Taken together, the estimated loss for the Deposit Insurance Fund for the three failed Puerto Rican banks is a whopping $5.3 billion (add another $2.1 billion for the night’s other 4 failures).
Schadenfreude Alert — Goldman shares off 9% on criminal probe (Yahoo Finance/NYT) To be sure, the SEC’s case looks far from a slam dunk, and the burden of proof is higher in criminal probes (beyond a reasonable doubt) than civil ones (preponderance of evidence). So my uneducated guess is this doesn’t go anywhere.
Asset bubble watch: Junk bonds back at par (Detrixhe, Bloomberg) “High-yield bonds rose to 99.67 cents on the dollar, up from a low of 54.78 cents in December 2008, according to Bank of America Merrill Lynch index data. The debt last reached par on June 11, 2007, just before credit markets began to seize up as losses on subprime mortgages spread.” How quickly we forget...
In poker, if you don’t know who the patsy is at the table, it’s probably you. In the first session of questioning at yesterday’s Senate hearings on Goldman, an exchange between Fabulous Fabrice Tourre and Maine Senator Susan Collins laid bare that Goldman’s game is to find patsies.
Buffett’s latest betrayal: Tries to water down derivatives regulation (Paletta/Patterson, WSJ) Though he’s long inveighed against derivatives as “financial weapons of mass destruction,” Buffett is lobbying hard to water down rules that would require derivatives traders to hold collateral against their positions. It’s a very sensible rule that would make derivatives trading less systemically risky, but it would also make it more expensive. Which is the point. “End users” are fighting derivatives regulation because unlike other financial contracts, they’re able to trade derivatives with far more leverage.
FDIC may be using up all available hotel rooms in Chicago this weekend as it closes five banks in the city and two others elsewhere in Illinois.
Senate panel OKs swap ban for banks (Sullivan/Rampton, Reuters) Now out of the Agriculture committee, which has jurisdiction over derivatives, the legislation goes to the Senate floor likely as part of the broader Dodd financial reform bill. Republicans are still opposed to it, and they do have some decent arguments about the bill leading to future bailouts. In particular, there’s a provision that effectively makes permanent the FDIC’s debt guarantee program. That was the most underrated bailout of the crisis. If made permanent, it would provide an escape hatch allowing regulators to avoid tough resolutions that impose losses on shareholders/creditors. Dodd should dump it.
Cross-posted from today’s NYT.
by Rolfe Winkler and Jeffrey Goldfarb
Public companies have quickly become leveraged-buyout targets again. The five “take private” deals of at least $500 million announced since February outnumber the four completed in all of 2009 according to Thomson Reuters data. The surprise return of such acquisitions signifies a marked change from the acrimony that followed the last round of private equity deals.
Democrats likely to drop $50 billion fund to draw Republicans (Vekshin/O’Connor, BW) Republicans are right that the fund creates moral hazard, but a bigger risk may be that the cost of a large resolution will be fronted by taxpayers. “Ex-post” funding from other banks to pay back taxpayers — which had been the alternative proposed — seems more than a bit unlikely. Post the failure of any large institution, banks would scream about paying a fee for a fallen competitor: “It will reduce lending!” If regulators could be trusted to seize large banks early enough such that there’s still some capital left in them, an ex-post regime would be better. But I fear WaMu may be the exception, not the rule.
As luck would have it, I’m way late in writing my review of Yves Smith’s new book “Econned.” The book, which primarily describes how flawed economic thinking culminated in the financial crisis, is more important than ever in the wake of the SEC’s allegations against Goldman Sachs. In it, Smith reports extensively about synthetic CDOs. Goldman, of course, now stands accused of committing fraud in the structuring and marketing of one particular synthetic CDO, Fabulous Fab’s Abacus 2007 AC-1.
Flashback: Banks bundled bad debt, bet against it and won (Morgenson/Story, NYT) This story from December presaged most of Friday’s news. It mentions how the Fabulous Fab and Goldman managing director, Jonathan Egol, were instrumental in structuring the Abacus deals. Why isn’t Egol targeted by the SEC? It also mentions the case of Lewis Sachs, whose firm Mariner Investment Group structured CDOs at the peak and managed to make handsome profits. They claim they weren’t short their own deals. Sachs later joined Treasury as a senior adviser to Geithner. He stepped down a month ago citing the end of the financial crisis. Was that really the reason he left?