Wherein Gary Cohn rewrites history

Dec 2, 2009 17:09 UTC

Bethany McLean pens a good article on Goldman for Vanity Fair. She gets the internal view from CEO Lloyd Blankfein and COO Gary Cohn on why Goldman’s really better than the competition and why they didn’t really need the government’s help. She’s properly critical of this. One reader passes on this telling paragraph:

Goldman’s press releases about its spectacular earnings never mention government assistance of any kind. In June, the firm paid back the $10 billion in tarp funds it had taken. Taxpayers got a 23 percent return. As for the $21.6 billion in funds guaranteed by the F.D.I.C. that Goldman still has outstanding, a recent Congressional report estimates that it will save Goldman $2.4 billion over the life of the debt. But Cohn argues that that is actually costing the firm, in fees to the F.D.I.C. and interest, because it is excess liquidity. (When I repeat that to another Wall Streeter, he closes his eyes and says, “Please tell me Gary didn’t say that.”) Cohn also says that issuing the F.D.I.C. debt was “the single biggest mistake we made.”

Including commercial paper, Goldman borrowed as much as $28 billion in FDIC guaranteed debt. Lest people forget how desperate they were for the funding, Joe Hagan’s New York Mag piece noted they were the first to borrow using the program.

Salvation came on November 25, a few days after Goldman’s stock price plunged to $52 a share, down from the year’s high of $200 and the lowest price the company had seen since it went public. Again, the white knight was the government. It turned out that Goldman’s conversion to a garden-variety bank-holding company offered an amazing advantage: Goldman now had access to incredibly cheap money. Exploiting its new status, Goldman became the first financial institution to sell $5 billion in government-backed bonds through the Federal Deposit Insurance Corporation, which allowed Goldman to start doing deals when the markets were at a near standstill. “Goldman was desperate for it,” says a prominent Goldman alumnus. “Everybody knows it. Those FDIC notes they got were lifesaving because they couldn’t issue any debt. If it had gone on another week or two, Goldman would have failed, they would have gone the way of Lehman, and you’d be talking about Lloyd the way you talk about [Lehman CEO] Dick Fuld.”

As the memory of Fall ’08 recedes, the reality that all of Wall Street would have collapsed were it not for bailouts and guarantees is slowly being forgotten. But at least folks are still angry about it. And the mainstream media is doing a decent job keeping the heat on.

There’s much more in the piece.

COMMENT

Goldman is too smart to be wasting their time with zero-sum games (HFT, most derivatives, short-term trading). That is like aspiring to be kudzu. In the short term that’s a good strategy but after a while everything is a mess and even the kudzu can’t find much to climb since it doesn’t work very well to climb other kudzu. Better to aspire to be oak trees, by focusing on the sustainable businesses that provide services people need.

Posted by Dan Hess | Report as abusive

Reuters buys Breakingviews

Dec 2, 2009 14:25 UTC

A quick note for readers. Today Reuters closed the acquisition of commentary service Breakingviews. Their team has joined the Reuters commentary team here at 3 Times Square and will be leading the commentary service going forward.

Here’s the news from CNN Money.

While the teams are integrated there could be some changes to my blog. I will update everyone as I learn more.

Looking forward to working with the new team here. We’ll be able to cover a lot more ground in a lot more detail as a group.

COMMENT

Thanks for the news Rolfe. I am surprised that you are the messenger of such an important change, take that as a compliment. It has been fun to exchange views with you guys and girls. I had a look at the new web page and have the following comments:1. I have never been sure who provides who with content.2. Will the Great Debate also fall away?3. My personal preference of news by latitude, i.e. working my way from east to west, as timelines change, cannot be fulfilled as the reporters seem to be skewed to certain latitudes and countries. At present the US, India and UK news is basically the same and other seems merely translated.4. Web pages are unstructured, have become too complicated and scatological and have a shotgun approach. The news comes from everywhere and lands everywhere. This leads to low absorption and click rates. I got put off by the unclear and tedious signing up procedure at the first visit.5. A free trial would indicate some form of payment later on. Read with 1 above, the risk of divulging banking details over the Net and personal budget constraints, I have to withdraw at this stage. I will have to fall back on TV and logic again to get by. Reuters and CNN will always be associated with the USA, as will foreign policy, my bane at the moment being Afghanistan.All of the best with the merger and thanks again. I will miss your mug shots and relaxed style and hope the new commentary page provides better advertising income.

Posted by Casper | Report as abusive

Back to (buyout) biz as usual

Dec 1, 2009 16:50 UTC

Reason #147 that nothing has changed: leveraged buyout private equity shops Carlyle and Hellman & Friedman are tapping the loan market to pay themselves dividends. From Pierre Paulden and Kristen Haunss at Bloomberg

Carlyle Group, the world’s second-largest private-equity firm, and Hellman & Friedman LLC are seeking to take advantage of a record rally in high-yield, high-risk loans to take cash out of companies they bought last year amid the financial crisis.

Goodman Global Inc., a maker of air conditioner systems bought by Hellman & Friedman, has asked lenders to allow a payment of as much as $115 million to the private-equity firm. Booz Allen Hamilton Inc., the U.S. government-consulting company purchased by Washington-based Carlyle, is seeking a $350 million term loan to finance part of a $550 million payout to its owners, Marie Lerch, a Booz Allen spokeswoman, said last week.

PE can be a great gig. Get control of a company, take cash out, leave bondholders to clean up the mess when the company falls into bankruptcy. A recent example is Thomas H. Lee Partners buyout of Simmons:

For many of the [Simmons'] investors, the sale will be a disaster. Its bondholders alone stand to lose more than $575 million. The company’s downfall has also devastated employees like Noble Rogers, who worked for 22 years at Simmons, most of that time at a factory outside Atlanta. He is one of 1,000 employees — more than one-quarter of the work force — laid off last year.

But Thomas H. Lee Partners of Boston has not only escaped unscathed, it has made a profit. The investment firm, which bought Simmons in 2003, has pocketed around $77 million in profit, even as the company’s fortunes have declined. THL collected hundreds of millions of dollars from the company in the form of special dividends. It also paid itself millions more in fees, first for buying the company, then for helping run it. Last year, the firm even gave itself a small raise.

Wall Street investment banks also cashed in. They collected millions for helping to arrange the takeovers and for selling the bonds that made those deals possible. All told, the various private equity owners have made around $750 million in profits from Simmons over the years.

How so many people could make so much money on a company that has been driven into bankruptcy is a tale of these financial times and an example of a growing phenomenon in corporate America.

Every step along the way, the buyers put Simmons deeper into debt. The financiers borrowed more and more money to pay ever higher prices for the company, enabling each previous owner to cash out profitably.

But the load weighed down an otherwise healthy company. Today, Simmons owes $1.3 billion, compared with just $164 million in 1991, when it began to become a Wall Street version of “Flip This House.”

Greed is good!

COMMENT

The pundits claim that wall street activity (bubble building etc.)enhances productivity and provides seed capital to entrepreneurship and vital funding to industry and propels growth so why the net effect is minus a negative in terms of long term employment homeownership and positive household balance sheets.Why this accumulation of debt has become all pervasive and how can use of debt enhance overall growth.

Posted by cosmicinsight | Report as abusive

Lunchtime Links 12-1

Dec 1, 2009 15:28 UTC

Must read: Somalis investing in piracy (Ahmed, Reuters) “In Somalia’s main pirate lair of Haradheere, the sea gangs have set up a cooperative to fund their hijackings offshore, a sort of stock exchange meets criminal syndicate.”

Goldman execs arming themselves in advance of bonus backlash? (Schroeder, Bloomberg) Caveat emptor: This column is based on a single anecdote. But it’s an entertaining one! Those bonuses sure are gonna be good…

Job cuts loom as stimulus fades (Fields, WSJ) Article notes that the small “shovel ready” projects funded by the stimulus are winding down. No doubt there will be calls for additional construction spending.

Morgan Stanley fears UK sovereign debt crisis in 2010 (Evans-Pritchard, Telegraph) See also here.

BOJ to provide 10 trillion Yen in emergency credit (Otsuma, Bloomberg) More QE to accompany more stimulus in Japan.

Pelosi spends $2,993 on flowers (Sherman/Shiner, Politico) Another Democrat, Tim Walz, gave back $2,000 of “unused office funds” to reduce the deficit.

Obama bumps Charlie Brown (Micek, TMC) Say it ain’t so Barack!

CNN Money’s bailout tracker (CNN Money) Helpful. I don’t see the Fed’s $175 billion commitment to buy agency debt, but most everything else is up there…

Former Miss Argentina dies after plastic surgery (AFP) The money quote: “This woman who had everything is dead because she wanted to have a slightly firmer ass.”

How bad are the Knicks? So bad, this is the most interesting thing going on at MSG (YouTube)

Recession hits inanimate objects (imgur)

WSJ: Japan passes moratorium on loan repayments

Nov 30, 2009 20:35 UTC

Interesting item from Alison Tudor:

Japan passed into law Monday a conditional moratorium on loan repayments by small businesses and home owners, a move that opponents say may lead to an increase in bad loans on the books of the country’s banks.

The bill, which has been in the works since the Democratic Party of Japan came to power in September, was passed by the upper house of Japan’s parliament on Monday, according to a spokesman at the Japanese banking regulator the Financial Services Agency.

The law is designed to encourage financial institutions to change the terms of loans when asked, though lenders aren’t required to do so. Opponents believe it still could put public pressure on banks to forgive payments, leading to an increase in nonperforming loans on bank balance sheets.

While Treasury is pressuring banks to make trial mods permanent, Japan wants to help out the little guy by encouraging banks to forgive loan repayments. Just another reminder that after two decades, Japan’s zombie economy is still struggling to extricate itself from an ’80s credit bubble.

“Forgiveness” is another word for writeoff. And debt writeoffs (accompanied by proper bank recapitalizations) are necessary to reboot the credit system. But “encouraging” creditors to do so won’t do much good. They have little incentive to forgive principal so long as macroeconomic policy rolls over debt perpetually.

There’s an uncomfortable truth to grapple with for those of us who didn’t get caught up in the housing/consumption bubble but instead built up savings. Depending on where those savings ended up, WE are the shareholders/creditors that by right should lose when the system gets recapped.

Nothing gets fixed till everyone takes a haircut.

Part of the appeal of gold, silver, raw land and other tangible assets is that it gets investors “out of the system” before that happens.

COMMENT

Waiting for Japan to blow up is stressful. It looms, and it is impossible for me to see the economic future beyond that event.

Posted by Dan Hess | Report as abusive

Fed to test exit strategy

Nov 30, 2009 17:27 UTC

From the Fed: Statement regarding reverse repurchase agreements

…in the coming weeks, as an extension of this work, the Federal Reserve Bank of New York plans to conduct a series of small-scale, real-value transactions with primary dealers. Like the earlier rounds of testing, this work is a matter of prudent advance planning by the Federal Reserve. It does not represent any change in the stance of monetary policy, and no inference should be drawn about the timing of any change in the stance of monetary policy in the future.

These forthcoming operations are being conducted to ensure operational readiness at the Federal Reserve, the triparty repo clearing banks, and the primary dealers. The operations have been designed to have no material impact on the availability of reserves or on market rates. Specifically, the aggregate amount of outstanding transactions will be very small relative to the level of excess reserves, and the transactions will be conducted at current market rates.

Bernanke has said that the Fed has the power to mop up excess reserves. Reverse repo transactions, whereby the Fed sells securities in exchange for cash, are one of the arrows in his quiver. The question is whether he’ll actually use it. The rise in gold’s price is a bet he never will, not in any meaningful way. He can’t. He’s trapped: If he goes hawkish, he’ll hammer the economy.

But if he doesn’t, he’ll just reflate a larger credit bubble.

COMMENT

I have the perfect solution. Rather than use quantitative easing to buy long bonds, why doesn’t the Fed using quantitative easing to buy gold?This is would have the fun effect of causing the price of gold to skyrocket, which would be a big boost to the value of our own supply at Fort Knox.Better still, the Fed should buy a ton of commodities that can be had for a better price. Buy those and put them in a warehouse somewhere.The fed is pussyfooting around its desire for inflation. Please! Robert Mugabe could tell him inflation is not rocket science.

Posted by Dan Hess | Report as abusive

Lunchtime Links 11-30

Nov 30, 2009 17:02 UTC

Four years of calling the global financial crisis (Steve Keen) The latest from Steve. Lots of helpful charts. We’ve a long way to go till we successfully de-lever the economy.

Investors face huge losses as Dubai abandons company (Robertson, Times UK) Not that investors thought Dubai had the liquidity to rescue Dubai World. They’re hoping for a bailout from Daddy Abu Dhabi, which doesn’t seem to be in the works.

Could cap and trade cause another market meltdown? (Morris, Mother Jones) Interesting. Mother Jones is a very liberal publication and yet they’re arguing that cap & trade, which is the compromise designed to reduce carbon emissions, is a bad idea because it will enrich banks that make markets in carbon offsets. Matt Taibbi made the same point in his vampire squid piece. I confess to being a global warming doubter, only because I studied the subject in university and wondered, given the complexity of the models involved, how any reliable scientific conclusions could be drawn from them. But if we are going to reduce carbon emissions, it seems like a straight carbon tax would be a much better idea.

An empire at risk (Niall Ferguson, Newsweek) Ferguson quotes Krugman’s infamous 2003 column.

The right reform for the Fed (Merkel, Aleph blog) David tears apart Bernanke’s Saturday op-ed. Not that there’s much chance of it, but my hope is that the Senate decides not to confirm Bernanke for another term. (His confirmation hearing is scheduled for Thursday.) Support for him is based on the premise that he’s acquitted himself well cleaning up after the financial crisis. But Bernanke is merely repeating Greenspan’s mistakes which inflated the credit bubble in the first place. He’s not cleaning up the problem. He’s sweeping it under the rug.

Fed tries theater ads to burnish image (Puzzanghera, LA Times) Look for PSAs from Ben Bernanke in your local movie theater….

AIG may face $11 billion shortfall in insurance reserves (Carney, Clusterstock) JC quotes a Sanford Bernstein report.

Bad scrabble strategy, from Alaska (Marginal Revolution)

Man robbed of $2 million bank withdrawal in Taiwan (Jennings, Reuters)

Guatemala’s “skullmongers” (AP) A different kind of ambulance chaser.

Dogs may have trouble with doors, but 3-week old kittes, not so much…

COMMENT

Bring back your “must read” label. I would sure put Steve Keen’s piece in that category.There are always going to be those who have a handle on what is going on in the economy. The challenge is to be able to pull those out from the mass of voices, all sounding of great authority, who assail the public with their ideas.The reward is great – you can keep from losing your shirt, or at least as much of it as others – but it can be very difficult to tell who is giving the true account for the many who are not versed in economics.

Posted by CB | Report as abusive

Lunchtime Links 11-29

Nov 29, 2009 21:24 UTC

UAE moves to counter Dubai fallout but markets wary (Dokoupil/Kiwan, Reuters) “Case by case” help from Abu Dhabi probably isn’t what Dubai creditors were hoping for…

Dangers of an overheated China (Cowen, NYT) We’re mostly worried about Chinese economic strength these days, but the Chinese economic miracle looks a lot like a manufacturing bubble being propped up with stimulus and easy credit. If it pops, China may have to direct more of its reserves to domestic spending priorities, potentially driving up U.S. rates.

Mark Pittman, reporter who foresaw subprime crisis, dies at 52 (Ivry, Bloomberg) Pittman also led Bloomberg’s FOIA fight against the Fed.

Excerpt from The Buyout of America (NPR) Discussing another credit tsunami bearing down on the economy…

Video Professor is a scam (Arrington, TechCrunch)

Goldman’s profit is Citi’s pain (Adams, NakedCapitalism) The monolines were opposite Citi’s trades while AIG was opposite Goldman’s. Monoline counterparties were forced to take writedowns while AIG’s were made whole. So is Goldman really smarter than Citi? Or just luckier?

Chart suggestions (imgur)

The man who smuggled himself into Auschwitz (Broomby, BBC)

Twilight in one minute (YouTube) I like the showdown….

Dog struggles with screenless door….

Poole on fixing TBTF

Nov 29, 2009 14:43 UTC

William Poole, the last President of the St. Louis Fed and now with the Cato Institute, has a good piece on fixing the TBTF problem in a recent issue of the Financial Analysts Journal. Based on a speech given last April, it’s still highly relevant.

Poole doubts that new resolution authority will end TBTF. When push comes to shove, regulators are more likely to bail out the next AIG or Lehman rather than attempt an “orderly” wind down, even if they have expanded authority to resolve holding companies.

Poole says four problems must be solved:

First, many firms have too little capital relative to the risks they run. Unfortunately, capital inadequacy is often revealed only after the fact. We need arrangements that force banks to hold more capital than might seem necessary. Second, banks need long-maturity capital that cannot run. Third, we need to rely more on market discipline to deny funds to banks deemed risky. Fourth, when a bank needs to be restructured, the bank, rather than the federal government, should manage the restructuring.

Perhaps the best way to reduce leverage would be to get rid of the tax incentive to max it out, ending the deductibility of interest on business and personal tax returns. Easier said than done, of course. The lobbying effort to stop such a reform would be huge. So Poole proposes that the transition be “smoothed.”

…interest deductibility could be phased out over the next 10 years. Next year, 90 percent of interest would be deductible; the following year, 80 percent would be deductible, and so forth, until interest would no longer be deductible at all. The same reform would apply to all business entities; partnerships, for example, should not be able to deduct interest if corporations cannot.

With this simple change, the federal government would encourage businesses and households to become less leveraged. We have learned that leverage makes not only individual companies more vulnerable to failure but also the economy less stable. We use tax laws all the time to promote socially desirable behavior; eliminating the deductibility of interest would reduce the risk of failure of large companies—especially, large firms—and thereby reduce the collateral damage inflicted by such failures.

As for dealing with capital inadequacy and maturity mismatch, Poole says banks should be forced to hold “a substantial block of subordinated long-term debt in their capital structure.” To discourage growth of large firms, a bank with total assets over a certain threshold…

…would have to issue subordinated debt equal to 10 percent of its total liabilities. The debt would consist of 10-year uncollateralized notes that were subordinated to all other debt obligations of the bank. With 10-year notes equal to 10 percent of the bank’s total liabilities, the bank would have to refinance one-tenth of its subordinated debt every year, equal to 1 percent of its total liabilities. The subordinated debt would be in addition to existing requirements for equity capital.

Subordinated debt has several important advantages. We have seen that banks do not have an adequate cushion against losses under current capital requirements. If taxpayers are to be expected to stand behind our giant banks, they deserve a larger cushion against the banks’ mistakes. More importantly, because banks would have to go to the market every year to sell new subordinated debt, they would have to convince the market that they are safe. A bank that found selling new subordinated debt too expensive would have to shrink by 10 percent.

Restructuring a bank at an annual rate of 10 percent is perfectly feasible, and the restructuring would be managed by the bank and not by the government.

A subordinated debt requirement hasa significant advantage over a higher equity capital requirement, which is one of the regulatory changes being discussed. A subordinated debt requirement entails much more market discipline because a bank must either go to the market every year to replace maturing debt or shrink. If a bank’s prospects appear poor to investors, its stock price will decline and it may be unable to sell more equity. But it is not forced to shrink under these circumstances, nor will regulators necessarily force a bank to shrink. Market discipline through subordinated debt would be much more rigorous than any discipline regulators are likely to apply.

Poole is basically in Sheila Bair’s camp about forcing creditors to face losses. Bair is a supporter of the Miller-Moore amendment to the financial reform bill, which would give FDIC the power to impose a haircut on secured creditors of a large financial firm that ends up in receivership. That’s a good idea and I hope it’s signed into law.

But it’s still a reactive way to shrink big banks. What we need are pro-active solutions that force banks to shrink before they get into deep trouble. Poole says his idea would accomplish this. I invite reader comments on whether it would or not…

There’s more in the article.

COMMENT

I think, if banks are not able to deduct interest paid on deposits, that such a change would be equivalent to not allowing Nucor to deduct the expenses of purchasing raw materials.It would certainly making borrowing more expensive.

Posted by Andrew | Report as abusive

Happy Thanksgiving

Nov 26, 2009 20:43 UTC

From The Reformed Broker

thanksgiving-bailout

The family is spending Thanksgiving with my sister at Luke Air Force Base in Surprise, AZ. Guest housing on the base comes with a helpful instruction manual, including this:

(Click to enlarge in new window)

toaster

COMMENT

If ‘The Indians’ are Native American, then the turkey is off and you and the broker are stuffed.

Posted by Casper | Report as abusive

If banks can delay, pray

Nov 24, 2009 17:51 UTC

The “too-big-to-fail” amendment offered by Representative Paul Kanjorski has good intentions, but fatal flaws.

One I wrote about on Monday. Another is a section (see page 7) that gives systemically dangerous institutions (SDIs) the right to appeal regulatory orders in a federal district court. If they don’t like the corrective actions that regulators instruct them to take, they could delay them indefinitely.

With bank resolutions, the key issue is speed. We learned that the hard way during the savings and loan debacle. Allowing banks to deteriorate until they have no capital left is like waiting for an infection to turn gangrenous before treating it.

With most companies, that’s not a problem for anyone but shareholders and creditors. But banks aren’t like other firms. Society provides them a strong, and expensive, safety net. And that safety net has expanded significantly in the last year.

In exchange, we rightly subject them to more stringent regulations. We guarantee their liabilities, after all, so we’ve the responsibility to control their assets.

As Ed Kane of Boston College told me: “We support them the way parents support children. It’s our responsibility to discipline them.”

So that regulators have the power to act quickly against plain-vanilla banks, Congress established the Prompt Corrective Action doctrine in 1991. It gives bank regulators extraordinary power to put the screws to banks before they dig themselves too deep a hole.

Banks may consult with regulators on what needs to be done. But the only judicial review available to them is through the court of appeals, which must review the administrative record of corrective actions that regulators have already instructed banks to take. And it must do so in an expedited manner, typically 30 days.

A similar doctrine to break up SDIs proactively is what many had hoped Kanjorski would propose. But the judicial review process it envisions would turn corrective actions into the SDIs’ shield, rather than the regulator’s sword.

For one thing, it would allow SDIs to challenge their regulator in a district court, not the court of appeals. A district court’s review wouldn’t be limited to the administrative record; it would likely include a trial by jury. First of all, this would involve a lengthy discovery process. And systemically dangerous institutions typically have the best, most expensive lawyers in the world. While regulators are tied up, they would have an even stronger incentive to engage in morally hazardous behavior, to shift losses to the safety net while looting whatever value is left in the institution.

Just look at the billions in bonuses that Wall Streeters paid themselves last year after their balance sheets were rescued by taxpayers.

Professor Bill Black of the University of Missouri Kansas City worries Kanjorski’s judicial review process would effectively turn the district judge and jury into the regulator, a position for which they have no expertise. Would a North Carolina jury instruct Bank of America to take corrective actions that could lead to thousands of lost jobs in their area? Probably not.

Black says Kanjorski can improve his amendment by limiting SDIs’ judicial recourse to an expedited review of the administrative record in front of the court of appeals.

Kanjorski’s head is in the right place, even if his legislation is flawed. We need a new regime that encourages regulators to break up big banks before they threaten to bring down the system.

But his amendment makes the process too difficult. Already it erects a big roadblock by telling regulators they can only take action if an SDI “poses a grave threat to the (nation’s) financial stability or economy.”

By the time regulators realize a firm poses a grave threat, it’s probably too late to do much about it. And if the firm can delay action indefinitely by going to a district court, then what’s the point?

COMMENT

“And if the firm can delay action indefinitely by going to a district court, then what’s the point?’That’s the point. Believe it or not, Jacob Viner thought that the 1933 & 1935 Banking changes were just the beginning of more changes. Deposit Insurance, which FDR opposed and the Chicago Plan economists thought was a good temporary measure, was supported by many banks because they thought it would ease the support for more change. It was a good idea, but fell short of what many people believed was needed.It’s the same deal here. Things will be better for a time, but eventually worsen. I’ve got all my Narrow/Limited/Utility Banking sources ready for the next financial crisis.

FDIC’s problem bank list grows to 552, DIF now negative

Nov 24, 2009 16:27 UTC

I’m not good at taking vacations….

FDIC published its quarterly banking profile today. Here are the latest banking industry statistics at a glance. A few interesting takeaways I’d like to highlight. First, the problem bank list grew again. And it still understates total problem assets…both Citi and Bank of American should also be on this list.

The number of institutions on the FDIC’s “Problem List” rose to its highest level in 16 years. At the end of September, there were 552 insured institutions on the “Problem List,” up from 416 on June 30. This is the largest number of “problem” institutions since December 31, 1993, when there were 575 institutions on the list. Total assets of “problem” institutions increased during the quarter from $299.8 billion to $345.9 billion, the highest level since the end of 1993, when they totaled $346.2 billion. Fifty institutions failed during the third quarter, bringing the total number of failures in the first nine months of 2009 to 95.

Also, what will get lots of headlines today is that the Deposit Insurance Fund went negative as of September 30th. We already knew this to be true, and it’s not totally fair to report the negative balance without noting that FDIC does have cash. That said, the DIF is still in a very precarious position.

As projected in September, the FDIC’s Deposit Insurance Fund (DIF) balance – or the net worth of the fund – fell below zero for the first time since the third quarter of 1992. The fund balance of negative $8.2 billion as of September already reflects a $38.9 billion contingent loss reserve that has been set aside to cover estimated losses over the next year. Just as banks reserve for loan losses, the FDIC has to set aside reserves for anticipated closings over the next year. Combining the fund balance with this contingent loss reserve shows total DIF reserves with a positive balance of $30.7 billion.

Chairman Bair distinguished the DIF’s reserves from the FDIC’s cash resources, which stood at $23.3 billion of cash and marketable securities. To further bolster the DIF’s cash position, the FDIC Board approved a measure on November 12th to require insured institutions to prepay three years worth of deposit insurance premiums – about $45 billion – at the end of 2009. “This measure will provide the FDIC with the funds needed to carry on with the task of resolving failed institutions in 2010, but without accelerating the impact of assessments on the industry’s earnings and capital,” Chairman Bair said.

The DIF will continue to be negative after FDIC gets the additional $45 billion at the end of this year. That’s not a “special assessment,” it’s the next three years’ regular assessments being collected up front. The distinction is crucial. Because it’s a regular assessment, FDIC won’t count it as new reserves for the DIF. Instead it will be counted as deferred revenue on the DIF’s balance sheet.

Why is that important? Because unlike the $5.6 billion special assessment in Q2, banks don’t have to take a hit against their capital all at once for this assessment. They get to treat it as a prepaid expense.

More later….

COMMENT

If the general public would take actions on knowing their account balances the banks would not charge them. There would be no overdrafts… The American public seems to point blame on the banks and not take the responsibility of maintaining their own accounts. When was it decided that Americans can just overdraw their accounts and expect the banks to pay the check for free? I think the general public needs to get a grip on their spending and actually keep a register again to make sure they have money in their accounts. You know just because you have checks it doesn’t mean you have money in your account. TAKE RESPONSIBILIY and quit blaming the banking system for your lack of knowing your account. The banks are not telling you to write bad checks….you are doing that on your own. If you don’t have the money don’t make the purchase. It’s high time people started owning up to their actions and quit blaming the banks. Tell me would you rather the banks send back your rent/mortgage payment? That way you would have the collectors calling you stating you owe money, then that would in turn hit your credit report and lower your score so when you went to purchase a vehicle or applied for credit you would be denied.
So you tell me what the banks should do? Just pay your mistake and not charge you for it? It sounds like you want everything for free…The reason banks charge is because people yes that’s right live people (that know how to manage an account) have to touch the check or make a decision about whether or not to pay it. If you want to you can go to your bank and ask them not to pay any checks that would create an overdraft fee. The banks are willing to just return your bad check and have the business owner turn it over to the prosecuting attorney to track you down.

Posted by Steve | Report as abusive

Grist for Goldman conspiracy theorists

Nov 24, 2009 13:33 UTC

From Yves over at NakedCapitalism:

A former managing director at monolines Ambac and FGIC wonders why AIG was bailed out but the monolines weren’t. (He admits to bias, so take this with a grain of salt.)

…the [AIG] bailout was prompted by fear mongering and deliberate strategies and manipulation on the part of Goldman and a few select others, to make sure that AIG would be bailed out to protect their trades in shorting ABS CDOs.

I believe that John Paulson benefited from this bailout, on his $5 billon or so of ABS CDOs with AIG. But not as much as Goldman benefited themselves, via Abacus and, perhaps, other deals.

AIG, Goldman and ABS CDOs were tied together at the center of the crisis. From Goldman’s perspective, all of the other participants were secondary – they had no exposure to the monolines and they were probably hedged against the other banks. The only loose end was the collateral posted by AIG.

The final question that this raises for me: would it have been cheaper for the government and the taxpayer to have bailed out the bond insurers instead of AIG? The total amount of CDOs and credit default swaps that would have needed to be guaranteed would have been smaller. In the number of investors across the market that would have benefited would probably have been larger. The auction rate securities market, the muni market, the investors that held bond insurer exposure to MBS and ABS would have all benefited. None of these markets were aided by AIG’s bailout.

But a bond insurer bailout would not have helped Goldman much and the AIG bailout did.

There’s much more in the post. As chairman of the NY Fed, former Goldman CEO Stephen Friedman was in an opportune place to scare Tim Geithner into bailing out AIG to benefit Goldman.

The Paulson connection is intriguing. I’ve always wondered who, ultimately, was on the other side of his “trade of the century.” He bought CDS and the banks he traded with had to lay off that risk to someone. That someone was AIG, which couldn’t have paid up if not for the bailout….. (admittedely, this is supposition on my part, would be interested to hear reader thoughts…)

COMMENT

The average pay (including bonus and benefits) for GS staff is approximately $770,000 – almost doubles the salary of US President.

Lunchtime Links 11-23

Nov 23, 2009 17:31 UTC

Reader note: I’m taking the week off for Thanksgiving, so blogging will be light. Back next Monday.

Sewers at capacity, waste poisons waterways (Duhigg, NYT) Fascinating. Yet another example of how society is overgrown. Everywhere you look, there’s another piece of antiquated American infrastructure that is completely unable to handle capacity thrown at it by the modern economy. Sewers, the electric grid, air traffic control systems, the list goes on. But it’s just too expensive to build any of them out: “As much as $400 billion in extra spending is needed over the next decade to fix the nation’s sewer infrastructure, according to estimates by the E.P.A. and the [GAO].” $400 billion. Just for sewers. We don’t, nor will we ever, have the money for that. Not w/o sacrificing all the other stuff we want. Economists are trying to convince you that debt-financed “growth” is the only way to solve our economic problems. They’re wrong. Debt-financed consolidation is the best we can hope for.

Wave of debt payments facing U.S. government (Andrews, NYT) Is the NYT editorial board getting budget conscious? (See again their pitch for fiscal prudence in NY State). This front-pager doesn’t contain much new info, but it articulates clearly the debt problem we face. And they put it next to the article on sewers above. By the way, the quote from Bill Gross is interesting. Out of one side of his mouth he tells the government to borrow to “support asset prices,” out of the other he wants us to stock away nuts for the Winter. Which is it Bill?

Gold reaches $1,174 (kitco) What kills the gold rally? Action from the Federal Reserve to defend the dollar. But we’re getting the opposite. Yesterday St. Louis Fed President Bullard said the Fed should keep its QE program open after it finishes its planned purchase of $1.45 trillion of mortgage securities next March.

Buffalo’s slow-moving Katrina (Carey, Reuters) Route to recovery is a great series from the folks here at Reuters. Detroit gets all the press, but there are plenty of other post-industrial neighborhoods that are suffering.

Wells Fargo underestimating off balance sheet exposures (Whalen, ZeroHedge) If you look at Wells Fargo’s latest 10-Q (page 31), the company has over $2.0 trillion of off-balance sheet assets. But they only plan to consolidate $48 billion worth, according to their most recent estimate. Chris makes the point that, although $1.1 trillion of the OBS assets are “conforming” mortgages (and therefore eligible for government guarantees) it’s not fair for Wells to pretend these mortgages pose zero risk for their balance sheet.

Taking taxpayers for a ride (Niedermayer, NYT) Last week Fritz Henderson said GM would “repay” part of its bailout? LOL!

Existing home sales increase sharply in October (CalculatedRisk)  Plus more interesting charts from CR. Ultra-low rates, government financing and the homebuyer tax credit are successfully reflating the housing bubble….for the moment.

Man trapped in 23-year coma was conscious the whole time (Hall, Daily Mail) Wow. Stephen King has written horror stories using this story line….

Argument against cloning… (imgur)

Squirrel saves baby from dog (picheroic)

COMMENT

Trying to parse Bill Gross’s apparent schizophrenia…He wants asset prices propped up at present with a concrete plan of fiscal austerity upon exit maybe?El Erian talks of the need for exit strategy (presumably involving fiscal prudence) to make present levering up more palatible.The problem with this is that congress will never willingly cut entitlement spending on the elderly, which is the bulk of it. They are owned by the AARP even more than big business.We risk calcifying like Europe or Japan, where the young exist as indentured servants to the old, GDP has stagnated for 30 years and consequent low birthrates put national solvency at risk.

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SNL on the U.S./China economic relationship

Nov 23, 2009 16:08 UTC

“Why are you trying to do sex to me like I was Mrs. Obama!?!”

Small quibble: SNL doesn’t note that the Chinese are, uh, “doing sex” to themselves by manipulating the yuan.

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