Fed’s wondrous printing press profits
– James Saft is a Reuters columnist. The opinions expressed are is own. –
Now finally we see what it takes to be a profitable bank with no capital worries and secure funding: own a printing press.
Sadly, since it is the Federal Reserve showing record $46 billion profits last year we have to conclude that, though it is a fool-proof plan, it’s not really scalable.
Combine news of the Fed’s biggest profit in its 95-year history with a report from the Troubled Asset Relief Program that its investments in banks are now showing a $7 billion gain and you’d be forgiven for concluding that this whole bailout malarkey is the next best thing to striking oil.
The two notional profits are of course related and prove little more than that if you have bottomless pockets you can make the price of a given asset rise. And while the trick for the Fed will be in how it exits its currently profitable positions, the real costs are more complicated and potentially much greater.
The means by which the Fed turned this magnificent profit are eerily similar to what Wall Street has been practicing: they grew their balance sheet and took on more risk. Its profits were generated by two related moves: it bought far more bonds than it had in the past and, perhaps more importantly, it bought bonds of lower quality as part of the rescue efforts. Those risky bonds have risen in price, as anything that the Fed decided to start buying in size would, be they baseball cards, Florida time shares or limited edition commemorative plates.
Easier jawboning banks than leery borrowers
(James Saft is a Reuters columnist. The opinions expressed are his own)
Jawbone all you like, but we are in a private sector de-leveraging, and bank lending and demand will remain weak, making interest rates unlikely to rise any time soon.
Monday’s two big economic news events dovetailed neatly, if not entirely happily; Citigroup announced plans to repay $20 billion to the government and President Obama called banks together to inform them of their obligation to support the recovery.
“My main message in today’s meeting was very simple: America’s banks received extraordinary assistance from American taxpayers to rebuild their industry,” Obama said after the meeting. “Now that they’re back on their feet, we expect an extraordinary commitment from them to help rebuild our economy.”
I just don’t think that is how it is going to work, or really how the capital intermediation process has ever worked. Banks will make loans when they have sufficient capital, when there are good opportunities, meaning demand for loans from good risks willing to pay good rates, and when there aren’t better opportunities elsewhere.
Taking one for the team is not how shareholder capitalism works, even if you lavish upon it public money.
Citigroup and the other 50-odd institutions which have repaid TARP funds have good reason to want to pay back the money — it makes them look weak to clients and investors and ties their hands when it comes to compensation. It is also quite unnecessary to have direct government money because there is so much of the indirect kind. Washington let it be known in the spring that the largest banks wouldn’t be allowed to fail, effectively underwriting their financing via that guarantee.
from Rolfe Winkler:
Bailout “profit” is taxpayers’ loss
Charging a bank for an implicit government guarantee to absorb losses? According to the Wall Street Journal, the Federal Reserve and Treasury are demanding that Bank of America pay $500 million to exit a bailout deal that was never actually signed.
That's a nice chunk of change, but taxpayers shouldn't be fooled into thinking this -- or any other bailout -- is a good deal.
A very dangerous misconception is taking root in the press, that in addition to saving the world financial system, the bank bailout is making taxpayers money.
"As big banks repay bailout, U.S. sees profit" read the headline in the New York Times on Monday. The story was parroted on evening newscasts.
The trouble is the popular view that TARP was the bailout. That very unpopular $700 billion program got all the attention because it was an easy story to tell a general audience. It had a big ugly price tag; it was debated very publicly in Congress; and, most important, the list of recipients and their take was made public all at once.
So when those recipients pay back TARP -- at a decent profit for taxpayers -- bailouts all of a sudden don't seem so bad.
But the bailout was much larger than TARP. There is FDIC's debt guarantee program, which still backs over $300 billion worth of financial sector debt; there are the Federal Reserve's emerging lending facilities, which have showered hundreds of billions of cash on banks in exchange for, well, we don't know what. There was the AIG bailout, which gave the company tens of billions more. There were changes in fair value accounting rules, which permitted banks to hide losses, and there is stupendous support for the housing market, which has rescued banks from huge write-offs.
Really, what can the average american do. He has no say because his representatives are bought off by the banking group and numerous other groups. Does anyone know if we still teach civics in our schools or ethics. Seems like we tell our children that they go to school so they can get a fat paycheck and enjoy life. Citizenship is more than complaining. It is getting involved and making changes, such as starting a third, or fourth political party, to replace the puppet parties we have now that say Rah Rah follow me, with their hand out for payment of “selling their vote”
Fishy bailout profits and ephemeral gains
(James Saft is a Reuters columnist. The opinions expressed are his own)
There is a long list of outfits which have done well out of the banking bailout, but the U.S. Treasury and Federal Reserve are not among them.
According to calculations made for the New York Times, the Treasury’s Troubled Asset Relief Program (TARP) has reaped profits of about $4 billion, or 15 percent annualized, as eight of the largest banks to participate have fully repaid what they owe.
Meanwhile unnamed Federal Reserve officials told the Financial Times that the central bank’s liquidity facilities have generated a “gain” of $14 billion since August of 2007.
The notion of TARP profits is only true if looked at in the narrowest sense, and even then may prove to be a return as real as those of the Florida condo flippers in the summer of 2007.
The Fed, on the other hand, incontrovertibly has earned more by buying and lending against poorer quality paper, but they did it by taking on more risk – a leaf out of the book of the industry they were helping to rescue.
Wait until the Fed starts making payday loans or gets into the reconditioned small appliance finance business, then you will see what kind of “gains” a bank with a printing press and the power to create money can really generate.
What’s so fishy about profits from loans made during the protracted bubble economy paid out by the government with funny money? As for your contention that taxpayers and governments aren’t getting their “fair share” what does that matter? They’re only there to pay for the nonpareil!
from Commentaries:
Regulators are opaque, too
So much for more transparency in the financial system.
It's hard for regulators to demand greater transparency from Wall Street banks when they can't even live up to their own standard of greater disclosure. A case in point is the Treasury Department's press release touting its decision to permit "10 of the largest U.S. financial institutions" to begin repaying $68 billion in federal bailout money. The only trouble is Treasury doesn't name any of the banks that can begin repaying money to the Troubled Asset Relief Program.
Treasury, it appears, has left it up to each of the "10 of the largest U.S. financial institutions" to make their own announcements about their intentions to repay the TARP. And some, like Morgan Stanley, didn't waste anytime putting out a PR trumpeting its plan to repay $10 billion in TARP money.
Now it's not like this list of banks is any big secret. For weeks now, it's been well-known that Goldman Sachs, JPMorgan Chase, American Express, Bank of New York Mellon--to name a few--were itching to repay the bailout money.
But this is a question of government accountability. If Treasury has made a decision to allow banks to repay TARP, it should tell us which banks it has given the all clear to. Why should it be left up to the banks to tell us? After all, isn't it the taxpayers' money that's being passed around here.
Nor should Treasury officials pass on the names of the banks in so-called "background'' sessions with favorite reporters. The best government is one that is run in the open--not in some closed-door Washington, D.C. conference room.
This refusal on Treasury to do something as simple as print the names of the "10 of the largest U.S. financial institutions" is similar to the same kind of arrogance the NY Fed displayed during the early days of the goverment's bailout of American International Group. The NY Fed, if you recall, refused to provide a list of the banks it was buying rotting CDOs from, in order to retire some $70 billion in credit default swaps that AIG had written on those securities backed by subprime mortgages.
U.S. should batten down the TARP
– James Saft is a Reuters columnist. The opinions expressed are his own –
The U.S. faces a lengthening series of request from industries and interests seeking shelter under the Troubled Asset Relief Program, most of which it should dismiss out of hand.
YRC Worldwide, a large trucking company, told the Wall Street Journal it will seek $1 billion in TARP funds to help relive it of its pension obligations.
YRC said that about half of the $2 billion it will owe in pension payments over the next four years covers the costs of retirees who worked not for it but for other companies, now vanished, that are part of a multi-employer pension plan.
That’s certainly an irony but doesn’t seem to be the basis for a claim on the public purse.
YRC is not systemically important and its pension woes, presumably the result of negotiation and free agreement, must be its own responsibility.
Next up: states and municipalities.
The last line of this article says it all for me, and I completely agree.
Goldman’s TARP out: give up ALL state aid
– Jonathan Ford is a Reuters columnist. The views expressed are his own –
Goldman Sachs wants to do its duty by the American people and give them their TARP money back. Some spoilsports have urged the government simply to say no because allowing the investment bank to repay the cash would make other banks look bad.
But this seems rather un-American. Why shouldn’t taxpayers get their money back if Goldman really doesn’t need it? The point to insist upon is that they get all of it back — and on commercial terms.
To be clear, that means not just the $10 billion of TARP-related preference shares the government subscribed for last autumn, but also the rest of the Federal assistance Goldman has received.
That includes the $29 billion of FDIC backed bonds that Goldman has issued at low coupons, without which — as Jon Unia observes in a snappy letter to the Financial Times on April 22 — it might have posted a first-quarter loss rather than a profit. Goldman has, as it points out, issued bonds without a guarantee since last autumn, so it’s not impossible. The full $29 billion would need to be refinanced on commercial terms. After all, either you’re a private sector player or you’re not.
Unia also observes that if Goldman wants to prepay the prefs, it should be charged by the taxpayer for the temporary loan of the Federal balance sheet. This, after all, is what a commercial lender like Goldman would do if the boot was on the other foot.
There is even a mechanism for it to happen. As part of any pref repayment, Goldman could be obliged to buy out the warrants it issued to the Treasury at the same time as the prefs at a price negotiated between the two. This payment could be the prepayment premium.
Tarp Two: New deal or no deal?
The U.S. Treasury Department on Tuesday unveiled a revamped financial rescue plan to cleanse up to $500 billion in spoiled assets from banks’ books and support $1 trillion in new lending through an expanded Federal Reserve program. But initial market reaction reflected investors’ doubts about the plan, with stocks falling around 3 percent after the announcement by Treasury Secretary Timothy Geithner.
“For all the rhetoric that this is a new plan, they’ve done nothing but rehash and expand the old procedures,” said Steven Ricchiuto, chief economist at Mizuho Securities USA.
Carl Lantz, U.S. interest rate strategist at Credit Suisse in New York, said details of a proposed public-private investment fund for mopping up toxic bank assets were “very vague”.
“It sounds like for this public-private investment fund they are still exploring a range of different structures for the program or seeking input from market participants,” he said. “That’s the the kind of stuff we heard on TARP One and suggests that given all this time they still don’t have anything very specific nailed down.”
James Ellman, president of Seacliff Capital in San Francisco, criticized the proposals. “Investors want clarity, simplicity, and resolution. This plan is seen as convoluted, obfuscating, and clouded. We know that Geithner was able to overrule many other Obama administration people, and said we should not be tough on bank equity holders or bank management. So equity holders got a better deal, and it’s still not a good deal.”
Do you have confidence in Geithner’s plans? Debate the announcement below. We’ll update this post with fresh comments from analysts and other market participants as we get them.
I think we should give the new plan a try. All the naysayers are just sitting on their hands, but not putting up any money.
Buy the bad debt, sell it at fire sale prices, and get the lost money from future bank profits. Maybe the taxpayer can get some of their money back before the money lenders take it for bonuses.
Get the lobbyists out of the picture in Washington. They are the people who bought the votes to get us into this mess, and get the senators and representatives out of office who got us into this mess. We can get this thing fixed, but the same people who screwed up the system surely do not have the brains to fix it.
First 100 Days: Fix the banks
– Peter Morici is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission. The views expressed are his own. —
For every new president, campaign promises and inaugural idealism must give way to the hard choices that measure the mettle of their leadership.
Now Barack Obama must act pragmatically to fix the banks or the economy will sink under their weight.
Banks continue to suffer losses on bonds backed by failing mortgages, credit cards and auto loans, and questionable corporate debt. To assist, the Treasury has used TARP funds to purchase capital in healthy and deeply troubled banks alike; however, no one can calibrate how high bank losses will go, because no one knows how far housing prices will drop and how many loans will ultimately fail.
The Obama Treasury could put a floor under bank losses, through government guarantees on their bonds, or by creating an aggregator bank that purchases those securities from banks altogether.
Guarantees would give the banks profits on bonds whose underlying loans are mostly repaid, and shift to taxpayers losses from those bonds whose loans are mostly not repaid. That would require additional large subsidies from taxpayer to the banks.
An aggregator bank, however, could turn a profit. It could purchase all the commercial banks’ potentially questionable securities, at their current mark to market values, with its own common stock and funds provided by the TARP. Then the aggregator bank could balance profits on those securities whose loans pan out against losses on securities whose loans fail.
I have always liked the idea of a “bad Bank” to clear off the balance sheets. I even suggest such somewhere else on these pages. The only thing that I would add is that the bank should make its acquisitions by auction. Secondary to that is to make sure that the new value flows through to the borrower and perhaps have a special capital gains tax if recapture, even progressively, any potential increase in values.
Light at the end of the tunnel
– John Kemp is a Reuters columnist. The opinions expressed are his own –
After more than a year of denial, misdirected policies and a steadily worsening outlook, the past fortnight has witnessed a marked improvement. For the first time, there are reasons to be cautiously optimistic that the economy faces a recession rather than a prolonged slump, and recovery could get underway in H2 2009.
Markets share some of that optimism. The Dow Jones Industrial Index has risen 15.5 percent over four consecutive sessions, the most sustained rally since April 2008. It is not yet time to break out the champagne. But there are reasons to start looking through short-term weakness to focus on an eventual, albeit modest, recovery by the end of next year.
DENIAL AND MISDIRECTION
Regulators and much of the financial services industry have been in denial for more than a decade about the steady accumulation of risk within individual institutions and across the system as a whole.
Even when rising defaults on subprime loans caused the music to stop last summer, regulators and industry leaders failed to appreciate the structural nature of the crisis. There was much talk of isolated instances of poor risk-management and hope the downturn could be contained in the housing market and motor manufacturing.
Most thought the music would begin playing again after a brief pause, and the dance could resume much as before with only a few minor modifications.
The gov’t and its branches can work all the manipulations it wants. Until the consumer is replaced as the economic engine, the only thing that will get the economy growing again will be JOBS JOBS JOBS JOBS JOBS JOBS JOBS.
Will blind men ever see?
Thanks to Mr. Debusmann and the Reuters for bringing the facts before its subscribers and readers
When the clerical dictatorship in Iran Rvrzanh suppresses the Iranian people. When the Iranian regime’s main threat is global peace and stability, when the Iranian people themselves, relying on themselves and resist the force of this regime are standing wild, at least do the work that the U.S. government to the people of history and head thrown not be impartial in this battle is keeping a list PMOI by the U.S. government and the Iranian regime takes a good message for those who believe democracy is not, it is shameful that date must be replicated again and the U.S. government along with the enemy Iranian people stand