Category: regulation

Geithner and His Evil Minions&trade Go Back to the Bad Bank

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Yep, it’s back to bad bank, only this time Geithner has created the fig leaf of private investors to cover up the fact that there will be gross overpayment.

The idea is the government would lend investors the money at sub market rates (ding, subsidy), for non recourse loans (ding, subsidy) to buy the big sh$#pile.

A non recourse loan is, “secured by a pledge of collateral, typically real property, but for which the borrower is not personally liable,” so the if you buy a piece of the big sh$#pile, and it goes bad, you don’t have to pay the loan back.

As a mental exercise, let’s assume that you buy 10 CDOs for $1 million each, and the government loans you 90% of the money to do so. 9 of the 10 are worthless, and you thus lose $900,000.00, with the US government losing $8,100,000.00, but that the 10th, which you bought at 33¢ on the dollar, pays off in full, so your $1million purchase is worth $3,000,000.00, so you pay back the US government, leaving $2,100,000.00, and then split the proceeds, so you and Uncle Sam each get $1,050,000.00.

This means that you cleared $50K on a $1 million investment, and Geithner and His Evil Minions™ just lost $7,050,000.00 of taxpayer money.

Not great, but considering the fact that $10 million was put in, and $7 million of that was lost, it’s pretty good for you.

As Calculated Risk notes it’s another attempt to overpay for bad assets.

Economics Update

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Will the last entity leaving making cars in the US please turn off the lights?

Toyota’s U.S. sales are down 39.8% to 109,583 units in February – MarketWatch, Ford and GM fell 48.2% and 51.6%, and Chrysler fell 44%.

In real estate, pending home sales fell, but realtors are hawking “affordability,” because, well, otherwise they would have nothing to hawk at all.

Meanwhile, the Federal Reserve is rolling out its Term Asset-Backed Securities Loan Facility (TALF), a lending facility geared toward business, auto, and consumer loans.

It’s buying more more sh%$pile from desperate people, but they have decided that they will ignore the compensation limits, even though some of the money from the $700 billion dollar bailout fund.

Bastards.

We also have some mixed signals with recession indicators, with a record number of cargo ships idle, but over the road trucking showing a slight bump.

Oil is above $41/bbl, and the dollar is a bit weaker, largely on the fact that Australia has not dropped its rates.

Timothy “Eddit Haskell” Geithner and His Evil Minions&trade Have Lost

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James Baker, “chief of staff and Treasury secretary for President Ronald Reagan and secretary of state for President George H.W. Bush,” on his management of the problems of America’s banking giants.

When you have James “Evil Capitalist” Baker saying that you are placing too much faith in private ownership, you have not just jumped the shark, but you have jumped Carcharodon megalodon, and probably an entire school of the prehistoric giant shark….

on a Big Wheel tricycle….

Naked…..

While blowing a slide whistle….

With a clown nose on….

While giving yourself a tattoo…

On your own genitals.

What the Shrill One Said

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Go read the latest Krugman OP/ED, he is at the top of his game:

Mr. Bernanke cited “the depth and sophistication of the country’s financial markets (which, among other things, have allowed households easy access to housing wealth).” Depth, yes. But sophistication? Well, you could say that American bankers, empowered by a quarter-century of deregulatory zeal, led the world in finding sophisticated ways to enrich themselves by hiding risk and fooling investors.

And wide-open, loosely regulated financial systems characterized many of the other recipients of large capital inflows. This may explain the almost eerie correlation between conservative praise two or three years ago and economic disaster today. “Reforms have made Iceland a Nordic tiger,” declared a paper from the Cato Institute. “How Ireland Became the Celtic Tiger” was the title of one Heritage Foundation article; “The Estonian Economic Miracle” was the title of another. All three nations are in deep crisis now.

(emphasis mine)

Keynes was right when he warned on how unrestricted torrents of capital could destabilize destroy an economy.

CDOs: How Bad Will It Get

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This is why our banks are insolvent. Even without the increases in leverage that have been created over the past 15 or so years, when you see losses like this:

The real shocker, though, is what has happened after those defaults. JPMorgan estimates that $102bn of CDOs has already been liquidated. The average recovery rate for super-senior tranches of debt – or the stuff that was supposed to be so ultra safe that it always carried a triple A tag – has been 32 per cent for the high grade CDOs. With mezzanine CDO’s, though, recovery rates on those AAA assets have been a mere 5 per cent.

Your bank is toast.

That’s 30¢ on the dollar for the best of the best, and just down from that, it’s 5¢ on the dollar.

This is why the big banks are insolvent.

Bailouts for Citi and Other Banks

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Let’s start with the numbers: City is currently trading at less than $1.50 a share, but the US government is converting its preferred shares to common stock at a price of $3.25/share, that’s around $12½ billion of taxpayer dollars down the hole.

Between the US Government, and various sovereign wealth funds, it means that existing shareholders have gone from 100% of the bank to 26% of the bank….Let’s be clear about it, they are insolvent, that’s the only reason that the management and the shareholders aren’t screaming bloody murder right now.

This is insane.

Good News on Student Loans

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We have some change we can believe in, Obama is calling for an end to federal subsidies to private student loan providers.

Seeing as how the private system has resulted in:

  • Higher costs to borrowers.
  • Higher costs to the federal government.
  • Corruption in the financial aid departments of universities.

It makes a lot of sense to stop subsidizing providers of an inferior service.

Obama would use the money saved for Pell Grants.

NY Times OP/Ed Comes Out for Nationalization Pre-Privatization

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I think htat it’s been clear that this is the best solution for some times, but the fact that The New York Times editorial board has endorsed this action, recognizing that there are Zombie banks, even if Ben Bernanke denies this, is significant.

The conventional wisdom is moving, and one hopes that mssrs Bernanke and Geithner will recognize this and act in a prompt manner.

Looks Like We Will Have the Zombie Banks Around for a While

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Because when you look at the Treasury’s terms of their Capital Assistance Program, (Treasury link)it’s clear that they are propping up Citi, the weakest of the Zombie banks, because it’s purchasing preferred stock, and “These shares can convert at the firm’s discretion (with the approval of their regulator) into common equity if needed to preserve lending in worse-than-expected economic environment at a conversion price set at a 10% discount from the prevailing level of the institution’s stock price as of February 9, 2009.”

Why February 9, 2009? Because that’s the day before Citi’s common share price fell off a cliff.

If they go back any further, it makes it transparently clear that Citi is insolvent, and Timothy “Eddie Haskell” Geithner is trying to avoid placing it into receivership…So….More zombie banks.

If you want any confirmation that they won’t nationalize pre-privatize the big banks ever, you need only look at Bernanke lobbying for a weakening of the mark to market rules, so that they can call the valueless sh^% on their books a pony.

It appears that everyone is doing their level best to duplicate the mistakes of the Japanese in the early 1990s.

Citi is trading at less than $3/share. BoA ain’t doing much better. Their shareholders are already wiped out. This is about letting senior management keep their jobs, even after they mismanaged our finance system out of existence.

The “Stress Testing” of the Big Banks is a Lie

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I’m shocked, shocked to find that gambling is going on here!

As Atrios notes, this is, “just overpaying for sh&%pile.“

Statement from the Treasury
Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.:

A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments. “We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment. Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital.

Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers. Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares.

The conversion feature will enable institutions to maintain or enhance the quality of their capital. “Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized. This program is designed to ensure that these major banking institutions have sufficient capital to perform their critical role in our financial system on an ongoing basis and can support economic recovery, even under an economic environment that is more challenging than is currently anticipated. The customers and the providers of capital and funding can be assured that as a result of this program participating banks will be able to move forward to provide the credit necessary for the stabilization and recovery of the U.S. economy. Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.”

(Emphasis is from FT Alphaville, not the original)

I don’t know about you, but it appears to me that Timothy Geithner has absolutely no intention of applying the normal standards of solvency to any of the big banks.

We have this further reinforced by this lovely quote:

Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

So that’s Geithner’s and by extension Barack Obama’s official policy: privatize profits, and nationalize losses.

(H/T Naked Capitalism for finding the quote)

BTW, just when you thought that Geithner could not get his tongue any further up Wall Street’s anus, we have news that he wants to loan massive amounts of money to hedge funds, to encourage them to buy large pieces of the sh%$pile.

By Dagon’s doughnuts, if this is that bad, we need to nationalize preprivatize the banks tomorrow.

I’m Speechless (Scummy Bank Edition)

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It appears that a number of states have moved to debit cards for unemployment applications, and the banks that have been contracted the service are nickel and diming the recipients with fees (see also here).

Even better, the banks in question are TARP recipients.

I will note that the banks are already making millions in interest on the “float” on the accounts sitting there, and if you call to complain, they charge you for that too.

Quoting Bruce Cockburn, If I had a rocket launcher, some son-of-a-bitch would die.”

Citi’s Plan to Get Bailed out….Again

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Once again, I can’t believe it, but I’m quoting Henry Blodgett, and he runs the numbers on the proposed conversion of preferred stock to common stock:

And what will the US taxpayer get for this preferred stock conversion? 40% of the company for some of its $45 billion of preferred, say reports. The reports add that Citigroup’s goal here is to keep the US’s ownership under 50%, so this won’t be a de facto nationalization.

Well, that’s nice for Citigroup…and another ream-job for taxpayers.

Citigroup’s common equity is currently worth $10 billion. If the US were to convert all $45 billion of its preferred at the current stock price, it should end up with 80% of the company, not 40%.

Basically, preferred stock is very similar from an accounting standpoint, to debt, while common stock is assets….What’s more in the process of writing off debt to assets, the taxpayer is expected to take a 50% haircut.

So the way for the banks to stay out of government hands is for the government to own the banks.

Citi also wantsother sovereign investors, such as, “Abu Dhabi Investment Authority, the Government of Singapore Investment Corporation, and the Kuwait Investment Authority,” to take part in a similar debt to equity swap, though it is not clear if they are being asked to take a similar haircut.

It appears that the US government, particularly treasury are, “open to considering a request to so do,” because placing an insolvent bank, which is what we have with Citi, in receivership is, at least according to Timothy “Eddie Haskell” Geithner evil beyond belief.

Someone needs to explain to Mr. Geithner that he is no longer an employee of the New York banks, as he was when he was president of the Federal Reserve Bank of New York.

When Lebanon is A Safe Haven for Your Money….

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You know that we are completely boned:

Instead, the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

So as major banks in America and Europe were shuttered or partly nationalized and thousands of people in the U.S. financial sector were laid off, Lebanon’s banks had one of their best years ever.

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

Lebanon as safe haven….I have a real problem wrapping my head around this.

More Calls to End “To Big to Fail”

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We are hearing more calls for breaking up the banking giant, this one from Rusty Cloutier, of MidSouth Bank, a regional institution.

Clouter, as CEO of a bank, obviously has an axe to grind, as the prospect of the banking giants getting massive bailouts makes it difficult for him to raise capital.

Right now, this doesn’t seem to be on the agenda, but three weeks none of the very serious people in Washington DC were willing to discuss it as anything but a joke, but yesterday hell froze over, and Alan Greenspan, longtime friend of Ayn Rand, said that it was the least bad solution.

Hopefully, we will see this bubble up over the next few weeks/months.

H/t Calculated Risk