Savers shoulder the inevitable burden of bad loans
Britain’s new coalition government likes to remind voters we are all in this together. The phrase is rather glib. But in an important sense savers and borrowers around the world are finding the costs of reckless lending are falling on the innocent and guilty alike.
Few people this century will have experienced what it is like to turn up at their bank and be told they cannot withdraw deposited funds because the bank has “suspended” payments.
Suspension sounds harmless. But before the spread of deposit insurance, the word was enough to strike fear into the hearts of depositors, who risked losing much if not all their life savings, and being made to wait months or years for access to what remained.
Between 1930 and 1933, more than 9,000 banks across the United States were “suspended”, accounting for $6.9 billion or 15 percent of all deposits in the country, according to official figures. Behind those numbers are tales of misery for families, farmers and small businesses suddenly left without funds when their bank was suspended or collapsed forever.
So terrible was it, that even the threat of suspension could produce long lines of anxious depositors outside institutions trying to withdraw cash before the tellers closed their windows. In 1907, long lines marshaled by police formed outside the doors of the Knickerbocker Trust Company on New York’s Fifth Avenue as the depositors (“mostly small shopkeepers, mechanics and clerks”) tried to pre-empt suspension.
“Stacks of green currency, bound into thousand dollar lots, were piled on the counters beside the tellers. One by one these stacks were broached and they dwindled rapidly. Clerks went to the vaults from time to time with arms full of notes, piled up like bundles of kindling wood,” according to an account published by the Washington Post and reproduced in Robert Bruner and Sean Carr’s monograph “The Panic of 1907″.
“As the morning wore on many more depositors arrived carrying satchels, showing they were ready to carry off large amounts. One young man, with his hands trembling, stacked his trousers pockets full of one-hundred and twenty-dollar bills.”
Senate vote exposes Wall Street impotence
Wall Street’s diminished influence in Washington was made plain yesterday when the Senate voted to approve financial reform legislation by 59 votes to 39.
Industry lobbyists will point out the bill only just managed to scrape the required votes needed to end debate and forestall a filibuster. It fell far short of a lopsided bipartisan majority.
But the formal tally on HR 4173 (Wall Street Reform and Consumer Protection Act 2009) as amended by S 3217 (Restoring American Financial Stability Act 2010) conceals a much wider bigger majority of 63-37 for enacting far-reaching reforms.
In the final vote on passage, the bill was backed by 53 Democrats, 2 Independents and 4 Republicans (Maine’s Susan Collins and Olympia Snowe, Iowa’s Charles Grassley and Massachusetts’ Scott Brown).
It was opposed by 37 Republicans and 2 Democrats (Maria Cantwell of Washington and Russ Feingold of Wisconsin). Two senators were not present (Democrats Robert Byrd of West Virginia and Arlen Specter of Pennsylvania).
But the two Democrats who voted “No” did so because they thought it did not go far enough and were registering a protest in a bid to get it toughened further. The two absent members were Democrats who had voted in favor of the legislation before.
All four votes should really be added to the “Yes” column to give an effective underlying majority of 63. By any measure that is a very high tally or a major piece of legislation.
“adverse” struck me,too. populist = equalitarian, not stupid masses. so many terms get rendered toxic in the “spin,” what’s needed is a reassertion of the “all [persons] are created equal . . . endowed with . . . rights to life, liberty and the pursuit of happiness” understanding of what it means to be a citizen. it isn’t “adverse” to reduce the size and impact of an exploitive paracitic oligarcy, is it?
from Rolfe Winkler:
Politics and bank regulation don’t mix
The Federal Deposit Insurance Corp tried to seize and sell Cleveland thrift AmTrust last January but local politicians intervened. In the end, the bank still went bust 11 months later - a delay that may have increased losses to the U.S. regulator’s funds. As Congress debates banking reform, AmTrust provides a useful warning that the regulatory apparatus needs to be kept free from politics.
Regulators had known for some time that AmTrust was troubled. AmTrust's chief regulator turned down the bank’s request for TARP money last fall. It also hit AmTrust with a cease-and-desist order, instructing management to change lending practices and boost capital by December 31. When AmTrust missed the deadline the FDIC decided to step in.
But Ohio Congressman Steven LaTourette and Cleveland mayor Frank Jackson convinced Treasury and the White House to keep the regulators at bay. Bythe time FDIC finally seized AmTrust on Dec. 4, its tangible common equity – the capital it has to withstand loan losses – had fallen to $276 million from $943 million the year before. The cost of the bank’s failure to FDIC: $2 billion.
The price tag to the FDIC would’ve been lower had it acted sooner, according to the Wall Street Journal. This isn’t a new lesson. Congress established the Prompt Corrective Action doctrine in 1991 because the S&L crisis taught that to limit the cost of bank failures, it’s important to seize troubled institutions quickly, while they've still got capital.
And the importance of speedy resolution is more pronounced with larger firms, whose deterioration can infect the entire system. Remarkably, Congress is poised to erect new political barriers that may delay pre-emptive action to corral systemically dangerous firms.
An amendment offered by Rep. Paul Kanjorski to Barney Frank' s Financial Stability Improvement Act would require Treasury to sign off on corrective actions imposed by regulators on firms with greater than $10 billion of assets. For $100 billion+ firms a White House signature would also be needed.
AmTrust was small enough that its collapse didn’t pose a systemic threat. At worst, it just compounded losses at FDIC, which may require its own taxpayer bailout before too long. With systemically dangerous firms, however, the cost of political delay will be much higher.
From what I understand, the Fed says it didn’t have the tools to handle the collapse of these firms. They aren’t asking for the authority to do so. But they do point out that because of a lack of any processes to unwind those companies the Fed had to keep the financial system afloat or the resulting defaults would have cause a depression on a global scale.
Mr Bernanke Pointed out that during the depression the banks were allowed to simply fail. And the resulting defaults cascaded causing a global down turn. He said that in order to prevent a repeat, some choices needed to be made to support the banks. If I understand history correctly, there was no financial social safety net in place during that time either.
I think it would have been easier and cheaper to keep the citizens afloat than it has cost us to keep the banks up. It also would have put the banks in a position of accountability to the citizens. Citizens with money can choose what sectors of the economy to support by choosing where to spend. It’s just incomprehensible to me that even though the citizenry is the engine of the economy, the engine is never given any fuel.
It’s like wanting to keep harvesting fruit from a tree that never gets watered. Eventually the tree dies and there is no fruit to be had. We are strangling our people with poverty. We are cutting off our own heads by keeping our people uneducated and sick, while expecting them to labor tirelessly. Our future slips away with each failed generation. It’s time to think about the citizens.
from Rolfe Winkler:
Let’s say RIP to PPIP
Remember PPIP? The Public-Private Investment Program was to provide cheap government financing to encourage investors to overbid for banks' toxic assets.
Investors would overbid, it was thought, because they were being offered a free put option. If the toxic assets they bought fell further in value, taxpayers would be left holding the bag.
The program has been largely left for dead, but the FDIC still sees some life in its part of the plan. Last week, the agency had a pilot sale, offering loans out of the estate of failed Franklin Bank, whose assets are in FDIC receivership.
Sure enough, the winning bidder elected nearly the maximum available amount of non-recourse leverage, resulting in a 22 percent premium for the assets over bids that didn't take advantage of leverage.
On the surface, this seems like a good thing for taxpayers, since the higher purchase price accrues to the FDIC's Deposit Insurance Fund.
But in a new paper, Linus Wilson of the University of Louisiana at Lafayette argues that while the auction prices are increased by leverage, the increase is offset by the loan guarantee the FDIC makes as part of the deal.
So at best it's a wash and at worst the "subsidized leverage discourages the winning bidder from maximizing the value of loan portfolios."
Any money Mr Obama will be letting the bankers make subprime liar loans to poor blacks and hispanics in less than 12 months.
On a totally different topic could any one tell me what an “uncle tom” is?
from Rolfe Winkler:
Banks should pay for FDIC fund
The banking system is still suffocating under the weight of bad loans, and it's well known that the FDIC doesn't have enough cash to deal with the problem.
What to do? According to a plan floated in the New York Times, FDIC may borrow from the banks themselves in order to replenish its Deposit Insurance Fund.
The optics may be good, but don't be fooled. The plan would be another balance sheet gimmick to paper over losses.
The FDIC itself is throwing cold water on the idea. Andrew Gray, FDIC's director of public affairs, says that "although this plan is an option, it's not being given serious consideration."
That leaves Sheila Bair with two unpopular options to replenish the Deposit Insurance Fund, which had just over $40 billion in reserve at the end of the second quarter.
One approach -- the right one -- would be to charge special assessments on banks themselves. FDIC insurance is the best marketing tool in American finance, and for too long banks paid next to nothing for it.
The other option is to borrow from taxpayers. Earlier this year the FDIC secured a $400 billion emergency line of credit at Treasury to go with the $100 billion line it already had.
I agree there are a lot of banks out there that need to go away and this will have minimal affect on over all lending for these banks simply don’t have the funds to lend to begin with.
The availability and expection of easy credit has allowed prices to climb faster then incomes. This was great for the ecomomy on the way up, but now the debt burden on consumers has gotten too big. There is no room for an income hic-up or prices to continue to climb as the consumer simply can’t afford it anymore. This de-leveraging is needed and will continue to be painful for some time.
However to help the FDIC get the temporary funds it needs to get through this period, selling bonds to healthy banks would be better than then borrowing from the Treasury or another special assessment. The FDIC gets the funds it needs at a fair price that will utimately be paid by regular assessments on all banks; healthy banks get a low-risk investment alternative at a time when Fed Funds and Treasury alternatives are next to nothing. I don’t see a negative affect on the consumer.
from Commentaries:
Time to get tough with AIG
It's time for someone in the Obama administration to read the riot act to Robert Benmosche, American International Group's new $7 million chief executive.
Since getting the job, Benmosche has spent more time at his lavish Croatian villa on the Adriatic coast than at the troubled insurer's corporate offices in New York.
And in the short term, Benmosche's vacation strategy appears to be paying dividends.
This week, AIG's shares surged 44 percent, to nearly $50, after Benmosche said that he intended to move slower than his predecessor in selling off AIG's still viable divisions.
Maybe Benmosche should consider relocating AIG's headquarters to Dubrovnik.
But the big run-up in AIG shares is merely a sideshow for momentum players, speculators and Hank Greenberg, the former AIG chieftain who controls about 11 percent of the company's outstanding shares.
The reality is that AIG exists today only because of the $180 billion lifeline the insurer has received from the federal government. Even Benmosche acknowledges that, telling The Wall Street Journal: "If the U.S. government doesn't continue to support AIG, we will fail."
They should have changed the whole management team right away, and appoint a new team to restructure the whole company.
from Rolfe Winkler:
For FDIC, a long tunnel and little light
There's good news and bad news in the FDIC's quarterly profile of the banking sector. The good news is that FDIC has more resources than you think to handle the problem banks on its radar. The bad news is that the too-big-to-fail banks aren't on it.
The balance in the FDIC's deposit insurance fund ended the quarter at $10.4 billion -- its lowest since the savings and loan debacle -- but it isn't the only security blanket protecting insured depositors. The agency also has a "contingent loss reserve."
If you add the loss reserve to the deposit insurance fund balance, the FDIC's total resources were $42 billion at the end of the second quarter. Despite 24 bank failures during the quarter, that total actually increased by half a billion dollars.
How could that be? The biggest reason is that the FDIC is finally getting serious about charging premiums for the insurance it provides. Member banks were charged $9.1 billion to replenish the fund last quarter. That's up from $2.6 billion in the first quarter and $640 million a year ago.
(Click chart to enlarge in new window)
A similar amount may be raised this quarter if the agency charges banks another "special assessment." While that decision won't be made till next month, it looks likely. That's great news for taxpayers who would otherwise have to plug the hole if the FDIC runs out of money.
Banks complain that special assessments put too much pressure on them at a tough time. But it's their own fault the deposit insurance fund is running so low.
Andrew….the $736 billion figure for TAG was published as part of the QBP. An FDIC spokesman confirmed that $725 billion is still a good estimate for the increase in insured deposits due to the new $250k limit for individuals.
from Rolfe Winkler:
Colonial, gone … Did FDIC tip its hand?
FDIC will seize Colonial and sell its assets to BB&T. This is the largest bank failure since WaMu last fall. Reuters:
The Federal Deposit Insurance Corp is taking Colonial BancGroup Inc into receivership and will sell the struggling lender's branches and deposits to BB&T Corp, Dow Jones said, citing a person familiar with the situation.The deal was approved by the FDIC on Thursday night and is expected to be announced later on Friday, the news agency reported.
Colonial, based in Montgomery, Alabama, operates 355 branches in Florida, Alabama, Georgia, Nevada and Texas and has over $25 billion in assets.
WaMu had $307 billion of assets when it was shut down. The largest bank failure since then had been BankUnited, with $12.8 billion of assets.
FDIC pulled a move with Colonial earlier this week that was eerily reminiscent of a similar move made with WaMu the week it was seized. Those of us who thought Colonial would outlast other banks like Corus and Guaranty, should have realized this move foreshadowed a much quicker seizure. Oops.
Here are the specifics from that filing earlier this week:
Colonial Bank ... a wholly owned subsidiary of The Colonial BancGroup, Inc. ... received notice on August 10, 2009 from ... FDIC ... directing ... a ... subsidiary of the Bank, to exchange all outstanding shares of its ... REIT Preferred Stock for an equal amount of Fixed-to-Floating Rate Perpetual Non-cumulative Preferred Stock, Series A of BancGroup ... due to the occurrence of an "Exchange Event."
What does that mean in English? Reader frog said the following when I asked him about it on Wednesday:
from Commentaries:
CIT is a warning sign
If it's not a risk to the financial system, let it fail.
That's the message from the government's reluctance to swoop in and bail out one of the nation's biggest commercial lenders, CIT Group Inc, as it struggles to stay afloat. But even though CIT doesn't have the firepower to take down the global financial system, its failure would certainly be felt by some of the struggling small businesses that rely on its financing.
CIT is negotiating with its regulators to find a solution to its near-term liquidity problems, but speculation that it will file for bankruptcy has intensified after the Wall Street Journal reported that it was preparing for a possible filing.
Not that you can blame the Federal Deposit Insurance Corp and the tough-minded Sheila Bair for thinking twice about supporting a junk-rated lender that has already sucked in more than $2 billion of government funds.
A failure, however, could still hurt Main Street since it's sure to make already tight credit conditions even more restrictive for businesses already on the ropes. This is important for regulators as well as investors to keep in mind.
For the last two years, dangers in the esoteric corners of the opaque credit markets were the ones that needed minding. Problems with complicated and difficult-to-understand structured credit products helped fell financial giants like
Lehman Brothers and AIG who were supposed to know best how to manage risk. Regulators have responded in kind with a blueprint for overhauling the system and a commitment to supporting firms that are too big to fail.
CIT is a failure. Now why is that so hard to digest. We would have all been better off if all the other failures were acknowledged and the system, the way it used to be, collapsed. Now its just postponed the inevitable evolution of socialism from capitalism. Marx winks from the grave.
from Commentaries:
Failing upwards at BofA
The ouster of Bank of America's chief risk officer, Amy Woods Brinkley, should not cause anyone to shed any tears.
Even though Brinkley was one of the few top female executives working on Wall Street, her departure is well deserved and has nothing to with gender inequality in the world of finance as some might suggest.
It's all about failure, and there's been plenty of that at BofA, in light of the more than $150 billion in bailout money and loan guarantees U.S. taxpayers have had to float the nation's largest bank by assets.
Presumably, Brinkley signed off on BofA's disastrous move into collateralized debt obligation underwriting on the eve of the mortgage meltdown.
A case in point is the ill-fated $4 billion CDO that the bank packaged and sold for two Bear Stearns hedge funds a month before the funds' collapse in June 2007.
BofA lost at least $2 billion and possibly more in that transaction. Brinkley will not be missed.
But replacing Brinkley with Gregory Curl, the architect of the Merrill Lynch acquisition and a crony of CEO Kenneth Lewis, is inexplicable and gives more ammunition to bank shareholders who are agitating for the ouster of Lewis.
“If true, real GDP will be around 15 percent lower in 2018 than it would have been in the absence of the crisis. Together with the extra millions of unemployed, that is the measure of the real cost of the financial crisis.”
The crisis was just the death by natural cause of the financial bubble that helped create the false prosperity reflected in past great GDP figures.
You can call it ‘false growth’.
The scary part is that the same mentality, interests and politics, which inflated that bubble are still dominant – both in WS and in DC.