- County Bank, Merced, CA
- Alliance Bank, Culver City, CA
- FirstBank Financial Services, McDonough, GA
That’s 9 for the year, a pace that would put us at 59 failed banks. There were 26 failures in 2008, and just 3 in 2007.
Category: regulation
Changes in Philosophy Bubbling Up in Banking Rescue Plans
In the Wall Street Journal (!), Paul Romer is suggesting something rather similar to my proposal, you know, the one where I suggest amputating the financial industry:
Everyone agrees that the United States urgently needs a few good banks. Turning bad banks into good banks is a difficult and risky way to get them. It’s simpler and safer to start entirely new banks.
In this context, “good” means a bank with assets and liabilities that are easy to value using market prices. At a good bank, officers, regulators and investors can be confident about the value of the bank’s capital.
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The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.
This sounds an awful lot like what I was suggesting.
BTW, it also appears that Timothy Geithner is backing away from the bad bank idea, and looking at having equity shares that have votes, as opposed to preferred stocks.
He’s fighting this kicking and screaming, but the banks are insolvent, and need to be nationalized or otherwise cut loose.
Economics Update
So we have the new, official jobs report, Oh My God!!!
The unemployment rate went up to 7.6%, and 598,000 jobs were cut, the most since 1974, and it happened across all sectors.
Barry Ritholtz looks at the number in more detail, and finds (excerpting):
- Total job losses since the recession started in December 2007: 3.6 million;
- Over the past 12 months, the number of unemployed persons has increased by 4.1 million;
- For the first time since records began in 1939, there were three consecutive months of 500k + job losses;
- Household survey showed a record 1.24 million job plunge (Since data began in 1950)
- The employment-population ratio fell to 60.5%, down from 62.7% at the beginning of the recession, — the lowest rate since 1986.
- Unemployment rate: 16-year high (1992);
- The 3.5 million job loss since January 2008 is the largest 12-month decline since the government started compiling those figures in 1939;
- U-6 Marginally attached and involuntary part-time workers: 13.9% last month — up almost five percent;
- The employment-to-population ratio was the lowest since 1986.
Except for the jobs report, it’s a slow news day, which is kind of like saying, “Apart from that Mrs Lincoln, how did you enjoy the play?
Then again, I expect at least one bank closing shortly after I shut down for Shabbos, because Friday is bank regulator seizure day (cue Prince Spaghetti Day ad).
The good news is that it looks like the SEC and Treasury are denying any plans of suspending mark to market.
Going back to mark to model would be like pouring gasoline on a the bonfire of the fraudulent.
One odd thing here is that the Federal Reserve appears to be walking away from expanding its Term Asset-Backed Securities Lending Facility (TALF) program, a sh%$ pile for cash givaway lending program, to include consumer credit derived instruments.
Not sure what is going on here, but it would seem to me that this might be one of the better ways to throw money at the problem.
Meanwhile, oil fell on the jobs reports, and the dollar was mixed, up against the Yen, down vs the Euro, and flat vs. the Sterling.
Regulating Credit Default Swaps
The head of the Agriculture committee, Collin Peterson (D-MN-07) is proposing that credit default swaps be treated like the insurance that they are. Here is money quote(PDF):
(h) LIMITATION ON ELIGIBILITY TO PURCHASE A CREDIT DEFAULT SWAP.—It shall be unlawful for any person to enter into a credit default swap unless the person would experience financial loss if an event that is the subject of the credit default swap occurs.
…
EFFECTIVE DATE.—The amendments made by this section shall be effective for credit default swaps (as defined in section 1a(34) of the Commodity Exchange Act) entered into after 90 days after the date of the enactment of this section.
Basically, what this is saying is that you can’t buy insurance on something unless you actually benefit from it.
This was discovered a long time ago, specifically 263 years ago, when the British Parliament passed the Marine Insurance Act of 1746:
In 1746, Parliament passed the Marine Insurance Act, requiring anyone seeking to collect on an insurance contract to have an interest in the continued existence of the insured property. Thus was born the insured-interest doctrine. The indemnity doctrine, which precludes a buyer from insuring property for more than it’s worth, soon followed. The point of these rules is to limit insurance contracts to trading existing risks and not to create new risks by giving buyers of insurance incentive to destroy property. The doctrines have been part of insurance law in both England and the United States (which in 1746 were colonies under English common law) ever since.
Unfortunately, it appears that the distinguished gentleman from Minnesota only intends for this regulation to be temporary, but it’s a good start.
It should be permanent though, there is a reason that this adopted so long ago.
But Kevin Lewis Should Still Be Fired
We now have credible reports that Hank Paulson and Ben Bernanke seriously twisted the Bank of America CEO’s arm to get him to finish the acquisition of Merrill Lynch, so Merrill may not be entirely his fault, but Countrywide, a morass of fraud, bad banking, and incompetence is.
He needs to go, so that those who would be like him will think twice before being so profligate.
Exec Pay Limit as Toothless as Gabby Hays
Remember when I said yesterday that The Devil is in the Details regarding Obama’s pay limits?
Well, ProPublica is all over this…..The bullet points:
- No enforcement mechanism or penalties.
- The conditions for things like stock grants are unclear, and look to be loophole filled.
- Shareholder votes on pay are non-binding.
- The $500K limits applies only to banks that aren’t “healthy”, which is basically none of them, because if Citi qualifies as “healthy”, they all do.
Oh, well, it was nice believing that something would be done for a few minutes.
This Was Not a Bug, This Was a Feture
The TARP watchdog committee is now saying that Hank Paulson and His Evil Minions™ overpaid for TARP assets, and that they paid $274 billion for assets worth $176 billion.
This was not an oversight. This was what Paulson wanted.
He was looking at bailing out his budget at taxpayer expense, because to him, bailing out overpaid Wall Street pukes was job 1….Mission accomplished.
The Next Shoe to Drop on Wall Street
It appears that Moody’s is reviewing the credit ratings of hundreds of billions of dollars of Commercial Mortgage Backed Securities (CMBS).
These are like residential mortgage backed securities, only they are for things like malls and apartment buildings, as opposed to houses and condos, and they are following the same path as the residential MBS, which is, as Calculated Risk notes, “First the reviews, then the downgrades, followed by the bank write-downs, and then more reviews …”
Economics Update
Our economy just had one of those days when you wonder why you get out of bet.
First, we have initial unemployment claims spiking to the highest number since October, 1982, 626,000. The consensus estimate had been 580,000.
The more reliable, and less noisy, 4 week moving average was up too, from 543,250 to 582,250, and continuing claims hit 4,788,000, another new record.
In manufacturing, December new factory orders fall 3.9%, well above the estimate of 3 %, and in rental real estate, the MIT commercial property price index posted a record drop, 10% in Q4 of 2008.
In international high finance, the Bank of England its benchmark rate by 50 basis points (½%), to 1%, which breaks last month’s record…..Considering that the BoE has been around since 1694, that’s a long record.
Across the channel in Euro land, the European Central Bank has left its benchmark unchanged, though I think that this is less from optimism than from the inflation-hawk nature of the ECB’s charter, and the fear of the zero rate destroying their ability to manage the economy with monetary means.
Meanwhile, mortgage interest rates have continued their increase, with the 30 year fixed being reported at 5.25%.
With the rate cuts in England, and the ECB still signaling future rate cuts, the dollar was up today.
The dismal job numbers drove oil down.
The Devil is in the Details
Because Obama’s plan to limit executive pay to $500K to TARP recipients will sink or swim on the loopholes.
Larry Summers’ suggestion that, “Executive compensation above a specified threshold amount be paid in restricted stock or similar form that cannot be liquidated or sold until the government has been repaid,” is one such loophole, because if the restricted stock has dividends, it’s back to the races.
One of the things that needs to be understood is that Wall Street’s excessive salary structure is not just a symptom of the current banking problem, it’s one of the causes, because the excessive leverage and incompetent risk taking made year over year results so remunerative that it encouraged byzantinely complex instruments.
As a note, it’s actually not the executives who will get hit hardest by this:
“That is pretty draconian — $500,000 is not a lot of money, particularly if there is no bonus,” said James F. Reda, founder and managing director of James F. Reda & Associates, a compensation consulting firm. “And you know these companies that are in trouble are not going to pay much of an annual dividend.”
Mr. Reda said only a handful of big companies pay chief executives and other senior executives $500,000 or less in total compensation. He said such limits will make it hard for the companies to recruit and keep executives, most of whom could earn more money at other firms.
(emphasis mine)
It’s the “compensation consulting firms”, whose business model is to get paid lots of money from CEOs and Boards of Directors to recommend high salaries to those very same CEOs and Boards of Directors, who lose the most.
It sure beats working for a living.
F%$@ing Stupid Idea
Barney Frank has a good basic idea, that of a federal regulator with the power to regulate all financial transactions with regard to systemic risk, and then he jumps the shark completely by suggesting that this regulatory authority be placed in the Federal Reserve.
Seriously. Much of the Federal Reserve has not only gone native, but are to some degree actually owned by the commercial banks.
Any organization that was headed by Alan “Bubbles” Greenspan 20 years should be kept as far away from managing systemic risk as possible.
It’s like giving an infant a loaded revolver.
Economics Update
To no one’s surprise, the Federal Reserve has extended its multi-trillion dollar so called liquidity facilities another 6 months, better known as the sh$tpile for cash program:
In addition to prolonging the currency swap lines that were due to expire on April 30, the U.S. central bank said it would extend through October 30 a host of other programs providing liquidity to the U.S. commercial paper and money markets, and to large Wall Street firms.
They’ve already spent in excess of 8 trillion dollars bailing out insolvent banks, but they think that more of the same will help.
The Federal Reserve is broken as an institution. It is run by and for the banks.
We also have aggressive stimulus programs ramping up in Australia and Japan.
Meanwhile, real estate and construction continues to be a disaster with US construction falling 1.4% in December and 5.1% for 2008, the largest drop since records began being kept in 1993, and the Homeownership rate has fallen to the 2000 level, so much for Bush’s “Ownership Society….In stead of owning, we got pwn3d.* With current equity losses of US home owner pegged at $3.3 trillion, a new record on vacant homes 19 million.
Even alleged good news in real estate, that the Pending Home Sales Index rose in December is pretty hollow, because, money quote from CR, “The biggest gains were in areas with the biggest improvements in affordability.”
So, if your house prices have dropped by 40+%, as they have in parts of California and Florida then homes might be moving…Otherwise, not so much.
Still real estate is not as bad off as the auto industry, with GM and Chrysler offering buyouts to all of their hourly workers, Ford posting 40.2% drop in January U.S. sales, and GM dropping 49%, Chrysler down 55% LLC, with the Japanese car makers seeing their sales dropping about 30% each
BTW, it appears that China may be headed for a period of economically induced social unrest, because more than one in seven rural migrant workers, more than 20 million, are unemployed.
In a nation that has systematically eliminated its safety net, 20 million pissed off unemployed people can make a lot of trouble.
In energy, I’m not sure if $40/bbl is the bottom, or if OPEC cuts are working, but oil was up today, and it appears that we have found a bottom there.
In currency, there dollar was down as there was less “flight to safety.”
*Leet speak for “owned”.
GDP Numbers Artificially Inflated by TARP
Barry Ritholtz has the goods.
He notes that the Bureau of Economic Analysis (BEA) notes the effect in their report:
Troubled Asset Relief Program
In October 2008, the Emergency Economic Stabilization Act of 2008 established
the Troubled Asset Relief Program (TARP). Among its provisions, the act authorized the Department of the Treasury to purchase or insure up to $700 billion in assets to alleviate the financial crisis. By the end of the fourth quarter, the program had disbursed $243 billion to banks and other institutions in exchange for shares of preferred stock and warrants. The program also disbursed a $4 billion loan to General Motors in the fourth quarter.Purchases of financial assets are generally not recorded in the GDP accounts (though they appear in the Federal Reserve’s flow of funds accounts). However, when the Treasury purchases a financial asset (other than a loan) at more favorable terms than are available in private markets, BEA records a portion of the purchase as a capital transfer, calculated as the difference between the actual price paid for the financial asset and an estimate of its market value. This treatment is consistent with the recommendations of the newly updated international guidelines, System of National Accounts 2008. For the fourth quarter, in most cases BEA’s estimates of these capital transfers are based on Congressional Budget Office estimates, which are prepared on a net present value basis. The recording of a capital transfer in the GDP accounts does not affect GDP or net government saving, but does reduce net government lending or borrowing.
(emphasis mine)
You’ll notice that that the BEA is saying that the TARP is just a transfer payment, and hence is not counted as GDP, but I would argue that in overpaying for assets and preferred stock, these expenditures find their way into the numbers indirectly.
Ritholtz says that the effect is close to 8% of Q4 GDP, I’d say a bit less, say 2-4%, because the money finds its way into the economy indirectly and slowly, but in either case, it makes the GDP numbers worse than they seem.
If any bankers want to correct me, please do so.
Almost Forgot, Banks Shuttered on Friday
MagnetBank, Salt Lake City, UT
Suburban Federal Savings Bank, Crofton, MD, and yes I mentioned the possibility that Suburban Feceral would be the first MD bank to fail since 1992 on Thursday.
Ocala National Bank, Ocala, FL
That’s 6 banks shuttered in January total. (list here)
It Won’t Pass, But I Support It
Senator Claire McCaskill (D-MO) has proposed a bill that would cap salary, bonuses and stock options at $400,000.00/year, the salary of the President of the United States, for any company that took federal bailout money.
It’s not gonna happen. It’s political grandstanding.
And I like it….A lot….
The ‘Good Bank’ Solution
Willem Buiter at the Financial Times writes to endorse the idea of creating government owned and operated lending facilities to replace the insolvent banks:
There is an alternative solution to the problem of valuing the toxic assets. It would not involve nationalising the existing banks. Instead the state would create one or more new ’good’ banks – all state-owned and state-funded to begin with. Effectively, some or all of the existing banks would become bad banks. The good banks would acquire the deposits and the good assets of the bad banks or legacy banks. The good assets are, by definition, easy to value. The creation of multiple good banks may be desirable to encourage competition. One could even create a good bank for every existing bank: New Citi, New RBS, New ING etc.
I posted this a 10 days ago, but he writes better.
The basic point is that the banking industry does not have to be preserved. What has to be preserved is transparent access to credit.
Geithner Needs to Work for the People of the United States of America
Barry Righolts of The Big Picture puts his finger on what is bothering me about Geithner:
- You no longer work for the Banks: The NY Fed is a private corporation, doing the bidding of the FOMC and its private sector owners — primarily, the primary dealers. In other words, the President of the NY Fed works for the biggest commercial and investment banks in New York. That is no longer operational for you.
- As Treasury Secretary, your immediate boss is the President, and your ultimate charge are the citizens of the United States, and the finances of the country.
- When any conflict comes into play between the nation and the banks, you as Treasury Secretary are on the side of the Nation.
- You cannot serve two masters, especially when they are in direct conflict with each other.
In its most basic form, all this talk about nationalization being somehow beyond the pale is really about people who do think that whatever is good for the banks is good for the county, and Geithner and Summers are both on that side….Or they are for now.
The question is not, “How do we save the banks,” it’s, “How do we get normal access to credit going again with a minimal impact on the taxpayer,” and throwing trillions at banks for their sh%$pile assets does not serve the nation or the taxpayers.
Bad Bank: Baltimore Edition
Regulators are telling Suburban Federal Savings Bank to find a buyer or face a takeover.
If it is seized, it would be the first bank failure since 1992 in Maryland.
The star marks the bank.
Nationalize the Banks, Because Crony Capitalism Ain’t Working
The Romans as Inspiration in the Banking Crisis
Should Barnabas Francus hold the next hearing of his House banking committee atop this cliff?
It appears that regulations limiting the amount of interest charged caused a collapse of lending, and from there it became a collapse of property values.
Finally, Emperor Tiberius disperses something over 100 million sesterces to the banks with explicit instructions to lend to anyone who can provide collateral that is double the amount borrowed.
It is a little different, it’s not an insolvency problem, it’s an illiquidity problem, and as I have noted before, the prescription is rather different.
That being said, one of the things that Tiberius did does look rather appealing:
Tiberius also raised funds by accusing Sextus Marius, the richest man in Spain, of incest — almost certainly a trumped-up charge — and then having him thrown headlong from the Tarpeian Rock (see below), a cliff at the edge of Rome’s Capitoline Hill. “Tiberius kept his gold mines for himself,” Tacitus notes.
I want a bigger cliff though.