Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. Move Your MoneyThis is from the Feb. 1st issue of The Nation; here's the link to the Move Your Money campaign, which Arianna Huffington and Rob Johnson of the Roosevelt Institute started. It sounds like a worthy campaign; if I had any savings I would move them (except I have never given the big banks my business, at least when I've been able to avoid it).Are you angry about Wall Street's reckless excesses? Are you disappointed with President Obama's limp approach to reform? You can change this, acting individually and collectively. Withdraw your deposit and savings accounts from the large banks that brought the system to ruin and were subsequently rescued with billions in government bailouts. Put your money instead in smaller, safer banks or credit unions closer to home--the thousands of community institutions that do not harvest their profits from greed and recklessness. "Move Your Money" is an electrifying slogan that's lighting up the Internet because it shows people how they can push back against the big dogs of banking. The concept is simple, but this is a big idea that could alter the timid direction of financial reform. This campaign is potentially more than a feel-good gesture. If coordinated with institutional reform efforts, it could lead to a broad rebellion against the financial system, with citizens reclaiming the power to act directly when politicians are too intimidated by moneyed interests to act in the public interest. Economist Jane D'Arista put it crisply: "We are not a nation of widows and orphans. We have quite a lot of money, and people control some of it. They might ask why they don't control more of it." The campaign was launched just before New Year's Eve by Arianna Huffington of the Huffington Post and Rob Johnson of the Roosevelt Institute. An influential bank-rating firm, Institutional Risk Analytics, donated a website window (moveyourmoney.info/find-a-bank), where citizens can find banks in their ZIP code that IRA certifies as safe and sound. In the first forty-eight hours more than 100,000 responded with inquiries. Within a week, people had searched for good banks in 16,631 ZIP codes--nearly 40 percent of the nation. The search tool is now getting 45,000 users a day. Naturally, the corporate media promptly assured readers that "ordinary Americans lack the power to hurt the big banks," as a Washington Post headline put it. Wrong. The cynics either do not understand banking or misunderstand the widespread public anger. Dennis Santiago, IRA's CEO and managing director, explained that banks compete fiercely for the "core deposits" provided by individual and small business accounts--this stable money is their preferred base for profitable lending. Take away core deposits, and bankers feel immediate balance-sheet stress. Expand the account base for community banks, and they gain greater stability and greater lending power. "Will moving your money have an effect?" Santiago asked. "And by effect, I don't mean making a momentary political statement. I mean making a structural difference to the country's financial system. The answer is yes." Structural change ought to be the primary goal of financial reform--breaking up the concentrated power held by mega-banks and creating a balanced system of smaller, more diverse lending institutions that thrive by serving local credit needs. Alas, the Obama administration and Congress are pursuing the opposite goal--rescuing the behemoths that failed and encouraging even greater financial concentration. This will lead to more reckless adventures, more "too big to fail" bailouts. "Move Your Money" is an important model for teaching people how to change a dysfunctional system. The same principle of taking control of your own money is at work in related reform movements. A campaign launched by faith-based community organizations associated with the Industrial Areas Foundation identifies sky-high interest rates on credit cards and other lending as the ancient sin of usury. IAF groups are asking churches, foundations and local governments to withdraw funds from the usurious banks that profit by destroying borrowers. Organized labor, likewise, has launched an aggressive movement to insist on responsible investing values for the pension-fund wealth of working people, urging state treasurers and fund managers to invest for society's interests as well as good returns. Changing the nature of finance capitalism is a long road, to be sure, and the industry will resist change every step of the way. But the fight begins in earnest when people decide to move their money. Labels: Arianna Huffington, Bank of America, banking industry, banking system, Move Your Money, Too Big to Fail Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). On Shrinking the CityTwo FT pieces today on regulating international finance. The first covers some rather remarkable statements by the head of Britain's Financial Services Authority (the regulator of financial services in the UK) on the place of the City of London in the UK's economy. Lord Turner, the head of the FSA, says nothing less than that the FSA should "be very, very wary of seeing the competitiveness of London as a major aim", and that the city's financial sector has become a destabilising factor in the British economy. It also says that the FSA is looking at a Tobin Tax to curb the excesses of global finance.In the second piece, columnist Gillian Tett continues her thoughts from last week on regulating global finance by assessing the cogency of the Tobin tax. Labels: Adair Turner, banking system, City of London, financial regulation, FSA, Gillian Tett, James Tobin, Tobin tax 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!). Gillian Tett on Corporate TransparencyAs ususal, Tett does a great job. The ending is key. From The Financial Times:Idea of 'living wills' is likely to die quiet deathBy Gillian Tett Financial Times Published: August 13 2009 19:50 | Last updated: August 13 2009 19:50 Preparing a will is usually an emotionally charged experience. After all, no one really wants to ponder their demise when they are in the prime of health. Nor is it pleasant to spell out difficult issues such as how to divide up all the family silver--or not. But could the lessons learnt from preparing for death prove useful for the modern banking world? Some western regulators are tossing the idea about. In recent months Treasury officials in Washington have been scurrying to create a so-called "resolution" regime, which would make it easier to wind up large banks if they fell into a crisis. The British Treasury and central bank have gone further by suggesting that banks should be forced to write "living wills" as part of a resolution system. These documents would in essence force banks to stipulate in advance how their operations could be wound down in a crisis and how their assets might be distributed, in the hope that such clarity might help to avoid a replay of the type of panic that erupted when Lehman Brothers collapsed last autumn. What spooked regulators and investors at the end of last year was not just the bank's collapse, but the fact that it was unclear where Lehman’s assets lay, or who could claim them. Thus, by injecting more transparency--and forethought--into corporate structures, another panic might be averted, or so the argument goes. Read the rest of the article Labels: banking system, corporate transparency, financial regulation, Gillian Tett, shadow banking system Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Widening Fair Market Value GapFrom Bloomberg:Next Bubble to Burst Is Banks’ Big Loan Values: Jonathan Weil Aug. 13 (Bloomberg) It’s amazing what a little sunshine can accomplish. Check out the footnotes to Regions Financial Corp.'s latest quarterly report, and you’ll see a remarkable disclosure. There, in an easy-to-read chart, the company divulged that the loans on its books as of June 30 were worth $22.8 billion less than what its balance sheet said. The Birmingham, Alabama-based bank’s shareholder equity, by comparison, was just $18.7 billion. So, if it weren’t for the inflated loan values, Regions' equity would be less than zero. Meanwhile, the government continues to classify Regions as "well capitalized." While disclosures of this sort aren't new, their frequency is. This summer's round of interim financial reports marked the first time U.S. companies had to publish the fair market values of all their financial instruments on a quarterly basis. Before, such disclosures had been required only annually under the Financial Accounting Standards Board’s rules. The timing of the revelations is uncanny. Last month, in a move that has the banking lobby fuming, the FASB said it would proceed with a plan to expand the use of fair-value accounting for financial instruments. In short, all financial assets and most financial liabilities would have to be recorded at market values on the balance sheet each quarter, although not all fluctuations in their values would count in net income. A formal proposal could be released by year's end. Read the rest of the article Labels: bailout, banking system, Fair Value Accounting, FASB standards, financial crisis, market value, profits Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). 4 Must Reads on China's Problematic StimulusWith vast sums committed to bank recapitalization and our own stimulus programs in the West, the pivotal role of China in the recovery of the global economy, such as it is, from the depths plumbed last autumn (and again this March) tends to be overlooked somewhat. But China's truly massive programs, which far outpace ours in terms of percentages of GDP, are full of desperate gambles and contradictions that these four articles document.First, from The Financial Times' John Authurs, Next, a piece on Beijing's dollar conundrum and strategy. Third, Michael Pettis on how lower US debt-fueled consumption will force China into a significantly lower growth trajectory. Finally, Reuters on China's hidden debts. Labels: bailout, banking system, China, financial crisis, monetary pilicy, Trade Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bearish Roach Losing China Stimulus OptimismFrom The Financial Times:I've been an optimist on China. But I'm starting to worry Financial Times By Stephen Roach Published: July 29 2009 03:00 | Last updated: July 29 2009 03:00 On the surface, China appears to be leading the world from recession to recovery. After coming to a virtual standstill in late 2008, at least as measured quarter-to-quarter, economic growth accelerated sharply in spring 2009. A back-of-the envelope calculation suggests China may have accounted for as much as 2 percentage points of annualised growth in inflation-adjusted world output in the second quarter of 2009. With contractions moderating elsewhere, China's rebound may have been enough in and of itself to allow global gross domestic product to eke out a small positive gain for the first time since last summer. That's the good news. The bad news is that China's recent growth spurt comes at a steep price. Fearful that its recent economic short-fall would deepen, Chinese policymakers have opted for quantity over quality in setting macro-strategy, the centrepiece of which is an enormous surge in infrastructure spending funded by a burst of bank lending. Sure, developing nations always need more infrastructure. But China has taken this to extremes. Infrastructure expenditure (including Sichuan earthquake reconstruction) accounts for fully 72 per cent of China's recently enacted Rmb4,000bn ($585bn) stimulus. The government urged the banks to step up and fund the package. And they did. In the first six months of 2009, bank loans totalled Rmb7,400bn--three times the pace in the first half of 2008 and the strongest six-month lending surge on record. Read the rest of the article Labels: bailout, banking system, China, Emerging markets, financial crisis, infrastructure Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). New Bank Scam: Buy Discount TARP WarrantsThe federal panel investigating the TARP bank bailout has announced that nearly a dozen banks have been buying back government-issued warrants at a steep discount from their face value. Banks that received emergency government funding were required to give the government warrants to purchase the company's stock at a certain price in the future. The banks are now buying back these warrants at only two-thirds of their face value. So far, the transactions have resulted in a loss of $10 million in revenue to taxpayers.Some on the panel are considering a proposal to mandate the sale of the warrants on the open market to maximize the benefit to taxpayers. Link to story in the Wall Street Journal. Labels: baillout, banking industry, banking system, TARP program Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). If You Liked CDOs, You'll Love CLOs...From the Financial Times:Night of zombie company looms as debt burden remains large By Anousha Sakoui Financial Times Published: July 2 2009 20:50 | Last updated: July 2 2009 20:50 Third time lucky is a phrase often quoted by bankers who believe it takes several debt restructurings to get a company's balance sheet right. The phrase is even more relevant today amid growing concerns that debt restructurings are leaving companies saddled with too much debt, even at the end of the process. Part of the blame has been laid at the feet of capital-constrained banks which have been reluctant to write down the debt because it could create losses that would further weaken their balance sheets. Debt and bankruptcy specialists warn that trend risks creating a new breed of zombie companies--those which survive simply to repay their debts but cannot move forward because their debts remain so large. An even greater problem is posed by collateralised loan obligations--complex funds that pooled loans and at the height of the credit bubble were buying up to 60 per cent of leveraged loans. Read the rest of the article Labels: bailout, banking system, bankruptcy, collateralized loan obligations, derivatives, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Behind Banks' Credit Card MovesAnother FT article goes deeper into the increasing danger credit cards are putting banks into, and what they're doing about it. Some scary stuff here.Record credit card losses force banks into action By Saskia Scholtes in New York Financial Times Published: July 1 2009 03:00 | Last updated: July 1 2009 03:00 Losses on US credit cards hit a record 10.44 per cent in June, squeezing profit margins for credit card securitisations to a 10-year low, according to Fitch Ratings. Profits from off-balance sheet vehicles backed by credit loans in June fell below the 5 per cent threshold for the first time since November 1998, said Fitch. Credit card securitisations have built-in triggers that force early repayment when profits fall below zero. Such triggers are designed to protect investors from prolonged exposure to bad credit card loans. Rising losses on credit cards have in recent months pushed US banks to come to the rescue of the off-balance sheet vehicles they use to transform hundreds of billions of dollars of consumer loans into securities sold to investors. Banks have also raised interest rates on credit cards to counter rising borrower defaults, late payments and boost profitability, underlining how the deteriorating health of US consumers is opening new fronts in the financial crisis. Read the rest of the article Labels: bailout, banking system, Credit card industry, financial crisis, securitization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). More Speculation on Demise of the PPIPFrom Wall Street Pit:Financial Crisis: The Two Sides of the Balance Sheet Wall Street Pit By James Kwak|Jun 30, 2009 Noam Scheiber at The New Republic has the inside scoop (hat tip Ezra Klein) on why Treasury is letting the Public-Private Investment Program die a quiet death (although at this point the legacy securities component may still go ahead). In short, the argument is that the point of PPIP was to help banks raise capital by cleaning up their balance sheets; since they have been able to raise capital themselves, there is no need for PPIP. According to one person Scheiber spoke to: "If you had asked–I don't want to speak for the secretary–what's problem number one? I think he'd say capital. Problem two? Capital. Problem three? Capital." This represents the latest swing of the pendulum between the two sides of the balance sheet. As anyone still reading about the financial crisis is probably aware, a balance sheet has two sides. On the left there are assets; on the right there are liabilities and equity; equity = assets minus liabilities. (There are different definitions of capital, depending on what subset of equity you use.) The goal has always been to provide confidence that there is enough capital to withstand the impact of market and economic turmoil--in particular, its impact on the toxic assets that litter banks’ balance sheets. However, there are two alternative approaches to doing this. One is to add more equity to the right side by issuing new stock (preferred or common). (This would add cash to the left side to keep them in balance.) The other is to reduce the uncertainty of the left (asset) side by helping banks sell toxic assets; even if the banks have to sell them for a little less cash than their current balance sheet value, this would have the salutary effect of reducing vulnerability, since cash does not lose value (at least not in an accounting sense). Alternatively, you could achieve the same effect by insuring the value of the assets while leaving them on bank balance sheets, because then the risk transfers to the insurer. Read the rest of the post Labels: bailout, banking system, Federal Reserve, financial crisis, PPiP Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). WSJ: Why Cleaning Banks' Books Is So HardIt was almost impossible to get this without being a subscriber, so I'm reproducing it in full (here's the link to the article, which has accompanying charts:JUNE 30, 2009 Wall Street Journal Wary Banks Hobble Toxic-Asset Plan By DAVID ENRICH, LIZ RAPPAPORT and JENNY STRASBURG The government's plan to enable banks to dump troubled assets is facing troubles of its own. Markets initially rallied when Treasury Secretary Timothy Geithner announced in March a two-pronged plan to offer favorable government financing to entice investors to buy bad loans and toxic securities from banks. But that initiative--called the Public-Private Investment Program, or PPIP--has lost momentum. Big banks worried about having to sell at fire-sale prices while small banks feared they would be shut out. Potential buyers balked at the risk of doing business with the government, concerned that politicians might demonize them for making big profits. The program's problems threaten to stymie efforts by struggling smaller banks, in particular, to clean up their balance sheets. That in turn could hinder efforts to revive the nation's economy. A look at why the program has stumbled underscores how difficult it has been to solve one of the economy's biggest problems: Mountains of bad debt sitting on the books of the nation's banks. As those loans and securities lose value, they are saddling the banks with losses and constricting their ability to lend. U.S. officials and investors are playing down expectations for the plan--originally billed as a $1 trillion endeavor. Some federal officials say the banking environment has improved since the program was unveiled. They assert that because a dozen or so big banks recently succeeded in raising capital, they are under less pressure to sell bad assets. Early this month, the Federal Deposit Insurance Corp. essentially shelved one arm of PPIP--the government-financed buying of bad bank loans. Mr. Geithner recently said the other part--to facilitate the buying from banks of troubled securities, many backed by real-estate loans--could be scaled back because investors are "reluctant to participate." This week, the government is expected to name investment firms to manage this securities-buying portion. "The fits and starts on all this stuff has added to the uncertainty that makes [investors] stay on the sidelines," says Trabo Reed, the deputy banking superintendent in Alabama, where many small and midsize banks are looking for cash infusions from investors. Lee Sachs, counselor to the Treasury secretary, says the department remains committed to the program and has received more than 100 applications from would-be investment managers. "One of the goals of the PPIP program has been to help create liquidity in frozen markets," he says. "Some banks will sell assets. Even those that do not will benefit from the greater ability to value the assets they hold." The slimmed-down program will focus not on bad loans, but on toxic securities, which are a problem for a relatively small fraction of the nation's banks. That is bad news for hundreds of smaller banks burdened with growing piles of defaulted loans. These banks are less able to tap capital markets than their larger rivals, so they have been eager for U.S. help unloading loans as a way to bolster their capital cushions. Many of them can face big problems if just one or two large loans go bad. Seventy banks, most of them community institutions, have failed since the start of last year. Analysts are bracing for hundreds of lenders to collapse in the next few years. Because these lenders often play key roles supporting their local economies, taken together, they are important to the financial system and to a U.S. economic recovery, says Kenneth Segal, senior vice president at Howe Barnes Hoefer & Arnett Inc., an advisory firm for small and midsize lenders. During the last banking crisis, nearly two decades ago, the government established the Resolution Trust Corp. to sell off the bad loans and securities of banks that had failed. Many experts credit the RTC with helping defuse that crisis. This time around, efforts to rid banks of soured assets have sputtered repeatedly. In late 2007, federal officials helped cobble together a plan for a bank-financed fund to buy securities held by bank investment funds, but the effort was aborted. In 2008, the Bush administration established a $700 billion program to buy banks' soured assets. Partly because of the complexity of valuing those assets, the U.S. abandoned that plan, instead opting to directly pump taxpayer money into banks. Scott Romanoff, a Goldman Sachs Group Inc. managing director, has referred to the current effort, PPIP, as "the greatest program that never occurred," because it "created confidence in the markets so banks can raise equity capital." In recent weeks, markets have lost some vigor amid renewed concerns about the economy. That could make it more difficult for big banks to raise additional capital. Banks also could face further losses as bad assets decline more in value. On March 23, when Mr. Geithner unveiled PPIP, the Dow Jones Industrial Average surged nearly 500 points, or 7%, its biggest gain since October, on hopes that the program would nurse the banking industry back to health. Many bank executives were skeptical about whether the program could succeed. Even before it was announced, some had grumbled that federal officials weren't consulting them, and instead were crafting the initiative with input from would-be investors. Some banking executives say they warned that they would be loath to sell at the kind of prices investors were likely to demand. Executives at Citigroup Inc. shared those concerns, according to people familiar with the matter. While the New York bank was sitting on at least $300 billion of risky loans and securities, selling them at discounted prices would require painful hits to its already thin capital ratios, these people say. Some Citigroup executives had a different idea: Maybe they could turn a profit by bidding on their own toxic assets at discounted prices, using government financing, according to the people familiar with the talks. Other big banks also talked about setting up distressed-asset units to snap up troubled loans and securities, including from their parent companies, with taxpayer financing. FDIC Chairman Sheila Bair later publicly shot down the idea. Citigroup declined to comment. Meanwhile, many small-town bankers hoped the program would help them unload the bad assets--generally loans to finance commercial real-estate projects--that were hurting their balance sheets. Some potential buyers had surfaced before PPIP was announced, but they were offering such low prices that few banks could afford to sell the loans without severely denting their capital cushions. The hope was that PPIP would help narrow the gap between buyers and sellers. Investors would be able to bid more because the government would offer buyers little-money-down financing, along with some downside protection. "We have illiquid assets," says Patrick Patrick, chief executive of Towne Bancorp of Mesa, Ariz. "It would be helpful to have a vehicle where you could sell them at market and be able to restructure our balance sheet." Like many small banks, Towne Bancorp has been hurt by a handful of loans to finance real-estate projects that went belly up. In the first quarter, the bank said two souring commercial real-estate loans caused its portfolio of loans at least 90 days past due to swell by 52%. Such loans represent more than 22% of Towne Bancorp's $143 million in assets. The company has been trying for months to sell 19 pieces of real estate--including undeveloped land and a warehouse--that it seized when loans went into default. When PPIP was announced, big-name investors were intent on figuring out how to profit from it. Raymond Dalio of giant hedge-fund firm Bridgewater Associates, which oversees $72 billion in assets, initially expressed interest in participating. But within days, he was blasting it, saying buyers and sellers would have difficulty agreeing on pricing and fund managers that profited would be exposed to criticism from politicians. The way PPIP is set up "makes us not want to participate and it makes us question the breadth of interest that we will see in the program," he wrote to clients. Lawyers for hedge funds and private-equity investors warned clients about the risks of doing business with the government. The industry was unnerved by the restrictions placed on banks participating in another federal bailout program, the Troubled Asset Relief Program. Fund managers were also bothered by President Barack Obama's criticism of the hedge funds holding Chrysler LLC debt who had refused the government's buyout offers. In conference calls with bankers and investors, FDIC officials emphasized that PPIP was critically important to cleanse banks of their bad assets. "I think you know the stakes are very high with this," Ms. Bair, the FDIC chairman, said during a March 26 call, according to a transcript. "We need this program to work." Ms. Bair and her deputies encountered skepticism. In an April 9 conference call with the FDIC, Mark Wolf of TRI Investments LLC, described his Carlsbad, Calif., firm as a potential PPIP bidder. "Unless you've got a process that either forces banks to sell or does a better job of encouraging them to sell, we're just going to see banks sitting back and dribbling these things out through an eyedropper over the course of time," he said. Some bankers were hesitant. "If these loans are bought at a discount, we create a hole in capital," Lou Akers, executive vice president of Adams National Bank in Washington, told FDIC officials on the March 26 call. He suggested that regulators consider changing the way they calculate banks' capital in order to cushion the blow. Government officials were noncommittal, a transcript of the call indicates. FDIC officials emphasized on the conference calls that PPIP was intended to benefit all banks, not just industry giants. But smaller banks began to worry they'd be locked out. To participate in PPIP, local lenders were told, they would have to pool their loans with other banks. The process, which the FDIC said it would facilitate, was designed to simplify the bidding process for government officials and prospective investors. The agency didn't want thousands of banks put their loan portfolios on the block separately. But the FDIC planned to require participating banks to kick in a minimum amount of assets, and some small-town bankers worried they wouldn't have enough to qualify. Too high a minimum "will virtually eliminate all community banks from being able to participate in this program," wrote Julian L. Fruhling, president of Legacy Bank in Scottsdale, Ariz., in a letter to the FDIC. Still, some investment firms that were hoping to help manage the government's program were optimistic. Laurence Fink, chief executive of BlackRock Inc., said in mid-April during a trip to Japan that if his firm is selected as a manager, it was ready to raise $5 billion to $7 billion to buy securities through PPIP. He said he hoped to raise money from individual investors in Japan and the U.S., and that potential returns could be as high as 20%. The FDIC and other regulatory agencies were planning to use their "stress tests" of the nation's top 19 banks to push them to sell assets via PPIP, according to people familiar with the matter. But in the weeks before the stress-test results were announced in May, market sentiment began to improve. A number of banks succeeded in raising capital by selling new shares to the public. Once the stress tests were wrapped up in May, even more banks sold shares--a total of roughly $65 billion within a month. The capital-raising removed regulators' leverage to encourage participation in PPIP, according to government officials. Around the same time, BlackRock reduced its goal for the size of its potential PPIP investment fund to about $1 billion, say people familiar with the matter. Earlier this month, the FDIC formally postponed the loan-buying portion of PPIP, called the Legacy Loan Program. "Banks have been able to raise capital without having to sell bad assets through the LLP, which reflects renewed investor confidence in our banking system," Ms. Bair said. Next month, the FDIC intends to use PPIP for a far narrower purpose: to auction loans the agency has seized from failed banks. Eventually, it hopes to resuscitate the loan-buying program so that smaller banks can benefit from it. But that could be tricky. The U.S. initially justified PPIP by invoking its "systemic risk" powers, which enable regulators to step in when the financial system is at risk. Regulators have debated whether such a justification would remain if the program were geared toward smaller banks. FDIC officials doubt they will muster the necessary consensus among regulators to invoke the special powers and keep the loan program alive, according to a person familiar with the matter. Many banking experts contend that the financial system won't fully stabilize until banks get rid of their bad assets. Mr. Segal, the bank adviser, complains that federal officials have cited recent capital raising by big banks as evidence that "the system is OK." That may be true "for the top 15 or 20 banks," he says. "But for everybody else, there really needs to be more attention paid." Labels: bailout, banking system, financial crisis, PPiP, toxic assets Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). How Striken Banks Are Making MoneyYou guessed it--fees. From Reuters:June 26th, 2009 Fee bonanza spells more trouble for banks Reuters By: Alexander Smith Alexander Smith is a Reuters columnist. The views expressed are his own Investment banks are going to have a lot of explaining to do. After the lows of 2008, and despite the mauling they've had from politicians and the public, 2009 is going to be a bumper year for those that lived to tell the tale. The banks have pocketed an incredible $16 billion in fees in the second quarter, according to Thomson Reuters first half data on deals and fee income, released on Friday. True, this is down from Q2 2008, when fees were almost $24 billion. But it should not come as a surprise to anyone who has been watching--often in disbelief--the huge amount of capital raising that has been going on in both the equity and bond markets. Take the bond markets, where total first-half issuance--excluding financials--has already reached $598 billion, outstripping previous records for an entire year. If anyone pretends it has been tough selling these bonds, don't believe them. The sales teams have been pushing at an open door, with fund managers buying anything they could get their hands on. The fees are good and so far this year, the risk has been limited. The ones to suffer have been the loan desks, with syndicated lending hitting a 13-year low. But since this market has always been seen as a loss-leader to help sell other products, there are probably fewer tears being shed at the top of the banks involved. The real star of the show, however, has been equity capital markets. Traditionally the poor cousins to the sexier and higher profile "rainmakers" in mergers and acquisitions, ECM desks have raked in underwriting fees of $7.6 billion in Q2 alone, almost half the industry total. As with bond issues, lead managing or underwriting such deals does carry a risk, but so far this year that has been limited as shareholders have lapped up the rights issues. There's no denying that many companies badly needed capital and that the banks have the expertise to get these deals done. The question that will increasingly be asked is whether the fee structure can still be justified. True, rights issues can fail, as underwriters of the 4 billion pound offering by British bank HBOS last year no doubt recall. But with banks charging bigger fees and pricing offerings at larger discounts, the rewards currently outweigh the risks. One area of investment banking which is still in the doldrums is M&A, despite the best efforts of some of the brightest minds in the game to get dealmaking back on track. The Thomson Reuters data shows global M&A revenues declined for a third consecutive quarter, with fees on completed deals down some 66 percent on the same period last year at just $3 billion. M&A activity--measured by the value of deals done--is down almost 45 percent so far this year, the lowest figure since 2003 and the sharpest fall since 2001. Of course, it is possible that these big fees will be wiped out by continued losses on the toxic assets that some investment banks still have on their balance sheets. But for an industry that was teetering on the brink last autumn, investment banking appears in rude health. With a second backlash already beginning as salaries rise and bonuses come back into fashion, the big investment banks--particularly those which still owe taxpayers money or government shareholders--will need to make sure their lines are well rehearsed. At the time of publication Alexander Smith did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. Labels: baillout, banking system, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Biggest Banks Need $75 Billion MoreThe results of the "stress tests" are in.According to the results, the biggest banks need $75 billion in additional capital to ride out a "prolonged downturn" (as opposed to whatever it was we've just been through and all the money we've loaned out). The Washington Post has a handy chart here. The biggest potential losers are Bank of America, Wells Fargo, and GMAC. However, according to former banking regulator and S&L scandal prosecutor William Black, the tests are a "complete sham" that don't go nearly far enough. If they really tested banks properly they would show a collective hole of $2 Trillion (yes, capital "t"), and force banks to massively increase their capitalization rates. Read the article here and the interview here, as well as Black's amazing article for D&S way back from 2007. --d.f. Labels: bank stress testing, banking crisis, banking system, Daniel Fireside, stress tests, William Black, William K. Black Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Sen. Durbin: Bankers 'Own' CongressFrom Glenn Greenwald's blog at Salon.com; hat-tip to LF:Thursday April 30, 2009 05:35 EDT Top Senate Democrat: bankers "own" the U.S. Congress Sen. Dick Durbin, on a local Chicago radio station this week, blurted out an obvious truth about Congress that, despite being blindingly obvious, is rarely spoken: "And the banks -- hard to believe in a time when we're facing a banking crisis that many of the banks created -- are still the most powerful lobby on Capitol Hill. And they frankly own the place." The blunt acknowledgment that the same banks that caused the financial crisis "own" the U.S. Congress -- according to one of that institution's most powerful members -- demonstrates just how extreme this institutional corruption is. The ownership of the federal government by banks and other large corporations is effectuated in literally countless ways, none more effective than the endless and increasingly sleazy overlap between government and corporate officials. Here is just one random item this week announcing a couple of standard personnel moves: Former Barney Frank staffer now top Goldman Sachs lobbyist So: Paese went from Chairman Frank's office to be the top lobbyist at Goldman, and shortly before that, Goldman dispatched Paese's predecessor, close Tom Daschle associate Mark Patterson, to be Chief of Staff to Treasury Secretary Tim Geithner, himself a protege of former Goldman CEO Robert Rubin and a virtually wholly owned subsidiary of the banking industry. That's all part of what Desmond Lachman -- American Enterprise Institute fellow, former chief emerging market strategist at Salomon Smith Barney and top IMF official (no socialist he) -- recently described as "Goldman Sachs's seeming lock on high-level U.S. Treasury jobs." Meanwhile, the above-linked Huffington Post article which reported on Durbin's comments also notes Sen. Evan Bayh's previously-reported central role on behalf of the bankers in blocking legislation, hated by the banking industry, to allow bankruptcy judges to alter the terms of mortgages so that families can stay in their homes. Bayh is up for re-election in 2010, and here -- according to the indispensable Open Secrets site -- is Bayh's top donor: Goldman is also the top donor to Bayh over the course of his Congressional career, during which Bayh has received more than $4 million from the finance, insurance and real estate sectors. In a totally unrelated coincidence -- after the Government, as Matt Taibbi put it, enacted "a bailout program that has now figured three ways to funnel money to Goldman, Sachs"-- this is what happened earlier this month: Goldman reports $1.8 billion profit Nobody even tries to hide this any longer. The only way they could make it more blatant is if they hung a huge Goldman Sachs logo on the Capitol dome and then branded it onto the foreheads of leading members of Congress and executive branch officials. Of course, ownership of the government is not confined to Goldman or even to bankers generally; legislation in virtually every area is written by the lobbyists dispatched by the corporations that demand it, and its passage then ensured by "representatives" whose pockets are stuffed with money from those same corporations. Just as one example, as Jane Hamsher reported about Bayh: Bayh's little "lobbyist problem" is considered by many to be what tanked his Vice Presidential aspirations. His wife Susan earns about $837,000 a year serving on seven corporate boards, among them Wellpoint, a health insurance company for which Bayh helped secure a $24.7 million dollar grant. She's on the board of ETrade, even as Bayh is on the Senate Finance Committee. Meanwhile, the only citizen protests relating to this mass robbery are driven by anger at the government for treating bankers too harshly and unfairly -- one of the most classic manifestations of what Taibbi, in a separate piece, so aptly calls the "peasant mentality": After all, the reason the winger crowd can't find a way to be coherently angry right now is because this country has no healthy avenues for genuine populist outrage. It never has. The setup always goes the other way: when the excesses of business interests and their political proteges in Washington leave the regular guy broke and screwed, the response is always for the lower and middle classes to split down the middle and find reasons to get pissed off not at their greedy bosses but at each other. That's why even people like [Glenn] Beck's audience, who I'd wager are mostly lower-income people, can't imagine themselves protesting against the Wall Street barons who in actuality are the ones who fucked them over. . . . One might think it would be a big news story for the second most-powerful member of the U.S. Senate to baldly state that the Congress is "owned" by the bankers who spawned the financial crisis and continue to dictate the government's actions. But it won't be. The leading members of the media work for the very corporations that benefit most from this process. Establishment journalists are integral and well-rewarded members of the same system and thus cannot and will not see it as inherently corrupt (instead, as Newsweek's Evan Thomas said, their role, as "members of the ruling class," is to "prop up the existing order," "protect traditional institutions" and "safeguard the status quo"). That Congress is fully owned and controlled by a tiny sliver of narrow, oligarchical, deeply corrupted interests is simultaneously so obvious yet so demonized (only Unserious Shrill Fringe radicals, such as the IMF's former chief economist, use that sort of language) that even Durbin's explicit admission will be largely ignored. Even that extreme of a confession (Durbin elaborated on it with Ed Schultz last night) hardly causes a ripple. Read the full post (I may have missed some his links, too). Labels: banking system, barney frank, Glenn Greenwald, Richard Durbin, U.S. Congress, U.S. Senate Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Cram Down Those Loans!Senate Democrats are negotiating with banking industry lobbyists on legislation that would allow for bankruptcy judges to "cram down" (or rewrite) mortgage loans. Judges currently have the authority to do this for mortgages on second homes, yachts, and luxury automobiles, but not for primary residences.Bank lobbyists (whose salaries are paid by banks receiving billions in taxpayer bailout funds) are hoping that Senate Republicans can either stop the bill outright or force limits on who would be covered by the bill, as well as a time limit (or sunset period). The House passed a version earlier this month. Advocates for troubled homeowners are pushing for legislation that would allow bankruptcy judges the authority to change the terms of interest rates and loan principle to reflect current market rates. This would help stop the flood of houses going into foreclosure, maintain value for the banks, and prevent neighborhoods from being overwhelmed with vacant properties. The bill would not only benefit homeowners who are able to convince judges that they have the means and will to pay a mortgage brought down to reflect the current value of their homes, but also renters -- a group that represents 40% of all people at risk of eviction because of foreclosure. Banks had no qualms about extending loans on overvalued properties in good times (and then leveraging them many times over in credit default swaps and other derivatives). Their current policy is to foreclose, evict everyone, and let the government deal with the resulting mess of abandoned property and growing homelessness. Even those current on their mortgages lose out as their property values continue to plummet amid the glut of bank-owned properties on the market. With profits rising thanks to government handouts, why should banks be allowed to duck their share of responsibility for the mortgage mess? --df Labels: banking crisis, banking system, Daniel Fireside, derivatives, lobbyists, mortgage backed securities, mortgage meltdown, Renters Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Skyrocketing ForeclosuresBanks have ended their voluntary halts on foreclosures, sending foreclosure rates skyrocketing 24% in the first three months of 2009.From the wires: Nationwide, nearly 804,000 homes received at least one foreclosure-related notice from January through March, up from about 650,000 in the same time period a year earlier, according to RealtyTrac Inc., a foreclosure listing firm. During the quarter, Ohio was the state with the seventh highest number of homes seeing foreclosure activity with about 31,600 receiving at least one filing, up 1 percent from a year earlier. Labels: banking system, financial crisis bailout, foreclosures Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). U.S. Seeks Expanded Power to Seize FirmsFrom the Washington Post. The plot thickens. Sure sounds to me like they're thinking Geithner's plan won't work and they'll have to nationalize after all. The "we've got to move quickly" line (2nd-to-last paragraph) is getting a little old.U.S. Seeks Expanded Power to Seize Firms Goal Is to Limit Risk to Broader Economy By Binyamin Appelbaum and David Cho Washington Post Staff Writers Tuesday, March 24, 2009; A01 The Obama administration is considering asking Congress to give the Treasury secretary unprecedented powers to initiate the seizure of non-bank financial companies, such as large insurers, investment firms and hedge funds, whose collapse would damage the broader economy, according to an administration document. The government at present has the authority to seize only banks. Giving the Treasury secretary authority over a broader range of companies would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president's Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators, according to the document. The administration plans to send legislation to Capitol Hill this week. Sources cautioned that the details, including the Treasury's role, are still in flux. Treasury Secretary Timothy F. Geithner is set to argue for the new powers at a hearing today on Capitol Hill about the furor over bonuses paid to executives at American International Group, which the government has propped up with about $180 billion in federal aid. Administration officials have said that the proposed authority would have allowed them to seize AIG last fall and wind down its operations at less cost to taxpayers. The administration's proposal contains two pieces. First, it would empower a government agency to take on the new role of systemic risk regulator with broad oversight of any and all financial firms whose failure could disrupt the broader economy. The Federal Reserve is widely considered to be the leading candidate for this assignment. But some critics warn that this could conflict with the Fed's other responsibilities, particularly its control over monetary policy. The government also would assume the authority to seize such firms if they totter toward failure. Besides seizing a company outright, the document states, the Treasury Secretary could use a range of tools to prevent its collapse, such as guaranteeing losses, buying assets or taking a partial ownership stake. Such authority also would allow the government to break contracts, such as the agreements to pay $165 million in bonuses to employees of AIG's most troubled unit. The Treasury secretary could act only after consulting with the president and getting a recommendation from two-thirds of the Federal Reserve Board, according to the plan. Geithner plans to lay out the administration's broader strategy for overhauling financial regulation at another hearing on Thursday. The authority to seize non-bank financial firms has emerged as a priority for the administration after the failure of investment house Lehman Brothers, which was not a traditional bank, and the troubled rescue of AIG. "We're very late in doing this, but we've got to move quickly to try and do this because, again, it's a necessary thing for any government to have a broader range of tools for dealing with these kinds of things, so you can protect the economy from the kind of risks posed by institutions that get to the point where they're systemic," Geithner said last night at a forum held by the Wall Street Journal. The powers would parallel the government's existing authority over banks, which are exercised by banking regulatory agencies in conjunction with the Federal Deposit Insurance Corp. Geithner has cited that structure as the model for the government's plans. Labels: bailout, banking system, financial crisis, Timothy Geithner Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). US and UK Increase Stakes in BanksFrom Reuters, again:Governments tighten grip on banksFri Feb 27, 2009 11:55am EST Reuters By Steven C. JohnsonNEW YORK (Reuters) Governments on both sides of the Atlantic moved to tighten their grip over banks on Friday to stem a financial crisis that has pushed the U.S. economy into its deepest contraction in more than a quarter century. U.S. stocks sank to a 12-year low after Washington struck a deal in which it could end up with more than a third of crisis-hit Citigroup. The World Bank and other development banks launched a $32 billion lending plan to help east European banks and businesses survive a deepening recession. Citigroup (C.N) shares tumbled some 30 percent after the U.S. Treasury struck a deal to convert $25 billion of its preferred stock to common shares, which could give it a stake of up to 36 percent in the bank by diluting existing investors. While the government will not add to the $45 billion it has already invested in what was once the world's largest bank, the stock conversion will shore up the most conservative gauge of the bank's health. The U.S. government is struggling to shore up its banks as part of its approach to restoring growth. Data showed the U.S. economy shrank a staggering 6.2 percent in the last three months of 2008, its biggest slide since the first quarter of 1982, as exports fell and consumers cut spending. "The fear is the government having a big stake in the company will create obstacles for Citigroup to be competitive, and there remain questions about the viability of the financial system," said Tim Ghriskey, chief investment officer at Solaris Asset Management in Bedford Hills, New York. "The (gross domestic product) number," he added, "just threw gasoline on the fire." Across the Atlantic, investors were eyeing Lloyd's Banking Group (LLOY.L) as the second major British financial firm lining up to tap a government-backed insurance scheme. The bank, which revealed a 10 billion pound ($14.28 billion) loss for 2008, said it had not finalized a plan yet but said talks with the UK government were "well advanced." On Thursday, Britain agreed to insure 500 billion pounds ($715 billion) of risky bank assets and struck a deal that could raise the government holding in Royal Bank of Scotland (RBS.L) to 95 percent. Global development banks also launched a two-year plan to lend up to 25 billion euros to shore up troubled banks and businesses in eastern and central Europe. The crisis has dried up credit and capital flows into the once-booming region, pressuring exchange rates and forcing some countries to seek help from the International Monetary Fund. Fannie Mae (FNM.P), the government-controlled company seen by the U.S. administration as a key conduit to stabilize the housing market, reported a $25.2 billion fourth-quarter loss, forcing it to ask for $15.2 billion from the U.S. Treasury Read the rest of the article Labels: bailout, banking crisis, banking system, Citibank, Fannie Mae, financial crisis, Royal Bank of Scotland Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Over 250 Banks On The EdgeThe FDIC reports that 252 US banks were on its list of troubled at the end of 2008, meaning they are at high risk of failure. This is the highest number since 1994. The total value of the assets of the banks on the watch list are $159 billion.Fourteen banks have failed so far this year, or an average of nearly two every week. From CNN: NEW YORK (CNNMoney.com) -- The government's closely watched list of troubled banks grew during the fourth quarter to its highest level since 1994, regulators said Thursday. Full story here. Labels: bad bank, bank failures, banking crisis, banking system, FDIC Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
