Category: Finance

Now For the Criminal Investigation

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Neel “Cash and Carry” Kashkari is finally leaving as head of the TARP.

I have no knowledge of whether or not he actually broke any laws, though describing the management of the program as “criminal,” is certainly appropriate, but I do think that the DoJ and SEC should investigate because it smells bad.

I do not think that it is at the level of a grand jury investigation….Yet….But you won’t know what’s under the rocks until you turn them over.

Certainly, the program was an example of corruption and regulatory capture though.

Economics Update

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Great Googly Moogly, the new GDP numbers are in for the first quarter, and they show that the economy contracted at a 6.1% annual rate, which follows a 6.3% rate for Q4 of 2008, the worst contraction for a 6 month period in 50 years.

There is a bright spot, however. As Calculated Risk notes, is that sectors that have been traditionally leading are doing better than those that typically lag a recession, which might point toward a bit of a moderation.

At least we are not Lithuania, whose economy contracted by 12% year over year.

It’s news like this that makes the Federal Open Market Committee (FOMC) statement minor economic news.

Basically, they said, “We think that it’s getting worse more slowly, and we can’t cut rates any more, but we will keep shoveling money out the door, and we are watching inflation, really we are.”

If that means anything, it’s beyond me, but it appears that the
Fed’s aggressive asset purchase program will not be further expanded, which implies that they think that we are at/near bottom.

In other banking news, remember yesterday’s stress test update, which fingered BoA and Citi?

Well, there are now reports that at least 6 of the 19 banking giants are under capitalized, hoocoodanode?

Meanwhile, in real estate, we have mortgage applications falling by 18%, and it appears that there is a tidal wave of troubled commercial mortgages on the horizon, with, “volume of commercial mortgages at risk of default has quintupled since the beginning of 2008.”

One of the interesting things here is that commercial real estate loans are generally short term, 5 years or so, so people who have to refinance into the teeth of the recession and credit crisis may be up a certain creek without a paddle, even though they would be otherwise solvent.

Meanwhile, oil rose on the slightly positive Fed statement and reports of a drop in gasoline inventories, while the dollar fell on on optimism about the world economy.

Federal Reserve Determines Interest Rate Appropriate to Economic Situation

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Using the “Taylor-rule approach”, basically yet another one of those equations for the economy that the “quants” came up with, and they get a number: negative five percent.

This is why central bankers have no clue what to do.

Of course, if Greenspan had not created the bubble, both in real estate, and in other investments, by pushing interest rates so low and ignoring market abuses, there would still be some marging, but there is no margin, so we are screwed.

Auto Industry Update

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Well, Honda automobile lost money, though the whole operation made a slight profit because of their motorcycle business.

Meanwhile, GM is having problems negotiating its bondholders, with the troubled automaker giving what says is a “final offer,” and the bond holders are blowing a gasket over this:

Today’s posturing makes it clear that the company and the auto task force would rather discount the thousands of individual investors and retirees who own GM bonds than undergo earnest negotiations.

I think that the bond holders think that they can do with GM what was done with GMAC, throw a tantrum, and get what they want, but the market has already discounted these bonds by over 85%, and the offer is a better deal than that.

On Chrysler’s side, things look better with both the UAW and the bondholders coming to agreements with the auto firm.

The UAW will a get 55% equity stake in Chrysler, in exchange for concessions, but I’m still a pessimist, and believe that they are getting 55% of what will turn out to be nothing.

I think that the bondholders for GM have unrealistic expectations of the carmaker’s survival.

I would say that even if GM gets the bondholders to an agreement, they still have to figure out how to cut dealerships without declaring bankruptcy.

Getting out of those franchise agreements would be difficult otherwise, unless Congress gets into the act to streamline the process, which I do not expect, since car dealers are big political donors.

Stress Test Update

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We are already getting reports, and the latest is that preliminary results show that Bank of America and Citigroup are under capitalized.

The truth is that it is very likely that all 19 banking giants are under capitalized, and that Citi and BoA are insolvent, but the tests would be universally seen as a joke if they had cited these two banks as needing more capital.

One area of concern here is that there is a a tremendous opportunity for insider trading and abuse here, and no one knows who has the data, and who doesn’t, so I would expect that some people are trading on this, or will be in the next few days.

Just in Case You Were Wondering How Tied Into Wall Street Geithner Is….

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The New York Times has a rundown of his ties, and the behavior that this has engendered:

Timothy F. Geithner, who as president of the New York Federal Reserve Bank oversaw many of the nation’s most powerful financial institutions, stunned the group with the audacity of his answer. He proposed asking Congress to give the president broad power to guarantee all the debt in the banking system, according to two participants, including Michele Davis, then an assistant Treasury secretary.

The proposal quickly died amid protests that it was politically untenable because it could put taxpayers on the hook for trillions of dollars.

“People thought, ‘Wow, that’s kind of out there,’ ” said John C. Dugan, the comptroller of the currency, who heard about the idea afterward. Mr. Geithner says, “I don’t remember a serious discussion on that proposal then.”

But in the 10 months since then, the government has in many ways embraced his blue-sky prescription. Step by step, through an array of new programs, the Federal Reserve and Treasury have assumed an unprecedented role in the banking system, using unprecedented amounts of taxpayer money, to try to save the nation’s financiers from their own mistakes.

And more often than not, Mr. Geithner has been a leading architect of those bailouts, the activist at the head of the pack. He was the federal regulator most willing to “push the envelope,” said H. Rodgin Cohen, a prominent Wall Street lawyer who spoke frequently with Mr. Geithner.

There is no failure in Wall Street that Geithner does not think should be subsidized by the taxpayer, or as Yves Smith says, “Geithner is a creature of the financial establishment.”

What is important here is that this was page 1 on the New York Times, which is a recognition by the main stream media that this is a problem, and they used his calendar while President of the New York Fed, showing private meetings and lunches with Wall Street executives, as a part of this.

The use of the calendar is very competent shoe leather journalism, and as Ms. Smith notes, it is exceedingly rare to see it used in a story.

If you scroll down toward the bottom of the story, you discover that the bill drafted to give the Treasury the authority to take over large institutions was drafted by Wall Street lobbyists, literally.

The draft bill sent to Congress sent contained metadata that showed it was from a law firm that represents lobbyists.

Seriously, if the problem is that the banking industry and its ethos are dysfunctional, and I believe this to be the case, you could not find a worse steward of this crisis.

And the MSM is beginning to notice,

The Fix is In on the Stress Tests

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It appears that the stress test results will say that only one bank will need additional capital.

This is bullsh@#. The result that only one bank has issues, and they are small was pre-ordained from the start.

Because they don’t want to say that banks are insolvent, and if they said that no banks had issues, the fix would be obvious, so they went with only 1 bank.

It looks like the good doctor (Roubini) agrees. He is saying that the stress tests are not “serious”.

Teck of a job, Timmy.

Economics Update

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Here’s a surprise, Bank of America buys Countrywide Financial, whose reckless mortgage policies destroyed their company and threw untold thousands out on the street, and now BoA is attempting to make the “Countrywide” brand vanish, because it is such a completely toxic entity.

Which means that they are writing off the so-called “good will”, basically the value of the “Countrywide” brand name, accrued with the purchase.

Heck of a job, Kenny.

In related real estate news, home ownership percentages are back at the level they were in 2000.

More generally, we have the Dallas branch of the Federal Reserve releasing its numbers, and they are all very negative, though they are no longer the end of the world bad, which is an improvement.

In energy, retail gasoline has been flat for the past 2 weeks, and oil is down on the expectation that the flu outbreak is likely to further crimp energy demand.

The flu also drove the dollar up, as people looked for safe havens.

Expect the Stock Market Rally to End Soon

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Because stock sales by executives and other insiders at firms has hit the highest level since 2007.

They know that the earnings for this quarter are not sustainable, and they are getting out of their own companies’ stocks and into cash:

Executives and insiders at U.S. companies are taking advantage of the steepest stock market gains since 1938 to unload shares at the fastest pace since the start of the bear market.

What we have been seeing is a bear rally or dead cat bounce.

Congress Threatens Subpoena Over BoA Threats

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Now that Bank of America CEO Ken Lewis’ testimony before NY State Attorney General Andrew Cuomo has been released, members of Congress want the documents to investigate, and are threatening a subpoena if they don’t get them.

Representatives Rep. Edolphus Towns (D-N.Y.), chairman of the House Oversight and Government Reform Committee, and Dennis Kucinich (D-OH), who the Domestic Policy subpanel, are demanding that all relevant documents be turned over to them, and they are threatening a subpoena:

The implications of Mr. Lewis’ testimony, if accurate, are extremely serious. Under these circumstances failure to comply with the Subcommittee’s request raises the prospect that we will be forced to consider compulsory means to achieve compliance with our request. However, we would prefer your voluntary compliance.

(emphasis mine)

As I’ve said before, it sounds to me like Paulson and Bernanke broke the law, and a full investigation would be a very good idea.

Hell an indictment would be a very good idea.

We Need to Be More European

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Because the EU is proposing a cap on executive compensation:

Bankers’ bonuses and golden parachutes would be capped in all European Union countries under a draft policy circulating in Brussels that amounts to one of the broadest responses yet to concerns about executive pay.

No BS about, “If you participate in this program, you are limited,” it applies to everyone.

They are saying, “Just so much and no more never more than a spot or something may happen, you never know what.”

Even if the bankers were doing a good job, that level of remuneration is immoral, whether its a lawyer or a football player.

Elections Have Consequences, Part IV

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Obama has stated his intention to shut down federal subsidies to private student loan lenders and go exclusively with direct federal loans.

It should save $5 billion a year for the taxpayers and lower interest rates for students, so everyone wins….Except, of course for the private lenders, who are basically parasites anyway, so it doesn’t bother me.

I believe taht he can do most of this through executive order, which is a good thing.

Banks Might Need $1T More in Capital

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So, Timothy Geithner will beginning to report the results of the stress test to the banks, and I do not know the results, but the estimate is scary:

“The headlines, not the details, seem to be driving the markets,” said Frederick Cannon, who is in charge of equity research at Keefe, Bruyette & Woods, a boutique investment bank.

Analysts are already betting that the stress tests will show that banks need to raise significant amounts of new capital, as profits made in the first three months of the year give way to more losses, tied to credit card, commercial real estate and corporate loans. An assessment by Mr. Cannon’s firm, which calculated its own stress test for the industry, concluded Thursday that United States banks might need as much as an additional $1 trillion in capital.

I don’t know this guy from Adam, but $1T is a lot of money. US GDP is about $15T.

I would also note that the economy is already doing worse than the worst case in the stress test, so I would expect the final number is likely to be at least twice as much as this.

Economics Update

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The British economy just posted its largest quarterly loss since 1979, 1.9 % for the quarter, and 4.1% year over year.

We had Moody’s downgrade American Express debt from A2 to A3, because of lower earnings from fewer purchases made with its cards, and more bad loans.

Unsurprisingly, the same thing is happening with the stress tested banks, where PNC Financial says that bad assets are expected to triple.

We do have some good news with Ford Motors beating expectations, though the numbers are still awful, and corporate borrowing costs falling below last October’s numbers.

In currency, the dollar weakened again, and this had traders bidding up the price of oil.

Auto Industry Update

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It now appears that the sale of GM’s main European division is a done deal, and it also looks possible that they will essentially give the car company away, “According to a person familiar with GM’s thinking, an investor will be asked to pay at least €500m ($652m) in equity but the carmaker will realise no financial gain as the money will be injected directly into Opel.”

I note without surprise that Cerberus, the private equity firm that owns Chrysler, is not interested in getting a piece of this deal.

When Cerberus bought Chrysler, they expected to hold onto it for perhaps 6 months, and then sell it to GM. Their model was flip and flee, not sensibly operate a company as a going concern.

Meanwhile, on the worker benefits front, it looks like GM Sand the UAW will be renegotiating their benefits deal, replacing much of the cash promised with an ownership stock in GM.

There is very little that I am sure of, but one is that when employees get an ownership stake in lieu of payment, they get the shaft.

In other GM News, it now appears that the normal 2 week end of year shutdown will be extended to 9 weeks, which makes sense when you look at how moribund car sales are, and they spooked the market by saying that was unlikely that they would be making a $1 billion debt payment in July, though they are saying that this is because they will have restructured the debt.

There is also a report that the US government will move to convert GM’s debt to it into equity, which will likely make the taxpayer the largest shareholder of the automotive giant.

Meanwhile, the Treasury is directing Chrysler to prepare for a bankruptcy filing, and not because, as the chattering class is so fond of asserting, the union is being unreasonable, but because the banks and other debt holders are.

Chrysler lenders offer to cut debt, take stock – Apr. 21, 2009, see here,
here, here, and here.

Basically, the market value on their debt is about 15%, and they want something north of 85%.