It’s been a bad week for Georgia banks (well, duh, 3 got closed).
There is some sort of joke about the bank closing in Fort Deposit, I’m just saying.
Advanta is a big fish. It was a major player in small business credit cards, and the parent company had declared bankruptcy (see here and here) after its credit card debt write-offs exceeded 20%
JPMorgan Chase recorded some repurchase trades as sales, the same accounting gimmick that spawned Lehman Brothers’ now-infamous “Repo 105s”, suggesting that the failed bank was not alone in its interpretation of a new accounting rule.
Unlike Lehman, which never disclosed the effects of its repo deals on the firm’s balance sheet, JPMorgan detailed the year-end values of its repo sales and purchases in annual reports beginning in 2001, after a new accounting rule was introduced.
The practice ended in 2005 when the company merged with Bank One. “The transactions were done in very small amounts and were fully disclosed,” a spokesman said.
Yeah, we believe you.
More seriously, it should be made illegal to engage in activities that have the effect of removing liabilities from the balance sheet a part of their purpose.
Basically, he’s full of it, the Fed pumped up the bubble, and Alan Greenspan was behind it, because he believed that regulation was unnecessary, and because he wanted to be reappointed by George W. Bush.
Well, the Federal Reserve just lost the next step of the court case, with the U.S. Court of Appeals in Manhattan siding with the circuit court, and with plaintiff, Bloomberg News, that its records are subject to the freedom of information act:
The Fed had argued that disclosure of the documents threatens to stigmatize borrowers and cause them “severe and irreparable competitive injury,” discouraging banks in distress from seeking help. A three-judge panel of the appeals court rejected that argument in a unanimous decision.
The U.S. Freedom of Information Act, or FOIA, “sets forth no basis for the exemption the Board asks us to read into it,” U.S. Circuit Chief Judge Dennis Jacobs wrote in the opinion. “If the Board believes such an exemption would better serve the national interest, it should ask Congress to amend the statute.”
The opinion may not be the final word in the bid for the documents, which was launched by Bloomberg LP, the parent of Bloomberg News, with a November 2008 lawsuit. The Fed may seek a rehearing or appeal to the full appeals court and eventually petition the U.S. Supreme Court.
May? May?
Of course they are going to ask for an en banc hearing, and of course they will appeal to the Supreme court.
My guess is that they will also lobby for a legislative exemption while their lawyers move as slowly as possible.
FWIW, I think that the claim that the borrowers would be “stigmatized” is pure bull sh%$.
Who got the money, and how much they got, is common knowledge on Wall Street: Everyone knows who the borrowers are, except for the general public.
What is really going on here is that there is likely evidence of some sort of wrongdoing, at least a lack of due diligence and sloppiness, that the Federal reserve does not want revealed.
It’s Jobless Thursday, and initial jobless claims fell by 5,000 to 457,000, which is less bad, you need to be under 400K for any real job growth, and the less volatile 4 week moving average fell, though continuing claims fell slightly.
Meanwhile, the CPI was flat in February, with a 0.1% increase in the core inflation rate, which omits food and energy.
The former president of New York’s privately held Park Avenue Bank was arrested on Monday on fraud charges, the first person accused of attempting to steal U.S. government bailout funds in the financial crisis.
The charges came just three days after regulators seized the bank, which had $520 million in assets.
A 10-count criminal complaint said Charles Antonucci devised “an elaborate round-trip loan transaction” that he told others was his own $6.5 million investment in Park Avenue Bank, misleading bank regulators. Antonucci made false statements in the bank’s application for $11.2 million from TARP, the Troubled Asset Relief Program, according to the complaint.
I gotta figure that there is some more TARP fraud among the banksters, but time will tell.
As I have said before, the problem was that the governments were too eager for integration, so they used unrealistic exchange rates to bring in the less well off EU members into the Euro, basically payoffs, and so you now have imbalances that need to sort themselves out.
Still if I were a betting man, I’d bet on the Germans being complete dicks about all of this, because it’s how they roll.
A Repo 105 transaction: if it looks confusing, that’s because it’s intended to confuse
As I noted a few days ago, Lehman used what any normal human being would have called, “accounting fraud.”
Well, we have some more details, and it appears that the New York Bank of the Federal Reserve, and its president, current Treasury Secretary Timothy Geithner, knew it, and did nothing about it.
Basically, this was all about what is called “Repo” transactions.
Essentially, it’s a way to get short term cash by turning over assets as collateral, which is normal and ordinary. It’s a lot like pawning your wedding ring, only the amounts are much larger, and typically the periods of the loan are typically shorter.
So, what is the problem?
Well, ignoring the fact that the assets were in reality absolute crap, which is really a matter of due diligence for the lender, if you remain responsible for any losses in value of these assets, and you structure the transaction so that it does not show up on your balance sheet, because they booked the transaction as a sale of assets, as opposed to borrowing money.
The thing is, that this is illegal, or at least without precedent, in the United States, so they justified the activities, which took place in the United States, by claiming that they operated under UK law:
When Lehman first designed Repo 105 in 2001, however, there was one catch. The firm couldn’t get any American law firms to sign off on the aggressive accounting, namely that these transactions were true sales instead of what amounted to the parking of assets. From the firm’s own Repo 105 accounting policy document, according to the report:
Repos generally cannot be treated as sales in the United States because lawyers cannot provide a true sale opinion under U.S. law.
Enter Linklaters, [a “magic circle” law firm, the US equivalent is a “white shoe” law firm] which grounded its legal brief in English, rather than American, law. The firm explicitly said: “This opinion is limited to English law as applied by the English courts and is given on the basis that it will be governed by and construed in accordance with English law.”
The full legal opinion is after the break.
In any case, other investment banks are denying that they use this accounting gimmick, to which I reply, “Yes, and you will respect me in the morning, the check is in the mail, and you won’t cum in my mouth.”
It’s no wonder that the bankruptcy examiner described the behavior as, “grossly negligent.”
Let me make this clear, I have not read the report, it’s 1053 pages long not counting appendices, but Yves Smith did, and she finds that the NY Fed did not exercise due diligence, and cites the footnotes:
Liquidity was an important factor in the stress testing that Lehman was required to run under the CSE Program. After March 2008 when the SEC and FRBNY began onsite daily monitoring of Lehman, the SEC deferred to the FRBNY to devise more rigorous stress‐testing scenarios to test Lehman’s ability to withstand a run or potential run on the bank.5753 The FRBNY developed two new stress scenarios: “Bear Stearns” and “Bear Stearns Light.”5754Lehman failed both tests.5755 The FRBNY then developed a new set of assumptions for an additional round of stress tests, which Lehman also failed.5756 However, Lehman ran stress tests of its own, modeled on similar assumptions, and passed.5757It does not appear that any agency required any action of Lehman in response to the results of the stress testing.
A final note on all this, for some reason, the blogs are doing a good job of covering all of this, but the papers are burying the story on inside pages, with the WSJ placing it on page C7, and the NYT placing it on B2.
The Fed speak is that economic conditions, “warrant exceptionally low levels of the federal funds rate for an extended period,” this means that they will not raise rates at their next meeting or probably the one after that.
Most likely you will see at least, and possibly 2 statement changes from the Fed before they raise rates, but they are closing the taps a bit by, “closing the special liquidity facilities that it created to support markets during the crisis,” and it reaffirmed that it will be closing the TALF will on June 30.
Release Date: March 16, 2010 For immediate release
Information received since the Federal Open Market Committee met in January suggests that economic activity has continued to strengthen and that the labor market is stabilizing. Household spending is expanding at a moderate rate but remains constrained by high unemployment, modest income growth, lower housing wealth, and tight credit. Business spending on equipment and software has risen significantly. However, investment in nonresidential structures is declining, housing starts have been flat at a depressed level, and employers remain reluctant to add to payrolls. While bank lending continues to contract, financial market conditions remain supportive of economic growth. Although the pace of economic recovery is likely to be moderate for a time, the Committee anticipates a gradual return to higher levels of resource utilization in a context of price stability.
With substantial resource slack continuing to restrain cost pressures and longer-term inflation expectations stable, inflation is likely to be subdued for some time.
The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide support to mortgage lending and housing markets and to improve overall conditions in private credit markets, the Federal Reserve has been purchasing $1.25 trillion of agency mortgage-backed securities and about $175 billion of agency debt; those purchases are nearing completion, and the remaining transactions will be executed by the end of this month. The Committee will continue to monitor the economic outlook and financial developments and will employ its policy tools as necessary to promote economic recovery and price stability.
In light of improved functioning of financial markets, the Federal Reserve has been closing the special liquidity facilities that it created to support markets during the crisis. The only remaining such program, the Term Asset-Backed Securities Loan Facility, is scheduled to close on June 30 for loans backed by new-issue commercial mortgage-backed securities and on March 31 for loans backed by all other types of collateral.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; James Bullard; Elizabeth A. Duke; Donald L. Kohn; Sandra Pianalto; Eric S. Rosengren; Daniel K. Tarullo; and Kevin M. Warsh. Voting against the policy action was Thomas M. Hoenig, who believed that continuing to express the expectation of exceptionally low levels of the federal funds rate for an extended period was no longer warranted because it could lead to the buildup of financial imbalances and increase risks to longer-run macroeconomic and financial stability. 2010 Monetary Policy Releases
Remember: Consumer protection was the Fed’s bailiwick in the run up to the, so this clearly appears to be a sell out, only, as an equally confused Paul Krugman notes:
…But here’s my puzzle: the bill, as I understand it, calls for an independent Consumer Protection Agency, with a director directly appointed by the president, but one that is “housed” at the Fed.
………
Does it mean that the staff will all be long-term Fed employees? Then that would, to at least some degree, compromise the agency’s independence. Or is it purely a cosmetic issue? If so, who exactly is being diverted?
I’m not prejudging this — there’s a lot to look at. But I’m puzzled.
He is insisting that the bureau (downgraded from agency) would be, “Autonomous from the Fed,” and just co-located.
Resolution authority for large institutions.
I think that the real question here is two fold, transparency and independence.
As to transparency, the question is whether Freedom of Information Act laws apply to this organization as they do to other regulatory institutions, or is it a paranoid secret black hole like the Federal Reserve.
As to independence, the question is whether it gets to, under the limitations of civil service regulations, hire its own staff, and draw up its own budget.
If it does not have this authority, it is a paper tiger.
There have been a number of initiatives geared toward getting consumers to move their funds from the too big to fail banks.
All in all, this is likely a good thing, but one of the things that people have not generally noted is that moving your money to a smaller bank also personally benefits you, because smaller banks charge lower fees, and generally treat small customers better.
The promise that has always been made with bank deregulation has been that larger banks would be more efficient, and so pass the savings onto consumers.
The reality is the opposite. Large banks use their oligopoly positions to extract more money from consumers.
Too big to fail banks are also banks that do not serve the consumer, so let’s break them up.
Basically, he has an idea so good, that I don’t care that he wrote it in The New Republic.
He notes that obvious, that the various ways that the government has attempted to deal with home foreclosures are inadequate, and what’s more, the banks aren’t cooperating with the program in any significant way.
The Obama plan, by contrast, has misunderstood the calculus faced by homeowners facing foreclosure. An underwater homeowner has little incentive to save their home from foreclosure, even if the monthly payment is reduced. Mortgage modifications that reduce the principal are far more successful than modifications that reduce the interest rate. A homeowner with equity to protect will find a way to pay the mortgage. In contrast, for underwater homeowners a mortgage payment is just expensive rent.
…………
Also, roughly half of troubled mortgages now have “second liens,” a second mortgage or a home equity line of credit. Second liens are secured by the value of the home in excess of the first mortgage. Home values in many markets have declined by well more than the amount of most second liens. A reduction of principal on the first mortgage would often just be a gift to the second lien holder, still leaving the homeowner with negative equity in their home.
…………
That’s why there’s a need for a much stronger government role in this crisis. Some in the financial industry may be more willing to sell mortgages to the government at a discounted price than they are to modify mortgages themselves. Servicers fear that if they offer affordable mortgage modifications to struggling homeowners, many more homeowners will stop paying and wait for an offer. Selling a mortgage to the government may avoid that problem because the government would modify the mortgage, not the servicer.
But for many of the same reasons that the financial industry has not modified mortgages voluntarily, others in industry would not likely sell many mortgages voluntarily either, at least not at a realistic discount. So how can a new HOLC [Home Owners’ Loan Corporation, an entity created by Roosevelt to help homeowners by buying and managing mortgages duringthe Great Depression] work if mortgage holders will not voluntarily sell mortgages?
The new HOLC could buy mortgages by eminent domain. Eminent domain powers are most commonly used to purchase land for highways or public buildings, but also to renew “blighted” neighborhoods or clean up contaminated land. And existing law allows the use of eminent domain to purchase property interests other than the outright ownership of land.
Some uses of eminent domain have resulted in public wariness and resentment. The Supreme Court’s 2005 decision in Kelo v. City of New London allowed the condemnation of family homes for an “economic development” project from which private developers profited. A mortgage in a securitized pool is no one’s castle.
The toxic assets backed by mortgages are impossible to value. The concern that taxpayers would get fleeced buying toxic assets from the financial industry was well justified. Whole mortgages are not hard to value at all. There are frequent, well-publicized auctions of mortgages with a sufficient number of informed, sophisticated buyers. The auctions are an almost perfect pricing mechanism. The problem for the financial industry is not the difficulty of valuing troubled mortgages; the problem is that many mortgages are not worth much. There are obviously many considerations in the price, but distressed mortgages generally sell for about 30 to 50 cents on the dollar at auction. And any honest valuation of many second liens would be pennies on the dollar.
Your mouth to Obama’s ear.
He is right on the law: In eminent domain, one is obligated only to pay market value, not par.
It won’t happen though, because Geithner and Summers would shoot it down, even it is legal, because, of course, it’s bad for the banks, and what’s bad for the banks is, to them, bad for America.
To be fair though, it should be noted that while Geithner and Summers may be financial Cossacks, it is also true, as Professor Delong is wont to say, “The Cossacks work for the Czar.”
But the examiner, Anton R. Valukas, also for the first time, laid out what the report characterized as “materially misleading” accounting gimmicks that Lehman used to mask the perilous state of its finances. The bank’s bankruptcy, the largest in American history, shook the financial world. Fears that other banks might topple in a cascade of failures eventually led Washington to arrange a sweeping rescue for the nation’s financial system.
That sounds like fraud to me, and I think that it warrants a criminal investigation.
Yves Smith, reading the 2200 page report so that yiours’s truly does not have to, makes this clear, and makes it clear that regulators were complicit:
Well, it is folks, as a newly-released examiner’s report by Anton Valukas in connection with the Lehman bankruptcy makes clear. The unraveling isn’t merely implicating Fuld and his recent succession of CFOs, or its accounting firm, Ernst & Young, as might be expected. It also emerges that the NY Fed, and thus Timothy Geithner, were at a minimum massively derelict in the performance of their duties, and may well be culpable in aiding and abetting Lehman in accounting fraud and Sarbox violations.
…………
But here is the part of the report that discussed how the Fed aided and abetted Lehman misconduct:
[T]he Examiner questioned Lehman executives and other witnesses about Lehman’s financial health and reporting, a recurrent theme in their responses was that Lehman gave full and complete financial information to Government agencies, and that the Government never raised significant objections or directed that Lehman take any corrective action.
I would note that at the time of the Lehman collapse, and for some time before it, the President of the Federal Reserve Bank of New York was one Timothy Geithner.
I’m beginning to think that this is more than incompetence, I’m beginning to think that a criminal investigation should include our current Treasury Secretary.
Barack Obama, you need to fire Timothy Geithner. If the ‘Phants filibuster, then you recess appoint his successor.
Basically, it’s about something that I’ve written many times; that there should be a requirement for insurance like financial products to have insurnace like regulations, such as the 260+ year old requirement that you cannot take out insurance on somethting that it is not yours to lose.
Of course, I understand that this actually does not mean much in the greater scheme of things: People get LTE’s published all the time.
Of course, I don’t have what the conquoring Roman general had, a slave whispering in his ear that fame is fleeting, but I do have a cat with a piece of bacon that has been taped to it.
Senate Banking Committee Chairman Christopher Dodd said he will release his version of legislation to overhaul financial rules, signaling that talks on a compromise with Republican Bob Corker have collapsed.
Dodd, a Connecticut Democrat who had been negotiating with Corker since last month, will release his proposal March 15 and hold a committee meeting to consider changes in two weeks, according to a statement released today.
“I have been fortunate to have a strong partner in Senator Corker and my new proposal will reflect his input and the good work done by many of our colleagues,” Dodd said. “Our talks will continue and it is still our hope to come to agreement on a strong bill all of the Senate can be proud to support.”
Note that he did not mention Richard Shelby, the ranking Republican on the committee, which I think was a deliberate snub; Shelby refused to do anything even approaching good faith.
I am not certain of the dynamics.
It could be that he realized that Corker was actually just trying to delay, that there were unbridgeable differences, or that the recent stories on how Bob Corker was doing the bidding of his campaign donor payday lenders skeeved him out.
My guess is that, at it’s core, Dodd did not want to spend any more time making the bill worse for just one Republican vote.
OK, we have a bank shut down today, a day before the normal Friday closures, and it makes 27 for the year, LibertyPointe Bank, of New York, NY.
I would note that the trend line moved down a bit, because we added one to the sample, but 6 to the number of days, and we are trending around 3 a week. There will be a more meaningful pic tomorrow.
I’m wondering if the FDIC is waiting to roll up a sh%$mess of banks tomorrow, or if this is some peculiarity of the New York State banking department, which executed the closure.
I just got a letter to the editor 
Of course, I understand that this actually does not mean much in the greater scheme of things: People get LTE’s published all the time.