from Rolfe Winkler:
Geithner’s faulty apologia
Tim Geithner's appearance in front of Congress today was another embarrassment, perhaps more for the people's representatives than the Treasury Secretary. Still, Geithner offered a clumsy defense for paying out 100¢ on the dollar to AIG's counterparties, which included more than Goldman Sachs.
What they lacked in knowledge and nuance, Congress made up for in volume and OUTRAGE. The worst moment I saw was the utterly bogus comparison by Rep. Stephen Lynch between AIG's payout to Goldman (100¢ on the dollar!) and the bailout offer for Bear Stearns shareholders (only $2 per share). 100 is a bigger number than 2, you see.
Geithner was lucky to be doing battle with such an unprepared, unimpressive group.
His defense, such as it was, amounted to the following:
Had the Fed imposed haircuts on AIG counterparties, it would have led to AIG's credit rating being downgraded and the company (and consequently the economy) would have collapsed.
But AIG had already been downgraded, that's why the government stepped in with a bailout. At that point the firm's liabilities were taxpayer backed, so it strains credulity to say that extinguishing certain CDS it had written would cause systemic fallout in and of itself. Essentially what was happening here was unused insurance contracts were being extinguished. (Imagine a pro-rata refund from your insurer for a homeowner's policy it wants to cancel...)
And there was precedent for this kind of negotiation. Eric Dinallo, former Commissioner of the NYS Dept. of Insurance and current candidate for Eliot Spitzer's old job, had previously negotiated haircuts on CDS written by the monoline bond insurers. They were never forced into a taxpayer bailout. Did anyone at the Fed pick up the phone to consult Dinallo? Why not?
from Commentaries:
Geithner of Oz
Earlier today I wrote that Sheila Bair is one of the few financial regulators who gets it. And by getting it, I mean not sucking up to the banks and the big money interests on Wall Street. You know, the guys (and most of them are guys), who got us into this financial mess. Tim Geithner, on the other hand, is a regulator who just doesn't get it.
It's not that the Treasury secretary isn't smart--he is. And it's not that he's not up to job--he is. It's that Geithner is too much of a politician and his views have been molded by people who work on Wall Street.
So, that's why we have Geithner telling The Wall Street Journal today that Wall Street isn't reverting back to its old ways--even though everything indicates that's exactly what is going on. In Geithner's world, things are getting better and the banks are becoming better citizens:
I don't think the financial system is reverting to past practice, and we won't let that happen. The big banks are running with much less leverage now, much more conservative liquidity cushions. There has been a significant shrinking of their balance sheets, getting rid of bad assets and cleaning up. And the weakest parts of the system don't exist anymore.
But Geithner lives in the land of Oz. A land where we should ignore the man behind the screen and all the toxic assets that still line the balance sheets of the nation's banks.
The trouble is the rest of us live in the real world where the roads aren't paved with gold bricks.
Tim Geithner was head of the NY Fed in the years when the regulators massively failed to regulate, so he has plenty to answer for. In a bit more than one year there will be an election for the House of Representatives and one-third of the Senate. The voters will then speak again, including the furious poor and middle class voters who have been and will continue to pay for this mess.
California, harbinger of hard U.S. choices
– James Saft is a Reuters columnist. The opinions expressed are his own –
California’s fiscal train wreck should be watched warily by investors in U.S. Treasuries; as the start of a trend among states seeking bailouts, as a source of pressure on Federal funds and as a harbinger of hard choices at national level.
California voters last week rejected a finance bolstering proposal, setting the stage for billions of dollars worth of cuts in services, layoffs and a shortened school year.
It also leaves the state with a budget shortfall of more than $21 billion, an exacerbated seasonal revenue shortfall and a fragile reputation in the bond market.
These are just about the last things a state needs when unemployment is high and recession is deep, but California is trapped between its own high cost base, bond investors unwilling to give it the benefit of the doubt and a Federal government that is loath to play Santa Claus. Of the three, the last is most likely to give way, and if the U.S. does widen the bailout it is already giving to states it will have potentially profound consequences.
Treasury Secretary Tim Geithner knocked back, equivocally, a request from California Treasurer Bill Lockyer to use TARP funds to backstop the issuance of bonds by California. Lockyer fears that investors and banks will impose punitive costs on new borrowings, costs that will only worsen its overall position.
Though Geithner was right to say California wouldn’t fit under the TARP, saying in essence that this was not the purpose of the vehicle, he was far from final on the whole issue.
How much more debt can we continue to accumulate? In the 1930s the U.S. had a very low income to debt ratio when contemplating the New Deal programs. We are not in that position today. Moreover that spending did not lift the nation out of the Great Depression.
The IMF has quietly said to the U.S. it must break the hold and influence of the banking Oligarchy. If not the recovery will not be sustained. There will not be enough growth to pay back all this debt we are accumulating.
Who is it that will tell the U.S. government to take the bitter pill of default when the time comes?
Failure is the only success in stress test
– James Saft is a Reuters columnist. The opinions expressed are his own –
The stress test of banks now underway in the U.S. is one exam in which failure will be the only true measure of success, at least in terms of speeding a recovery.
The U.S. will release some information about the methodology of the stress test of 19 major banks on Friday according to reports, with results slated for release in some form on May 4.
What is far from clear is if this will be some sort of self-deluding exam in which all of Treasury Secretary Tim Geithner’s children are judged to be above average or whether the U.S. will take this opportunity to take real and difficult remedial action with banks that are too insolvent to play their role in the economy.
Keep Dreaming..
Maybe if we all click our heels together in our magical ruby slippers we can resurrect the american middle class from the destruction of the last ten years.
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.
“Truman doctrine” could boost IMF firepower
– Paul Taylor is a Reuters columnist. The opinions expressed are his own –
The day before he returned to the U.S. Treasury for six weeks to help the understaffed Obama administration, Edwin Truman published a proposal to give the International Monetary Fund more firepower to fight the financial crisis.
Truman’s idea — a one-off $250 billion allocation of Special Drawing Rights (SDRs) to IMF member states — looks like the quickest way to put a safety net under developing countries and avert financial contagion. The Group of 20 world leaders should embrace it at the meeting in London on April 2.
U.S. Treasury Secretary Tim Geithner has not endorsed the plan in public, but the British minister preparing the summit confirmed it is one of the options under consideration. It could supplement a proposed doubling of the IMF’s resources and get around the reluctance of surplus countries such as China and Saudi Arabia to contribute more for now.
SDRs are international reserve assets, calculated in a basket of major currencies, that are allocated to the IMF’s 185 members according to their quota of the Fund’s capital. A special issue would be a bit like a global central bank printing money to help countries with payments difficulties.
A G20 endorsement would show financial markets that world powers are cooperating to overcome the crisis by supporting developing nations starved of credit by the collapse of international bank lending.
THE BENEFITS
Poor countries do not need to be economically and politically crushed with the burden of more debt. Instead of advancing $250 billion, why doesnt the IMF just FORGIVE $250 billion in existing debt??? Listen up all you politicians — the public is worn out on all this funny money stuff that does nothing but increase our collective tax burden.
Too failed to live not too big to fail
– James Saft is a Reuters columnist. The opinions expressed are his own –
The U.S. policy of keeping zombie financial institutions alive is so clearly failing that it is now attracting attack from inside policymakers’ circle of covered wagons.
The most interesting intervention in the banking debate in the past few weeks was an extraordinary attack by Kansas City Federal Reserve President Thomas Hoenig on what he termed a policy of “piecemeal” nationalization which leaves discredited management in place, repels new capital from the banking system and allows bad assets to fester rather than be cleared.
This is no academic who can be dismissed as having a poor grasp of the major systemic consequences of letting the big zombies fall, this is the man who has been a Fed president for 17 years and has a deep history in banking regulation, deeper and with more practical experience arguably than the people making the policies in Washington.
“If an institution’s management has failed the test of the marketplace, these mangers should be replaced. They should not be given public funds and then micro-managed, as we are now doing under TARP, with a set of political strings attached,” Hoenig said.
In short, it’s not an ideological attack on runaway market forces but a collection of sensible practical considerations that should limit the ideologically based decisions now being made.
And be in no doubt; administration policy as laid out by Treasury Secretary Tim Geithner, Fed chief Ben Bernanke and White House economic advisor Larry Summers has as its core a fervent commitment not to take into state control large insolvent institutions, preferring instead to essentially bear the risk and the cost without having a clear line of accountability for day-to-day bank actions.
The term zombie financial institution is fantastic whoever coined it. There is nothing inherently wrong with the concept of nationalization if we intend to regulate the marketplace so it is friendly to competition. I’m thinking that the situation has to be really messed up to make this radical maneouver necessary. I also think folks in the know are witholding information. These are sad times. I guess all we can really do is just carry on and make the best of things. People are comforted by tangibles. You don’t worry about going hungry if there are chickens in the back. But this kind of invisible monster that is large and pervasive is pretty terrifying. So maybe we should be getting back to basics. For me this means, if the guys in suits must spend our money, they can at least give us something right now in exchange. Give me a jar of honey, bowl of cereal, anything, something. Don’t just take the cash.
Geithner’s hair of the dog plan for banks
– James Saft is a Reuters columnist. The opinions expressed are his own. –
U.S. plans for a public-private fund to buy up toxic assets are likely to amount to a fig leaf with which to hide subsidies to failing banks.
It is also, inevitably, an entirely new subsidy to outside investors, who by definition will only participate if they get better terms than now available in what we formerly thought of as the free market.
Treasury Secretary Tim Geithner last week announced the plan, which will provide between $500 billion and $1 trillion of financing to private sector funds which will use the money to lever up their own capital and make offers for complex and doubtful securities now clogging balance sheets. Further details are to follow.
But it’s likely the plan won’t work, if by work we mean come up with a believable price for these assets.
Banks won’t sell at market prices because to do so would make many fall over bankrupt. The U.S. can surely manipulate prices by providing cheap and plentiful leverage – sound familiar? – but that will be seen for what it is; a subsidy for the funds and the banks rather than a firm base to allow confidence to return.
As it is, there’s a standoff in markets as to how to price these assets. For the sake of illustration, let’s pretend that banks have a security marked on their books at 90 cents on the dollar, while similar securities change hands at 60 or 65 cents when bought and sold in arms length transactions.
Why the step into Socialism? Let the teetering banks fail; let the ones with power buy up the (so-called) toxic assets & turn them around. Failing companies should FAIL; let the performing companies TAKE their market share & perform even better! Let the failing customers FAIL & declare bankruptcy & start over. Allow the market to work out which companies are STABLE while the unstable ones FAIL. The previous 3 sentences are the result of CAPITALISM at work, best here in the U.S. Leave the socialism to France, Sweden/Denmark, Russia & other countries which are NOTHING on the world stage next to American capitalism. Stop this financial madness!
Hold your wallet — here is TARP 2
– Diana Furchtgott-Roth is a senior fellow at the Hudson Institute and former chief economist at the U.S. Department of Labor. The views expressed are her own. –
This week Treasury Secretary Tim Geithner unveiled a financial stabilization plan that could cost $2 trillion, in addition to the $790 billion that Congress plans to spend on economic stabilization. All this without any consultation with Congress.
That’s financial stability?
The Dow Jones Industrial average fell almost 400 points Tuesday on the news, and the Asian equity markets followed. This steep decline is symptomatic of the unease that permeates financial markets.
It’s not just the amount of money that is troubling. The markets were also distressed by a lack of detail, especially on how to deal with so-called toxic assets – loans with diminished and uncertain value. The previous Treasury secretary, Henry Paulson, proposed to buy toxic assets, then discovered the difficulties of pricing and so switched to purchases of banks’ preferred stock to infuse capital into the banks.
Geithner promised “to consult closely with Congress” as he moved forward, but Congress has not held hearings on implementing the program, even though it would leverage $1 trillion of Federal Reserve funds and close to that in private-sector funds. The public fears that the $2 trillion dollar bank bailout fund would be just throwing good money after bad.
Last October Congress allocated $700 billion to the Troubled Asset Relief Program. But TARP, with roughly half the funding disbursed, has not yet delivered on its promises. Then, on February 10, it was déjà vu all over again. Geithner declared, “Our plan will help restart the flow of credit, clean up and strengthen our banks, and provide critical aid for homeowners and for small businesses.” He didn’t say how long it would take – because no one knows.
I get tired of politictions telling me they know what I
need as I have never talked to them, what makes them so
sure they now my needs.
As for the banks, let those high rollers go bankrupt and
give the bailout money back to the taxpayer from whose
pocket they picked to began with.
I am on a fixed income and tired bailing out some one
who has gotten away with it.
If gov’t. wants to do something try triming the fat off
the hogs back instead of his ankles.
This is just pure politics, I don’t want to read deep into all these.