Unstructured Finance

Nationalization Boogeymen

February 12, 2009

FINANCIAL/BAILOUT-CEOS(Updated with references from Paul Kanjorski’s office)

Lined up to pay their dues, Wall Street CEOs met their congressional inquisitors on Capitol Hill, sparking bouts of righteous indignation peppered with cringe moments worthy of The Office.

Pennsylvania Democrat Paul Kanjorski implored the posterboys for an era of high finance gone bad to “please find a way to return that money before you leave town,” referring to hundreds of billions of dollars in taxpayer bailout funds that officials believe were poured into unwarranted bonus payments instead of being used to revive the business of lending to America. At least he said please.

The message was clear. Though they may never have been instructed to lend the funds when they got them, that’s what Congress wanted. Bankers need to get back to the business of lending. That’s what they were being bailed out for. Never mind that the business of lending, conducted with adequate credit checks, was not what they were doing before, and that prudence in a period of high inflation would preclude much new lending today.

Kanjorski, chairman of the House subcommittee on capital markets and insurance, is himself the subject of a telling tale of befuddlement making its way around the Internet. In an interview on C-Span he said money market investors pulled $550 billion from their accounts, prompting the Fed to step in on Sept 15 and stop the panic by closing money market accounts. His estimation was that “$5.5 trillion would have been drawn out of the money market system of the U.S., would have collapsed the entire economy of the U.S., and within 24 hours the world economy would have collapsed.”

It looks increasingly like he didn’t have all his facts in presentable, working order. Felix Salmon of Portfolio.com says he can’t find any reporting of money market funds being closed by the government, and neither can we. Andrew Leonard at Slate.com also questions the numbers. Kajorski’s office pointed us to a September New York Post article citing traders as saying money markets were pushed to the wall with $500 billion in sell orders, about a fifth of the entire market, and comments the congressman made at a hearing with then Treasury Secretary Henry Paulson, apparently referencing this report.

Keeping in mind that Paulson was just one of a long list of Goldman Sachs grads to become a top policy maker it’s not terribly surprising that neither the rocket scientists of Wall Street nor angry congressional committees seem well suited to the job of restoring confidence in the financial sector.

Other Deals News:

* Chinese state-owned aluminum group Chinalco will invest $19.5 billion in miner Rio Tinto in a deal that will secure resource supplies for China and help cut Rio’s debts, but also raise regulatory scrutiny.

* Rio Tinto Ltd/Plc will sell nearly half its stake in the world’s biggest copper mine, nearly a third of its share in a major bauxite mine and sizeable stakes in key operations in Australia, Indonesia and the Americas in a $12.3 billion asset deal announced on Thursday.

* Spanish competition authority CNC has approved Gas Natural’s 16.7 billion euro ($21.58 billion) bid for Union Fenosa with conditions, a spokeswoman for the regulator said on Thursday.

* General Motors has been in talks with China’s SAIC Motor about the possible sale of a share of GM’s stake in their joint venture or other assets as the U.S. automaker races to raise cash, two sources familiar with the discussions said.

* Japanese video games maker Square Enix has agreed to buy the British firm behind titles such as “Tomb Raider” and “Championship Manager” for 84.3 million pounds ($120.8 million) to extend its reach in Europe.

* Satyam Computer Services Ltd’s board expects to outline the bidding process for a possible sale of the fraud-hit firm in the next 10 days time, Chairman Kiran Karnik said on Thursday.

* Thailand’s Bank of Ayudhya (BAY) said on Thursday it was in talks with financial institutions to buy more retail banking businesses following last week’s acquisitions from AIG.

* German retail and tourism group Arcandor is not in talks with Wal-Mart, the world’s biggest retailer, Thomas Middelhoff said on Thursday, pouring cold water on earlier market talk.

(PHOTO: Combination photograph of Wall Street bank executives testifying before House Financial Services Committee on Capitol Hill in Washington, February 11, 2009. Top row (L-R), are: Bank of New York’s Robert Kelly, JPMorgan Chase’s Jamie Dimon, Goldman Sachs’ Lloyd Blankfein and Wells Fargo’s John Stumpf. Bottom row (L-R), are: CitiGroup’s Vikram Pandit, Morgan Stanley’s John Mack, Bank of America’s Ken Lewis and State Street’s Ronald Logue.  REUTERS/Larry Downing)

Comments
3 comments so far | RSS Comments RSS

The “stress-test” will triage the solvent banks from the insolvent ending the game of chicken banks are playing with taxpayers. Nationalization of insolvent banks will follow, with their eventual sale back to solvent banks. It will still take time for credit markets to recover because of cap ratio restrictions on the remaining banks.

Posted by CS | Report as abusive
 

While bank executives haven’t acquitted themselves very well lately, I’m more concerned that members of the House committee displayed an astounding level of ignorance and naivete about the banking system. Instead of taking their five minutes to posture and pose, maybe they should study a litle harder. It also seems that Congress and the Treasury should sit down together and agree on the purpose of the TARP funds. I thought one goal was to shore up the capital position of these institutions; if they lend it all out they will weaken – not strengthen – their capital ratios.

Posted by Jim | Report as abusive
 

I think a lot of the banks that were in trouble should just fall and no one should pick them up. It starts from the top and down the pole with greed and stupidity so why should tax payers deal with this. They did it let them learn from it.

Posted by L | Report as abusive
 

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