Commentaries

from Rolfe Winkler:

Morning Links 1-22

Geithner has reservations on US banks (Wutkowski/Eder, Reuters) More evidence that Geithner is a goner. Will Volcker replace him? Sheila Bair could be a dark horse. She has lots of Democratic fans on the Hill despite being appointed by a Republican. In any case, Geithner was on PBS last night defending the plan.

A closer look at the Volcker rule (Felix) Capitol Hill may not be taking Obama's rule very seriously. They think it was just a way to spin the news cycle away from the fact that healthcare will fail now that the Dems have lost their 60th vote in the Senate. Moreover, they don't think Obama's actually going to wage the fight against Wall Street that he claims he's ready for.

Bernanke faces tougher vote in Senate (Reddy/Paletta, WSJ)

Fed secrecy claims bogus redacted AIG details already public (Adams, Naked Capitalism) More detail in a second post here.

FDIC and Bank of England to cooperate on resolution of troubled cross-border financials (FDIC) Next time a big financial blows itself up, Sheila Bair and Mervyn King want to make sure they're prepared to deal with it in tandem.

NYC will move (a little bit) of its money (Traub, HuffPo) Bloomberg puts a little bit of support behind the Move Your Money campaign.

Chavez accuses U.S. of using weapon to cause Haiti quake (Moran, Digital Journal) "Venezuelan President Hugo Chavez has accused the United States of causing the devastating 7.0 magnitude earthquake in Haiti, which killed possibly 200,000 people. Chavez believes the U.S. was testing a tectonic weapon to produce eco-type devastations."

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.

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.

from Rolfe Winkler:

Geithner: Some rescue programs will end, others won’t

Tim Geithner testified before the Congressional Oversight Panel for TARP this afternoon. A few interesting comments with respect to Treasury's bailout initiatives:

On PPIP (Public Private Investor Program):

The Treasury will continue ... its plans to buy small-business loans and to remove toxic assets from bank balance sheets through the Public-Private Investment Program, a Treasury official told reporters earlier today on condition of anonymity. The first PPIP funds are expected to begin operating later this month or in October, the official said.

This is bad news. PPIP was a terrible idea to begin with. It provides cheap, non-recourse government financing to encourage investors to buy toxic assets from the banks. This takes banks off the hook and puts taxpayers on it.

Other, unused programs will be allowed to expire, including a program guaranteeing money-market mutual funds and the Capital Assistance Program, which was established earlier this year to provide extra money to banks that needed it and couldn’t access private markets.

"Unused" doesn't seem a fair modifier to me. No, there weren't any money market funds that broke the buck and required a taxpayer bailout, but the industry as a whole has benefited tremendously from the Treasury guarantee they've been able to market to investors.

On TARP:

The capital games that banks play

Treasury Secretary Timothy Geithner’s call for the global banks to set aside bigger capital cushions to better absorb losses on souring securities and ailing loans is a good idea. But that alone won’t be enough to prevent another crisis.

Regulators must also clamp down on the kind of AIG-engineered deals that legally enabled German, French, Dutch, Danish and other European banks to dodge existing capital rules and free up some $400 billion on their balance sheets.

It has become all too popular to characterize last year’s bailout of AIG as an attempt by the federal government to funnel about $50 billion to Goldman Sachs and a handful of other banks.

But the collapse of AIG would have caused even greater hardship for dozens of largely unknown European banks that entered into so-called “regulatory capital relief” transactions with the giant insurer.

In these deals, European banks purchased credit default swaps from AIG to reduce the amount of capital they needed to set aside to cover potential losses on corporate loans and residential mortgages sitting in those banks’ portfolios.

The banks bought these derivatives, largely in 2007, to navigate the changes in capital holding requirements under a switch from the Basel I international banking accord to a revised one known as Basel II.

These CDS deals, underwritten by the insurer’s AIG Financial Products division, essentially permitted the banks to transfer the risk of loss on corporate loans and home mortgages to AIG. And that meant the banks were able to set aside less capital in reserves — freeing up some $400 billion for other purposes.

Defoliating JC Flowers

William Cohan has a great takedown of J. Christopher Flowers and his struggling private equity firm in Fortune.

The story sheds light on how Flowers lost a good deal of money for his investors over the past few years and how this has tarnished the reputation he earned years ago at Goldman Sachs.

Cohan also does a great job chronicling the Flowers’ publicity machine, which excels at getting him linked in the business press to numerous potential deals. Even though Flowers’ firm never completes many of the deals he’s said to have interest in.

But the most intriguing part of Cohan’s story is Flowers’ claim that he was one of the people who alerted former Treasury Secretary Hank Paulson to the desperate situation facing American International Group a week before Lehman Brothers collapsed. Flowers says he learned of AIG’s terrible plight in early September when the giant insurer reached out to him as potential savior.

Cohan doesn’t spend much time exploring this conversation between Flowers and Paulson but it’s probably worthy its own investigative story. With the anniversary of Lehman’s collapse fast approaching, this intriguing incident is another reminder of just how clueless our public officials were to the problems that almost sunk the global financial system.

I think Flowers’ account of his talk with Paulson is probably accurate. In the summer of 2008, Paulson was going around the country privately telling news organizations that the financial crisis was nearing an end. What’s particularly shocking is that Paulson was trying to sell this story just a few weeks before the federal government bailed out mortgage giants Fannie and Freddie.

There’s no doubt Paulson didn’t understand just how dire the situation was at AIG. Maybe if he did, he would have done more to avert Lehman’s bankruptcy–an event which nearly turned a very bad credit crunch into the second Great Depression.

from Rolfe Winkler:

Talking warrants on TV

Recorded a segment for Reuters Insider today, the TV product in Beta here at 3 Times Square.

One big correction: I say the DIF never charged banks for the insurance it provided.  What I meant to say was that they hadn't charged banks anything over the last ten years.  What I should have said is that, in effect, they haven't really charged anything because the DIF is negligible relative to the deposits it insures.

Enjoy!

Geithner comes up empty

Tim Geithner took center stage on Capitol Hill today and once again he disappointed.

Geithner went before Congress to sing the praises of the Obama administration’s plan for regulating derivatives–something that’s much needed. But once again, Geithner failed to explain the criteria that will be used to distinguish standard derivatives from so-called customized derivatives.

And that’s pretty important since the crux of the Obama plan is for regulating standard derivatives. A week ago I pointed that the Obama administration had failed to explain the difference betwee the two. And Geithner still hasn’t met this important challenge.

PPIP is a pipsqueak

The Treasury Department is finally out with its final version of a plan for ridding the banks of toxic assets and you have wonder why the Obama administration even bothered.

Treasury will now fund the program with $30 billion in government money. Back in March, Treasury Secretary Tim Geithner was talking about kicking in between $75 billion and $100 billion into the program.

The reduced government commitment is a sign that Treasury couldn’t convince banks to go along with the idea of selling their toxic securities at a discount–something that would force another round of painful writedowns.

So the toxic assets, for the most part, will continue to sit on the balance sheets of the banks and we’ll continue to delude ourselves that the financial system is on the road to recovery.

Back in June I suggested half in gest that Geithner scrap the PPIP altogether and simply tinker with the tax laws to make it possible for banks to take hefty tax deductions on any CDOs that were contributed to charitable groups.  But after seeing this half-hearted government plan, I think my idea is better.

In my plan, a favorable tax deduction would ease the bite of any writedown a bank would take on a CDO donation. And charitable groups would be able to make some money by selling the ailing mortgage-backed securities if they ever recovered in value.

Compared to Geithner’s lousy plan, CDOs for Charity seems like a win-win.

The people not in the room

President Obama says he wanted a “light touch” in his adminstration’s approach to regulatory reform. And he certainly appears to have gotten that, after a quick read of a draft copy of the administration’s 85-page “white paper.”

Much of the meat of the reform package has been known for quite a while and some of it–like the plan to create a new consumer financial products protection agency–is good. But too much of the reform proposal seems more aspirational than anything else. I stopped counting, but the word “should” appears throughout the text far too many times.

After Wall Street banks, credit rating agencies, greedy mortgage lenders and unscrupulous mortgage brokers almost brought the world economy to the brink of collapse, it’s time for Obama to get as tough with the financial markets’ players, as he did with that fly seen buzzing around him during a CNBC interview. (For those who didn’t see it, Obama showed great skill in swatting and killing the fly without a missing a beat).

Bill Mahr, the left-leaning, politically engaged comic, had it just right when he called out Obama for being too much of a conciliator and not being more forceful in dealing with the banking crisis–and other urgent problems. It’s good that Obama seeks out lots of viewpoints, but at the end of day he needs to be decisive and bold in forming his own.

Too much of this reform proposal reflects the Wall Street friendly sentiments of Treasury Secretary Tim Geithner and White House economic adivsor Larry Summers. Stephen Labaton has a good story in The New York Times today about all the people–the lobbyists, industry representatives, policiticans and consumer advocates–that got to meet with the White House team as they put together this “light touch” regulatory reform package.

But most notable is the list of people not in the room–some of the actual victims of Wall Street’s malfeseance. Where were the victims of Bernie Madoff and R. Allen Stanford? Where were the investors who were told auction rate securities were as safe as money market funds? Where were the investors who were told that Lehman issued structured notes were “principal protected” and a conservative investment? Where were the homeowners suckered into taking out adjustable rate mortgages and told time and again that housing prices never fall.

I could go on and on. The point is that this package of reforms would have been a good response to something like the bursting of the tech bubble–even the scandals at Enron and WorldCom. But it’s an inadequate response to the worst financial crisis since the Great Depression.