Opinion

Felix Salmon

Citi’s expensive TARP exit

Felix Salmon
Dec 14, 2009 15:10 UTC

Citi’s paying big to exit TARP:

The moves will result in a pre-tax loss of $10.1 billion that will likely be taken in the fourth quarter from accounting charges taken on the value of the repaid preferred shares and the cancelation of the insurance plan. The new stock offering, meanwhile, will severely dilute erode the value of existing Citigroup shares.

Once the repayment deal is completed, it will still take several more years to clean up the financial carnage. Citigroup has not posted a substantial profit in seven quarters, and the bank is expected to muddle through most of 2010 amid another wave of mortgage and credit card losses. And, like several big rivals, the bank continues to lean heavily on government support through a debt guarantee program that makes taxpayers liable if it is unable to pay back the loans.

There’s lots of talk this morning of Citi’s strong capital ratios once this deal is done. But capital ratios aren’t everything. Citi needs to become (a) smaller and (b) more profitable, while (c) being a force for good rather than evil with consumers. It’s actually doing a reasonably good job with (c): on things like overdrafts and credit-card fees Bank of America and even Chase are generally much worse, maybe because their US consumer-banking arms are so much bigger.

But Citi is still weighed down by those toxic assets that the government has put so much effort into trying and failing to get off the banks’ books. It’s selling some of them, slowly, but what it really needs to be able to do is recapitalize itself through earnings power. And there’s no sign of that happening any time soon.

Update: Citi calls to say that they’re reducing assets quickly, not slowly. They’ve put the assets they’ve marked for getting rid of into a vehicle called Citi Holdings, which includes business with about $900 billion in assets at the peak in the first quarter of 2008. That number was reduced by about $183 billion to $715 billion by the end of 2008, and today it’s $617 billion — a further reduction of almost $100 billion. More’s to come: selling Nikko Holdings will take another $25 billion off that total, and with the exit from the loss-sharing agreement with the government, Citi no longer needs Treasury approval to sell assets in the loss-sharing pool.

Still, it does seem that the low-hanging fruits — things like the Smith Barney brokerage — have largely been plucked, and that the pace of reductions in the assets at Citi Holdings is going to continue to decelerate in the quarters and years ahead, even accounting for divestitures like the upcoming IPO of Primerica. What’s more, core assets at Citicorp have been flat all year at $1 trillion, which itself is Too Big.

I’ll give this to Citi, though: at least they are shrinking, deliberately: they’re moving in the right direction. Which is not something you can say about most other too-big-to-fail banks.

COMMENT

Most banks fluctuate in a pretty small range of NIM because of competition, floating rates in a variety of products, government support, and hedging of interest rate risk. So WFC for instance has been 4.xx% for the last several years. Thus jswede is technically right. However KidDynamite gets at important point: large banks currently have enormously cheap funding supporting enormously cheap lending to their customers.

Without a lot of government support neither of these would make sense. We now know how much risk there is in banks – why would a capital-holder fund them cheaply without faith in government bailouts for depositors and creditors? We also now know how much risk there is in all forms of lending – why would a bank put out 5% mortgages in this climate without knowing that the government will buy them and bail the bank out if they get in trouble? Without lots of cheap government funding, all forms of credit would be scarcer and more expensive.

If you shift all the rates up due to a more neutral government policy, I think banks would probably be doing less lending at lower spreads because there’s simply a limit to what already highly-indebted customers can afford to pay to roll their debt. Cheap funding has been a huge boon particularly to companies like WFC that had enough trust from customers and faith in their own capital base to write a lot of new business at low rates/huge spreads this year. If WFC was paying 8% for 10-year debt, 5% for longer deposits, and 3% for whole-sale funding (to create an imaginary yield curve that probably would look funny), they simply wouldn’t find a lot of takers for the 8% mortgages they would have to be selling and they would be running at much lower NIM on whatever they could sell (maybe 2-3% instead of over 4%). This would make it much harder to earn out from under the pile of terrible Wachovia mortgages and only moderately better WFC 2005-7 mortgages. WFC needs to be able to get customers to refinance/take loans to move, both to avoid defaults and to generate the fee income that the bank depends on. We also can hope that they’re doing good underwriting on these loans, but that might be too much to hope for. At least they’ll do it better than Wachovia did.

Posted by najdorf | Report as abusive

Counterparties

Felix Salmon
Dec 14, 2009 08:10 UTC

Charlie Calomiris owns a bank! Which just got seized by the FDIC! — WaPo

Toyota to sell plug-in hybrid within two years getting 134 mpg — Bloomberg

Best detail of Berlusconi story? “The attacker was holding a small model of Milan Cathedral” — Sky

Immigration and Customs Enforcement seizes an illegal immigrant. Which does 0-60 in 4 secs — NYT

Very, very bad pun — Pearls before Swine

Well done, Houston! — Chronicle

Ashley Dupre, NY Post advice columnist. For realsy — Mediaite

US vs UK household leverage — Blogspot

The work-for-Amazon fitness program — Whimsley

On Matt Taibbi, flame throwing and making sense of things — Digby

“The Twitter API may have just become an open standard” — UnBerkeley

The only thing better than getting Kurt Andersen to write about the LHC? Getting Todd Eberle to photograph it — VF

Tyler Cowen says that FairTrade coffee is “mostly a marketing gimmick” — MR

Taibbi slaps down Fernholz — True/Slant

Bill Ackman’s studio apartment: Asked $950k. Sold for a rather more reasonable $320k — Curbed

I cannot distinguish / some phonemes in Enguish / which causes me anguish / in learning the languish — Language Log

“I never had trouble with Vista, but upgraded to Windows 7 and I haven’t seen so many blue screens in years” — Thoma

Fake Steve UNLOADING on AT&T. An instant classic — Fake Steve

COMMENT

Re Calomiris — you’ve got to get out more:

http://baselinescenario.com/2009/11/19/w hat-did-tarp-do/#comment-34237

Posted by Uncle_Billy | Report as abusive

Too-big-to-fail advertisement of the day

Felix Salmon
Dec 13, 2009 18:42 UTC

Here’s a full-page ad I just found in the WSJ; it seems that Bank of America considers $760 billion in lending to be “a good start”. Me, I consider it to be “too big to fail” and a clear sign that BofA needs to get smaller, not bigger. I do wonder: is there any point at which BofA would consider itself to be too big? Judging by this ad, it seems the answer is no.

(more…)

COMMENT

To a bank, a loan is an asset, and companies that have lots of assets are good. Of course, only time will tell if this is like a company in 1900 bragging that it had invested millions of dollars to build state-of-the-art facilities in 20 states and three foreign countries – for the manufacture of buggy whips.

Posted by KenInIL | Report as abusive

How smaller banks would have helped shrink the CDO market

Felix Salmon
Dec 13, 2009 18:07 UTC

The WSJ has new details on how banks would pass CDO risk between each other in an improbably long chain:

One of Goldman’s trades with AIG involved a financial vehicle called South Coast Funding VIII. South Coast was one of many pools of bonds backed by individual homeowners’ mortgage payments that Wall Street turned into collateralized debt obligations or CDOs.

Merrill Lynch, now part of Bank of America Corp., underwrote the South Coast CDO in January 2006 by stuffing it with packages of home loans originated by firms such as Countrywide Financial Corp., the big California lender.

Once a CDO debt pool is assembled, it is sliced into layers based on risk and return. Merrill sold the safest, or top layer, of deals like South Coast to large banks, including in Europe and Canada.

The banks wanted protection in case the housing market tanked. Many turned to Goldman, which effectively insured the securities against losses. Then, to cover its own potential losses, Goldman bought protection from AIG, in the form of credit-default swaps.

The risk, here, originated with Countrywide. It then got moved to South Coast Funding, whence it moved to Merrill Lynch, and thence to European banks, who sold it on to Goldman Sachs, who in turn passed it on to AIG. When the music stopped, AIG bore the brunt of the losses.

The obvious question here is why the chain was so long: why couldn’t Merrill (or even Countrywide) just insure the mortgages with AIG itself, instead of sending them off on a long and winding road to end up in the same place?

There’s actually a good answer to the question. Countrywide considered itself to be in the originate-to-distribute business, it didn’t want an exploding balance sheet. So it was very happy to sell its mortgages to the likes of South Coast Funding and book the profits immediately. South Coast Funding, in turn, had no real equity of its own, it was just a special-purpose vehicle set up by Merrill Lynch. And Merrill considered itself to be in the moving business rather than the storage business, so it wanted to sell as much of the debt as it could.

Eventually, the bonds ended up with big European and Canadian banks, who were attracted by their triple-A credit ratings: under Basel II, that meant they needed to hold very little capital against them. Crucially, it was these banks, who had no size limits, which were happy expanding their balance sheet as much as they could, so long as that meant extra profits. They even managed to bring their risk down near zero by getting Goldman to insure the credit.

Finally, Goldman was basically in the trading business, insuring CDOs only if and when it knew that it could get someone else (in this case, AIGFP) to reinsure the risk at a lower rate; eventually the European banks got wise to that trade, and started dealing directly with AIG themselves.

There’s a lot of blame to go around here, but right at the heart of it is the fact that there were no limits on the size of banks’ balance sheets. The European banks (and, later, once AIG stopped insuring this stuff, Merrill Lynch itself) would happily balloon up as large as they could with stuff like this, because sheer size was one of the profitable attributes that regulators didn’t mind in the slightest. If there were a cap on size, this chain would have been much harder to construct.

COMMENT

jian1312: Why should we discourage risk-taking in the tax code? Risk-takers have been very, very good to the IRS with their tendency to generate growth, profitability, and corporate income/capital gains taxes. I would rather work on modifying our social contract so that no one expects that the government will save risk-takers when downside materializes. Size has been addressed. I agree with you on the other two.

Posted by najdorf | Report as abusive

Drug money and the financial crisis

Felix Salmon
Dec 13, 2009 16:52 UTC

How much money does the international drugs trade make, and how much of that money helped out the global banking system when liquidity dried up last year? According to the UN, the answer to both questions is “a lot”:

Antonio Maria Costa, head of the UN Office on Drugs and Crime, said he has seen evidence that the proceeds of organised crime were “the only liquid investment capital” available to some banks on the brink of collapse last year. He said that a majority of the $352bn (£216bn) of drugs profits was absorbed into the economic system as a result.

I’ve spent a chunk of this morning rooting around the UNODC’s website to see if I could find a source for that suspiciously-precise $352 billion number, but I couldn’t: if someone can point me to the report which generated it, I’d be much obliged. I did however find a press release in which Costa said that corruption was “the cause and consequence” of the financial crisis, which does make me suspect that he’s prone to talking his own book here. (The financial crisis had many causes, but corruption wasn’t even in the top ten.)

So I’m filing this one under “empirically-dubious publicity-seeking” for the time being, if only because Costa is prone to statements like this:

Mr. Costa said: “Nicolas Cage’s characters have exposed us to some of the darkest aspects of human nature. Now he is championing one of the most noble – the quest for justice. The Lord of War has become a messenger for peace, the Bad Lieutenant has turned into a good cop, and the inmate from Con Air has become a champion of prison reform. His star status and strong conviction on these issues will help us achieve security and justice for all.”

Or, to put it another way, the forces of evil and corruption were responsible for causing the financial crisis. But don’t worry, we’ve got Nicolas Cage on our side, so the good guys are bound to win.

(Via Yves)

COMMENT

Felix,

This is a bit late, but here’s where the original comments came from, an interview in an Austrian publication:

http://www.profil.at/articles/0905/560/2 31884/der-suchtgiftmarkt-zeiten-krise-un -drogenbekaempfer-costa-interview

As you can see it’s in German.

Posted by reutersitsme | Report as abusive

The upside of lo-fi

Felix Salmon
Dec 12, 2009 21:51 UTC

Tyler Cowen is weeping over the fact that younger listeners now prefer the sound of degraded-quality MP3s to that of CDs. Nick Spence has more, pointing out that this is just a 20-years-on reprise of the CD vs vinyl debate; his story ends with this quote.

“What you are hearing is that everything is being squared off and is losing that level of depth and clarity,” said producer Stephen Street, the man behind hits from The Smiths, Morrissey, Blur and Kaiser Chiefs. “I’d hate to think that anything I’d slaved over in the studio is only going to be listened to on a bloody iPod.”

The fact is, of course, that consumers never have listened to uncompressed digital music files played through high-end studio monitors, and they never will. Meanwhile, Lou Reed dreams of a world where people who try out an MP3 then go out and buy a version they “can actually listen to”.

In the real world, something similar but more exciting is happening: people try out an MP3 and then go out and listen to the artist in question live. We’ve left the world where recorded music tries to replicate the live experience with maximal fidelity; we’ve entered a world where recorded music is its own art form, as well as acting as an advertisement for a separate-but-related art form of live music. The bifurcation has created some interesting epiphenomena, such as the auto-tune craze; it has also helped to create what is arguably the largest and most vibrant live-music scene of all time.

The losers in this game might well be the likes of Stephen Street: there are fewer mega-artists willing and able to spend millions of dollars producing and polishing studio albums. Indeed, even the likes of Radiohead have decided that the whole concept of the studio album is outdated and have said that they will not record any more of them. But live shows will continue to improve, and music of both kinds will continue to be made and consumed by more people than ever before. So me, I’m smiling, not weeping.

Update: D^2 has some trenchant words for Mr Reed.

COMMENT

“We’ve left the world where recorded music tries to replicate the live experience with maximal fidelity; we’ve entered a world where recorded music is its own art form, as well as acting as an advertisement for a separate-but-related art form of live music. ”

Ah, recorded music stopped trying to replicate the live experience decades ago, the whole studio as art canvas began with Sgt. Pepper and peaked in the 70s. Queen didn’t have 9 vocal tracks on stage to layer like Bohemian Rhapsody. Moving up from 8 to 24 tracks, increased separation and overdubbing capabilities, etc.

Music was always listened to in a compromised way. The whole of mono recording and mixing techniques from the 50s and 60s was geared towards a.m. radio, not exactly hi fi. CDs are compressed, and modern studio mixing is super compressed, low dynamic range (see multiple screeds from mastering engineers online).

I wouldn’t call the modern live music scene the most lively or interesting, its going the other way…. acts using Logic and pro tools to trigger lots of secret studio audio into the “live” act, making it more a reproduction of studio and less spontaneous and genuine. Studio isn’t an ad for live, live is a canned repro of studio. Including the use of auto-tune for its intended purpose, to fix up poor singing.

Auto-tune pumped up as in hip hop is the equivilent of the 80s gated drum, a technology turned into a gimmick.

Posted by CASLondon | Report as abusive

The happy kind of mortgage default

Felix Salmon
Dec 12, 2009 20:47 UTC

Many congratulations to Mark Whitehouse for writing an evenhanded and even positive article about walking away for the WSJ. He says that “a growing number of families are concluding that the new American dream home is a rental”, and talks about Shana Richey, a schoolteacher who took a $430,000 no-money-down mortgage in 2004 on which she was making payments of $3,700 a month.

Wells Fargo offered Richey a modification down to $3,300 a month, but then she found a larger, nicer rental for $2,195 a month, which includes not only a swimming pool but also the cleaning of that pool. It was a no-brainer, especially since California is a non-recourse state:

Ms. Richey’s family of five used some of the money to buy season tickets to Disneyland, and plans to take a Carnival cruise to Mexico in March… “We’re saving lots of money,” Ms. Richey says.

Good for her. In California especially, no one should pay vastly more for their housing than they have to.

COMMENT

Megan McArdle’s alternative (and superior) take on the story:
http://meganmcardle.theatlantic.com/arch ives/2009/12/the_new_breed_of_deadbeats. php

Posted by nyetter | Report as abusive

“Larry Bergman”, Overstock’s sock-puppet

Felix Salmon
Dec 12, 2009 18:35 UTC

Here’s the friend list of “Larry Bergman”, the Overstock-financed sock-puppet who helped to generate the notorious list of friends of those who are critical of crazy Overstock CEO Patrick Byrne. Gary Weiss has the details of exactly how that list was generated; although “Bergman” never asked me to be his friend, he friended a few friends of mine, and that’s all he needed to see my own friends list.

The funniest part is that “Bergman” claimed to work at Goldman Sachs, and to have the email address sellrshort@gmail.com. You really can’t make this stuff up, but the problem is that public ridicule has no effect on these people. I guess they’re a bit like David Zinczenko that way.

Update: “Larry Bergman” has now been removed from Facebook, but Judd Bagley, his puppetmaster, has popped up on TBI, saying that he was “a composite” and “a simple labor-saving device”.

COMMENT

It seems a lot of people in the mass media are blindly following the Gary Weiss version of the story without fully understanding what transpired. Gary Weiss just rants repeatedly about how Patrick Byrne “crazy” but everything that I’ve heard and read from the guy seems to make sense and there is a lot of evidence to support him. Gary Weiss on the other hand clearly has a history of trying to push his agenda in the media, on Wikipedia, and with industry insiders. Historically, the bulk of evidence I’ve been able to find on Mr Weiss is that he clearly lives in his own fantasy world where personal attacks instead of facts rule.

Posted by d_duder | Report as abusive

Don’t ask Taibbi to be Krugman

Felix Salmon
Dec 12, 2009 18:24 UTC

Andrew Leonard takes the Tim Fernholz approach to Matt Taibbi:

The co-optation of regulatory reform by Wall Street is an important story, and one that needs to be pressed at every point. It would be nice though, if the left could pursue that story without flaunting the same cavalier attitude toward the complexity of the economic challenges faced by the current administration that we are already so familiar with from the right.

Really, Andrew? I think the left is doing that very well, thank you — and you’re a prime example, as is Tim Fernholz. And then there’s the likes of Dean Baker, Joe Stiglitz, Paul Krugman, I don’t need to go on, you know all the names better than I do.

The existence of a Taibbi screed in Rolling Stone is not going to invalidate or render irrelevant the substantive criticisms of these people, and neither will it change the way in which “the left” is being seen to react to Obama’s economic policies. We have a left-leaning government now, and one which is proud to encourage and participate in economic debates. Taibbi’s not going to change that. We’re happy judging Krugman on his own merits; we shouldn’t seek to judge Taibbi on Krugman’s merits too.

COMMENT

“Personally, I’m indifferent to Taibbi’s existence one way or the other”
Are you kidding me? Be f…ing honest man, you’re obviously mad at people around here for defending Taibbi so I doubt you’re indifferent to him. Please don’t pretend anything to the contrary!
By the way, what do you mean when you imply that he is tricking out the news for people who supposedly do not like to read? What the hell does that even mean? Is this some professional authorship/readership type of analysis? Are you a graduate student in a school of journalism anxious to defend the highest standards? I think you feel threatened in some way and it shows.
Clearly Taibbi attracts a lot of attention (maybe too much),and some of his readers obviously have developped a sort of very emotional attachment to him. I think it’s fine, I would certainly not deride it as “fanboy worship”. A lot of people just love the guy. Deal with it.

Posted by peteLL | Report as abusive
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