Commentaries

from Rolfe Winkler:

Lunchtime Links 2-2

Homeownership rate falls to 2000 level (CR) At 67.2% it's still way overstated. Home "ownership" is a misnomer in cases when the owner has withdrawn mortgage equity or when the price of the home has fallen below the principal value of the mortgage. A better measure of homeownership, I think, is just to look at total owner's equity as a % of household real estate. The most recent Fed Flow of Funds report (page 104, line 50) puts the figure at just 37.6%...

U.S. could extend bank fee beyond 10 years, Geithner says (Di Leo/Crittenden, WSJ) The proposed tax on non-deposit liabilities should be permanent, and should target ALL liabilities, including repos. Deposits are guaranteed via FDIC. While that insurance is dramatically underpriced (witness the cash-strapped state of the DIF) at least banks pay something for it. Non-deposit liabilities are also effectively guaranteed, for the biggest banks anyway, via the promise that none which is too big will be allowed to fail. To counter moral hazard, this implicit guarantee must be taxed in order to offset any benefit derived from lower funding costs.

Must-Read: What's a college degree really worth? (Pilon, WSJ) A lot less than you think, as argued here before. This piece is well-written with lots of good data!

AIG derivatives staff said to forgo $20 million in retention bonuses (Katz/Son, Bloomberg) They're still well-paid, but this is better than nothing I suppose.

Deficits as a national security issue -- Sanger NYT & Seib WSJ -- Good to see prominent columnists picking up the thread. A refresher on the Suez Crisis of 1956 offers helpful background.

Rising FHA default rate foreshadows foreclosure crush (ElBoghdady/Keating, WaPo) Key line: "the FHA projects that it will pay out claims to lenders on one out of every four loans made in 2007 -- the worst rate in at least three decades. The claim rate should be nearly the same on the vastly larger volume of loans made in 2008."

Goldman spokesman's most withering rebuttals (Daily Intel) Methinks he doth protest too much...

from Rolfe Winkler:

Geithner’s faulty apologia

Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.

What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.

Geithner was lucky to be doing battle with such an unprepared, unimpressive group.

His defense, such as it was, amounted to the following:

Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG's credit rating being downgraded and the company (and consequently the economy) would have collapsed.

But AIG had already been downgraded, that's why the government stepped in with a bailout. At that point the firm's liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner's policy it wants to cancel...)

And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer's old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?

from Rolfe Winkler:

Grist for Goldman conspiracy theorists

From Yves over at NakedCapitalism:

A former managing director at monolines Ambac and FGIC wonders why AIG was bailed out but the monolines weren't. (He admits to bias, so take this with a grain of salt.)

...the [AIG] bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.

I believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.

The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.

There's much more in the post. As chairman of the NY Fed, former Goldman CEO Stephen Friedman was in an opportune place to scare Tim Geithner into bailing out AIG to benefit Goldman.

The Paulson connection is intriguing. I've always wondered who, ultimately, was on the other side of his "trade of the century." He bought CDS and the banks he traded with had to lay off that risk to someone. That someone was AIG, which couldn't have paid up if not for the bailout..... (admittedely, this is supposition on my part, would be interested to hear reader thoughts...)

Barofsky audit a Fed, not Geithner, problem

Sure, Timothy Geithner led the negotiations with AIG counterparties when he headed the New York Fed last year, but TARP special inspector Neil Barofsky’s audit is damning where it really hurts the Fed. It raises the question of whether the central bank is a tough enough regulator at a time when Senator Christopher Dodd is calling for the Fed to be stripped of such power over big banks.

Big Picture has posted the report in its entirety.

It’s one thing to be a bad regulator during the boom years when, let’s face it, there were bad regulators everywhere. But to shrink from tough negotiations with banks during the height of the crisis when those banks were already benefiting from billion of dollars in state aid will be harder to explain away, though the New York Fed has tried.

From the report:

FRBNY’s decision to treat all counterparties equally (which FRBNY officials described as a “core value” of their organization), for example gave each of the major counterparties (including the French banks) effective veto power over the possibility of a concession from any other party…

It also arguably did not account for significant differences among counterparties, including that some of them had received very substantial benefits from FRBNY and other Government agencies through various other bailout programs (including billions of dollars of taxpayer funds through TARP), a benefit not available to some of the other counterparties (including French banks)…

…the refusal of FRBNY and the Federal Reserve to use their considerable leverage as the primary regulators for several of the counterparties, including the emphasis that their participation in the negotiations was purely “voluntary,” made the possibility of obtaining concessions from those counterparties extremely remote.

Sure, it’s a fine line of when to use such leverage, but the report goes on to note that the Fed didn’t shy away from using it when, for example, it and Treasury compelled banks to take TARP funds. Similarly, the government played hard core with General Motors and Chrysler creditors when the automakers barreled toward bankruptcy.

The conspiracy theorists are sure to jump on the below.

Dow 10,000 is a gas

Jack Healy’s story in The New York Times about the Dow getting closer and closer to the magical 10,000 mark is OK, but it contains few surprises. But I really was blown away by the chart that shows the perfomance of Dow component stocks since March 29, 1999–when the index crossed 10,000 for the first time.

The chart, which includes a number of stocks that are no longer part of the Dow–such as AIG, Citigroup and Eastman Kodak–is interesting because more component stocks have lost ground over the past 10 years than posted gains.

The list of losers that are still part of the Dow include a broad swath of US industries. Some of the stocks that have lost ground in the decade since the Dow first hit 10,000 include American Express, Walt Disney, Cisco, JPMorgan Chase, Microsoft and Home Depot.

This long list of illustrious losers should be a sober reminder for the bulls prediciting an ecomonic rebound simply because the stock market is rising.

And maybe just as disturbing is the fact that two of the biggest gainers in the Dow over the past 10 years are oil and gas giants, ExxonMobil and Chevron. That, of course, is a byproduct of the ill-fated and ill-advised love affair US citizens have with gas guzzling SUVs.

Exxon and Chevron’s dominance should also serve as reminder that we remain too heavily dependent on a dwindling natural resource that makes us dependent on tyrannical foreign governments and is quickly destroying our environment.

One can only hope that 10 years from now, the top performers in the Dow will include a solar cell manufacturer and a wind farm manufacturer.

AIG has debts that no honest man can pay

Here’s more evidence that it would be better for the federal government to order the break-up of AIG sooner rather than later.

Former AIG chief executive  and chairman Robert Willumstad, in a speech today, says the taxpayer-supported insurer “owes the government more than it has the ability to pay back.”

TheStreet.com’s Lara Tara LaCapra covered Willumstad’s talk and has all the details.

Bonus coverage: Dealbreaker on White House economist Austan Goolsbee calling out current AIG CEO Robert Benmosche. Finally.

Profiting from the bailout

What is it with this belief that somehow the federal government’s role should be to profit from the bank bailout?

I thought the purpose of the bailout was to save the financial system from collapse.  And that’s why I supported it last fall–even if it was poorly designed and poorly explained to the public.

If the government could somehow make money on its capital infusions, so much the better. But making a profit on the bailout–or even getting back all the government’s money–was not critical to judging the success of the bailout.

Now don’t get me wrong, I have no problem with the government recouping its investment. But the main goal of the bailout was to avert another Great Depression.

By that score, the bailout was a success. But big problems remain: banks still have too much toxic securities on their balance sheets and there’s serious doubts about the longterm viability of the biggest bailout recipients–Citigroup and AIG.

That’s why I called on the Obama administration to get tough with AIG and put into works a plan for dissolving the defacto government owned insurer. Forcing AIG to sell off it parts ASAP would recoup some of the $120 billion still owed to the government.

Critics contend my approach is wrong and it makes sense to keep AIG together as long as possible for the government to be made totally whole. But that assumes AIG is a viable company–something I don’t think it is.

Time to junk AIG

The federal government’s $180 billion effort to prop up American International Group has worked, averting an even bigger financial catastrophe. Now it’s time for the Obama administration to oversee the dismantling of the failed insurance giant with all due speed.

A report this week from the Government Accountability Office makes clear that AIG would crumble and likely reignite financial fears around the world without the government’s massive support.

And the report says it’s “unclear” whether AIG will ever pay back the $121 billion in government assistance that’s still coursing through its balance sheet.

The GAO report should provide the administration will all the ammunition it needs to get tough with AIG. The report’s conclusions should stiffen the spine of regulators in their dealings with Robert Benmosche, AIG’s new $9 million chief executive.

The former MetLife chief executive seems to act as if he has taken over a financial company that’s simply made one or two bad decisions — not one that nearly brought the global economy to its knees.

Benmosche’s plan to take his sweet time in selling off AIG’s assets might make sense if the insurer could someday stand on its own without the government’s help.

But the GAO report raises serious doubt about whether AIG will ever be self-sufficient again, noting that “the company continues to rely heavily on the federal government as its source of liquidity and capital.”

What did rating agencies know about AIG?

It’s time to start asking the big credit rating agencies just when they realized that American International Group might pose a systemic risk to the global financial system.

And what, if anything, did the rating agencies do to warn financial regulators of the global crisis that might ensue, if AIG’s debt ratings were suddenly slashed.

There’s been a lot of attention paid to the role the credit agencies played in the build-up to the financial crisis by slapping triple A ratings on complex securities built from mortgages to subprime borrowers.

But there’s not been enough scrutiny into the behind-the-scenes work the credit rating agencies did last summer as Lehman Brothers lurched toward bankruptcy and AIG’s cash crunch grew increasingly grave.

By virtue of their status as Nationally Recognized Statistical Rating Organizations, the major credit agencies are charged with making sure companies that sell bonds are able to make good on their obligations. Some 30 years ago, securities regulators effectively deputized Moody’s Investors Service, Standard & Poor’s and Fitch Ratings as gatekeepers for the financial system.

And with that lofty and privileged status, there should come a responsibility to help regulators keep an eye out for systemic financial risk.

“We rely on our gatekeepers to help insure that financial markets are safe and information is accurate,” says law professor Frank Partnoy.

Obama’s AIG timidity

I’ve been pretty amazed at how silent the Obama administration has been about Robert Benmosche’s antics since becoming the well-compensated CEO of American International Group–the defacto government owned insurer.

But after reading this story in The New York Times, I was shocked to learn that many in the Obama administration are warying of looking like they are injecting themselves into the company’s affairs. That’s the case, even though many on Team Obama are upset with Benmosche’s $9 million pay package and his desire to move slowly in selling AIG’s assets.

WTF? Intefere, please. The taxpayers didn’t bailout this company so its high-living CEO can do as he pleases. The Obama administration has never sought to put anyone on AIG’s board–maybe it should.

James Kwak at Baseline Scenario is equally puzzled and disturbed by the administration’s hands-off approach to AIG.