This is in response to the Wall Street contagion moving to Euro banks, which seem to be in worse shape than US ones right now.
Category: Finance
Self Dealing and Corruption, Check
It looks like Hank Paulson is setting about recruting his buddies to purchase toxic assets from themselves.
Delightful.
SEC Reauthorizes Faith Based Accounting
It looks like the banks lobbying the SEC has gotten the desired results. The SEC has relaxed rules on “Mark to Market” accounting:
The three-page joint statement today from the SEC and the Financial Accounting Standards Board does not do away with fair value accounting provisions altogether.
But it gives companies more leeway to employ estimates and their own judgment in many cases when they deem the market to be “disorderly” or seized by liquidity problems. It also gives companies room to determine whether the impaired value of their assets is no longer temporary, a conclusion that could trigger massive write-downs.
Not to get in to the minutiae of this, but it appears that they largely gutted mark to market.
This will make any final reckoning worse.
Not Enough Bullets, Part 2 of Who Knows How Many
Alan H. Fishman. former CEO of the former Bank Wamu, got $20 million for his 17 days on the job:
According to filings with the Securities and Exchange Commission, WaMu threw a $7.5 million bonus at Fishman when it hired him on Sept. 8, and guaranteed him an immediate cash severence of $11.6 million — both of which he gets to keep.
He also was eligible for annual bonuses of up to 365 percent of his annual base pay — set at $1 million — to go with millions of shares of company stock.
Fishman does lose out on a big bonus that would have kicked in had he remained on the job through 2009.
We are paying a bunch of Harvard MBAs to fail, and not surprisingly, that’s what they produce, failure.
Of course, the employees and their pensions….C’est caduc.
Your Financial Meltdown Funny of the Day
Too Funny
Economics Update
Well, we are seeing the 9th straight drop in monthly non-farm employment rolls (click on graphs for pretty pictures).
I find The U6 graph that I swiped from Paul Krugman to be particularly interesting.
Let’s just call it; we are in a recession.
I would also note that the credit flows have nearly shut down worldwide, which is why the Federal Reserve lending window is seeing record use from banks.
BTW, it ain’t just the Fed which is throwing money, particularly US Dollars, out the windows, it’s all of the central banks.
The obvious big news is the House passing the Wall Street bail-out, and I’m as yet unsure how the markets are reacting to this.
Oil is down down, which could either imply confidence in the US economy, or the belief that a recession is inevitable, and the dollar is mixed.
Me Bad
It appears that the Wachovia-Citi deal is off, and they will be purchased by Wells Fargo, though Citi is saying that Wachovia can’t back out of the deal.
My guess is that they are looking for a breakup fee.
Interestingly enough, the Wells deal does not require FDIC assistance.
All I can say is that it was a done deal yesterday evening.
People are Hoarding Gold
For those folks who think that treasuries art not safe enough.
I Love Barney Frank
In the “Heterosexually yours in a chaste and biblically appropriate kind of way,” that the Jesus’ General does. Or at least I love the distinguished gentleman from Massachusetts when he says stuff like this:
Frank: “We don’t believe they had the votes and I think they are covering up the embarrassment of not having the votes. But think about this: somebody hurt my feelings so I will punish the country. I mean that’s hardly plausible. And there were twelve Republicans who were ready to stand up for the economic interest of America but not if anybody insulted them. I’ll make an offer: Give me those twelve people’s names and I will go talk uncharacteristically nicely to them and tell them what wonderful people they are, and maybe they’ll now think about the country.”
There is some serious ownage going on here.
Economics Update
First the Institute for Supply Management’s manufacturing index just fell off a cliff, dropping to 43.5%, when the consensus was for 49.6%.
This is the lowest number since October, 2001, when manufacturers were freaking out over 911, and the biggest drop since 1984.
The fact that factory orders are down 4%, and that the
Baltic Dry Index Tanks, a survey of shipping costs are also in the tank, reinforce the idea that something is amiss, though I woul,d be remiss not to note that the Baltic Dry Index has a lot of noise in the data, and so is not particularly reliable.
Meanwhile, the marginally less noisy weekly jobless claims number have shown an increase too, up 1000, to 497K.
We also have evidence that the credit freeze up continues, with LIBOR spreads rising, and commercial paper basically going away.
In fact, the spread between two year debt swaps and treasuries hit a record, 167.25 basis points.
It doesn’t help that hedge funds are experiencing problems related to the Lehman collapse, with billions of dollars still tied up with mess, while facing a surge of withdrawals from their clients.
Furthermore, there are rumors of a major insurance company on the verge of collapse, and so borrowing costs for the major insurance companies have spiked.
Things aren’t looking great with college’s finances either, with Commonfund restricting withdrawals from its Intermediate Term Fund, which serves schools and other non-profits, because of liquidity concerns.
On the other side of the ocean, the ECB is openly talking about a rate cut, which has pushed the Euro below $1.40:€1.00.
This is all pushing commodities down in price, with Oil, Gold, and Corn falling on the expectation of a stronger dollar and a weaker global economy.
In banking and real estate, 30-year fixed-rate mortgage rates are up marginally, and Citi bought Wachovia for some magic beans (actually around $1/share), and the FDIC got preferred shares.
While not technically a bank failure, that is what it is in reality.
Senate Passes Bailout Package
74-25, with Kennedy not voting, for obvious reasons.
Oh My God Economics Update
I normally don’t note stock market swings, but 778 points after House ‘Phants kill the Paulson bailout bill?
Surprisingly, the dollar is up and oil is down.
Money with half a brain should be fleeing in the other direction, but it appears that European banks are in real trouble too, because their governments are bailing a bunch of them out.
Not that US banks are doing much better, with Citi getting the bits of Wachovia for magic beans.
So not both the US Federal Reserve and various foreign central banks are shoveling money out the door.
Meanwhile, Iceland did what Paulson should have, when it nationalized the Glitnir bank, as has the UK, which has nationalized mortgage lender Bradford & Bingley.
Economics Update
With upwards of 70% of the US Economy being consumer spending driven, it’s not good news that the final for consumer confidence missed expectations, 70.3, as opposed to the forecast 71.0, but it does reflect the fact that the final number for economic growth in the 2nd quarter was revised downward.
The fact that August new home sales are the lowest since 1982, which was not a great year for the economy either, points to the fact that the economy sucks in the real world too.
Of course, while all this is going on, Congress is still fighting over bailing out Wall Street, which has lead to a muddled picture for the dollar.
That beins said, it’s clear that the energy markets are banking on a recession with both oil and retail gasoline heading lower.
All this uncertainty is why 30 year mortgage rates exploded this week, going from 5.78% last week, to 6.09% this week.
31 basis points in a week….Ouch.
FWIW, the central banks are shoveling cash out the door, which will eventually start devaluing the currency (inflation).
Must Read on History of Ratings and How they Destroyed Wall Street
House of Representatives Passed New Credit Card Regulations
It’s some fairly minor stuff, but it’s a start, though I doubt that it will make it past the Senate, though considering that the distinguished gentleman from MBNA Delaware is otherwise occupied, it’s possible.
Basic provisions:
- requires a notice period for interest rate increases
- prohibits interest charges on balances paid during grace periods
- bars issuers from applying payments first to lower-interest debt while debt carrying a higher interest rate remains unpaid.
The Seeds of the Next Crash Have Just Been Sown
The Federal Reserve just eased regulations on minority ownership of banks, raising the percentage of stock ownership allowed to be raised without requiring registration as a bank holding company”
Key changes in the guidelines include allowing an investor to buy up to a 15 percent voting stake instead of the previous 9.9 percent limit. Investors can also buy up to 33 percent total equity interest, including voting and non-voting shares, instead of the 25 percent prior limit.
Allowing greater ownership before regulation, reminiscent of the S&L crisis, when many of these institutions were purchased by developers, who then lent to themselves at unrealistically attractive rates.
Of course, these days, it won’t be real estate developers, but private equity firms who can use this to exert influence over banks for capital.
Not enough bullets.
H/T Calculated Risk.
Overpaying for Assets is Key to Paulson Plan
FDIC Seizes Washington Mutual
J.P. Morgan Chase bought the assets for $1.9 billion.
To clarify, the “purchase” is not a purchase accounts, those still belong to the account holders. The purchase is of the banking operations, J.P. Morgan now manages the accounts, the banks, etc.
Economics Update
More signs of a recession, durable orders just dropped 4.5%, initial jobless rose by 32,000, to a 7 year high, and existing home sales fell by 2.2% in August.
Meanwhile, the dollar has fallen, largely on concerns about the bailout deal.
Meanwhile, banks are borrowing in excess of $110 billion a day, 39.36 billion from commercial banks, and $88.15 billion from investment banks.
Well, This Has Fiasco Written All Over It
It appears that Goldman Sachs is look at buying IndyMac, or at least parts of IndyMac, to build out a retail banking network.
Is it just me, or does this have “Epic Fail” written all over it?