banks

by Dollars and Sense

We weren't so surprised when Noriel Roubini called for (temporary) bank nationalization in a Washington Post op-ed co-authored with Matthew Richardson this past Sunday. But now this bombshell from the Financial Times, via Naked Capitalism, with Yves Smith's excellent-as-usual commentary:

Greenspan Predicts TARP Will Prove Insufficient, Supports Bank Nationalization

Before readers start throwing brickbats at the mention of the name of Alan Greenspan, it's important to remember that he has become the poster boy of the policy errors that lead to our financial mess. And that isn't an accurate picture. This crisis had many parents, and even though Greenspan was one of the key actors, he was far from alone. Treasury Secretaries Robert Rubin and Larry Summers were also backers of the financialization of the economy, the permissive regulatory posture, and the strong dollar policy.

Greenspan, to his credit, at least appears chastened by the mess helped create. As far as I can tell, very few of the other perps have questioned their decisions.

Greenspan spoke this evening at the Economic Club of New York. Some of his comments show that he has made some considerable shifts from his libertarian, anti-regulation stance. But he hasn't had a Damascene moment; he seems to be changing his views incrementally.

Nevertheless, it's remarkable that Greenspan has come out saying that nationalizing banks is the "least bad" policy option, as he did in a Financial Times interview. Now we are seeing role reversal: the loyal libertarian reluctantly admitting the need for regulation and the advantages of taking over dud banks, even big dud banks, while the Democrats tip toe around the idea of doing anything that might ruffle bankers feathers too much.

Note that he stresses, as we have, the need to clean up the financial system for fiscal stimulus to be effective (as in kick the economy into a higher gear, rather than provide a temporary amphetamine hit that quickly wears off). He also sounded a warning similar to Willem Buiter's, that the US is fiscally constrained and cannot run deficits as large as we might otherwise like without incurring serious sdverse consequences. Buiter has warned of the danger of a collapse in dollar assets. Greenspan seems more concerned about immediate effects, namely, rising long term bond rates (the Fed in theory can suppress a rate rise by buying long-dated Treasuries, but I suspect in practice this policy would lead to private investors and other central banks abandoning the long end of the yield curve, knowing the Fed could not continue this strategy on an unlimited basis, and the Fed having qualms about ballooning its balance sheet to grotesque size. Even at this level, the Fed seems cautious about further balance sheet growth, even though some have argued the Fed would need to expand its balance sheet far more aggressively to combat deleveraging).

From the Financial Times:

The US administration will have to go back to Congress for additional funds to recapitalise the banking system to restore the normal flow of credit in the economy, Alan Greenspan, former chairman of the Federal Reserve, said yesterday....

Mr Greenspan warned that, without a proper banking sector fix, the $787bn fiscal stimulus would provide only short-term relief.

"Given the Japanese experience of the 1990s, we need to assure that the repair of our financial system precedes the onset of major fiscal stimulus," he said. "Unless we are successful at that, in my judgment, the positive impact of a fiscal stimulus will peter out after its scheduled completion."

Mr Greenspan said foreign investor appetite for US government debt was not unlimited. "There is obviously a limit to the expansion of US federal debt," he said. He said the recent rise in long-term interest rates "may be signalling market concerns".

The former Fed chairman—a champion of laisser-faire principles—said he now acknowledged there was "no alternative to a set of heightened federal regulatory rules for banks and other financial institutions".

However, he suggested that rather than rely heavily on regulators to prevent the next crisis, the authorities should simply increase the amount of capital banks were required to hold against risks of all kinds...

But at a time when the US Congress is racing to begin legislation on a new regulatory framework for the financial system, Mr Greenspan urged less haste, saying the market was currently imposing strict discipline.

As for the idea of increasing capital levels, it's a poor second best to rethinking what the financial system ought to look like. And it is truly sobering how little serious thought has been done on that front.

As for Greenspan depicting Congress champing at the bit to reform the industry, that couldn't be further from the truth. Enacting strict limits on pay to TARP recipients is a far cry from meaningful regulatory reform.

From the Financial Times interview:

In an interview with the FT Mr Greenspan, who for decades was regarded as the high priest of laissez-faire capitalism, said nationalisation could be the least bad option left for policymakers.

"It may be necessary to temporarily nationalise some banks in order to facilitate a swift and orderly restructuring," he said. “I understand that once in a hundred years this is what you do."...

The former Fed chairman said temporary government ownership would "allow the government to transfer toxic assets to a bad bank without the problem of how to price them."

However, he wimped out on cramming down bondholders (note Martin Wolf and Nouriel Roubini, among others, have advocated that step, although Wolf did warn that it would need to be done with ample preparation for temporary disruption):

"You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks," he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt."

Greenspan is a consultant to Pimco, and Pimco has consistently bet that the Feds would be nice to banks (I am told by someone in a position to know that they own a lot of junior bank debt). So this statement may be de facto an admission by Greenspan that he sees nationalization as inevitable and is trying to shape what form it takes.

(This was the full post.)

Labels: Alan Greenspan, bailout, bank nationalization, financial crisis, Nouriel Roubini, TARP program, Yves Smith

 

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2/18/2009 12:22:00 PM 0 comments links to this post

 

Banks That Got TARP $ Reduced Lending

by Dollars and Sense

From Yves Smith at naked capitalism; hat-tip to LP. I just realized that the name of the blog may be a reference to that famous quote from Warren Buffet about how you can't tell who's naked until the tide goes out (or however he phrased it). Is Yves suggesting that all the capitalists are naked? Or the whole system? No arguments here.

Quelle Surprise! Big Banks Who Got TARP Funding Reduced Lending
Monday, January 26, 2009

Before we get to the particulars of tonight's Wall Street Journal story, we need to step back a second.

Just like the war in Iraq, which had a ton of justifications served up by the Bush Administration, none of which added up (and the most obvious one, that the Bushies wanted to control the second biggest oil reserves on the planet, somehow never gets mentioned in polite company in the US), we've also had too many rationales offered for the TARP in its very short life.

The one that has stuck with Congress and in the public's mind is that it was meant to get banks lending again. And the Journal tells us that measured against that benchmark, it hasn't worked.

Like the war in Iraq, it's a given that the stated rationales for the TARP were not the real one. Cynics see it as a plutocratic transfer, son of the grossly inflated outsourcing contracts to Halliburton and friends in the Middle East, a last opportunistic looting of the Treasury (literally, in this case).

But this may instead have been the a recycling of Paulson's bazooka notion. Remember when he asked for and secured authority to increase Fannie's and Freddie's credit lines with the Treasury and buy equity:

If you've got a squirt gun in your pocket, you probably will have to take it out. If you have a bazooka in your pocket and people know it, you probably won't have to take it out.

That, as we now know, proved to be patently untrue, as the markets called the Treasury Secretary's bluff. But Paulson is a very stubborn man and also seems to have remarkably few ideas (his initial plan for the TARP funding was a rejiggered version of his failed "rescue the SIVs" MLEC plan of the previous fall).

Recall also that Paulson is a deal guy out of Goldman. Anyone who has been in the deal business knows that the verbal representations are meaningless, and what counts is what is in the contract, or in his Treasury role, in the legislation. And Congress approved a huge blank check.

Thus I suspect the real rationale behind the TARP was that Paulson would have so much money at his disposal that he could credibly rescue the banking system, and in Bazooka version 2.0, he would not need to use it in a major way (although he would need to be perceived to have ready access to it, hence his protests over having only $350 billion for his immediate use). The existence of the funding capability would (presumably) restore confidence in the banks.

That theory would be consistent with the shifting rationales and plans. Paulson saw this as emergency authority to be used as needed and figured with that much money, he could punch above his weight (recall that $700 billion seemed simply enormous back in October, we've now become inured). But anyone who was up on the work from Bridgewater Associates, or connected the dots from what bank analyst Meredith Whitney was saying, or took Nouriel Roubini seriously (to name just a few) would know that $700 billion wasn't sufficient to plug the leaks the banking system had ALREADY sprung.

But that aside, why should we expect that the TARP would lead to more lending? First, there should be less lending, independent of the economic contraction. We know now that TONS of credit was extended to people who shouldn't have gotten it at all or should have been granted much less than they got. Those balances NEED to shrink, ideally by paying them down, although a fair bit will be via defaults and writedowns.

Second, in case you somehow missed it, the economy stinks. Even among the solvent, far fewer businesses and consumers are keen to borrow than in "normal" times. Thus, as bankers know well, those who want more credit now are likely to have a higher level of adverse selection than you'd see most of the time.

Now offsetting that to a fair degree is that a lot of businesses are dragging out payments, which puts financial stress on their vendors. They could really use more financing now, if you assume that the business itself is viable and the customers won't default on their obligations. But banks aren't set up to do that level of credit investigation. If you fit in the right box on their grid, great, otherwise, you are toast.

That is a long-winded way of saying it's no surprise the banks aren't lending. If their assets were valued realistically, most doubtless need even more equity than the TARP provided. Shrinking their balance sheets is part of their effort to get their equity back to healthy levels (memo to regulators: why isn't there more in the way of formal regulatory forbearance right now? It's standard bank recession practice to let banks officially run with lower equity levels as they try to get themselves back on their feet. It's better to admit banks are undercapitalized and give them a temporary waiver than play blind with balance sheet games than undermine investor confidence).

Read the rest of the post, which is a discussion of the WSJ piece she mentions at the top.

Labels: Henry Paulson, Naked Capitalism, TARP program, Yves Smith

 

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1/26/2009 02:39:00 PM 0 comments links to this post

 

Bankruptcy Doesn't Mean No Bonus

by Dollars and Sense

Merrill Lynch is under NY Attorney General Andrew Cuomo's spotlight after doling out billions in year-end bonuses just days before the bankrupt company was taken over by Bank of America (a company that has received $25 billion in direct bailout funds, then just got another $20 billion plus another $100 billion in guarantees for bad debt).

How much were the bonuses? $15 billion. Who is going to pay for these bonuses given by a company with no money? The one that bought it--Bank of America. What money are they going to use? Seventy-five percent of the latest $20 billion they got in taxpayer bailout money.

Before all that, Merrill Lynch also spent over a million dollars refurbishing the CEO's office last year while the company was going down the tubes, as we reported yesterday.


Now these and other shenanigans are attracting the attention of the Obama administration and members of Congress who are vowing to put restrictions on corporate windfalls for companies that are receiving future bailout money. No word yet and getting money back from the folks who absconded with the first batch.

Labels: Corporate Swindles, Merrill Lynch, TARP program

 

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1/24/2009 12:05:00 PM 0 comments links to this post

 

Labor to BoA: 'We See Your Greedy Side'

by Dollars and Sense

From the excellent new Open Media Boston, which has more photos and video of this event:

by Jesse Kirdahy-Scalia (Staff), Jan-15-09

BOSTON/Financial District - Members of local labor unions, labor justice and housing justice groups, SEIU and AFL-CIO spokespersons rallied today outside Bank of America's building on Federal Street as part of a national campaign to demand the company cease its attempts to defeat the passage of the Employee Free Choice Act and use Troubled Assets Relief Program funds to help Americans.

Among the approximately 65 people who rallied outside Bank of America's building today in 15° weather were members from SEIU Locals 615, 509, 1199 and the SEIU Massachusetts State Council, AFL-CIO and its affiliates, Jobs with Justice, Massachusetts Interfaith Worker Justice, and City Life. Protesters held a banner which read, "It's time our economy worked for everyone: support Employee Free Choice" and signs depicting piles of money and corporate jets while they chanted, "Banks get bailed out, people get thrown out!" and "Bank of America, you can't hide! We can see your greedy side!"

According to an action alert about today's rally sent through state and local listservs, Bank of America has joined other employers such as Wal-Mart, Home Depot and McDonald's in trying to defeat the Employee Free Choice Act. Harris Gruman, Massachusetts Political Director for the State Council of SEIU in Massachusetts, said Employee Free Choice, health care reform and a stimulus package for working Americans are all necessary for economic recovery. Gruman said Bank of America is not using TARP money to benefit working people and communities. "They're exhibiting all this corporate greed. They're not helping people facing foreclosures, not helping workers have a better life, they're not loaning money, even, to other business. They're sending the money overseas. It's not part of what we need for a real recovery here."

Read the rest of the article.

Labels: AFL-CIO, Bank of America, Open Media Boston, SEIU, TARP program

 

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1/17/2009 02:07:00 PM 0 comments links to this post

 

More Bailout Bucks for Bank of America

by Dollars and Sense

The Reagan-era fairy tale about the "welfare queen in the Cadillac" has been firmly replaced by the very real welfare CEO in a stretch limo.

Today's case exhibit is Bank of America. After doing who-know's-what with the last $25 billion dollars in government dough (according to press reports they used it to buy up Merrill Lynch and Countrywide, but there's still no official accounting of TARP handouts) B of A just received another $20 billion infusion to back up the bad debt on the company's books. The latest infusion of government cash (plus guarantees to absorb the bulk of future losses from bad debt) come after repeated public statements by CEO Kenneth D. Lewis that the company was in fine shape.

The latest payout means that $380 billion of the $700 billion TARP funds will have been disbursed before Barack Obama takes office (as of today, anyway).

Labels: bailout, Bank of America, financial crisis bailout, TARP program

 

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1/16/2009 02:14:00 PM 0 comments links to this post

 

At Least It's for a Good Cause...

by Dollars and Sense

Just in from Reuters:

U.S. close to giving BofA billions more aid: report
Wed Jan 14, 2009 6:25pm EST

NEW YORK (Reuters) - The U.S. government is close to pledging billions of dollars of additional aid to Bank of America Corp, the Wall Street Journal reported on Wednesday, making the bank the second to require a second round of emergency government assistance.

Bank of America is struggling to digest its January 1 acquisition of Merrill Lynch & Co, the newspaper said, citing people familiar with the situation. The bank's shares dropped more than 5 percent after hours, reaching their lowest level since 1991.

Merrill Lynch's losses in the fourth quarter were larger than expected, which spurred Bank of America to start talking to the U.S. Treasury in mid-December, the newspaper said. The terms of the government aid are still being finalized, and details are expected to be announced with Bank of America's fourth-quarter earnings, due out January 20.

A possible deal would involve protecting Bank of America from Merrill's bad assets by capping the bank's potential losses from them.

The talks were driven by Treasury Secretary Hank Paulson, who was concerned that Bank of America would be unable to close the deal, possibly leaving Merrill Lynch without a partner.

Bank of America spokesman Scott Silvestri declined to comment. The White House declined comment on the report, as did the U.S. Treasury.

Merrill Lynch CEO John Thain negotiated the sale of the brokerage, which had been rocked by billions of dollars in toxic assets, to Bank of America in mid-September on the same weekend that Lehman Brothers Holdings Inc filed for bankruptcy protection.

Some analysts had seen the deal as a coup for Bank of America's CEO Kenneth Lewis, who also used the bank's relative strength to buy Countrywide Financial, formerly the nation's largest mortgage lender, but the bank's stock has since spiraled lower.

Bank of America shares fell 5.9 percent to $9.60 in electronic after-hours trading on Wednesday, its lowest level since December 1991. The bank has not traded below $10 a share since January 1992.

Bank of America and Merrill Lynch together received $25 billion from the Treasury's Troubled Asset Relief program in October. Citigroup received the same amount in October, and another $20 billion of capital in November.

(Reporting by Dan Wilchins; Additional reporting by Matt Spetalnick in Washington; Editing by Gary Hill)

Labels: bailout, Bank of America, financial crisis, TARP program

 

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1/14/2009 07:17:00 PM 0 comments links to this post

 

More Criticism of TARP (WSJ)

by Dollars and Sense

From today's WSJ:

Panel Steps Up Criticism of Treasury Over TARP

By MICHAEL R. CRITTENDEN | January 9, 2009

WASHINGTON -- The U.S. Treasury has failed to reveal its strategy for stabilizing the financial system, not answered questions asked by a government watchdog, and has done nothing to help struggling homeowners, a report being released Friday charges.

In the most scathing criticism yet of Treasury's implementation of the $700 billion financial-rescue package, a draft report being issued by the five-member congressional oversight panel said there appear to be "significant gaps" in Treasury's ability to track hundreds of billions of dollars of taxpayer money.

"The panel's initial concerns about the [Troubled Asset Relief Program] have only grown, exacerbated by the shifting explanations of its purposes and the tools used by Treasury," said the draft report, which found that the department has "not yet explained its strategy" for stabilizing the financial markets.

The report faults Treasury on a variety of fronts: having no ability to ensure banks lend the money they have received from the government; having no standards for measuring the success of the program; and for ignoring or offering incomplete answers to panel questions.

The bipartisan panel, headed by Harvard Law School professor Elizabeth Warren, reserved its most strident criticism for Treasury's approach to dealing with the foreclosure crisis at the root of the economic turmoil. The draft report noted that Treasury hasn't used any of TARP's $700 billion to help borrowers refinance or deal with mortgages that are worth more than the market value of the homes they are tied to.

"Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what 'help' means," the draft report said.

Read the rest of the article.

Labels: bailout, Elizabeth Warren, financial crisis, TARP program, Treasury Department

 

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1/09/2009 09:37:00 AM 0 comments links to this post

 

$1.6 Billion of Bailout Went to Pay Top Execs

by Dollars and Sense

According to a study by the Associated Press, $1.6 billion of the federal bailout funds went into the pockets of top bank executives. Even institutions that have cut the salaries and bonuses of top corporate officers have awarded massive compensation packages, despite having logged billions of dollars in losses.

Some highlights:

The total amount given to 600 top executives of financial institutions that have received federal bailout money would have covered what many of the 116 banks received in taxpayer funds.

Banks that received federal bailout money paid their executives an average of $2.6 million in salary, benefits, and bonuses.

The top five executives of Goldman Sachs took home $242 million last year, including $54 million for CEO Lloyd Blankfein. The company has received $10 billion in taxpayer money, and has posted its first quarterly loss since going public in nine years ago. Reacting to public outrage over executive compensation, the executives have decided to forgo their bonuses this year, and live off a mere $600,000 salary (no word yet on any plans to refund last year's bonuses).

The rest of the sad story can be found here.

Labels: executive pay, Golden Parachutes, Goldman Sachs, TARP program, taxpayer ripoff

 

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12/21/2008 09:32:00 PM 0 comments links to this post

 

Where Have All the Billions Gone?

by Dollars and Sense

From the Inter-Press Service:

A new U.S. investigative panel is demanding answers from the U.S. Treasury about how the agency has spent money from the 700-billion-dollar bailout fund.

The Congressional Oversight Panel, a four-person board authorized by Congress and led by consumer advocate Elizabeth Warren of Harvard Law School, is charged with finding out what Treasury has done with the billions it has already spent.

"We are here to ask the questions that we believe all Americans have a right to ask: who got the money, what have they done with it, how has it helped the country and how has it helped ordinary people?" the panel says in its first report, which lays out its work.

The panel has begun gathering documents from Treasury and also is holding a series of public meetings across the U.S., to hear the public's concerns about the bailout and the economy. The panel expects to have some answers for Congress and the public by Jan. 9, when it will issue a report on its website, cop.senate.gov.

"We will be running very hard over the next 40 days," Warren told members of Congress recently. Also on the panel are Rep. Jeb Hensarling, a Republican from Texas; Richard Neiman, Superintendent of Banks in New York; and Damon Silvers, a lawyer with AFL-CIO.

"The recession has visited every household in the country. More than 100,000 families last month headed into bankruptcy courts. Americans are watching Washington's every move with great concern," Warren said.

In a desperate attempt to ease lending, the Federal Reserve Tuesday dropped the federal funds interest rate to between 0 and .25 percent, the lowest in decades.

The Warren panel lacks subpoena power but will work together with Special Inspector General Neil M. Barofsky, who will wield significant legal power, and the General Accounting Office, in auditing and overseeing the funds.

The rest of the article is here.

Labels: bailout, Elizabeth Warren, financial crisis, TARP program, Treasury Department

 

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12/18/2008 09:45:00 PM 0 comments links to this post

 

Watchdogs Chide Treasury on Bailout (WSJ)

by Dollars and Sense

Just posted to the WSJ site:

By MICHAEL R. CRITTENDEN | DECEMBER 10, 2008, 4:45 P.M. ET

WASHINGTON -- U.S. Treasury Department assurances that the $700 billion financial rescue plan is helping to stabilize markets aren't enough for a program that has been implemented with few internal controls, a pair of government watchdogs said Wednesday.

In separate testimony, the Government Accountability Office and a congressional oversight panel said Treasury has doled out billions of dollars to banks with no way to ensure they comply with government-mandated restrictions, or they are using the money to help increase the availability of credit to consumers.

The four-person oversight panel, in its first report to Congress, said it found Treasury has "administrated the [Troubled Asset Relief Program] without seeking to monitor the use of funds provided to specific financial institutions."

Read the rest of the article.

Read the full TARP oversight report.

Labels: bailout, financial crisis, GAO, TARP program

 

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12/10/2008 04:53:00 PM 0 comments links to this post

 

Why Should We be Surprised? (Yves Smith)

by Dollars and Sense

We noticed the article in today's NY Times that the GAO will be releasing the first audit of the TARP program. Here is what Yves Smith of Naked Capitalism has to say about it:

The New York Times reports that the General Accounting Office is readying to issue a report that will criticize how Treasury has handled its spending under the $700 billion TARP program. The main shortcomings are failure to track how the money is actually being used and inadequate controls to prevent conflicts of interest.

Gee, I thought of those supposed failings as features rather than bugs.

Here's what the Times had to say:

The first operational audit of the $700 billion financial rescue plan, to be delivered to Congress next Tuesday, is expected to be critical of the Treasury Department’s failure to set up ways to track how its bailout money is being used in the marketplace, according to people briefed on a draft of the report.

The audit, done by the Government Accountability Office, is also likely to call for tighter controls over the conflicts of interest that are arising as financial specialists, institutions and law firms are hired for Treasury work that could later aid their private-sector clients, said these people, who would speak only on condition of anonymity because the briefings were confidential.

But the overall assessment was “a mixed bag,” as one person put it. It was clear, he said, that the auditors took into account how quickly the program was carried out, how much its focus shifted over time and how little feedback Treasury has had from oversight agencies so far.

Read the rest of the article.

Labels: bailout, financial crisis, GAO, Naked Capitalism, TARP program, Yves Smith

 

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11/26/2008 04:08:00 PM 0 comments links to this post

 

Citi bonanza for Goldman or Morgan?

by Dollars and Sense

According to Bloomberg.com:

A purchase of Citigroup Inc. would "significantly" add to Goldman Sachs Group Inc. or Morgan Stanley's earnings as long as the U.S. government absorbed losses on the embattled bank’s assets, according CreditSights Inc.

Buying Citigroup "would be significantly accretive to Goldman and Morgan Stanley's earnings as the potential buyer would be acquiring a significant future earnings stream for a relatively low price," David Hendler, an analyst at CreditSights in New York, wrote in a report yesterday. The buyer "would probably receive government support if it was needed."

...

Goldman Sachs and Morgan Stanley were the two biggest U.S. securities firms before converting to bank holding companies in September. They took the step after smaller rival Lehman Brothers Holdings Inc. was forced into bankruptcy, undermining investors' faith in investment banks that rely on the constricted debt markets for financing. All three firms are based in New York.

Goldman and Morgan Stanley have said they would consider acquisitions to help build their deposit bases. Spokespeople for both companies declined to comment on whether they would consider buying Citigroup.

Citigroup's $2 trillion of assets would have to be booked by any acquirer at current market values, which could translate into about $100 billion of writedowns, CreditSights estimated. To help facilitate a transaction, the Federal Deposit Insurance Corp. could provide loan-loss support or the U.S. Treasury could contribute money from the $700 billion Troubled Asset Relief Program passed by Congress in October, the report said.

In related news, analysts predict that the purchase of Citigroup Inc. would "significantly" add to Dollars & Sense's earnings as long as the U.S. government absorbed losses on the embattled bank's assets...

Labels: Citigroup, Goldman Sachs, Morgan Stanley, TARP program, taxpayer ripoff

 

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11/23/2008 09:36:00 PM 0 comments links to this post

 

Reid Names Elizabeth Warren to TARP Board

by Dollars and Sense

According to Politico, Senate Majority Leader Harry Reid has named Harvard Law prof Elizabeth Warren to the oversight board of the Troubled Assets Relief Program (TARP). This is the program that was established by the Emergency Economic Stabilization Act of 2008, aka The Bailout, and regular readers of the D&S blog know that it is sorely in need of oversight.

Warren is a great (and surprising) pick. She's a bankruptcy expert, and has been outspoken on the issue of the "middle-class squeeze." Back in March, we posted a video of her appearance on the University of California TV's public affairs program "Conversations with History."

Politico also reports that Reid and House Speaker Nancy Pelosi jointly appointed Damon Silvers, AFL-CIO Associate General Counsel, to the TARP board. This is a nice contrast to the utter lack of labor folks among the economic advisers pictured behind President-Elect Obama in news reports last week.

Hat-tip to Michael Pollak on lbo-talk.

Labels: bailout, financial crisis, TARP program

 

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11/17/2008 10:48:00 AM 0 comments links to this post

 

$10 million gets you $billions!

by Dollars and Sense

Several insurance and financial service companies are reportedly buying up small S&L's, for as little as $10 million, in order to qualify for billions of dollars from the TARP bailout fund.

According to Bloomberg News,

Hartford Financial Services Group Inc.,Genworth Financial Inc. and Lincoln National Corp. plan to buy lenders, a move that may entitle the three insurers to billions of dollars from the Treasury's bank rescue fund.

Hartford, which posted a $2.6 billion third-quarter loss, jumped 21 percent in New York trading after agreeing to buy Sanford, Florida-based Federal Trust Corp. for $10 million. That should allow the insurer to convert to a savings-and-loan holding company and qualify for $1.1 billion to $3.4 billion from the Treasury, the company said in a statement today.

Genworth and Lincoln also sought recognition as S&L holding companies as they seek to buy thrift institutions in Minnesota and Indiana, OTS spokesman Bill Ruberry said. They're following American Express Co., Goldman Sachs Group Inc. and Morgan Stanley, which sought bank status to get U.S. backing and bolster themselves against the worst financial crisis since the Great Depression.

"Wave a wand and suddenly Hartford is not an insurance company but a bank -- it's voodoo," said Jim Glickenhaus, who helps manage $2 billion at Glickenhaus & Co. in New York. Treasury and lawmakers "need to take a deep breath and see what they're doing."

Labels: bailout, financial crisis bailout, TARP program

 

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11/15/2008 11:38:00 AM 1 comments links to this post

 

Paulson Changes Tack Yet Again on TARP

by Dollars and Sense

It's a good thing (for him) this guy doesn't have to face elections.

From Reuters:

Treasury backs away from plan to buy bad assets
Wed Nov 12, 2008 11:51am EST

WASHINGTON (Reuters) Treasury Secretary Henry Paulson on Wednesday said he was backing away from buying troubled mortgage assets using a $700 billion bailout fund, instead favoring a second round of capital injections into financial institutions that would match private funds.

Paulson, in an update on the Treasury's financial rescue efforts, said his staff has continued to examine the benefits of purchasing illiquid mortgage assets under the so-called Troubled Asset Relief Program.

"Our assessment at this time is that this is not the most effective way to use TARP funds, but we will continue to examine whether targeted forms of asset purchase can play a useful role, relative to other potential uses of TARP resources," Paulson told a news conference.

When Treasury was selling the $700 billion bailout plan to Congress, it initially promoted it as a vehicle that would purchase illiquid mortgage assets from banks and other institutions to cushion potential losses.

But it became quickly apparent that setting up such purchases would take time, and Treasury opted for the faster method of injecting capital directly into banks by buying preferred stock. The Treasury has allocated $250 billion of the fund to such purchases so far.

Paulson said the Treasury is evaluating a second program that would provide government investments that would match private investments in capital raisings.

"In developing a potential matching program, we will also consider capital needs of non-bank financial institutions not eligible for the current capital program," Paulson said.

He also said support was needed for the markets that securitize credit outside the banking system for products such as car loans, credit cards and student loans. The Treasury and Federal Reserve are exploring the development of a potential liquidity facility for highly rated AAA asset-backed securities.

"We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers' investment," Paulson said.

(Reporting by David Lawder, Editing by Chizu Nomiyama)

Labels: bailout, financial crisis, Henry Paulson, housing bubble, Reuters, TARP program

 

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11/12/2008 01:18:00 PM 1 comments links to this post