Dollars & Sense blog

Why Private Equity Wants To Buy Banks

noreply@blogger.com (Dollars and Sense) — Sat, 04 Jul 2009 16:05:00 +0000

because there's not much else to buy, according to this Financial Times story:

On Wall Street: Banks no longer so lucrative
Financial Times
By Henny Sender

Published: July 3 2009 19:52 | Last updated: July 3 2009 19:52

The planned merger of two Japanese banks is the latest unhappy chapter in the 10-year saga of foreign private equity capital's adventure in Tokyo finance.

The two banks, Shinsei and Aozora fell into the hands of Ripplewood and Chris Flowers and Cerberus Capital Management respectively at what appeared to be close to the end of the country's lost decade. The two purchases came after the Ministry of Finance was unable to find any domestic buyers for the two ailing institutions. Ten years on, the two are still not healthy. Both got into trouble like many of their US peers by straying into investments that promised high yields with seemingly low risk, whether junk bonds that proved worthless for Shinsei or a piece of GMAC in the case of Aozora. It has been easy for both banks to stray from the banking business in Japan in recent years because they lacked a broad base of cheap funding from deposits and they never became the go-to source of loans for corporate Japan.

Now private equity is an eager if frustrated buyer of troubled banks in the US and one of the few sources of fresh equity for a sector that desperately needs capital. US authorities are as paranoid as their Japanese peers of these would be owners' intentions and intend to impose onerous requirements, (which may or may not prove very burdensome) on private equity. At the same time, regulators also intend to impose all sorts of constraint on the banks and limit the degree of leverage all banks are allowed, which will likely lead to lower profitability.

Read the rest of the article

If You Didn't Have Enough To Worry About...

noreply@blogger.com (Dollars and Sense) — Sat, 04 Jul 2009 15:44:00 +0000

Apparently there's major concern about an El Nino developing in the South Pacific. Such events can wreak havoc on commodity prices, some of which are already gyrating all over the place. Now that the "green shoots' view has been replaced by one that envisions considerably less growth in the near-term future, any serious reduction of supply could provide inflationary pressures in key commodities--even in oil, a (relatively-speaking, anyway) non weather-related one, that is used to hedge macroeconomic bets, like those in the dollar--in the Northern autumn and winter, when rising unemployment is likely to depress demand considerably. This, in turn, would depend on whether or not the dollar as the ultimately safe store of value during global downturns predominates over concerns about exit strategies from increasingly expensive government programs as the economic outlook stagnates or even deteriorates. The fear is that a serious shift towards the latter, especially, could lead to a situation in which oil and food prices rocket even as the dollar declines and unemployment continues its rise. The fact that US (home to a huge share of global planting in key foodstuffs) planters have ramped up in the last few months is a good sign, but...

From The Financial Times:

Commodities fears after El Nino alert

By Javier Blas,Commodities Correspondent
Financial Times
Published: July 1 2009 17:41 | Last updated: July 1 2009 17:41

The emergence of El Nino, a weather phenomenon that could dramatically influence commodities markets as it brings drought conditions to south-east Asia, seems all but certain, Australia's weather office said on Wednesday.

"More evidence of a developing El Nino event has emerged during the past fortnight, and computer forecasts show there's very little chance of the development stalling or reversing," Australia's Bureau of Meteorology said in a report.

A month ago, the bureau said that “the odds of an El Nino were above 50 per cent”. Australian officials on Wednesday said they could declare officially an El Nino event in the next few weeks, promising an update as early as next week.

The recurring climatic event--caused by an increase of the water temperature in the tropical Pacific--has in the past triggered wild gyrations of food prices, particularly wheat, rice and sugar. The event could also disrupt India's annual monsoon.

Commodities traders pay extra attention to Australia's meteorologists as the country is one of the most exposed to El Niño and its weathermen have a good track record in anticipating the emergence of the phenomenon.

Traders and meteorologists said that even if an El Nino emerged, its impact on commodities markets would depend on the weather pattern's strength. The previous two events were weaker, but 1998 saw a strong phenomenon.

So far, analysts and traders are taking comfort from a period of favourable weather, particularly in the northern hemisphere. The weather has also been auspicious in south-east Asia, although India's monsoon has had a poor start.

Sugar prices on Wednesday hit a three-year high, with the front-month contract trading as high as 18.01 cents per pound, on fears that the sugarcane crop in India, the world’s largest consumer of the sweetener, would be hit by a poor monsoon.

El Nino--"Spanish for "the little boy"--has important consequences for weather, including increased rainfall across the southern tip of the US, Peru and Chile, which has caused destructive flooding, and drought in the west Pacific from Australia to Bangladesh.

It has also affected fisheries, as nutrients in eastern Pacific waters drop.

Rogue Trader Causes Oil Spike

noreply@blogger.com (Dollars and Sense) — Fri, 03 Jul 2009 22:43:00 +0000

From The Financial Times:

'Rogue broker' blamed for oil spike

By Javier Blas and Izabella Kaminska in London
Financial Times
Published: July 2 2009 12:07 | Last updated: July 2 2009 20:26

The startling spike in oil prices to their highest level this year on Tuesday was caused by a rogue broker who placed a massive bet in the Brent oil market, triggering almost $10m (7m euros) of losses for his company.

PVM Oil Associates, the world's largest over-the-counter oil brokerage, said on Thursday it had been the "victim of unauthorised trading". The privately owned company said that as a result of the unauthorised trades it had been forced to close substantial volumes of futures contracts at a loss.

Read the rest of the article

If You Liked CDOs, You'll Love CLOs...

noreply@blogger.com (Dollars and Sense) — Fri, 03 Jul 2009 22:36:00 +0000

From the Financial Times:

Night of zombie company looms as debt burden remains large

By Anousha Sakoui
Financial Times
Published: July 2 2009 20:50 | Last updated: July 2 2009 20:50

Third time lucky is a phrase often quoted by bankers who believe it takes several debt restructurings to get a company's balance sheet right.

The phrase is even more relevant today amid growing concerns that debt restructurings are leaving companies saddled with too much debt, even at the end of the process.

Part of the blame has been laid at the feet of capital-constrained banks which have been reluctant to write down the debt because it could create losses that would further weaken their balance sheets.

Debt and bankruptcy specialists warn that trend risks creating a new breed of zombie companies--those which survive simply to repay their debts but cannot move forward because their debts remain so large.

An even greater problem is posed by collateralised loan obligations--complex funds that pooled loans and at the height of the credit bubble were buying up to 60 per cent of leveraged loans.

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7 Banks Fail Today: 52 For the Year So Far

noreply@blogger.com (Dollars and Sense) — Fri, 03 Jul 2009 03:41:00 +0000

Seven banks were taken over by the FDIC on Thursday, six of them based in Illinois. A total of 52 banks have failed so far in 2009, an average of 2 each week.

Today's bank failures cost the FDIC over $300 million.

According to a report in February, up to 1,000 banks may fail in the next 3-5 years.

Roubini on Details in the Payrolls Data

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 22:49:00 +0000

U.S. Job Report Suggests that Green Shoots are Mostly Yellow Weeds
Nouriel Roubini's Global Economonitor
Nouriel Roubini | Jul 2, 2009

The June employment report suggests that the alleged 'green shoots' are mostly yellow weeds that may eventually turn into brown manure. The employment report shows that conditions in the labor market continue to be extremely weak, with job losses in June of over 460,000. With the current rate of job losses, it is very clear that the unemployment rate could reach 10 percent by later this summer, around August or September, and will be closer to 10.5 percent if not 11 percent by year-end. I expect the unemployment rate is going to peak at around 11 percent at some point in 2010, well above historical standards for even severe recessions.

It's clear that even if the recession were to be over anytime soon--and it's not going to be over before the end of the year--job losses are going to continue for at least another year and a half. Historically, during the last two recessions, job losses continued for at least a year and a half after the recession was over. During the 2001 recession, the recession was over in November 2001, and job losses continued through August 2003 for a cumulative loss of jobs of over 5 million; this time we are already seeing more than 6 million job losses and the recession is not over.

The details of the unemployment report are even worse than the headline. Not only are there large job losses right now, but as a way of sharing the pain, firms are inducing workers to reduce hours and hourly wages. Therefore, when we're looking at the effect of the labor market on labor income, we should consider that the total value of labor income is the product of jobs, hours, and average hourly wages--and that all three elements are falling right now. So the effect on labor income is much more significant than job losses alone.

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Goodbye, Green Shoots

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 22:41:00 +0000

The FT's John Authers (video clip) on market reaction to today's US payrolls data, which were far worse than expected.

Male Worker Jobless Rate In June: 10.6 Percent

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 17:47:00 +0000

A summary of today's BLS report from Bob Feldman:

The official "seasonally adjusted" unemployment rate for male workers in the United States over 16 years-of-age increased from 10.5 percent to 10.6 percent between May 2009 and June 2009, according to the latest Bureau of Labor Statistics data.

The official "seasonally adjusted" unemployment rate for white male workers increased from 9 percent to 9.2 percent between May 2009 and June 2009.

For all U.S. workers, the "not seasonally adjusted" jobless rate increased from 9.1 percent to 9.7 percent between May 2009 and June 2009.

The official "not seasonally adjusted" jobless rate for Black female workers over 20 years-of-age also increased from 11.1 percent to 11.7 percent between May 2009 and June 2009; and the official "not seasonally adjusted" jobless rate for all Black workers increased from 14.7 percent to 15.3 percent during this same period.

The official "not seasonally adjusted" rate for all Black male workers over 20 years-of age was still 16.1 percent in June 2009.

The official "not seasonally adjusted" jobless rate for Black youth between 16 and 19 years-of-age increased from 40.1 percent to 45 percent between May 2009 and June 2009, while the "not seasonally adjusted" unemployment rate for Hispanic or Latino youth was still 30.1 percent during this same period. The official "not seasonally adjusted" jobless rate for white youth between 16 and 19 years-of-age also increased from 21.1 percent to 25 percent between May 2009 and June 2009.

Between May 2009 and June 2009, the official "not seasonally adjusted" jobless rate for Hispanic or Latina women jumped from 10.5 percent to 11.5 percent, while the "not seasonally adjusted" unemployment rate for Asian-American workers jumped from 6.7 percent to 8.2 percent during this same period. The official "seasonally adjusted" unemployment rate for all Hispanic and Latino workers in the United States in June 2009 was 12.2 percent.

According to the Bureau of Labor Statistics' July 2, 2009 press release:

"Nonfarm payroll employment continued to decline in June (-467,000)... Job losses were widespread across the major industry sectors, with large declines occurring in manufacturing, professional and business services, and construction ...

"The number of long-term unemployed (those jobless for 27 weeks or more) increased by 433,000 over the month to 4.4 million. In June, 3 in 10 unemployed persons were jobless for 27 weeks or more...

"Employment in manufacturing fell by 136,000 over the month… Within the durable goods industry, motor vehicles and parts (-27,000), fabricated metal products (-18,000), computer and electronic products (-16,000), and machinery (-14,000) continued to lose jobs in June.

"In June, employment in construction fell by 79,000, with losses spread throughout the industry…Mining employment fell by 8,000 in June...

"Employment in the professional and business services industry declined by 118,000 in June... Within this sector, employment in temporary help services fell by 38,000 in June...

"Retail trade employment edged down in June (-21,000)…Over the month, job losses continued in automobile dealerships (-9,000). Employment continued to fall in wholesale trade (-16,000).

"In June, financial activities employment continued to decline (-27,000)…In June, employment declined in credit intermediation and related activities (-10,000) and in securities, commodity contracts, and investments (-6,000).

"The information industry lost 21,000 jobs over the month…

"Employment in federal government fell by 49,000 in June, largely due to the layoff of workers temporarily hired to prepare for Census 2010..."

--b.f.

Delasantellis on Realtors' Latest Lobby Effort

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 00:55:00 +0000

From his Asia Times column:

Cheating still beats real work
By Julian Delasantellis
Asia Times
July 2d, 2009

A colleague recently relayed a story about her experience as an observer at a faculty/student disciplinary hearing for a pre-law undergraduate charged with cheating.

Apparently, this young man had come around to the belief that, when it came to engaging in conduct that could get him expelled, in for a dime-in for a dollar. Just in the space of a single term, his teachers had found him copying from a test, rifling through the course's graduate assistant notebook looking for a test, and, word for word, punctuation mark by punctuation mark, lifting without attribution a large section of a Wikipedia entry on "jurisprudence" for a research paper.

"How do you answer these charges?" asked the earnest student prosecutor, who, both my colleague and I agreed, can be expected to be next seen on TV in Kevlar helmet, flak jacket, frameless glasses and FBI windbreaker when the government takes down another religious compound in 2017 or so.

Read the rest of the article

California to Issue IOUs at Discount?

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 00:32:00 +0000

The creator of the fine website Across the Curve had the following to say about the situation on California tonight: "I guess it is fair to state that California is bankrupt. If one issues scrip money rather than paying bills in cash that would signal a serious problem. It is a sad sign of the vale of tears through which we have passed these last two years that the fiscal demise of our largest state receives remarkably little notice. In another time and place it would have been a seismic event of major import."

This piece from Breaking Views notes that banks may ask for a discount on state IOUs:

Banker: "This Is a Phenomenal Environment"

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 00:24:00 +0000

One more from today's FT:

Radical shift in the banking power base

By Patrick Jenkins and Jane Croft
Financial Times
Published: June 30 2009 18:50 | Last updated: June 30 2009 18:50

It is barely nine months since the collapse of Lehman Brothers ushered in one of the worst financial crises since the Great Depression. But for the strongest banks, the second quarter of 2009, which closed on Tuesday, has confirmed the upbeat trends of the first quarter.

While banks such as Citigroup, Merrill Lynch, Royal Bank of Scotland and UBS continue to find life difficult, thriving rivals--JPMorgan, Goldman Sachs, Morgan Stanley, Barclays, Deutsche Bank and Credit Suisse--are talking privately of a record second quarter.

They have benefited from lively markets for commodity and foreign exchange trading, at profit margins that are between two and eight times higher than before the height of the financial crisis last autumn. At the same time, companies have been rushing to issue new debt and equity.

More fundamentally and sustainably there have been clear shifts in market share between the banks--in everything from UK mortgages to US Treasury bill issuance--as aggressive groups have taken advantage of opportunities left by weakened rivals.

BanksOne investment banker says: "There used to be 15 banks competing. Now there are six. This is a phenomenal environment. I’ve never seen anything like this in 20 years in the business."

Read the rest of the article

Behind Banks' Credit Card Moves

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 00:18:00 +0000

Another FT article goes deeper into the increasing danger credit cards are putting banks into, and what they're doing about it. Some scary stuff here.

Record credit card losses force banks into action

By Saskia Scholtes in New York
Financial Times
Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00

Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings.

Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch.

Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans.

Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors.

Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis.

Read the rest of the article

Citi Raises Rates on Cardholders

noreply@blogger.com (Dollars and Sense) — Thu, 02 Jul 2009 00:09:00 +0000

This is before new regulations come into effect that prevent them from doing this very thing come into effect in a few months. From The Financial Times:

Citi raises card rates on millions

By Francesco Guerrera
Saskia Scholtes
Tom Braithwaite
Financial Times
Published: June 30 2009 23:59 | Last updated: June 30 2009 23:59

Citigroup has sharply increased interest rates on up to 15m US credit card accounts just months before curbs on such rises come into effect, in a move that could fuel political anger at the treatment of consumers by bailed-out banks.

People close to the situation said that Citi, which is about to cede a 34 per cent stake to the US government as part of its latest rescue, had upped rates on between 13m and 15m credit cards it co-brands with retailers such as Sears.

Citi's rate increases emerged on the day the government proposed legislation to create a new regulator with sweeping powers on consumer protection and a week after the bank was attacked by some politicians for raising employees’ salaries.

Holders of co-branded cards who failed to pay their balance in full at the end of the month saw their rates rise by an average 24 per cent--or nearly 3 percentage points--between January and April, according to a Credit Suisse analysis of data from the consultancy Lightspeed Research.

Read the rest of the article

More Speculation on Demise of the PPIP

noreply@blogger.com (Dollars and Sense) — Wed, 01 Jul 2009 01:07:00 +0000

From Wall Street Pit:

Financial Crisis: The Two Sides of the Balance Sheet
Wall Street Pit
By James Kwak|Jun 30, 2009

Noam Scheiber at The New Republic has the inside scoop (hat tip Ezra Klein) on why Treasury is letting the Public-Private Investment Program die a quiet death (although at this point the legacy securities component may still go ahead). In short, the argument is that the point of PPIP was to help banks raise capital by cleaning up their balance sheets; since they have been able to raise capital themselves, there is no need for PPIP. According to one person Scheiber spoke to: "If you had asked–I don't want to speak for the secretary–what's problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital."

This represents the latest swing of the pendulum between the two sides of the balance sheet. As anyone still reading about the financial crisis is probably aware, a balance sheet has two sides. On the left there are assets; on the right there are liabilities and equity; equity = assets minus liabilities. (There are different definitions of capital, depending on what subset of equity you use.)

The goal has always been to provide confidence that there is enough capital to withstand the impact of market and economic turmoil--in particular, its impact on the toxic assets that litter banks’ balance sheets. However, there are two alternative approaches to doing this. One is to add more equity to the right side by issuing new stock (preferred or common). (This would add cash to the left side to keep them in balance.) The other is to reduce the uncertainty of the left (asset) side by helping banks sell toxic assets; even if the banks have to sell them for a little less cash than their current balance sheet value, this would have the salutary effect of reducing vulnerability, since cash does not lose value (at least not in an accounting sense). Alternatively, you could achieve the same effect by insuring the value of the assets while leaving them on bank balance sheets, because then the risk transfers to the insurer.

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Eurozone Moves into Deflation for First Time

noreply@blogger.com (Dollars and Sense) — Tue, 30 Jun 2009 22:20:00 +0000

From The Financial Times:

Eurozone inflation turns negative

By Ralph Atkins in Frankfurt
Financial Times
Published: June 30 2009 11:03 | Last updated: June 30 2009 18:16

Eurozone annual inflation has turned negative for the first time since records began, creating a headache for the European Central Bank as it seeks to draw a line under emergency measures to tackle continental Europe's recession.

Consumer prices in the 16-country eurozone were 0.1 per cent lower in June than the same month a year before, according to Eurostat, the European Union's statistical office. It was the first time eurozone annual inflation had fallen below zero since comparable records began in 1991.

The fall in prices reflects sharply lower energy costs and the effects of the region's worst economic downturn since the second world war. Annual inflation is hugely undershooting the ECB's target of "below but close" to 2 per cent.

Read the rest of the article

Optimism...

noreply@blogger.com (Dollars and Sense) — Tue, 30 Jun 2009 21:53:00 +0000

They keep saying the UK should emerge faster and stronger than other economies (and that may still turn out to be the case, give horrible performances elsewhere) from the recession--or whatever it is--but the carnage continues to get worse:

Economy suffers steepest fall in 50 years
The Independent
By Russell Lynch, Press Association

Tuesday, 30 June 2009

The UK economy recorded its sharpest decline in more than 50 years during the first quarter of 2009, figures showed today.

And revisions to figures revealed the current recession began earlier than first thought, with a 0.1 per cent decline seen between April and June last year compared with previous estimates of zero growth.

Output fell 2.4 per cent in the first three months of the year - the fastest rate since 1958, the Office for National Statistics (ONS) said.

The economy also showed an annual decline of 4.9 per cent - the biggest fall since ONS records began in 1948.

The first-quarter decline of 2.4 per cent is much worse than the 1.9 per cent first estimated and comes after bigger-than-expected falls in construction and the UK's key services sector.

The plummet in activity between January and March was almost equal to the 2.5 per cent fall suffered during the whole of the recession in the 1990s, Investec's David Page said.

He warned: "The economy is now likely to undergo a peak to trough adjustment in excess of 5 per cent, nearly as big as the overall 5.9 per cent collapse seen from 1979-1981."

The scale of the decline could put pressure on Chancellor Alistair Darling's forecasts for the public finances this year.

Read the rest of the article

WSJ: Why Cleaning Banks' Books Is So Hard

noreply@blogger.com (Dollars and Sense) — Tue, 30 Jun 2009 02:03:00 +0000

It was almost impossible to get this without being a subscriber, so I'm reproducing it in full (here's the link to the article, which has accompanying charts:

JUNE 30, 2009
Wall Street Journal
Wary Banks Hobble Toxic-Asset Plan
By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG

The government's plan to enable banks to dump troubled assets is facing troubles of its own.

Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks.

But that initiative--called the Public-Private Investment Program, or PPIP--has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits.

The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy.

A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend.

U.S. officials and investors are playing down expectations for the plan--originally billed as a $1 trillion endeavor. Some federal officials say the banking environment has improved since the program was unveiled. They assert that because a dozen or so big banks recently succeeded in raising capital, they are under less pressure to sell bad assets.

Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP--the government-financed buying of bad bank loans. Mr. Geithner recently said the other part--to facilitate the buying from banks of troubled securities, many backed by real-estate loans--could be scaled back because investors are "reluctant to participate." This week, the government is expected to name investment firms to manage this securities-buying portion.

"The fits and starts on all this stuff has added to the uncertainty that makes [investors] stay on the sidelines," says Trabo Reed, the deputy banking superintendent in Alabama, where many small and midsize banks are looking for cash infusions from investors.

Lee Sachs, counselor to the Treasury secretary, says the department remains committed to the program and has received more than 100 applications from would-be investment managers. "One of the goals of the PPIP program has been to help create liquidity in frozen markets," he says. "Some banks will sell assets. Even those that do not will benefit from the greater ability to value the assets they hold."

The slimmed-down program will focus not on bad loans, but on toxic securities, which are a problem for a relatively small fraction of the nation's banks. That is bad news for hundreds of smaller banks burdened with growing piles of defaulted loans. These banks are less able to tap capital markets than their larger rivals, so they have been eager for U.S. help unloading loans as a way to bolster their capital cushions. Many of them can face big problems if just one or two large loans go bad. Seventy banks, most of them community institutions, have failed since the start of last year. Analysts are bracing for hundreds of lenders to collapse in the next few years.

Because these lenders often play key roles supporting their local economies, taken together, they are important to the financial system and to a U.S. economic recovery, says Kenneth Segal, senior vice president at Howe Barnes Hoefer & Arnett Inc., an advisory firm for small and midsize lenders.

During the last banking crisis, nearly two decades ago, the government established the Resolution Trust Corp. to sell off the bad loans and securities of banks that had failed. Many experts credit the RTC with helping defuse that crisis.

This time around, efforts to rid banks of soured assets have sputtered repeatedly. In late 2007, federal officials helped cobble together a plan for a bank-financed fund to buy securities held by bank investment funds, but the effort was aborted. In 2008, the Bush administration established a $700 billion program to buy banks' soured assets. Partly because of the complexity of valuing those assets, the U.S. abandoned that plan, instead opting to directly pump taxpayer money into banks.

Scott Romanoff, a Goldman Sachs Group Inc. managing director, has referred to the current effort, PPIP, as "the greatest program that never occurred," because it "created confidence in the markets so banks can raise equity capital."

In recent weeks, markets have lost some vigor amid renewed concerns about the economy. That could make it more difficult for big banks to raise additional capital. Banks also could face further losses as bad assets decline more in value.

On March 23, when Mr. Geithner unveiled PPIP, the Dow Jones Industrial Average surged nearly 500 points, or 7%, its biggest gain since October, on hopes that the program would nurse the banking industry back to health.

Many bank executives were skeptical about whether the program could succeed. Even before it was announced, some had grumbled that federal officials weren't consulting them, and instead were crafting the initiative with input from would-be investors. Some banking executives say they warned that they would be loath to sell at the kind of prices investors were likely to demand.

Executives at Citigroup Inc. shared those concerns, according to people familiar with the matter. While the New York bank was sitting on at least $300 billion of risky loans and securities, selling them at discounted prices would require painful hits to its already thin capital ratios, these people say.

Some Citigroup executives had a different idea: Maybe they could turn a profit by bidding on their own toxic assets at discounted prices, using government financing, according to the people familiar with the talks. Other big banks also talked about setting up distressed-asset units to snap up troubled loans and securities, including from their parent companies, with taxpayer financing.

FDIC Chairman Sheila Bair later publicly shot down the idea. Citigroup declined to comment.

Meanwhile, many small-town bankers hoped the program would help them unload the bad assets--generally loans to finance commercial real-estate projects--that were hurting their balance sheets. Some potential buyers had surfaced before PPIP was announced, but they were offering such low prices that few banks could afford to sell the loans without severely denting their capital cushions.

The hope was that PPIP would help narrow the gap between buyers and sellers. Investors would be able to bid more because the government would offer buyers little-money-down financing, along with some downside protection.

"We have illiquid assets," says Patrick Patrick, chief executive of Towne Bancorp of Mesa, Ariz. "It would be helpful to have a vehicle where you could sell them at market and be able to restructure our balance sheet."

Like many small banks, Towne Bancorp has been hurt by a handful of loans to finance real-estate projects that went belly up. In the first quarter, the bank said two souring commercial real-estate loans caused its portfolio of loans at least 90 days past due to swell by 52%. Such loans represent more than 22% of Towne Bancorp's $143 million in assets. The company has been trying for months to sell 19 pieces of real estate--including undeveloped land and a warehouse--that it seized when loans went into default.

When PPIP was announced, big-name investors were intent on figuring out how to profit from it. Raymond Dalio of giant hedge-fund firm Bridgewater Associates, which oversees $72 billion in assets, initially expressed interest in participating. But within days, he was blasting it, saying buyers and sellers would have difficulty agreeing on pricing and fund managers that profited would be exposed to criticism from politicians. The way PPIP is set up "makes us not want to participate and it makes us question the breadth of interest that we will see in the program," he wrote to clients.

Lawyers for hedge funds and private-equity investors warned clients about the risks of doing business with the government. The industry was unnerved by the restrictions placed on banks participating in another federal bailout program, the Troubled Asset Relief Program. Fund managers were also bothered by President Barack Obama's criticism of the hedge funds holding Chrysler LLC debt who had refused the government's buyout offers.

In conference calls with bankers and investors, FDIC officials emphasized that PPIP was critically important to cleanse banks of their bad assets. "I think you know the stakes are very high with this," Ms. Bair, the FDIC chairman, said during a March 26 call, according to a transcript. "We need this program to work."

Ms. Bair and her deputies encountered skepticism. In an April 9 conference call with the FDIC, Mark Wolf of TRI Investments LLC, described his Carlsbad, Calif., firm as a potential PPIP bidder. "Unless you've got a process that either forces banks to sell or does a better job of encouraging them to sell, we're just going to see banks sitting back and dribbling these things out through an eyedropper over the course of time," he said.

Some bankers were hesitant. "If these loans are bought at a discount, we create a hole in capital," Lou Akers, executive vice president of Adams National Bank in Washington, told FDIC officials on the March 26 call. He suggested that regulators consider changing the way they calculate banks' capital in order to cushion the blow. Government officials were noncommittal, a transcript of the call indicates.

FDIC officials emphasized on the conference calls that PPIP was intended to benefit all banks, not just industry giants. But smaller banks began to worry they'd be locked out.

To participate in PPIP, local lenders were told, they would have to pool their loans with other banks. The process, which the FDIC said it would facilitate, was designed to simplify the bidding process for government officials and prospective investors. The agency didn't want thousands of banks put their loan portfolios on the block separately.

But the FDIC planned to require participating banks to kick in a minimum amount of assets, and some small-town bankers worried they wouldn't have enough to qualify.

Too high a minimum "will virtually eliminate all community banks from being able to participate in this program," wrote Julian L. Fruhling, president of Legacy Bank in Scottsdale, Ariz., in a letter to the FDIC.

Still, some investment firms that were hoping to help manage the government's program were optimistic. Laurence Fink, chief executive of BlackRock Inc., said in mid-April during a trip to Japan that if his firm is selected as a manager, it was ready to raise $5 billion to $7 billion to buy securities through PPIP. He said he hoped to raise money from individual investors in Japan and the U.S., and that potential returns could be as high as 20%.

The FDIC and other regulatory agencies were planning to use their "stress tests" of the nation's top 19 banks to push them to sell assets via PPIP, according to people familiar with the matter. But in the weeks before the stress-test results were announced in May, market sentiment began to improve. A number of banks succeeded in raising capital by selling new shares to the public.

Once the stress tests were wrapped up in May, even more banks sold shares--a total of roughly $65 billion within a month. The capital-raising removed regulators' leverage to encourage participation in PPIP, according to government officials.

Around the same time, BlackRock reduced its goal for the size of its potential PPIP investment fund to about $1 billion, say people familiar with the matter.

Earlier this month, the FDIC formally postponed the loan-buying portion of PPIP, called the Legacy Loan Program. "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system," Ms. Bair said.

Next month, the FDIC intends to use PPIP for a far narrower purpose: to auction loans the agency has seized from failed banks. Eventually, it hopes to resuscitate the loan-buying program so that smaller banks can benefit from it.

But that could be tricky. The U.S. initially justified PPIP by invoking its "systemic risk" powers, which enable regulators to step in when the financial system is at risk. Regulators have debated whether such a justification would remain if the program were geared toward smaller banks. FDIC officials doubt they will muster the necessary consensus among regulators to invoke the special powers and keep the loan program alive, according to a person familiar with the matter.

Many banking experts contend that the financial system won't fully stabilize until banks get rid of their bad assets.

Mr. Segal, the bank adviser, complains that federal officials have cited recent capital raising by big banks as evidence that "the system is OK." That may be true "for the top 15 or 20 banks," he says. "But for everybody else, there really needs to be more attention paid."

Steep Increase In Fannie/Freddie Delinquencies

noreply@blogger.com (Dollars and Sense) — Tue, 30 Jun 2009 00:37:00 +0000

This is bad news: Fannie and Freddie mainly deal in prime, not subprime, mortgages. Job losses are the culprit. From The Wall Street Journal:

By JAMES R. HAGERTY
JUNE 29, 2009, 4:44 P.M. ET
Wall Street Journal

Fannie Sees Jump in Overdue Home Loans

Fannie Mae reported a steep increase in the percentage of home mortgages with overdue payments.

The government-backed mortgage investor said in a monthly summary released Monday that 3.42% of the single-family mortgages it owns or guarantees were 90 days or more delinquent in April, up from 3.15% a month before.

Fannie's main rival, Freddie Mac, reported last week that its single-family delinquency rate for May was 2.62%, up from 2.44% in April.

Fannie and Freddie are the main providers of funding for U.S. home mortgages. Although the two companies bought many of the riskier types of home loans in recent years, their main business is in prime mortgages. More prime borrowers have been falling behind as they lose jobs or their incomes fall.

Richard DeKaser, an independent economist in Washington, D.C., blamed the continuing rise in loan delinquencies on the spike in job losses and on what her termed the "evaporation" of home equity amid falling home prices, leaving many borrowers without a cushion when they lose their jobs.

Read the rest of the article

More Background on Coup in Honduras

noreply@blogger.com (Dollars and Sense) — Mon, 29 Jun 2009 20:34:00 +0000

As the situation in Honduras continues to unfold in unexpected ways, we recommend reading the posts from the America's Policy Program.

Another chance to see Steve Early

noreply@blogger.com (Dollars and Sense) — Mon, 29 Jun 2009 18:35:00 +0000

If you can't make it to Cambridge tonight to see Steve Early talk about his new book, Embedded with Organized Labor: Journalistic Reflections on the Class War at Home (see earlier blog posting), he'll be speaking next week in Boston, with Elaine Bernard & Rand Wilson.

Steve will address his critique of organized labor, and his vision of how American workers can get out from under the terrible economic and political constraints they endure. Rand Wilson and Elaine Bernard will draw on Steve's analysis to provide their own reflections. More information here.

The event will take place on Tuesday, July 7, at 7:00 p.m. at Encuentro 5, a space for progressive movement building, located in Chinatown.

Economists on Iran

noreply@blogger.com (Dollars and Sense) — Mon, 29 Jun 2009 18:14:00 +0000

The Union for Radical Political Economics (URPE) has recently updated its Web page on Iran. The site features URPE members whose expertise is the political economy of Iran, many of whom come from Iran.

Among the highlights: Reza Ghorashi, Tom O'Donnell, Ervand Abrahamian and Manijeh Saba presented a panel at the 2009 Left Forum (on April 18 in New York City) called "Obama and Iran: A New Beginning?" Audio recordings of the talks are posted on the URPE Web page.

You can also listen to panels from previous years for background information on Iranian internal politics, the roles of oil and nuclear power, regional power relations, Iran and Israel, etc.

TONIGHT: Steve Early on unions --- Boston-area event

noreply@blogger.com (Dollars and Sense) — Mon, 29 Jun 2009 16:00:00 +0000

Meet the author of
Embedded with Organized Labor: Journalistic Reflections on the Class War at Home
A new book by Steve Early, former CWA organizer, labor journalist, lawyer and frequent contributor to The Boston Globe

Speaking at: Porter Square Books (at Porter Sq. Shopping Center across from Red Line T-stop)
25 White St., Cambridge, Mass. (617-491-2220)

Monday, June 29
7:00 to 8:30 P.M.
With after-party at Christopher’s Restaurant across the street...

Find Out More About:
—Workers and the economic crisis
—The fight for health care reform
—The fate of “Employee Free Choice”
—Current struggles for union democracy and rank-and-file control
—The future of national labor federations like Change to Win and AFL-CIO

Sponsored by: Monthly Review Press, Labor Notes, Massachusetts Jobs with Justice, CWA Locals 1400 and 1298, IBEW Locals 2222 and 2321, Boston Newspaper Guild, TNG-CWA, IUE-CWA Local 201, Boston DSA, Boston Radical Education Project, Solidarity, Socialist Alternative, and Dollars & Sense Magazine

Refreshments will be served. For more information, call: 617-930-7327
To order the book online, visit: www.monthlyreview.org

Background on Military Coup in Honduras

noreply@blogger.com (Dollars and Sense) — Sun, 28 Jun 2009 17:08:00 +0000

The Honduran military has forcibly taken President Manuel Zelaya and put him on a plane to Costa Rica.

Two very interesting reports from the Council on Hemispheric Relations (COHA) discuss the background to the coup.

21st Century Socialism Comes to the Honduran Banana Republic discusses the moves that Zelaya had taken as part of the leftist wave in Latin America: joining the alternative free-trade alliance known as ALBA, raising the minimum wage by 60%, and announced plans to support indigenous groups and increase literacy. However, the report also details the increasingly autocratic actions he has taken when faced with opposition.

A quick update from Friday discusses the situation leading up to the coup.

The Christian Science Monitor has an excellent breaking news piece on today's events.

Bloomberg Preview: June Unemployment

noreply@blogger.com (Dollars and Sense) — Sun, 28 Jun 2009 16:48:00 +0000

They see a loss of .2% for the month, which will take it up to 9.6%, and attribute the slower pace to long-awaited signs of stabilization in manufacturing:

Unemployment Probably Rose at Slower Pace: U.S. Economy Preview

By Shobhana Chandra

June 28 (Bloomberg) Unemployment in the U.S. probably rose at a slower pace and the manufacturing slump eased this month as evidence mounted that the end of recession is in view, economists said before reports this week.

The jobless rate rose 0.2 percentage point to 9.6 percent, the highest level in 26 years, according to the median of 58 estimates in a Bloomberg News survey. The gain would be the smallest since November 2008. A survey of purchasing managers may show manufacturing shrank at the mildest pace in 10 months.

Government efforts to stabilize housing and consumer spending are only now starting to pay off, indicating it will take months before a recovery develops. The job market will remain one of the biggest threats to the emerging rebound as companies from General Motors Corp. to Kimberly-Clark Corp. focus on cutting costs by trimming payrolls.

Read the rest of the article

On The Situation In Iran

noreply@blogger.com (Dollars and Sense) — Sun, 28 Jun 2009 16:38:00 +0000

First, a piece by Slavoj Zizek, turned down by the New York Times, which was posted on LBO talk.

Second, an FT article on the power struggle at the top, focusing on the supreme leader, Ayatollah Khamenei:

Man in the News: Ayatollah Ali Khamenei
Financial Times
By Roula Khalaf
Published: June 26 2009 19:14 | Last updated: June 26 2009 19:14

Not long ago, Ayatollah Ali Khamenei was in an enviable position. Manipulating the levers of power from behind the scenes, the 70-year-old turbaned cleric with oversized glasses was credited with every pragmatic decision taken by the Islamic Republic. Iran's belligerence and extremism, meanwhile, were conveniently laid at the feet of the firebrand president, Mahmoud Ahmadi-Nejad. When the supreme leader spoke, he delivered the last word. No one dared contradict him, or offer an alternative opinion.

But that was before disputes erupted over the presidential election a fortnight ago, before Mr Khamenei declared the controversial vote "a divine victory", and before he unleashed his forces to repress peaceful opposition. Now his followers are forced to remind Iranians, time and again, that he had spoken "the last word". The rage of Iran's protesters has turned against him, with an "I hate Khamenei campaign" launched on Facebook, and cries of Allahu Akbar on rooftops at night, an act of defiance borrowed from the days of the 1979 revolution, designed to tell him that no one is above God.

These days, Mir-Hossein Moussavi, the opposition leader who says the election was stolen from him, issues statements responding to the ayatollah. It is not in the interest of the country, he said this week, for the supreme leader to be "equated" with the president. And no, he had no intention of bowing to the brutal pressure and accepting a rigged election result.