Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. More on the FCIC HearingsHere is something from The Nation; it is somewhat in contradiction to what I posted late last week (here), which portrayed the hearings as letting Wall Street off the hook, whereas this piece finds the testimony (and the quesstioning?) pretty damning of Wall Street, regulators, and ratings agencies, but says that the media have stopped covering the hearings. Sheila Bair's testimony was great; click here for a pdf of her full testimony.Financial Crisis Inquiry Commission Turns Up the Heat By Greg Kaufmann | January 15, 2010 Two days of Financial Crisis Inquiry Commission hearings have me rattled about how little has changed about our financial system and how much is still at risk. They also have me wondering this: where the hell are the media? For the first day of panels, reporters were squeezed together in the back rows after filling more reserved seating than I've seen at any prior hearing during this session of Congress. But as I wrote previously, after the banksters had preened for the cameras and recited their testimony like four schoolboys BSing their way through an oral report, the press vanished, missing out on more candid and informative witnesses. Yesterday, day two of the hearings, maybe a dozen reporters attended, fewer than were at for the press conference afterward. What did they miss? For starters, FDIC Chairman Sheila Bair testified that the credit-default swaps (CDS) market still poses a systemic threat and that even she can't access CDS information to accurately assess financial institutions' exposure. Bair and SEC Chairman Mary Schapiro were in agreement with Commission Chair Phil Angelides's assessment that the credit rating agencies were "proved to be worthless and remain so today," given that they are paid by the very Wall Street firms who are profiting from AAA-rated securitized assets. State attorneys general Lisa Madigan of Illinois and John Suthers of Colorado revealed that not only were their warnings about unscrupulous and predatory lending practices ignored but that their investigations were actively thwarted by federal regulators who in turn did nothing--under the guise of pre-emption. Madigan also described how rate sheets reveal that Wall Street paid mortgage brokers and loan officers more for risky mortgages--with low teaser rates, pre-payment penalties, low or no documentation--because the consequent higher interest rate paid by the borrower would bring in more income. Wall Street wasn't the victim of bad underwriting that it claims to be; indeed, it incentivized it. Denise Voigt Crawford, a Texas securities regulator for twenty-eight years, discussed the revolving door between agencies and the industries they regulate, and the "chilling effect [it has] on the zeal with which you regulate." Schapiro, Bair and Madigan argued that Wall Street should have to "skin in the game" when securitizing assets. As things stand now they sell them with a bought and paid for AAA-rating, and then take their profits even if the underlying assets are worthless. Madigan said of mortgage-backed securities, "At the end of the day, the people who had the risk were on the very front end, the borrower, and on the very back end, the investor. All the other market participants were paid along the way, and they didn't hold on to any of that risk." Bair said the agency that could have done something about subprime products early on--when it had a report on problems back in 2000--was the Fed. "I think the only place to tackle that on a system-wide basis for both banks and non-banks was through...the Fed [which had] the authority to apply rules against abusive lending across the board to both banks and non-banks," said Bair. "If we had had some good strong constraints at that time, just simple standards like you've got to document income and make sure they can repay the loan--not just at the start, but at the reset rate as well--we could have avoided a lot of this." So why didn't the Fed and other federal agencies act? "It can be very difficult to take away the punch bowl when, you know, people are making money," said Bair. She also talked about "pushback" from both the industry and the Hill--as late as 2007-- when the FDIC tried to "tighten up" on subprime mortgages and commercial real estate. Reforms discussed included a systemic risk council, a consumer financial protection agency, an industry-funded mechanism so that large firms can be broken up and sold off without taxpayer money, greater disclosure of compensation structures and a single clearinghouse for derivatives like credit-default swaps. But the task of this commission isn't to open its hearings by announcing the necessary reforms. It's to tell the story of what caused this meltdown, which should galvanize public demand for the necessary reforms. In that regard I think the commission is off to a decent start. They are breaking down tough concepts, showing the interconnectedness between Wall Street, legislators and regulators and fishing with dynamite when it comes to exposing bad actors. But time is short--the FCIC's report is due in December of this year. It's going to have to be fearless, and build momentum quickly by bringing in big players and asking them tough questions. That's the only way a bipartisan populist backlash will fight for reform--and it's the only way the media might consider showing up too. Read the original article. Labels: Credit Default Swaps, financial crisis, Financial Crisis Inquiry Commission, Sheila Bair, Wall Street Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Failures Send FDIC Into the RedThere are no green shoots at the FDIC, only red ink. And it's going to get worse before it gets better.From the New York Times: The government-administered insurance fund that protects depositors fell $8.2 billion into the red for the first time since the fallout from the savings-and-loan crisis of the early 1990s as the pace of bank failures accelerated in the third quarter. So far in 2009, the FDIC has seized and sold 124 problem banks. Despite booming trading profits posted by some of the larger banks, the bad loan portfolios of zombie banks weigh like a nightmare upon the living. CNN Money reports that the FDIC has hiked up its list of "problem banks" from 416 to 562 just in the last quarter. The Wall Street Journal reports that FDIC head Sheila Bair stated "We do obviously have a lot more banks that will close this year and next," Bair said, adding the failures "will peak next year and then subside." Labels: bank closures, bank failures, FDIC, FDIC fund, Sheila Bair Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). FDIC Bled by Bank Losses, Sets P.E. RulesFirst, the NYT on the scary FDIC banking report. As the article notes, the warnings about large numbers of banks should be contrasted with the financial sector's surge on Wall Street.And then there's Reuters' Rolfe Winkler on new FDIC capital-adequacy rules for private equity firms. Interesting commentary concerning the FDIC's slipping and sliding regarding definitions of Tier-one capital in promulgating the new rule. Winkler thinks these may serve to deter private equity investors from issuing lower-quality equity in the future. So while the new rules allow for a lowering of capital-adequacy ratios for P.E. firms looking to buy distressed banks, they may serve to tighten standards in a part of the market that really needs it. Labels: bad loans, banking system, FDIC, FDIC fund, financial crisis bailout, private equity, Rolfe Winkler, Sheila Bair, US Treasury Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). FDIC Bill Attempt To Bypass TARP battleFrom The Wall Street Journal:MARCH 7, 2009 FDIC Bill Dodges a New TARP Fight Wall Street Journal By DAMIAN PALETTA WASHINGTON A three-page bill designed to bolster the Federal Deposit Insurance Corp. could let the Obama administration sidestep a huge political problem: securing more financial firepower without opening a debate over the Troubled Asset Relief Program. The legislation, introduced late Thursday by Senate Banking Committee Chairman Christopher Dodd, would temporarily allow the FDIC to borrow $500 billion to replenish the fund it uses to guarantee bank deposits, if the Federal Reserve and Treasury Department concur. Those funds would be distinct from the contentious $700 billion financial-sector bailout, which lawmakers are loathe to expand. The FDIC can presently only borrow $30 billion from Treasury. The bill would permanently raise that level to $100 billion, which the FDIC could tap without prior approval from the Fed and Treasury. Mr. Dodd, a Connecticut Democrat, already has four Republican co-sponsors for the bill and it could quickly gain momentum, in part because of strong backing by community bankers. Read the rest of the article Labels: bailout, Christopher Dodd, FDIC, financial crisis, Sheila Bair, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Investors Can't Bank on CapitalInteresting commentary from Bloomberg; hat-tip to Larry P.Commentary by David Reilly (Bloomberg) Jan. 28—Sheila Bair shouldn't try to jawbone these markets. The head of the Federal Deposit Insurance Corp. declared during a television interview last week that "98 percent of all banks are well capitalized." Technically, she is right, since regulatory capital is different from shareholder equity. Still, that's a nuance lost on most of the public and one that doesn't adequately reflect just how bad things are at banks. Even as Bair was speaking, debate was brewing in government circles over the possibility of having to nationalize banks. It doesn't get much bleaker than that. Bair needed to reflect in her comments more of a sense that all isn't well, even if in language that didn't panic investors or cause a bank run. That may sound like semantics. It isn't. In July 2008, then-Treasury Secretary Henry Paulson and other government officials reassured the public that Fannie Mae and Freddie Mac had adequate regulatory capital. Plenty of mom-and-pop investors took those declarations to heart and held onto their stock in the mortgage giants. About six weeks later, those same investors got whacked when Paulson placed Fannie and Freddie under government control. Even if the outcome isn't as grim this time around, Bair's talk of banks being well-capitalized runs the risk of lulling investors. She may also have underscored what many investors consider to be the inadequacy of capital measures and the need for changes to these measures. Capital Overstatement Consider Tier 1 ratios, a key regulatory measure of a bank's financial strength that compares Tier 1 capital to so-called risk-weighted assets. Banks must have a Tier 1 ratio of 4 percent to be adequately capitalized and a ratio of 6 percent to be considered well-capitalized. At the end of last year, Citigroup Inc. had a Tier 1 ratio of 11.8 percent and Bank of America Corp.'s was 9.15 percent. Yet both have needed huge amounts of government support. Why doesn't this distress show up in the Tier 1 ratios? Because Tier 1 capital can contain what investors now consider fluff. "The definition of capital for the banking world has been confused over the last 20 years as the government regulatory bodies have counted various long-term funding sources as capital," Paul Miller, a bank analyst at Friedman, Billings, Ramsey & Co., wrote in a Dec. 3 research report. Debt in Disguise Preferred stock is an example. Normally preferred stock wouldn't be such a concern since it is typically only a small portion of a bank's total equity. At the end of 2007, for example, Citi didn't have any preferred stock outstanding. That's no longer the case. The government has taken $52 billion of preferred stock in Citigroup. This is more than two times the bank's tangible common equity and about three times its market capitalization. That is troubling because the government preferred, while offering a lifeline, isn't capital in the traditional sense. The dividend on the preferred increases after five years, meaning banks that received this assistance will eventually have to buy out the government. That makes the government preferred more akin to debt. "That's the problem. It's a loan and they're calling it Tier 1, but the market doesn't think it's Tier 1," said Chris Senyek, tax and accounting analyst at research firm ISI Group. "They couldn't issue five-year paper to private investors and get that to be counted as Tier 1 capital." Deferred Assets Besides preferred stock, banks also count in their Tier 1 capital certain hybrid securities that have equity-like characteristics but actually are debt. These accounted for $18.4 billion of BofA's $100.3 billion in Tier 1 capital at the end of the third quarter, the last period for which a detailed breakdown of regulatory capital is available. Losses on certain holdings, mostly mortgage-backed securities, that banks claim are temporary are excluded from Tier 1 capital. That has a flattering effect; Citigroup in the third quarter excluded $6.2 billion of such losses. Banks can also get credit in Tier 1 capital for a portion of what are called deferred-tax assets. These could one day be used as a tax offset. Their usefulness is far from certain, though, given banks' greatly reduced profitability. This makes these a pretty airy asset. All of this can leave Tier 1 measures looking fatter than metrics based on tangible common equity. No surprise, then, that investors are giving up on regulatory capital and turning to this measure, which takes common shareholder equity and subtracts goodwill and other intangible assets. Running Lean On that basis, many banks look a lot worse than their Tier 1 ratios suggest. According to an investment presentation made by Citi yesterday, a group of nine large banks (Citi included) had average tangible common equity ratios of 2.1 percent versus average Tier 1 ratios of 10.2 percent. Even worse, the 8.1 percentage-point difference between the two rates compares with a spread of just 5.3 percentage points in 2006, according to Citi. Those aren't the kind of figures that leave investors feeling warm and fuzzy about big banks, no matter what the FDIC's chairwoman says. (David Reilly is a Bloomberg News columnist. The opinions expressed are his own.) Labels: Bank of America, banking system, capitalization, Citigroup, FDIC, Sheila Bair Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A New US Option: An "Aggregator Bank"From The Wall Street Journal, a short excerpt from an interview with FDIC head Bair, and an excerpt and link to a longer Financial Times piece from yesterday on newer options being considered by policymakers, and the dire financial situation prompting such shifts.January 16, 2009, 6:05 pm WSJ Interview: FDIC's Bair Fleshes Out 'Aggregator Bank' Idea Federal Deposit Insurance Corp. Chairman Sheila Bair spoke with The Wall Street Journal's Damian Paletta about some of the options regulators are considering to target the assets weighing down banks. WSJ: There has been some discussion about the federal government creating an "aggregator bank," which would be a facility that could buy troubled assets from financial institutions. How would it work? Ms. Bair: The idea here is that the aggregator bank would buy the assets at fair value. Some are concerned that you'd have to mark the assets down to purchase them, but I think it could help provide some rational pricing, actually, for the market in some of these assets because we don't have really any rational pricing right now for some of these asset categories. The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds. Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion. If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank. So that would be an additional cushion against loss. With a combination of private equity contributions plus tarp capital, I think you could leverage that into some fairly significant volume to purchase assets. WSJ: What would the aggregator bank do with the assets? Ms. Bair: The aggregator bank could use multiple tools. It might want to hold some of the assets. It might make sense to just hold them for a while. You might want to securitize some of them. You could do a covered bond issue. I think there are lot of different strategies that could be used to get these assets back into the market. WSJ: Why do regulators think it's important to do address the assets? Ms. Bair: I think everybody agrees it's important to provide some troubled asset relief, because I think it's key to getting private equity capital back into banks. They need to have some certainty about what the tail risk is on some of these assets. By doing the insurance wrap or providing a bank to just get them off the balance sheet complete, I think that would help us get some private capital back into banks. WSJ: What is the status of talks? Are they at a hypothetical stage? Ms. Bair: It's beyond hypothetical. I think all of the agencies are committed to coming up with a program for troubled asset relief. We're vetting the various different structures, the pros and cons of those. I think we would all like to have something in place in the not too distant future. I'm hoping the decision making on it would be fairly quick. It has been discussed for some time. So I think we are nearing the point to make a decision. But it's complicated. We want to make sure we get it right. from the Financial Times Governments eye new tools for credit crisis By Peter Thal Larsen Financial Times Published: January 16 2009 20:11 | Last updated: January 16 2009 20:11 When governments in Europe and the US unveiled co-ordinated bail-outs of their banking industries last October, politicians and regulators rightly believed they had narrowly avoided a collapse of confidence of the financial system. But this week it became clear governments will have to take on even more risk from the private sector if they are to restore the flow of credit to the economy. Citigroup's $8bn loss for the fourth quarter offers a vivid illustration of how the government bail-outs have failed to stabilise flailing markets and a deteriorating economy that continues to undermine the value of banks' assets. The US government's decision, finalised late on Thursday, to insure Bank of America against "unusually large losses" on $118bn (89bn euros, 80bn pounds) of loans on its balance sheet underscores the sheer scale of the commitments taxpayers are being forced to make to shore up confidence. If government intervention were limited to mopping up the residual mess left over from last year, this would represent little more than a minor headache. But the real problem facing policymakers is that, despite spending or committing hundreds of billions of dollars, the banking system is still not distributing credit to the economy. Consumers and companies are being starved of credit, raising the prospect of a continuing downward economic spiral. Read the rest of the article Labels: bailout, banking system, FDIC, financial crisis, Sheila Bair Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Movement on the Bailout FrontThis could be pretty big news. From Reuters:Bair says FDIC's powers could extend to insurers Wed Oct 29, 2008 11:34am EDT By Karey Wutkowski WASHINGTON (Reuters) - The Federal Deposit Insurance Corp's powers could be expanded if Congress decides to shift insurance companies from state regulation to federal regulation, FDIC Chairman Sheila Bair said on Wednesday. The FDIC could start providing guarantees for insurance companies, much like it already guarantees the deposits of most U.S. banks, if the insurance industry comes under federal regulation, Bair said. Insurance companies are currently regulated by individual states. "Our authorities would be expanded," Bair said at the annual conference of the International Association of Deposit Insurers. Read the rest of the article Many people know about this already, but remember the pressure on the automakers. They want to get a (subsidized) deal done before the election next week, so an incoming government won't be able to tamper with it. But the deal is so complex it'll be extremely difficult to pull off. Sounds a bit like Bear Stearns, but in the non-financial, real-economy sector. From the Financial Times: GM and Cerberus race to finalise Chrysler deal By Bernard Simon in Toronto, Julie MacIntosh in New York James Politi in Washington, John Reed in London. Tuesday Oct 28 2008 19:20 General Motors (NYSE:GM) and Cerberus Capital Management are racing to finalise a deal for the carmaker to acquire the private equity group's stake in Chrysler before next week's US election. While many motor industry experts question the benefits of a tie-up between Detroit's number one and number three carmakers, they increasingly recognise that the companies have few other options. Both are bleeding cash and in danger of running out of liquidity some time next year as sales fall in their core US market. Read the rest of the article Labels: Cerberus Capital Management, Chrysler, FDIC, financial crisis bailout, GM, Sheila Bair Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
