Comments on: Counterparties: The bailout according to Treasury A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: TFF Wed, 18 Apr 2012 20:18:28 +0000 Yes, with the support of the FDIC, JPM acquired the deposits, assets, and contracts of WaMu, but left the stockholders and bondholders to the mercy of the bankruptcy courts.

It was an odd transaction — in theory, the bondholders should have been senior to the counterparties of the swap contracts.

By: Danny_Black Wed, 18 Apr 2012 20:11:51 +0000 TFF, more than possible I am confusing them with WaMu but one of those two banks were the counterexample in a debate with a colleague of mine about the debt holders being made whole.

By: TFF Wed, 18 Apr 2012 19:50:14 +0000 Tried searching Google, and the only mentions I could find were the reporting of the original deal in 2008 and some testimony in 2010. Possible that the book isn’t fully closed on that one yet? Wells Fargo agreed to take the first $42B of losses, with the FDIC covering anything after that. But the losses were never expected to exceed $42B, and actual realized losses (thus far) have generally been short of the initial expectations.

The Wachovia shareholders weren’t totally wiped out (they got a fractional share of Wells Fargo), so I imagine the debt holders were made whole.

By: Danny_Black Wed, 18 Apr 2012 17:52:08 +0000 TFF, no idea, sorry. I know the shareholders got wiped out and I believe some of the debt holders did too.

MrRFox, wow what a re-writing of history. Shame Stalin is dead.

BSC didn’t get “tens of billions” in guarantees. A collection of assets JPM didn’t want got put in a SPV and JPM agreed to take the first billion hit. It is currently making a profit for the US taxpayer.

LEH went bankrupt. The Fed acted as it should as lender of last resort, lending at above market rates against collateral with the appropriate haircut. These operations made billions of dollars for the taxpayer.

The “aid” you are complaining about has to date returned tens of billions of dollars in cash profit to the taxpayer. Maybe you are confusing banks with auto firms?

I refer you to how everyone who criticises Paulson et al always have to resort to lying.

By: MrRFox Wed, 18 Apr 2012 17:01:38 +0000 @DannyB – IIRC, first there was Bear Sterns, which got tens of billion$ in gov-guaranties to plug its holes before it was sold on. Then came Lehman, which was clearly insolvent in both senses. Its collapse rippled through the financial world in way that immediately destroyed liquidity – effectively making all players insolvent in the cash-flow sense.

That illiquidity had an impact on asset values, which did – or would have shortly – rendered all of them insolvent in the equity sense. From both angles, the entire industry was facing imminent destruction and was helpless to help itself. Its very survival was dependent of government aid – and that was the moment to act.

At that time, the entire industry could have been legally compelled to reform, and be restructured in a way that was both equitable and best for the society as a whole. Needless to say, the Wall Street types running the government wanted none of that for their (temporarily) former firms. What we got instead was a (temporary) solution that punishes everyone except those most responsible for creating the mess. Those guys came out it just fine. Not surprising – they owned the guys who made the decisions.

Soon, the opportunity to correct that mistake will likely be offered to us. Best that we not pass it up a second time.

By: TFF Wed, 18 Apr 2012 16:47:44 +0000 Yeah, I think you are correct on both counts. The “Golden West” acquisition landed Wachovia $100B+ in bad loans on top of whatever they originated themselves. Devastating!

Any idea how much of a hit the FDIC took on that one?

By: Danny_Black Wed, 18 Apr 2012 16:08:37 +0000 MrRFox, and which firms failed to pay their debts as they fell due? Which firms had liabilities exceeding their assets?

TFF, Wachovia was seized by FDIC and sold on, from recollection they used some quirk to avoid the normal FDIC process. Interesting little side-note, they were bankrupted by a purchase of a bank which made billions for the people who fund Jesse Eisenger….

By: MrRFox Wed, 18 Apr 2012 13:43:37 +0000 @DannyBoy – sorry, DB, for using legal terms with a general audience – wicked of me. Insolvent in the “equity sense” refers to having total liabilities that exceed total assets. Insolvency in the “cash-flow sense” refers to the inability to pay obligations as they become due and without regard to solvency in the equity sense.

By: TFF Wed, 18 Apr 2012 13:38:31 +0000 Good point, Danny_Black…

Still, you have to admit that huge fortunes were made in banking/finance during the real estate bubble. You haven’t shared details of your own history, but I suspect you were part of that.

Minor quibble — Wachovia was pushed into the arms of Wells Fargo, and while there were some public guarantees against losses (did they ever materialize?) they were never a ward of the state in the same way that Fannie/Freddie, AIG, and Citicorp were.

By: MrRFox Wed, 18 Apr 2012 13:36:16 +0000 ” At this point you would be artificially creating a crisis situation,….give it another six months or a year, and your crisis situation could create itself…” (TFF)

Quite so, no need to rush. Now is the the time to do what was not done over Lehman Weekend – think the matter through and plan an effective and ethical actual solution to the matter.

Wonder how much time there really is though – the focus now is on keeping things from falling apart before the election. Once that’s out of the way ….