Shock and awe the TBTF

Nov 23, 2009 15:39 UTC

For all the fear that bankers have expressed about Representative Paul Kanjorski’s amendment to end “too big to fail,” the final text shows that they don’t have much to fear. While the amendment gives regulators new power, it’s unlikely they’d actually use it.

The Pennsylvania Democrat neuters his own legislation with a single line, which stipulates that for regulators to take action against a systemically dangerous institution (SDI) it must “(pose) a grave threat to the financial stability or economy of the United States.”

But if the point is to break up systemically dangerous institutions pre-emptively, then we want regulators to tear them apart before they pose a grave threat. SDIs tend to fall into that category only after they’re in trouble. By that point it’s too late.

“There’s no political constituency for bank soundness regulation until it’s too late,” says Professor Richard Carnell of Fordham. “Regulators will tend to do what’s politically expedient. During good times that means carrying on business as usual.”

I don’t suspect any regulator today would say that Goldman Sachs poses a grave threat to financial stability. Yet the complexity of its operation and its interconnectedness with the rest of the financial system means that it clearly has the potential to. That may be a fine distinction, but in practice it’s one regulators will be likely to hide behind.

Another problem with Kanjorski’s amendment is that it pollutes bank regulation with politics. The Treasury secretary would have to sign off on resolutions over $10 billion and the president on resolutions over $100 billion.

Walker Todd, a bank expert at the American Institute for Economic Research recently told me: “It’s been my experience over the last 35 years that examiners in the trenches identify the problems in banks quickly. They dutifully pass their concerns up the line, but their criticisms often get wiped away or tamped down for political reasons.”

Examiners do their job well, but politicians get in their way.

I’m torn. At a visceral level, I like the idea of using TBTF status as a hammer to shatter SDIs into pieces. But if this is the best we can hope for, then perhaps it’s better to focus on other structural reforms that will make banks safer and less complex.

Putting OTC derivatives onto exchanges, strengthening capital (the Miller-Moore amendment is a good start), splitting commercial from investment banking, establishing some sort of exposure rules so that SDIs can’t have too much exposure to any single counterparty. But that’s a wish list that will never get done. In the end, I suspect the only way we’ll rebuild a sound financial system is after the one we have blows itself up.

COMMENT

Inertia. You would think that after what has happened with us teetering over the edge (and still just a step or two away from the edge) something significant would be done. Apparently not.

Then again, let a commander-in-chief raise a war cry, as GWB did, and Congress jumps to approve with a blank check.

How strange that national security is a proven winner with military deployment but it seems to pass everyone’s understanding that the financial world and national financing pose equal, if not even more dangerous threats than any armed foe.

Posted by CB | Report as abusive

Lunchtime Links 11-22

Nov 22, 2009 20:47 UTC

The talented Mr. Pang (Maremont, WSJ) Maremont uncovered the long and sordid history of Mr. Pang. The Journal also broke the Norman Hsu story. Both were high-flying con-artists before the Journal got on their case. Great stories.

The 70% discount on Goldman’s $500m gift (Ransom, SmartMoney) Really great work from Diana Ransom. Goldman will get a tax writeoff for much of its “gift.” Other parts of it are actually loans the company expects will be repaid with interest. BTW, people know that Warren Buffett isn’t actually contributing any money, right? He’s just lending his time. Hmmm. What’s he going to do? Get on the phone with a Denny’s franchisee to talk about the stock market?

Congresswoman passes leverage amendment (Grim, HuffPo) It’s hard to keep track of the House Financial Services Committee these days. The amendment would apparently limit leverage to 12x. I’m trying to get my hands on a copy to determine how it defines leverage. And in any case, all of this may be a dead issue. The Congressional Black Caucus canceled a vote on the package Thursday arguing that not enough is being done about unemployment. Ugh. There are lots of problems with the financial reform package, but now it’s looking like we may not get anything signed into law before 2011.

Millions may have to repay part of stimulus tax credit (

Tim Geithner, mad as hell and not going to take it anymore (Tech Ticker) This quote from Geithner, in response to criticism from a Republican congressman, is just another reason he has to go: “What I can’t take responsibility for is the legacy of the crises you’ve bequeathed this country.” But Geithner bears as much responsibility for the banking crisis as anyone. Recall that he was chief of the NY Fed before he joined the administration. In that role he was supposed to regulate banks. Clearly he wasn’t a very tough regulator if, when the CEO spot at Citigroup opened up two years ago, Geithner was Sandy Weill’s first choice.

The Louisiana Purchase redux (Milbank, WaPo)

Unburied bodies tell the tale of Detroit (Reid, Times Online)

Baby elephant sneezes…

COMMENT

Strange conclusion:
“Recall that he was chief of the NY Fed before he joined the administration. In that role he was supposed to regulate banks. Clearly he wasn’t a very tough regulator if, when the CEO spot at Citigroup opened up two years ago, Geithner was Sandy Weill’s first choice.”
Either you think Sandy Weill was very incapable so he would choose an easy push-over to replace himself, or, maybe, Geithner had shown himself a very capable chief of NY FED and regulator and therefore he was wanted by Weill? Clearly if he was not very good at his job he would not have been asked or even considered.

Posted by M | Report as abusive

Could England be headed for a “sudden stop?”

Nov 21, 2009 17:41 UTC

From Landon Thomas at NYT: In Britain, visions of Japan’s decade of stagnation

Britain may finally be emerging from recession, but many analysts warn that it is a false dawn. In fact, they argue, the economy here is so ravaged by growing debts and ruined banks that it could well be following in the steps of Japan’s lost decade of the 1990s.

I still don’t understand why we refer to Japan’s “lost decade,” singular. The country is now moving into its third consecutive lost decade.The Nikkei is still at 1984 levels.

But back to the UK: the NYT piece quotes the latest research from Variant Perception (no link). I got it in my inbox earlier this week and it’s a fascinating (though not pleasant) read. Notably, they talk about the outside possibility of a “sudden stop” event. As mentioned in this space before, a “sudden stop” is what happens to emerging economies when they lose access to capital markets. Confidence is lost in the government’s ability to pay back debt and everyone races to get out of the system. See Argentina.

The problem is acute for indebted emerging markets because they don’t borrow in a currency they can print. So, the argument goes, you can’t have a sudden stop in Britain, or the US, because we print the currency in which our debt is payable.

I’ll let the VP guys take it from here:

The UK’s fiscal situation is in its most precarious state for 30 years. The Bank of England has responded by cutting rates to historic lows. This has merely bought time. Debt in the household sector remains at its highs, and enormous relief has been provided to many overleveraged mortgage holders who hold tracker deals [i.e. teaser-rate mortgages]. They have been able to ride out the recession so far without defaulting. As their trackers expire and they reset to higher rates they will face acute problems.

Usually a government can quickly return to fiscal vitality after a cyclical upturn. The UK will find this difficult. Structural problems such as a heavy reliance on the business and finance sectors and a consumer that will eventually have to deleverage will provide strong headwinds to any sharp turnaround in revenues.

To pay for the shortfall in income, the UK government has stepped up bond issuance to generational highs. This is not sustainable and taxes will eventually have to rise. However, there is a belief that raising taxes will increase revenue. We believe the opposite is true, and the state will have to borrow more than is projected, for longer than is hoped.

The Bank of England has embarked upon a quantitative easing program to support the gilt market. The sheer size of the initiative raises the question of whether it will be able to reverse it in a stable and orderly manner. Any trip-ups in its unwind would raise yields considerably.

The structural problems in the domestic economy, and difficulties in other economies across the globe, will impede the prospects for sustainable growth in the UK. Debt will continue to grow, and the creditworthiness of the country will continue to weaken. Investors will be more and more reluctant to meet the borrowing needs of the UK.

If the situation continues to deteriorate there is a non-negligible possibility the UK could face a ‘sudden stop’ in capital inflows. A debt crisis would precipitate a currency crisis. This would not be especially unusual for the UK: during the postwar period, there has been one on average every 15 years. These have happened like clockwork.

The possibility of this course of events unfolding is small, but not negligible. If a new government is formed next year, perhaps they will be able to enact the policies that will reduce the deficit and restore confidence in the financers of the UK deficit. We believe, though, that to say the UK will not have a debt crisis is complacent and pays no heed to the past.

If Britain is laid low by a sudden stop event, if the BOE finds itself the only buyer of British government debt, the argument in favor of deficit spending whenever there’s an “output gap” will, in my view, suffer a fatal blow.

Also worth calling out, the VP guys note that household debt is still growing quickly in the UK:

screen-shot-2009-11-21-at-120707-pm

In order to return to health the UK, more than most countries, needs to deleverage. However, this process still seems to be in its early stages. UK consumers have so far not materially improved their balance sheets since the onset of the crisis. This is concerning: before the crisis, UK consumers were some of the most indebted in the world, and so have more urgency than most to reduce their indebtedness via deleveraging or default.

But …. household debt to GDP in the UK continues to rise. This is partly a denominator effect, as nominal GDP has fallen in the recession. However, even on a QoQ basis, household debt has barely contracted.

The US consumer, by comparison, is showing much clearer signs of reducing leverage. Over the last 2 years (to Q209), US household debt to GDP has risen by 0.7%-pts, while in the UK the same metric has risen by 4.4%-pts, more than 6 times as much.

COMMENT

One reason that the UK consumer has not begun to deleverage is that unemployment is not as high as in the US. Also, since the “safety net” has more and denser webing than in the US there is less incentive to do so.

Posted by Bob4232 | Report as abusive

Bank failure Friday

Nov 21, 2009 04:54 UTC

It was a slow night. One small bank failed.

#124

  • Failed bank: Commerce Bank of SW FL, Fort Myers FL
  • Acquiring bank: Central Bank, Stillwater MN
  • Vitals: at 8/28, assets of $79.7m, deposits of $76.7m
  • DIF damage: $23.6m

Central has been busy. They also acquired the assets of Riverview Community Bank and Jennings State Bank in October, as well as Mainstreet Bank in August.

Dodd on Bernanke: “not necessarily”

Nov 20, 2009 21:45 UTC

From Shahien Nasiripour at HuffPo.

One wonders where news and approval ratings will be when Bernanke’s confirmation comes up for a vote….

I went on record with my Bernanke angst the day said he’d nominate Bernanke for a second term. At that time I qualified my opinion by saying that if Larry Summers was the other option, then I’d settle for BB. But I get the sense that Larry isn’t that popular now either, that Washington wants a clean break from Bernanke/Summers/Geithner.

So take a shot on a new Fed chair Mr. President. One who’s not afraid to challenge the banks, and run the occasional Fed fire drill.

COMMENT

I think that the federal reserve should be shut down, get rid of the poeple that are in power now and replace them with poeple that have been morally and ethically tested. Also test the testers, corruption and greed is a disease

Posted by Azrael | Report as abusive

CRE cliff-diving continues

Nov 20, 2009 19:37 UTC

Moody’s/REAL released September data for their commercial real estate price index. Month over month drops have been fast and furious this year.

cre-chart

(Click chart to enlarge in new window)

  • -8.6% Mar to Apr
  • -7.6% May
  • -1.0% June
  • -5.1% July
  • -3.0% Aug
  • -3.9% Sept

Since the peak in October 2007, CRE prices are down 43%.

Residential real estate has been coming back lately, according to the Case-Shiller index. The composite 20 index rose 1.2% in August, after rising 1.7% the month before and 1.4% the month before that.  Again these are month over month changes. The index is still down 11% compared to last year.

There’s a lot of skepticism that this indicates we’ve reached the bottom. Real estate agents will no doubt tell you they have. I doubt many are aware that the GSEs now guarantee a super-majority of all mortgages and that the Fed is printing money to put most of those on its balance sheet. Also ask what they think will happen when the homebuyer tax credit finally goes away next year. Without government support, the housing market wold be a ways down from where we are right now.

As always, keep in mind that the chart above comes with a BIG caveat. The Case-Shiller index is more robust than the Moody’s CRE index. The former is based on millions of transactions. In September, there were a total of 363 commercial transactions, valued at $5.1 billion. Of those, 76 totaling $1.1 billion were repeat sales used in calculating the index.

(Click chart to enlarge in new window)

cre-volume

The market for CRE is as cold as ever. Will the Superdome be included in November’s data?

COMMENT

CRE, although only 1/4 the size of residential, blows a stiff deflationary breeze at the present.

Efforts to reflate residential real estate are fed by populism that likely does not extend to CRE.

Posted by Dan | Report as abusive

Morning Links 11-20

Nov 20, 2009 15:11 UTC

Bill Gross says chase risk! (PIMCO) In his December letter, Gross laments the ultra low yields available to investors. Holding cash is a terrible idea he argues. (Luckily he’s not saying to go far out on the risk curve.) Still, I disagree. While I believe there’s an outside chance of a dollar crisis (highly inflationary…hence the reason many investors have a 5-10% position in gold for insurance), the more likely scenario over the next few years is the one laid out by the SocGen guys: debt deflation. In that case the purchasing power of cash goes up. Looking at the .01% nominal yield on cash equivalents is therefore unfair. The deflation-adjusted yield would be much higher. This is not a reason to try to “inflate away” debt however as that’s not actually a solution. It just gets us closer to the dollar crisis scenario. 90% cash + 10% gold has done very well over the past two years (especially on a risk-adjusted basis!) I guess you can jump back into risky assets if you feel you “need” yield. Of course that’s the mistake so many people made in response to Alan Greenspan’s low rates. How well did that strategy work?

Fed makes capital foremost concern (Torres/McKee, Bloomberg) With the Fed/Treasury actively engaged in reflating the asset bubble (see next link), it’s good to know they’re paying attention to capital levels…

With FHA Help, easy loans in expensive areas (Streitfeld, NYT) Anecdotally this is quite scary. Remember a year ago when the size of “conforming” mortgage loans was raised over $700k? That means FHA is backing much larger home purchases (I’d forgotten this when I linked to that article on Toll calling FHA the new subprime). The scary quote (ht CR) comes from some technology guys who went in on a $900k property having been busted just a year ago: “We’re banking on real estate,” said Mr. Kurland, 24. “Everyone expects prices to keep going up.”

Can the postal service be saved? (Montopoli, CBS)

Asia considers capital controls to stem bubble dangers (Adam, Bloomberg) Low rates in the developed world are putting emerging markets in a dangerous position. With no returns available at home, hot money is again flowing East (and South, to Brazil).

SocGen’s worst-case debt scenario (Murphy, Alphaville) Good sleuthing from Paul. He has a link to the report that Ambrose Evans Pritchard wrote up. Ambrose embellished a bit. Also the report is over a month old. Still, pessimism porn at its finest.

Texas accidentally bans straight marriage (Spak, Newser) HT Felix.

Satan, the great motivator (Fitzgerald, Boston Globe) “A pair of Harvard researchers recently examined 40 years of data from dozens of countries, trying to sort out the economic impact of religious beliefs or practices. They found that religion has a measurable effect on developing economies – and the most powerful influence relates to how strongly people believe in hell.”

College students arrested for not paying tip (Mucha, Philly Inquirer)

Commuter cat star of bus route (BBC)

Nunchuck (imgur)


COMMENT

Re “Satan the Great Motivator”It would have probably been helpful if unscrupulous lenders, fudging borrowers and two-faced politicians feared some consequences for their actions.Americans lied en masse on their mortgage applications, behavior that has never really happened before. Derivative garbage and short termism by investment banks is a monument weak morals.The popular religion these days is Joel Osteen’s “Your Best Life Now”…. Live for the moment… Pray for God to bless me me me! Holy cow, our ancestors would barely call this religion…

Posted by Dan | Report as abusive

Krugman on the invisible bond vigilantes

Nov 20, 2009 06:32 UTC

Paul Krugman is complaining of deficit hysteria over on his blog again. Where are the bond vigilantes? he wonders. Since we’re still able to sell debt so cheaply, why is anyone worried about more deficit spending?

As always, there are numerous holes in his argument that he chooses to ignore.

1. The chart he uses is the most charitable view of America’s public debt burden. It’s simply public debt outstanding. This ignores money the government owes itself to fund future benefits. More importantly, it ignores unfunded liabilities. Paul puts debt to GDP at 60%. In reality, public debt is closer to 500%. And that’s using 2005 figures.

2. Krugman ignores private debt (household, business, financial) which still stands at a suffocating 300% of GDP according to the latest flow of funds report. If households are drowning in private debt, they can’t exactly afford tax increases to pay off more public debt. This is a key argument against those who say that we can borrow more because we have in the past, specifically during the ’40s when we were fighting WW2. Yes, public debt was much higher then. But private debt had been virtually wiped out by the Depression. So the total public + private debt burden was far lower than it is today.

(Click chart to enlarge in new window)

public-and-private-debt-burden

Again, the chart above excludes unfunded liabilities. Including them would put the total debt burden closer to 800% of GDP. Truly an astonishing figure.

What bothers me most is how Krugman caricatures the fiscally conservative as Scrooges unconcerned with high unemployment. To the contrary, we see that the root of the employment problem facing the country is debt itself. That’s why we find ourselves in this financial crisis.

Digging ourselves a deeper hole means worse unemployment down the road.

But PK needn’t take my word for it. He made the argument himself quite cogently back in 2003.

COMMENT

every country and everyone in it is in debt! What would the wold be like be every country agreed to be even and start fresh? LOL wishful thinking?

Potty Training | Potty Training Boys \ How To Potty Train A Toddler

Posted by jillbradlie | Report as abusive

Midnight Links 11-18(19?)

Nov 19, 2009 06:10 UTC

Rep. DeFazio calls for Geithner and Summers to be fired (YouTube) Geithner has done many other things wrong besides paying out 100% to AIG’s counterparties. Slamming banks together to avoid resolving their balance sheets was another big one. As for Summers, I still don’t understand why he’s so revered at the top of Democratic policy circles. His prior support of the CFMA and Gramm, Leach, Bliley — two of the biggest regulatory blunders of our time — should be enough to disqualify him from his current post.

FHA-backed lending is a train wreck says Toll (Gittelsohn, Bloomberg) Maybe a reader can correct me, but I’m guessing Toll Brothers, because it’s a higher-end builder, doesn’t rely much on FHA-backed lending to move its inventory. Still, it’s interesting that a homebuilder would criticize the government for providing too loose credit. Homebuilders wouldn’t have much of a business without it.

Jobless benefits to end for 1 million in January (Eckholm, NYT)

Audit the Fed effort under threat in House (Grim, HuffPo)

Cash for caulkers (Leonhardt, NYT)

Costco no longer carrying Coke products (AP)

California faces new $21 billion budget hole (Goldmacher, LA Times) CA lawmakers have more tough decisions to make…

On the shoreline (Boston Globe) The latest from the Globe’s Big Picture blog.

Students unhappy with big tuition hike at UCLA. Education is expensive and CA’s public university students have benefited from state subsidies for years. With CA’s budget in tatters, the free ride is over

COMMENT

Rolfe — Toll Brothers (and ALL high end homebuilders) do rely on FHA loans, albeit indirectly. The link between access to financing for lower-mid end homes feeds a material portion of those who sell their house to move up to higher end Toll housing (mcmansions). Best, WM

Posted by Wallace Manzes | Report as abusive

Silverdome sold for $583k

Nov 19, 2009 05:17 UTC

From Mark Guarino at CS Monitor…..New tale of Detroit’s woe: Pontiac Silverdome sold for $583,000

Ever want to own a domed football stadium?

The question was a plausible one Monday when it was announced that the Pontiac Silverdome — once home to the NFL’s Detroit Lions — was sold for $583,000, or about 1 percent of the $55.7 million it took to build in 1975.

The Silverdome, an 80,300-seat stadium located in Pontiac, Mich., is the latest example of how comprehensively the recession has socked southeastern Michigan.

Mass layoffs and automotive plant closures have wreaked havoc on the local economy. Budget deficits are deep, foreclosures are widespread, and the population shrinking – from about 2 million people in the 1960s to about 900,000 today.

The article doesn’t mention if the buyer assumed any debt as part of the purchase. And apparently the sale is on hold.

The real cost to the buyer isn’t this initial layout, most likely it’s the cost of converting the property into something that is revenue generating — they’ve envisioned a soccer stadium — not to mention the continuing cost of maintenance.

COMMENT

true

Paula.
asistencia.tecnica@live.com.ar

Posted by Paula | Report as abusive

The Fed is sending gold higher

Nov 18, 2009 18:53 UTC

Is gold going to $6,300? Dylan Grice, an analyst with Societe Generale, says it’s possible, given the decline in central bank credibility. But investors need to keep one thing in mind: Gold is merely a vehicle to protect the purchasing power of money.

Gold is surging because investors see that the Federal Reserve — more concerned with deflation and unemployment than sound money — may be trapped in a never-ending cycle of monetary accommodation.

Ben Bernanke says he won’t monetize debt, but he already has. His Fed has bought $300 billion of Treasuries and is on pace to buy $1.45 trillion of government-backed mortgage debt all of which is being salted away indefinitely on the Fed’s balance sheet.

Why indefinitely? Because the Fed has no intention of unwinding its balance sheet so long as the economy is stressed. Witness comments this week from Bernanke, Fed Vice Chairman Don Kohn and San Francisco Fed President Janet Yellen all suggesting that the Fed’s “extended period” of low interest rates can be measured in years, not months. Today St. Louis Fed President James Bullard said rates aren’t going up till 2012.

So long as deficit spending continues, if the Fed wants to avoid deflation, it will be forced to monetize more debt.

[Elsewhere, capital controls are being erected in emerging economies like Brazil, Taiwan, and possibly Indonesia in order to keep speculative waters at bay. As Hong Kong's chief executive remarked last week, a dollar carry trade spawned by low rates threatens to inflate dangerous asset bubbles in emerging markets the same way low Japanese rates did in the '90s.]

Exploding debt throughout the developed world means other central banks face similar pressure.

(Click chart to enlarge in new window, reprinted with permission)

insolvent

So confidence in paper currencies is waning.

Some people say it is absurd to buy gold; the metal has no intrinsic value. That may be. But is it any less absurd to hold paper? The best that can be said for paper is that if you lend or invest it, tomorrow someone will give you more paper in return. This is fine so long as its purchasing power is maintained. But it isn’t. A 2009 dollar is worth a 1914 nickel.

Eventually the value of all the paper you’ve accumulated goes to zero. The trick is to turn that paper into tangible assets with tangible value.

Gold may be volatile, but at least it maintains its real value:

(click chart to enlarge in new window, reprinted with permission)

golds-real-value1

Grice contends that the price of gold could reach $6,300 an ounce. He explains: “The U.S. owns nearly 263 million troy ounces of gold (the world’s biggest holder) while the Fed’s monetary base is $1.7 trillion. So the price of gold at which the U.S. dollar would be fully gold-backed is currently around $6,300. Gold is very cheap — at current prices, the USD is only 15 percent gold-backed.”

Absurd you say? It happened 30 years ago. President Nixon ended the Bretton Woods global monetary system and his compliant Fed Chairman Arthur Burns let inflation run wild. So by 1980 gold spiked to a level at which the dollar was “overbacked” according to Grice.

Did gold overshoot in 1980? Sure, but only because Paul Volcker was willing to hammer the economy to re-establish the Fed’s credibility. Today’s Fed has been very clear that it isn’t willing to put up with a recession of any kind in the service of sound money.

All of that said, investors should be careful. Grice’s chart shows that, over the long run, gold is likely to do no better than protect your purchasing power. An ounce of gold today buys a good men’s suit; in 100 years, it is likely to buy the same.

So gold won’t make you rich. But it may protect you from becoming poor.

COMMENT

People in here talking gold down. Look at a ten year chart, and then do the same for stocks, bonds, housing, the dollar, and oil. Gold shines. If you must hate it for being what it is, that’s your emotions talking. The numbers tell a different story.

The dude who said, “. . . gold is worth $300, tops,” (or something similar), is especially emotional about it. Gold has been worth more than $300/oz. for a long, long time, despite your valuation.

Posted by Mortimer | Report as abusive

Steve Keen on Minksy

Nov 18, 2009 18:31 UTC

One of my favorite economists talking about one of my favorite economists (ht Yves). Liberal use of the “pause” button to read his slides is recommended. He also goes into great detail about his “roving cavaliers of credit” thesis, which, in a nutshell, argues that money isn’t created by the Fed, it’s created by banks.

The slide on Bernanke around the 12 minute mark is very interesting.

COMMENT

Rod Laver of economists

Posted by Tim | Report as abusive

GMAC shouldn’t have a government ally

Nov 17, 2009 16:17 UTC

Al de Molina’s tenure as CEO of GMAC was short and rocky, punctuated by bailouts and controversy over the morally hazardous tactics of subsidiary Ally Bank.

His strategy hasn’t worked and Ally’s anti-competitive behavior is hurting other banks. The new chief executive, Michael Carpenter, needs to restructure GMAC so that it is no longer dependent on a government lifeline.

GMAC has already received $12.5 billion of TARP money and recently asked for as much as $5.6 billion more. In addition, the FDIC has guaranteed $7.4 billion of debt.

Ally has also received another $7 billion in federally subsidized loans in the form of advances from the Federal Home Loan Bank of Pittsburgh. As a government-sponsored enterprise, the FHLB has access to cheap capital. It passes the savings on to member banks like Ally.

At the same time, Ally is marketing deposit accounts with interest rates among the highest in the nation. Insulated from risk, depositors couldn’t care less about Ally’s health. They’ve poured money into the bank over the past year, raising GMAC’s total deposits 57 percent, to $28.8 billion.

This doesn’t sit well with other banks that don’t benefit from so much government largess and can’t afford to pay the same rates. Last May, the American Bankers Association complained to the FDIC, which put the screws to Ally. The bank reduced its rates, but only a little. According to the Wall Street Journal, Ally now pays 2.1 times the national average for a one-year CD, down from 2.3 in May.

Ally’s financial condition, meanwhile, continues to deteriorate. Chris Whalen of Institutional Risk Analytics gives Ally an “F” grade, pointing to charge-offs that doubled in the third quarter.

Whalen also notes the growth of Ally’s securities portfolio. It is becoming less of a conventional lender and more of a bond hedge fund, he says. So why is the government is supporting it?

Ally’s funding is also life-support for ResCap, the subprime mortgage unit that helped sink GMAC in the first place. The more cash GMAC/Ally pours down the drain at ResCap, the less taxpayers are likely to get back.

Carpenter should cut his losses by cutting off ResCap. That would be a good start to restructuring GMAC.

But if GMAC can’t fund itself without the magical elixir of bailouts, deposit insurance and nation-leading CD rates, then for the sake of taxpayers, depositors and banks struggling on their own, it should be put out of its misery.

COMMENT

First of all, Al De Molina was only there for just 18 months – long after the damage inflicted by those before him – and was attempting to turn that place around. Any bailouts GAMC took were because they needed that money to stay afloat. Al’s whole strategy was to have that company come clean, change their business model and earn more liquidity so it could be saved. When he was at B of A he was known for pushing back against unfair banking practices and that’s why he has so many people were loyal and followed him.

What’s ‘morally hazardous’ about Ally bank? It was ‘morally hazardous’ to offer better rates and not screw people over? Even with TARP money, it was wrong to offer higher rates to create more liquidity fast in order to be able to raise capital to pay back TARP faster?

Al is out because he rocked the boat and tried to truly change an industry deeply entwined with government. The status quo is back in charge.

Posted by Mick | Report as abusive

Whitney: “I haven’t been this bearish in a year”

Nov 16, 2009 21:48 UTC

Bartiromo asks some good questions, including “are banks adequately capitalized today?”

“No way” says Whitney.

She adds: “I don’t know what’s going on in the market right now ‘cuz it makes no sense to me.” The fundamentals aren’t there.


(ht Alexis N.)

COMMENT

Here’s what I don’t understand… the banks own VERY little of what they service… most everything I’m seeing that’s in default is GSE or FHA… how much of the mortgage market is owned/controlled/backed by the federal government now?

And with the HAMP incentives, Fannie and Freddie buying most of what they originate(d), and the Fed buying their toxic loans, federal takeover of the GSE’s, billions in TARP stimulus, 4 lenders now control over 80% of all new originations- which are virtually all Fannie/Freddie/FHA, they get reimbursed in full for advances once a property sells REO… and they still can’t make a buck?

They’ve been given EVERY advantage and they still can’t function…

What, exactly, do they own?

Posted by robert | Report as abusive
  •