Link:
Last month’s federal backstop of Citi attracted some catcalls for letting the struggling bank’s management and shareholders off easy. But to former AIG chief Hank Greenberg — a persistent critic of the tougher terms the government has enforced in its rescue of the teetering insurer — the Citi deal is a paragon.
(emphasis mine)
Hank Paulson and His Evil Minions™ are looking at bailing out private student loan issuers with TARP money:
Student advocacy groups are urging the Treasury Department to prevent a new $200 billion consumer-lending program from benefiting private student lenders, which they say are largely unregulated and prey on students with risky, high-interest loans.
The program, announced this week and developed by the Treasury and Federal Reserve, is not aimed specifically at the student loan market. Its much broader goal is to encourage lending to consumers — including car loans, credit card debt and student loans — as well as help the financial system by increasing liquidity in the credit markets.
But groups including Consumers Union, the nonprofit group that publishes Consumer Reports magazine, and the American Association of Collegiate Registrars and Admissions Officers say the money will also help prop up private student-loan providers, which often offer high and variable interest rates but not the consumer protections guaranteed under the federal government’s loan programs.
These people are sleaze merchants, and they victimize the students in question and the taxpayers, in addition to having been caught bribing school financial aid officials.
Sallie Mae, the nation’s largest lending company, has offered private loans with an average interest rate of 11 to 13 percent, nearly twice as much as federal loans, according to Student Lending Analytics, a California-based firm that advises financial aid offices. It said Sallie Mae, which is based in Reston and controlled 42.5 percent of the private student loan market last year, has offered some private loan variable rates that are more than 17 percent.
Tom Joyce, a spokesman for Sallie Mae, said the average rate now is between 10 and 11 percent, around what most banks are charging for private student loans, which are not subsidized and government-guaranteed like federal loans. “The comparison to federal student loan rates is unfair and artificial,” he wrote in an e-mail. “The comparison should be to borrowing on a credit card or other unsecured loans.”
Only, of course, these loans cannot be discharged through bankruptcy, and they are guaranteed by taxpayers, so they are completely different from credit card loans.
Can you imagine an industry so f$#%ed up that it compares itself to the credit card industry in regards to how ethically it treats its customers?
Well, you don’t have to, because reality has met you, and smacked you in the face with a rancid halibut.
This time on the effect that zero down, negative equity and other risky mortgages might have if allowed to continue:
The Bush administration backed off proposed crackdowns on no-money-down, interest-only mortgages years before the economy collapsed, buckling to pressure from some of the same banks that have now failed. It ignored remarkably prescient warnings that foretold the financial meltdown, according to an Associated Press review of regulatory documents.
“Expect fallout, expect foreclosures, expect horror stories,” California mortgage lender Paris Welch wrote to U.S. regulators in January 2006, about one year before the housing implosion cost her a job.
Bowing to aggressive lobbying — along with assurances from banks that the troubled mortgages were OK — regulators delayed action for nearly one year. By the time new rules were released late in 2006, the toughest of the proposed provisions were gone and the meltdown was under way.
They soft pedaled Saudi involvement in terrorism both before and after 911 because the House of Saud is an FOB (Friend of Bush), and they soft pedaled sleazy mortgage agents because they gave money to Republithugs.
That’s what it’s all about for them.
Well it now appears that the merger of Bank of America and Countrywide Financial so aggressively pushed by Bank of America CEO and President Kenneth D. Lewis is finally bearing some fruit.
Unfortunately, it appears to be fruit of the toxic variety, as investors who hold mortgage backed securities of the former subprime lender are suing to demand their repurchase at full face value:
On Monday, a hedge fund sued the Countrywide Financial Corporation, the giant mortgage lender, demanding that Countrywide compensate holders of some securities backed by mortgages if the lender changes the terms of the loans.
The fund, Greenwich Financial Services, said it and other investors stood to lose money if Countrywide, now part of Bank of America, modified loans under a settlement that it reached with 11 state attorneys general in October.
Seriously, what were you thinking when you turned over the rock that was Countrywide Financial, saw the slime that lay beneath, and started to eat that, Mr. Lewis?
The problem with superstar multimillion dollar CEOs is that they don’t think that the basic rules of reality apply to them.
They claim to have dropped bonuses, but they made “retention payments” to top level executives, including, “$3 million to retirement services chief Jay Wintrob.”
Who is Jay Wintrob?
Wintrob is CEO of AIG Retirement Services Inc., the division that sells annuities. He was chief operating officer of SunAmerica when AIG bought the firm for $19.7 billion in 1998. The business he now heads may sell for about $12 billion, according to Gary Ransom, analyst at Fox-Pitt Kelton Cochran Caronia Waller. Wintrob didn’t return a call seeking comment.
So, he lost about 7.7 billion for AIG, and they feel the need to pay him money to keep him.
We need to start sending these guys to jail.
Well, it looks like today was the day for all the stuff you wanted to dump before a 4 day weekend.
First, consumer spending fell 1%, well beyond the prediction of 0.7%.
Remember that these days, the Christmas season starts in October for a lot of people.
This is a crushing figure, and it’s not just due to falling energy prices, because people are paying down debt too.
The consumer confidence numbers reinforce this. The index is at 55.3, the lowest number since 1980, though still above the record of 51.7 in May, 1980.
Confidence not any better on the business side of things, with
durable goods orders falling 6.2% in October, and no, that’s not an annual rate, that is the shrinkage for the month.
The unemployment stats say that weekly jobless claims fell last week, but I’m taking that with a grain of salt for the following reasons:
Just in case you are wondering how bad this will get, note that Fitch just cut its ratings on Toyota’s bonds to AA from AAA.
Seriously this is a Stay-Puft Marshmallow Man news.
The credit markets are freezing up, though applications for mortgages are up, largely on insanely low interest….I wonder how many applications are rejected though.
I would also note that new home sales declined to the lowest level since 1982, so its not like there are a sh^%load of buyers out there.
As a result of all this, we are seeing a number of rescue packages world wide, with the European Commission announcing a €200 stimulus plan, ]China’s central bank cutting rates.
These are probably what drove the dollar up today, and it also drove oil up
That being said, I think that the most troubling indicator is the fact that the 10-year Treasury yield fell below 3%, a new record, and this indicates that the flight to the relative safety of US Treasuries is continuing unabated.
Like me, they ask the question, “Why are Robert Rubin and other directors still employed?“
It’s a good question.
Truth be told, my guess is that the Wall Street Journal hates Bob Rubin because he worked for Clinton, and they have CDS.*
It may be further exacerbated by the fact that his policies were so completely slanted toward the financial services industry, so the cognitive dissonance makes their heads hurt.
For me, it’s because he has been consistently anti-worker, pro-Wall Street, and now we know that he’s just an incompetent with a good line of crap to feed people.
*Clinton Derangement Syndrome
It appears that the FDIC just started requiring that banks deemed troubled by the FDIC must start reporting details of all its qualified financial contracts. (QFC)
What are QFC’s? Basically they are the big sh*&pile, MBS, CDS, etc.:
QFCs are contracts between a bank and a counterparty, and they include everything from securities and repurchase contracts to currency and credit default swap agreements – some of the same murky derivatives behind Wall Street’s biggest blowups.
Why does this scare banks:
Many banks still don’t know their exposure to these products or details about the counterparties, which they are also required to provide by the new ruling. The way Bair sees it, they don’t know because no one has ever forced them to know.
The bottom line:
If the FDIC rule passes, banks will have to be able to account for their exotic securities. These banks might have trouble.
Definitely, and it would have been far better that it had been done years ago.
After driving their bank into the ground, senior Wachovia executives in line for almost $100 million in severance packages.
Gee, the updated numbers for US GDP are in, and they have gotten worse, going from an annual rate of contraction of -0.3% to -0.5%.
In an effort to staunch the bleeding, the Federal Reserve has announced a new sh#@pile buy:
The Federal Reserve announced on Tuesday that it will initiate a program to purchase the direct obligations of housing-related government-sponsored enterprises (GSEs)–Fannie Mae, Freddie Mac, and the Federal Home Loan Banks–and mortgage-backed securities (MBS) backed by Fannie Mae, Freddie Mac, and Ginnie Mae. Spreads of rates on GSE debt and on GSE-guaranteed mortgages have widened appreciably of late. This action is being taken to reduce the cost and increase the availability of credit for the purchase of houses, which in turn should support housing markets and foster improved conditions in financial markets more generally.
They are also opening up a facility for
consumer and small business loans.
This took down 30 year mortgage rates to a record low, down 1-1/8 percentage point to 4-7/8.
Of course, right now, the banks are so skittish that they are unlikely to do a mortgage unless the property is sold at a seriously depressed price anyway.
This is actually good sense, as the Case-Schiller home price index fell 17.4% year over year.
That’s probably why the Libor is trending up again. Too much uncertainty, so banks want more for their overnight loans.
Then again with the number of banks characterized as “troubled” by the FDIC jumped from 117 in the 2nd quarter to 171 in the 3rd quarter, the highest number in 13 years.
It’s no wonder that some of the technical wonks who watch the stock market are noting that this is the most volatile market ever, with average daily swings over the last 50 trading days of 3.82%.
By way of comparison, this number was 0.33% in February.
Oil fell a bit to day, to $50.77/bbl, and I think that the markets are starting to wonder about just how much money that the Federal Reserve will print, so the dollar fell on the news of the new Fed lending facilities.
That’s the short read on Dan Ariely’s reseasrch, he is a professor of behavioral economics at Duke University:
We did this study in India, where the cost of living is relatively low so that we could pay people amounts that were substantial to them but still within our research budget. The lowest bonus was 50 cents — equivalent to what participants could receive for a day’s work in rural India. The middle-level bonus was $5, or about two weeks’ pay, and the highest bonus was $50, five months’ pay.
What would you expect the results to be? When we posed this question to a group of business students, they said they expected performance to improve with the amount of the reward. But this was not what we found. The people offered medium bonuses performed no better, or worse, than those offered low bonuses. But what was most interesting was that the group offered the biggest bonus did worse than the other two groups across all the tasks.
(emphasis mine)
So, we have people over compensated and for work that mostly really does not to be done, (financials have exploded relative to the rest of the economy over the past few decades) and given bonuses for under-performing, and now we find out that the bonuses make them do a crappier job.
Delightful.
We now have reports that Hank Paulson is considering asking for the 2nd $350 billion installment of TARP.
Great googley moogley.
I’m just saying.
He’s lied every step of the way. He’s been wrong every step of the way.
He has studiously cushioned his friends from consequences, creating moral hazard, every step of the way.
Give him nothing….Except perhaps Robert Rubin as a cell mate.
So the US government is putting in $20 billion for non-voting preferred stock and guaranteeing over $300 billion in securities.
They are getting only 8% on this, and remember that Citi’s market cap was $22 billion. That $20B should have given the Feds 90% control of the company.
They should have taken it over, and fired (no golden parachute) upper management…Particularly Robert Rubin.
Instead, it’s a suspension of dividends, and some cosmetic restrictions in executive pay.
Mark Thoma has the rundown of informed reactions. A bailout was necessary — but this bailout is an outrage: a lousy deal for the taxpayers, no accountability for management, and just to make things perfect, quite possibly inadequate, so that Citi will be back for more.
Amazing how much damage the lame ducks can do in the time remaining
Paul Kedrosky goes into a bit more detail in Good Bank, Bad Bank, and F$#ked Bank ($# mine):
Here is the gist:
- Citi will carve out $300-billion in troubled assets, which will remain on its balance sheet
- The first $37-$40-billion in losses on those assets will go to Citi
- The next $5-billion in losses will hit Treasury
- The next $10-billion in losses will go to the FDIC
- Any more losses will go to the Fed
- There will be no management changes at Citi, because, you know, they are all fine and upstanding people who have done nothing wrong
- There will be some compensation limitations, but those have not yet been made clear
To be clear, this is not a “bad bank” model. Assets are not, apparently, being taken off the Citi balance sheet and put into another entity walled off from the Citi biological host. Instead, they are being left on the Citi balance sheet, but tagged and bagged for eventual disposal via taxpayers. In other words, we are, given the size and nature of the maneuver, creating a new variant on the good/bad bank model that I hereby christen “f$#ked” bank. You do that, of course, when removing all the toxic assets from a “good” bank’s balance sheet would leave no bank behind at all.
(emphasis mine)
You know, I was wrong when I said that Robert Rubin should be fired. He should be pursued by criminal authorities with the same Javertian intensity that that corrupt prosecutor did in the Julie Amero case (previous post).
Robert Rubin needs to go to jail for a very long time.
The WaPo has a story about how Countrywide Mortgage went regulator shopping to find a more compliant agency, they ended up going with the Office of Thrift Supervision, who wooed the now disgraced mortgage lender. Why?
Winning Countrywide was important for OTS, which is funded by assessments on the roughly 750 banks it regulates, with the largest firms paying much of the freight. Washington Mutual paid 13 percent of the agency’s budget in the fiscal year ended Sept. 30, according to OTS figures. Countrywide provided 5 percent. Individual firms tend to make a larger difference to OTS finances than other bank regulators because the agency oversees fewer companies with fewer assets.
Yes, let’s make sure that regulators are paid by the industries that they regulate.
Let’s make sure that regulators are forced to compete for who they regulate.
That way, they won’t regulate at all.
I think that we have to start with the fact that U.S. Treasury Credit Default Swaps risk premiums just hit record levels.
If that sounds arcane and obscure, that’s because it is, because the brokers like it that way, but here is a slightly clearer statement, returns on insurance against a defaults on US Treasuries hit a new high….Meaning that investors are pricing in the possibility of a US government default.
This means that a Lot of people are betting that the full faith and credit of the United States of America means nothing.
The US defaulting is the Stay-Puft Marshmallow man moment of US society, and an increasingly large segment of the investing world is betting on it.
At its core, the problem is that this bubble is something that people cannot walk away from, housing and shelter, and the realtor-pimps are now saying that existing home sales are softening, though the staid New York Times is saying that home prices are plunging.
Existing home sales down over 3.1%, and prices down 11.3% year over year.
In the mean time, the Citi bailout is pushing on both currency and energy, with
the dollar falling, because people realize that the printing presses are running non-stop.
That being said, the falling dollar is not helping the ruble, where the Russian central bank has reduced support for the currency for the 2nd time in as many weeks.
It also drove oil up about a fin spot, though retail gasoline prices fell for 68th straight day.
It’s not going to get better any time soon, because MasterCard is reporting falling retail sales.
Meanwhile, Calculated Risk’s Credit Crisis Indicators are slightly worse today.
No details, but considering that it’s George W. Bush and Hank Paulson and Their Evil Minions™, mu guess is that it:
As details come in, and as I read stuff from people who actually have a clue about this crap, I’ll update.
Because that way, much like Amex and GMAC, I can go to the treasury and get some of that money.
Well, we have the stock tanking by 25% yesterday, and Its CEO Vikram Pandit denying reports that it is looking for a buyer.
I dunno, its market cap has dropped from $274 billion to $21 billion in a couple of years, and $21 billion sounds a lot like a handful of beans.
We have reports that “non core” assets might be sold off, and there are leaks that notwithstanding Mr. Pandit protestations, that they are looking to merge with someone.
Well, let’s start with where I got it really wrong, energy, where oil closed below $50/bbl, and retail gasoline prices fall below $2.00/gallon.
I was completely wrong on both counts about my predictions.
In the meantime, the credit crunch is savaging an industry highly dependent on venture capital, biotech.
In the long run, that may be a good thing, because when they aren’t making money, they aren’t lobbying Congress, which makes health care reform, at least for prescription drugs, that much easier.
In terms of the overall credit crisis, things still stink, though Calculated Risk’s Credit Crisis Indicators are neutral in terms of spreads, there has been an incredible flight to US Treasuries, driving rates down to record lows.
Of course, we could be in Europe, where both manufacturing and services are dropping like a stone, and the Euro bank Prez is telegraphing another rate cut