Felix Salmon

The distant and painful recovery

Felix Salmon
May 20, 2009 15:44 UTC

Julia Ioffe’s TNR profile of Nouriel Roubini is better than most, if a little bit on the fawning side; it’s noteworthy for delving more into his biography and background than other profiles of Nouriel that I’ve seen. It also ends with a glimmer of optimism:

He’s been thinking a lot not just about the way down but the way out. With the help of the Obama administration’s policies (not great, he says, but better than nothing), he sees “a light at the end of the tunnel.” To actually get to the end of it, though, the United States will have to get used to consuming less, which means China, Germany, and Japan will have to get used to producing less, which means that all the intermediaries–Chile, Australia, Brazil–will have to scale back and turn inward like everyone else. The world may curve and warp a bit, and it will be difficult, but Roubini sees good in this. Given the right changes, perhaps the United States can develop with the productive long view in mind, and maybe its human talent can be spread more equitably. “When you have more financial engineers than computer engineers, you know that the brightest minds have gone into something where, probably, the margin was excessive,” he had told me earlier. “Maybe some of these bright people are going to do something entrepreneurial, more creative, or go into government. I think that’s actually a good change. The transition is painful, but the result may be good.”

I had tea yesterday with a very bright mathematician and computer scientist who, in the wake of the financial crisis, is not going to go work for a hedge fund as he’d anticipated. Instead, he’s packing up his bags and moving — with his fiancée — to Kaust, the King Abdullah University of Science and Technology in Saudi Arabia, which he described as having a faculty like Caltech’s and an endowment like Harvard’s. All that money will be put to many uses, of course, but the main object of study will be the future of the energy industry — which is surely a much more useful and productive place to use one’s intelligence than the finance industry.

Interestingly, the mathematician was still in a bull-market mindset: after a 25-year bull market and an 18-month bear market, he seemed to expect that markets would start rebounding again in no time, and indeed that the rebound might already have started. That kind of thinking is going to take a long time to eradicate, I think.

So over the long term, I’m optimistic that the redeployment of US human resources away from finance and into the real economy is bound to be a good thing. But in the medium term, the process of “scaling back and turning inwards” around the globe is going to be extremely painful — and is far from over. Or, to put it a more familiar way, things are going to get worse before they get worse. Only very slowly and very painfully might they start to get better — and it’s not going to happen any time soon.


These “best and brightest” have shown themselves to be short term greed masters to an almost sociopathic scale.Im sorry but Im sure anywhere they go disaster will follow.We dont need more Gorden Geckos running anything.

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More free goodies from credit card companies?

Felix Salmon
May 20, 2009 15:05 UTC

Will the new credit-card regulations harm people who pay their balance in full every month? Quite the opposite, says Ron Lieber:

Will credit card companies kill reward programs or drastically scale most of them back? Of course not…

People who spend a ton generate fees galore from merchants, and that money helps the card company stay in business. So you may soon see card companies giving away more goodies or lowering annual fees for people who hit certain spending thresholds each year.

It’s conceivable that your habits might have to change if you have lots of different credit cards, none of which you spend a lot of money on, and all of which you pay off in full each month. But if you’re in that situation, cutting back on the number of cards you have is probably a good idea anyway. The fact is that the credit-card bill is a good thing for all consumers, not just those who run a balance.


today RBS sent a letter to me raising my interest rate on the Master Card to 19%, I had paid off the balance and used the card when the rates were very low to pay off Dental bills that were very high. I closed my account right after I told them that I have had the card since 2001 and am now being penalized because I paid off the balance. They (and I am sure all the others will follow suit),are using not the US APR now but the Global one from London.

Now for the real damage they are inflicting. The small business owners who for one thing participate in trade shows and put $3,300 on a card for a show. Now they will be hit with an additional 19% or more when they are watching every dollar they spend. Is this what our President has done..and I supported him.

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Are we bailing out GMAC’s bondholders?

Felix Salmon
May 20, 2009 14:47 UTC

Amid all the noise about the government doing unspeakable things to Detroit bondholders, it looks very much to me as though in fact we’re shamelessly bailing them out:

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC…

The Treasury and Federal Reserve Board this month announced GMAC needs $11.5 billion in additional capital reserves as the result of government stress tests. The additional assistance to be announced this week is likely not the end of government support for GMAC.

Credit default swaps on GMAC are trading at 900bp these days, and its bonds are trading at yields in the 50% range*. GMAC’s bond investors mark to market: they’ve already taken their losses. So let’s take advantage of that fact, and convert their debt to equity, before pouring billions of fresh dollars into this particular black hole.

Update: There is one possible reason for this: GMAC needs cash — and a debt-for-equity swap doesn’t provide cash.

*As for the bond yields, my commenters are right, I made a mistake reading my Reuters screen. The most near-dated bonds come up first, and the annualized yields on bonds maturing in June and July are over 50%, but that doesn’t mean very much. Still, if you look at say the 8.4% bond maturing in April 2010, it’s trading at 79.5 cents on the dollar, which is a yield of 36.1%.


I had just two 11/15/18 notes left after selling most of them before the housing crisis, so I hung onto them, and I’m glad I did. I started receiving a dividend again back in 2009 and the value is back to .97 on a dollar, up from .18 back in 2008, paying interest of 6.50 monthly- now I wish I had more of them.

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Bank governance datapoint of the day

Felix Salmon
May 20, 2009 14:21 UTC

David Reilly reckons we should have bankers overseeing banks:

Only about 15 percent of directors have banking experience at the 10 largest U.S. commercial banks by assets, according to my own analysis. Include directors with investing, accounting, insurance or real estate backgrounds and the rate creeps up to only 33 percent…

Bank directors also include academics, politicians, retired military officers and heads of nonprofit groups such as the Pennsylvania Horticultural Society. There are more of these folks than non-executive directors with banking experience at the banks I examined.

This is startling, and I’d be inclined to agree with him — if he did a bit more empirical work. Looking at the percentage of directors with banking experience is just step one; the second step is to see if there’s any correlation between the number of directors with banking experience, on the one hand, and the performance of the bank, on the other. Reilly writes:

To understand what might sink a bank, directors needed a grasp of instruments like collateralized debt obligations and off- balance-sheet entities like conduits or structured investment vehicles…

Boards with more investing, finance and accounting experience may be better positioned to deal with today’s quickly evolving financial industry.

Or, they may not: bankers have proven themselves, over the past couple of years, to be just as oblivious as everybody else when it comes to complex products and systemic risks.

So let’s do a bit of homework here, and see whether banks with boards with lots of financial experience are less likely to lose money, or less likely to blow up, than banks with few such board members. Then we can start pushing them to make changes, starting with the chairman of BofA.


“bankers have proven themselves, over the past couple of years, to be just as oblivious as everybody else when it comes to complex products and systemic risks.”

I’m not so sure. This worked out pretty well for the banks – considering what happened. They gave themselves the opportunity to earn huge fortunes – and failure didn’t cost them all that much. There banks should be in bankruptcy and these guys and few gals should have been fired sans parachutes or pensions.

If you and I take those risks, there is no bailout.

More squabbling at the WTC site

Felix Salmon
May 20, 2009 13:48 UTC

Depressing news from Christina Lewis today: we’re entering yet another round of unhelpful bickering between the Port Authority and Larry Silverstein over the future of the World Trade Center site. What we desperately need is a strong New York governor willing to knock heads together — but we didn’t have that in George Pataki, and we certainly don’t have it in David Paterson.

Silverstein seems to think that the Port Authority should provide financing for him to build millions of square feet of empty office space at the site, even after it took responsibility for financing the Freedom Tower (now called 1 World Trade Center) off his hands. The Port Authority’s response is spot-on:

Officials note the agency finances major infrastructure projects throughout the region. They say backing Mr. Silverstein’s projects would prevent the agency from fulfilling its core mission.

“It’s not for the public sector to be financing speculative buildings,” said Christopher Ward, the agency’s executive director.

I hope that the Port Authority does manage to force Silverstein to scale back his ambitions: as a New York taxpayer, I have no particular interest in providing this particular property speculator with low-cost funding which gives him all the upside and leaves me with most of the downside.

On the other hand, we do seem to be moving to a world where the only two towers to be built on the site for the foreseeable future will be the boringly gigantic Freedom Tower by David Childs, and the dully minimalist 4 World Trade Center by Fumihiko Maki. The two interesting buildings, from an architectural standpoint — the Norman Foster and Richard Rogers towers — look set to exist on paper only.

Also, two questions for the WSJ. First, where did they get the idea that Ground Zero is “the most popular tourist attraction in Manhattan”? And second, why does the sidebar open up in PDF format? Most peculiar.


Siverstein paid rent on the site for 8 years – for what? If the design process had been just in the hands of the Port Authority (Pataki) it would be a bigger fiasco than it is already. Original WTC plans for the plaza were a terrazzo map of the world, but they ran out of money, thats why it was dismal. You are right that breaking up the super block and the windowless 20 stories can not be justified.

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The new regulatory structure begins to emerge

Felix Salmon
May 20, 2009 03:45 UTC

The WaPo all-star team of Zachary Goldfarb, Binyamin Appelbaum and David Cho broke the news this evening that Elizabeth Warren’s dream of a Financial Product Safety Commission is likely to become reality, thanks to the Obama administration. The WSJ’s Damian Paletta then did a fantastic job with his follow-up (although weirdly Warren’s name is nowhere to be seen):

Under the patchwork of regulation that presently exists, oversight of financial products is now split between a myriad of state and federal agencies, including the Fed, the Securities and Exchange Commission, the Federal Trade Commission, and others.

One possible scenario is that government officials consolidate some government agencies, such as the Office of Thrift Supervision, and strip some powers from the Federal Reserve and others to centralize the policing of financial products within a new body.

Anything which spells the end of the OTS (which, you’ll recall, was in charge of “regulating” AIG) is surely a good thing. And if the consumer-protection arms of the Fed and the SEC are bundled together into a new entity, that would surely reduce the chances of regulatory capture. As would this:

The creation of a financial product regulator would match a theme that Mr. Geithner has suggested is central to his vision of financial supervision. Instead of having regulators that look at specific companies, he has suggested having regulators that look horizontally at products and practices.

For example, he has called for the creation of a systemic risk regulator that would look at the concentration of risks in specific sectors, such as subprime lending. A financial product regulator could detect abusive practices in specific products, regardless whether a bank or small finance company originated the loan.

My feeling is that regulation by product — one entity regulating derivatives, another consumer-facing products (including insurance), and maybe a revamped SEC regulating securities — makes a great deal of sense. Then the Fed would sit atop those “horizontal” regulators, get data from them, and try to keep an eye out for systemic risks, with a particular emphasis on institutions which are too big to fail.

I’m reminded of the silliness that is the fact that Lending Club is regulated by the SEC — something extremely onerous for Lending Club, on the one hand, and something which is clearly outside the scope of what the SEC was designed to do, on the other. Instead, it, along with other peer-to-peer lenders, should be regulated by the new entity.

Is such a radical revamp politically possible? I think so, yes. Pointless regulators like the OCC and the NCUA might go by the wayside, but I doubt anybody will much mourn their passing, and most of their functions will be incorporated into the new horizontal regulators. The tougher fight will be with powerful state regulators, who probably have quite a lot of clout with the federal legislature. But it just doesn’t make sense to regulate financial products on a state-by-state basis, and it’s long past time that anachronistic practice came to a welcome end.


OTS is not the problem, FDIC is. Sheila Bair is the one out there trying to grab more power despite all the messes she created, while OTS and SEC stayed silent from their scandals involving Indymac and Madoff…

FDIC And Its Newest Victims: Small Business Owners, Farmers, And Community Banks
http://seekingalpha.com/instablog/387205 -ppy/4125-fdic-and-its-newest-victims-sm all-business-owners-farmers-and-communit y-banks

Our Congress has once again voted favorably to hand billions of our tax dollars to another unelected official. It recently increased FDIC’s borrowing power to at least $100 billion, if not more, without the stipulation that such fund must be used only to protect deposit and process bank failures. This time, Sheila Bair will assume Hank Paulson’s previous role and emerge as bankers’ new best friend and turn FDIC into the next AIG. This is a continuation of the greatest financial travesty against all American taxpayers, unrestrained even after Elizabeth Warren of COP blasted these regulators for spending “beyond what Congress appropriated… exceeding $4 trillion and smacking of high level of corruption.” FDIC’s own OIG also reported that the agency was at fault in at least 6 bank failures. It is a blatant insult to our justice system when these regulators are not held accountable for their mistakes, mistakes that should not have been repeated and worse, so costly and the damage so comprehensive that they ended up creating systemic risk instead of preventing it. Throughout this economic crisis, as the director of Federal Deposit Insurance Corporation, Bair’s decisions and actions have often posed major stumbling blocks to the goals of our administration and further deteriorated public confidence and trust in the financial industry.

Currently FDIC has about $19 billion to guarantee over $4 trillion in deposits. Its DIF reserve ratio is around 0.4%, significantly lower than “the statutorily mandated minimum of 1.15 percent.” Yet, even before Bair proposed to raise bank fees and Congress passed the bills to increase her agency’s borrowing limit, FDIC had already gotten itself involved in TLGP and PPIP. “According to President Barack Obama’s fiscal 2010 budget proposal,” FDIC was “expected to guarantee about $600 billion in bank loans over the life of the temporary debt program.” This was in addition to the $500 billion Bair expects to finance for the legacy asset program.

“Nearly all of the Deposit Fund’s assets are held in U.S. Treasuries… any drain on FDIC reserves starting from dollar number one is met by sales of Treasuries, which are a direct obligation upon the U.S. taxpayer.” In other words, with FDIC’s reserve at a meager $19 billion, Bair singlehandedly threw over $5 trillion worth of burden on the shoulders of all taxpayers, including the guarantee of approximately $1 trillion for TLGP and PPIP. We now not only protect our own deposit with our tax dollars, we also back bank bonds and buy toxic assets to help these financial institutions clean up their balance sheets.

What kind of an insurance corporation is this? How many bank failures can it really cover and who gave Bair the authority to guarantee billions for TLGP and PPIP? With this pathetic reserve insurance premiums FDIC collected was no longer sufficient to keep it solvent. Bair committed one of the greatest moral hazards ever when she prioritized her agency over private properties belonging to the citizens of the United States. She had chosen to insure FDIC’s survival at the expense of both the depositors it was mandated to protect, and taxpayers.

Even more disconcerting was the fact that these two programs benefitted mainly the very same institutions which dragged us into this financial chaos. TLGP was our government’s solution to a devastating misstep by FDIC using our tax dollars. Bair’s impetuous decision to wipe out Wamu bondholders dealt a fatal blow to the bond market; it became nearly impossible for banks to raise capital by selling bonds without our tax dollar guarantee. This program created a double jeopardy for the general public because it also enabled banks to raise capital while allowing them to avoid TARP restrictions such as those on executive pay and bonuses. Bair vigorously endorsed PPIP, boasting this government program would “likely… generate a ‘healthy’ proft” to taxpayers. However, FIDC itself had only been able to “clear performing commercial loans at 50 cents on the dollar on average in its own regulated, orderly auctions.” Fed’s latest financial release on the Maiden Lanes further weakened her assessment, showing a $10 billion loss, instead of a profit, for the toxic/legacy assets that belonged to Bear Stearns and AIG.

What was even more outrageous was the irresponsible and random manner in which FDIC had been dealing with bank supervision, seizure, and receivership. Did these banks really fail? How many of these failures occurred as a result of poor supervision? Furthermore, did FDIC manage the receivership fairly and effectively? The fact was, in 2008, “FDIC faulted in four bank failures… [and] fell short in correcting deficiencies at four U.S. banks before they were seized last year at a cost of almost $1 billion to the deposit insurance fund, the agency’s inspector general said.” Those banks included Silver State Bank, Integrity Bank, First Priority Bank, and Columbian Bank and Trust.

More recent reports by OIG also showed that “FDIC supervision fell short for Freedom Bank” in Florida. The agency was “criticized for failing to take supervisory action quicker.” “Freedom Bank (FBBEE) failed primarily due to an aggressive growth strategy that relied on high-risk commercial real estate loans and poor underwriting. But mistakes by FDIC and Florida regulators helped exacerbate the problems that led to the bank’s demise.” In another case, FDIC was found liable for not “tak[ing] ‘timely and effective’ action to prevent Georgia’s Alpha Bank and Trust from failing less than three years after opening.”

While it is understandable that no government agency is perfect, with over 30 banks already failed thus far in 2009, supervisory effort by our current financial regulatory agencies had clearly been a horrendous failure. Instead of shamelessly demanding jurisdiction expansion and diverting FDIC’s manpower and resources, Sheila Bair should be re-examining its actions, or lack of. When her own agency was found to be at fault for not one, two, but SIX bank failures why she had the audacity to ask for more power was beyond logic.

FDIC now “wants the power to curtail certain payments owed to counterparties of a tottering firm if the U.S. is expected to sustain losses from winding down.. counterparties could receive no less than 80% of the net due depending upon the government’s losses.” 80%? Why any at all? In the Wamu sale to JP Morgan, FDIC “made the claims of the counter-parties of all the swap contracts, futures contracts senior to those of the bondholders in the capital structure… This is a HUGE deal.” Who gave Bair the right to completely screw up system to give “counter-parties… precedence over the debt holders of the firm?” Why should AIG make Goldman Sachs whole a priority? No wonder taxpayers got stuck backing TLGP because all these actions by FDIC killed any incentive to buy company bonds.

Next, “FDIC is… seeking authority to seize bank and thrift holding companies that are not deemed systemically important but have one or more failing subsidiaries.” Take a look at the Wamu case. FDIC did not even know the parent company had over $4 billion in deposit (so much for that liquidity issue Bair cited for the seizure). In other words, this request clearly showed it shouldn’t even be in court right now fighting for that money because it currently has NO authority to seize holding companies.

“[T]he agency is [also] pushing to scrap a requirement… that gives Treasury veto power over FDIC’s decisions.” What happened to “checks and balances?” If it weren’t for the Treasury and Fed interference, Wachovia would have been sold to Citigroup and Sheila Bair would have created the biggest bank failure in the history of mankind, wasting billions more of our tax dollars with all the guarantee she offered in that deal.

This was the same regulator who tried to increase bank fees by declaring potential insolvency, even though she knew “Competitive Equality Banking Act of 1987.. serves as a reaffirmation by Congress that the United States pledges its full faith and credit behind the federal deposit insurance funds.” Bair also double-crossed Citigroup in a poorly arranged rescue that cost Wachovia investors millions. On Friday Bloomberg reported ” U.S. stocks fell, extending the worst weekly loss for the Standard &Poor’s 500 Index since March, as… Sheila Bair predicted the heads of some banks may be replace.” No sensible and prudent government official would make misleading statements that might result in a nationwide bank run, betray the trust of the institutions he or she was regulating, and destroy preciously recovered investor confidence by dictating possible change of control in the management of private corporations. Congress should realize by now it is our regulators that require the most oversight. Incompetent officials such as Bair must be reprimanded and investigated, and not be granted addiitional power until they take proper and serious measures to prevent a repeat of similar mistakes.

As President Obama attempted to create more jobs and increase lending and credit flow, especially to small businesses, FDIC’s actions frequently dampened his effort.

FDIC seized Wamu last September and sold the bank to JP Morgan for $1.9 billion, citing severe liquidity pressure. Many investors were shocked because “Washington Mutual had a Tier 1 capital ratio of 8.4 percent on Sept. 30, well above the 6 percent threshold that regulators use to classify a bank as well capitalized.” It also had a TCE ratio of 7.8%, well above the 4% many analysts believe banks must maintain to pass the stress test. In other words, this $300 billion institution was considered a failure by OTS and immediately seized by FDIC because of a one week bank run that temporarily affected its liquidity, despite the fact that it probably could have passed the latest stringent examination conducted by our Treasury.

Worse, this FDIC seizure and sale did not just hurt Wamu shareholders, employees, and customers. As mentioned previously, Bair also wiped out Wamu bondholders. This unprecedented action led to credit freeze worldwide, crippling the effort by our Treasury to re-establish liquidity and depleting what President Obama called “economy’s ‘lifeblood.’” In Europe, for instance, daily deposits to European Central Bank increased from $0.09 billion to an astonishing $169 billion the week after Wamu seizure; banks were hoarding money and not even lending to each other, much less the general public.

As President Obama persevered to decrease unemployment, Bair’s hasty and thoughtless decisions often led to job and benefit loss inadvertently. Her rescues of Washington Mutual and Wachovia “deposits” was really a rescue of FDIC itself, period. JP Morgan laid off over 12,000 Wamu employees and delayed 401k contribution to its own employees making between $50,000 and $250,000 (yes, that is you again, the responsible middle class Americans getting sacrificed) to cut “COST,” while contemplating the purchase of more private jets and the building of a “premier hangar.”

Many institutions Bair, Paulson, and other officials deemed “too big to fail” never appeared to be concerned with public welfare. No taxpayer I know wanted to give JP Morgan $25 billion in TARP and $38 billion in TLGP-backed bonds so it could spend millions converting the already new, modern Wamu Occasio branches instead of retaining more workers during this economic downturn. We did not want to give Citigroup billions so it could keep its Mets Stadium sponsorship. And we certainly did not want to give AIG billions for its extravagant spa retreats and making Goldman Sachs whole.

President Obama wanted to increase credit flow for small business owners, because “a line of credit [could] be a lifesaver, giving them a buffer against cash-flow problems and enabling them to handel regular expenses such as payroll. But beginning in March, according to documents obtained by BusinessWeek, JP Morgan suspended credit lines for a large number of business owners [many of them NEVER EVEN MISSED A PAYMENT BEFORE]. According to someone familiar with the matter the move affected thousands of businesses. They had been clients of Washington Mutual before Chase bought the ailing bank in September 2008.”

According to the Center for Public Integrity, “U.S. and European Investment banks invested enormous sums in subprime… [and] made huge profits… Investment banks Lehman Brothers, Merrill Lynch, JPMorgan & Co., and Citigroup Inc. both owned and financed subprime lenders.” Given most banks were corrupt, why let Wamu, a “Mainstreet” bank, with its free checking and excellent customer service, fail and small business owners suffer? In 2007, as “one of the nation’s leading banks for consumers and small businesses,” it “was ranked the highest retail bank in customer satisfaction in two regions of the U.S. by J.D. Power and Associates… BusinessWeek named Wamu a Top 25 Service Champ- the only bank to make the list… Fortune designated WaMu a Blue Ribbon Company for 2006 as a result of its listing on Fortune’s 100 Best Companies to Work For, America’s Most Admired Companies, Fortune 500 and Global 500.”

Community banks have also been victims of FDIC’s unfair and improper seizure. In Colorado, New Frontier Bank’s failure led to despair among many farmers. “One Fort Morgan farmer broke down in tears Monday morning as he spoke to Colorado’s congressional delegation at the Morgan County Fairgrounds in Brush. He said he’s under a 30-day deadline to find new financing for his cattle and farm operation or face liquidation.” “The Teagues spent about $50 million a year in the Morgan County community through its farming operations and employs about 155 people, who also contribute to the local economy.” “A month is not enough time to find a new lender, especially when many banks are undercapitalized and ill… many are now facing liquidation threats from the FDIC.” “FDIC … of the Division of Resolution and Receivership Ron Bieker said the agency had no policy which requires that borrowers pay off or refinance loans within that time period, implying that this was a misunderstanding… [but] Windsor Mayor John Vazquez said he could show Bieker a letter which did say loan customers had only 30 days to do something about their loans.” &… was business as usual at FDIC: just another “misunderstanding… another mess for Congress and taxpayers to help clean up.

New Frontier did not have to fail, at least according to the bank president. Though he followed FDIC’s instruction and tried to raise more capital, he claimed that ” deal was doomed because [at the same time] the FDIC offered a sweeter deal… the icing on the cake being that the FDIC would take the bank’s troubled loans out of the deal… when the FDIC has you out on the bid process, why would anyone buy you… he also expressed frustration with [TARP], $53 million of which New Frontier Bank would have qualified for based on its size… [but] was denied… he called the process politically corrupt… it will cost the FDIC… $500- $750 million… if they give us $53 million we could save it.”

The situation became so urgent that Congressional leaders had to step in and help buy these farmers more time from FDIC. In addition, USDA will “pump” $253 million to help these farmers. What? USDA? Isn’t USDA funded by the government and that means TAXPAYERS? What FDIC did was NOT the least cost solution. The agency expected to lose $670 million for New Frontier. With the money from USDA , total cost for this seizure soared to about $900 million. Why not just give New Frontier the $53 million it needed to avert disaster in the first place? That $253 million should not have been used to help rectify another FDIC mistake; it should have been saved for OTHER farmers in need.

In the case of First Bank of Idaho, ” lawmakers questioned whether federal regulators acted too hastily and knowingly took steps to exacerbate the bank’s failing financial health in its final days… OTS gave the bank until june 30 to raise $10 million and bring its capital level up to 12 percent… But regulators moved to shut down the bank before that June deadline, shocking bank executives who contend they had investors lined up to give the bank a cash infusion and clear millions in bad loans.”

“Local newspapers learned of the Cease and Desisit order and announced it to the community (the bank did not release this information, which means that government agencies probably “leaked” the news of their own actions. The only possible result of leaking this information would be to prevent the bank from saving itself.”

“The FDIC says they will lose $191 million because of what happened, but if they’d waited a few weeks it never had to happen,” said Schauer. “That’s 191 million reasons why this takeover should be undone. Now the losses are incalculable,” she said. “A $35 million loss to our shareholders, the loss of more than 60 local jobs, which is a huge number of jobs for this area, the payroll that won’t be spent here, the taxes that won’t be collected here, the home foreclosures. People here know how much this bank has done for the communit, and it’s a calamity for many small businesses.”

Other scandals involving FDIC also made national headlines recently. In one example, “Citizens for Responsibility and Ethics in Washington (CREW), a public watch dog group, urged the inspector General’s Office at the Federal Deposit Insurance Corp. on Monday to investigate a contract that the agency awarded to a real estate firm headed by the husband of Sen. Dianne Feinstein.” Apparently the terms were a bit too lucrative, the firm a bit too inexperienced “dealing with foreclosed residential properties,” and the timing a bit too coincidental.

In another example, FDIC drew criticism for trying to relocate its office in New York. Its “decision to pay any price to abandon Lower Manhattan is wrong on so many levels it is hard to know where to start… [it] is prepared to pay about $2.5 million more each year… [to shorten] the commute for some of its suburban workers.” Thousands of people lost their jobs after their banks got seized and FDIC was worrying about the convenience of its workers’ commute? Sheila Bair must have forgotten that “wasteful spending” problem President Obama had been trying to end.

Irresponsible decisions and inconsistent actions are NOT the answers to solving economic crisis as systemic as the current one. We all know Congress will not let FDIC fail. This does not mean, however, Sheila Bair should get an increase to $100 billion, and up to potentially $500 billion, in borrowing power without any legitimate reason. She recently estimated that bank failures through 2013 would cost her agency $65 billion. Especially now that these stress test results are boosting investor and public confidence in our financial industry, and big banks are raising capital on their own, what is that extra $35 billion, or $435 billion for? As far as I am concerned, neither TLGP nor PIPP protects deposits or facilitates processing bank failures. It is time to “REGULATE” our financial regulators and replace corrupt officials with those who will truly serve in the best interest of ALL hard-working, responsible taxpayers.


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Chart of the day, contemporary art edition

Felix Salmon
May 20, 2009 03:19 UTC

From Maneker:



I know the point of the graph is to be a birds-eye view of the NYC art marketplace, but several New York art developments have been pretty exciting. Last Thursday at the Christie’s sale in NY, the record lot sold was a piece by the contemporary Chinese artist Zhang Xiaogang, which sold for over $700K, in a western artist-focused show. That’s a pretty big development, and this and other sales of big Chinese artists like Zeng Fangzhi at the Phillips sale last week in NY indicate that the city’s art dynamics (and buyers’ habits) are a bit more fluid than single graphs show.

The neg-am credit card

Felix Salmon
May 19, 2009 19:47 UTC

Remember those negative-amortization mortgages, where you could pay less than the interest rate and see your total amount owed go up from one month to the next? Those worked so well, now the credit-card companies are following suit!

I got my Chase credit card bill this week and it had a $0 minimum payment, although I had had an abnormally expensive month. It didn’t make much sense til I looked closer and found this on my bill:

“You have the flexibility to skip a payment. You must pay past due and overlimit balances immediately. However,the remaining minimum payment for this month has been reduced to $0. Finance charges will continue to accrue. To reduce your balance, feel free to make a payment.”

I just love that line about “feel free to make a payment” — and also the fact that Chase waited until the balance was abnormally high before it tried this stunt. And people wonder why JP Morgan’s credit card losses are rising fast and could hit 24% on some portfolios.


That’s nothing new. I used to get those ‘offers’ on a card, I think from PNC or MBNA, several years ago.

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Where are Ecuador’s bondholders?

Felix Salmon
May 19, 2009 19:35 UTC

According to Ecuador’s finance minister — and there’s no reason not to believe her — there’s been “excellent” take-up of her offer to buy back Ecuador’s 2012 and 2030 bonds at somewhere in the neighborhood of 30 cents on the dollar. As Reuters’s Maria Eugenia Tello notes,

Most holders of defaulted debt have so far failed to create a united front against Ecuador to seek repayment via courts.

This is in contrast to what happened the last time the Ecuador defaulted, in September 1998. Back then, Ecuador made the announcement in the middle of the annual meetings of the IMF in Washington, and substantially all of Ecuador’s bondholders were in the same place at the same time. It didn’t take long for them to organize meetings and reject Ecuador’s offer to pay some bonds in full while in other cases using the bonds’ own built-in collateral to keep current.

Why do bondholders seem to have lost cohesion over the past decade? At the time, I thought that the experience of Ecuador’s 1998 default was going to be the event which catalyzed bondholders to come together as a much more unified bloc — and indeed the Emerging Market Creditors Association was formed as a direct result of the way that the Ecuador default was handled.

But EMCA fell apart, nothing really took its place, and a major global financial and economic crisis kinda took the wind out of bondholders’ sails. At this point, most of them have neither the energy nor the time horizon nor the levels of capital needed to rally and fight — Ecuador’s timing, you could say, is perfect in that regard.

What’s more, any holdout strategy is fraught with risk:

Many market watchers on Wall Street say Ecuador has a key advantage because Correa had already bought back most of the debt when the country started to threaten a default and dragged down market prices in late 2008. Ecuador has not confirmed or denied past buybacks.

The point here is that if and when Ecuador controls a supermajority of the bonds — which it certainly will by the time the exchange is over, if it doesn’t already — it can start modifying a lot of the covenants in them, making a court fight that much more difficult. Most hold-out or “vulture” creditors tend to dislike litigating bonds in any event, preferring loans instead, which tend to have stronger covenants.

So if there are any hold-outs, their best hope will be that they’re in a tiny minority, and Ecuador just does what it did last time, and pays them off in full because it’s easier and cheaper than fighting them in the courts. But the hold-outs would probably need to amount to less than 4% of the amount issued before Ecuador went down that route.

Will there be 96% takeup of this offer, including bonds Ecuador already owns? It’s possible, but I suspect that there will be enough too-high bids, in the 40-cent-and-over range, to stop that from happening. In which case Ecuador’s holdouts will find themselves in much the same position as Argentina’s. Which is to say, an unhappy position indeed.


Felix your note are very good
wright more please

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