American Investment Banking on the Ropes - Lehman / Citigroup etc. - the 8.5 trillion Bailout

Squire wrote:

To my mind financial institutions should
1 Admit their mistakes and either sell or adjust down the value of the assets they bought with borrowed money. Can't proceed without investors and account holders having a clear view.
2 Pay off debt.
3 Try and rebuild their capital base.

Nothing magic about it and no different than any other business.

Senator Charles Chuck Schumer is now on the telly talking about RTCs (?) but favours doing your point #1 above. ibis says it can't happen because no one knows who owns the mortgage or if we do and one of the bond holders doesn't want the assets revalued then they don't get revalued ... unless bankruptcy is declared in which case a federal judge can allow the assets to be adjusted down.

The money would come from the Fed initially and then gradually there would be a return from the bad mortgages over their lifetime which would presumably be more manageable. The dodgy borrowers might be the principal gainers in this whole mess of gambling.

Johnny Keogh wrote:

rockyracoon wrote:

From what I can gather, when the Fed essentially bought AIG, the Fed didn't have a dime in the coffers. However, AIG needed cash immediately so the Fed went and printed $40 billion dollars. It didn't sell Treasuriers in order to raise cash because the Fed didn't have any short term Treasuries to sell. (They have some long term Treasuries but that is a different kettle of fish.) So the Fed, like Zimbabwe just recently and like the Weimar Republic in the 1930's, has just stepped over the precipice. It has gone third world. It just turned on the printing pressses. If this is true, it dwarfs anything that has occured up to now.
.

What makes you think this is so?

Hiya Johnny.

First of all let me clarify that I wasn't having a pop at anyone on MN. I started the post and remembered I had to pick up the SU (spousal unit. Feck it, if Wall St can come up with nonsense, so can I. And hate the term partner) and kind of hurried too much.

Anyway. Normally when the Fed wants money it sells from its stock of Treasury bonds. Sell the bonds and gets the cash. It needs to inject cash into AIG who is hemoraging. However, the Fed had no short term bonds left in the cuppard. It had used them all propping up various financial institutions until now.

Normally money supply is created when banks lend money to individuals/corporations or when the Fed issues new treasury bonds. There is a future value implicit in both transactions because the loans are backed by future income or taxation and will be paid back. In fact, the cash will be paid back with interest so hypothetically the indentures are more valuable than the present value of the money that is created.

Well, the Fed nor the Treasury didn't issue any new loans or anything of the sort. They just turned on the printing presses and printed 40 billion dollars. The value of every existing dollar has just been reduced. Now, given that there are so many dollars in circulation and on balance sheets across the world, this is not so serious or doesn't have a very tangible impact immediately.

However, imo the US is an addict. It's addiction is debt. It went from using recreation drugs to injecting herion yesterday. Would you believe that a drug addict is just going to use this drug just once, never again, swear to god? Zimbabwe has been printing money like this for a year and their inflation reached 1200% or something. Will the drug addict experiment with the inflation creating dollars just this once or will another crisis give him the excuse to inject again?

The markets seem to believe the addict for the time being. But remember the addict's cuppards are bare. Essentially the Fed is broke at the moment. Another crisis and the whole dirty edifice will crumble. The US is that close to the edge at the moment.

Well, well, well, the UK FSA isn't going to allow investors to short the poor financials. The govt is furiously re-writing the competition laws to allow the Lloyds-HBOS merger. What message does this send to financial institutions? "Screw up all you like lads/lassies because we're here to bail you out from your own stupidity." A moral hazard as well as a financial hazard ,imo.

The broader concept of short/long is fundatmental to banking and finance. For example, when a bank lends you money to purchase a home it thinks in these terms: it is going short cash and going long on a legal debt agreement. The long position (ie the loan) now becomes an asset on its balance sheet. Every month it takes in cash payments (hence is fractionally long cash again) and must find new ways to invest the money as its present value is being degraded by inflation. Banks hate being long cash.

The FSA's actions are twofold, imo. One to throw up a smoke screen to masquerade the horrendous asset position of banks due to their massive risk miscalculations in making loans. Second they are giving the financial institutions a breather from market participants who are better at measuring risk and reward than the banks have been. In other words, the FSA isn't allowing the market to determine the real value of shares. It is allowing pricing distortion. It's not the market's fault. It's the banks fault but they are penalising the market makers. Who should really be penalised here? The banks, of course, for being so bad at their jobs but they are instead being rewarded in an sense. As an investor would you feel comfortable with this situation? Say this calms the markets down for the next while and everything levels off. What happens? Probably very little will be done to examine the regulatory foundations and practices that have created this mess. Investors will now know that the markets will be distorted every time the banks screw up. And, more than likely, the banking directors will go on taking massive salaries and everything will carry on until the next bubble.

Rocky - is America rolling up its sleeves for some more mainlining already - just saw this on Bloomberg - I think it's a nationalisation of as much of the bad mortgages as is necessary ... and then a MABS-style solution for the poor payers...

Quote :

Sept. 18 (Bloomberg) -- Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke are considering a new plan to address the credit crisis, said Senator Charles Schumer, who proposed an agency to pump capital into troubled banks.

``The Federal Reserve and the Treasury are realizing that we need a more comprehensive solution,'' Schumer, a Democrat who chairs the congressional Joint Economic Committee, told reporters in Washington today. ``I've been talking to them about it.''

Schumer urged forming an agency to inject funds into financial companies in exchange for equity stakes and pledges to rewrite mortgages and make them more affordable. His remarks indicate momentum is building for some wider plan after the Fed and Treasury's takeovers of Fannie Mae, Freddie Mac and American International Group Inc. this month.

Schumer advocated a Great Depression-era Reconstruction Finance Corp. model, different from the Resolution Trust Corp.- type plan others have floated. Another RTC, which was a 1990s agency that sold devalued assets in the Savings and Loan Crisis, would ``simply transfer excessive risk to the U.S. government without addressing the plight of homeowners,'' he said.

Bloomberg on the RFC

And this is what the RFC is/was according to wiki - an entity from an inter-war period best left alone or too late to do anything else?

Quote :

The Reconstruction Finance Corporation (RFC) was an independent agency of the United States government chartered during the administration of Herbert Hoover in 1932. It was modeled after the War Finance Corporation of World War I. The agency gave $2 billion in aid to state and local governments and made loans to banks, railroads, farm mortgage associations, and other businesses. The loans were nearly all repaid. It was continued by the New Deal and played a major role in handling the Great Depression in the United States and setting up the relief programs that were taken over by the New Deal in 1933. (Sprinkel 1952)

It dispersed $1.5 billion in 1932, $1.8 billion in 1933, and $1.8 billion in 1934. Then it dropped to about $350 million a year. On the eve of World War II it greatly expanded to build munitions factories, dispersing $1.8 billion in 1941. The total from 1932 through 1941 was $9.465 billion.(Sprinkel 1952)

Quote :

The broader concept of short/long is fundatmental to banking and finance. For example, when a bank lends you money to purchase a home it thinks in these terms: it is going short cash and going long on a legal debt agreement. The long position (ie the loan) now becomes an asset on its balance sheet. Every month it takes in cash payments (hence is fractionally long cash again) and must find new ways to invest the money as its present value is being degraded by inflation. Banks hate being long cash.

Are short sellers able to co-ordinate information in order to provoke prices and thus to play markets? That way you get a distortion that doesn't at all reflect the true behaviour of the market. It sounds like it might be possible to influence the prices anyway by short selling. Perhaps it's legitimate in some markets but if it influences them (like food) then it can surely be seen as immoral or at least irresponsible?

Well, Auditor #9, very interesting developments. I can't give it much attention tonight but will have a look tomorrow. On the surface, it seems to tell me that the US financial system is dead in the water. This scheme is a tacit acknowledgement that the day to day running of the banking system has failed. No one in the banking industry believes the other fella is telling the truth or possibly doesn't know or can't calculate the worth of their respective balance sheets.

The question is: is the US financial system "holed" below the waterline and is it sinking?

One thing I will note before I retire for the night is all the talk about "confidence in the system" or "consumer sentiment". There's some sort of notion floating about that once confidence is stabalised and sentiment turns positive that all will be well. The scheme outlined above plus the present melt-down of the US financial system belies a problem much more complex than mere confidence or sentiment provisions. There are fatal flaws in the system; in the way in which the US is handling its entire economy; the way in which the US views the use of debt; and most importantly on the moral imperative by which business and finance are conducted. Unless these fundamental issues are adressed, they can only postpone the day of reckoning imo.

So some big changes are going to come? Hopefully for the better of course.

Try not to wake the SU as you head for the leaba. Good night.

Auditor #9 wrote:

Squire wrote:

To my mind financial institutions should
1 Admit their mistakes and either sell or adjust down the value of the assets they bought with borrowed money. Can't proceed without investors and account holders having a clear view.
2 Pay off debt.
3 Try and rebuild their capital base.

Nothing magic about it and no different than any other business.

Senator Charles Chuck Schumer is now on the telly talking about RTCs (?) but favours doing your point #1 above. ibis says it can't happen because no one knows who owns the mortgage or if we do and one of the bond holders doesn't want the assets revalued then they don't get revalued ... unless bankruptcy is declared in which case a federal judge can allow the assets to be adjusted down.

The 'book value' of assets in any set of accounts is never an exact science. In many businesses they are often under valued, particularly property in established companies. A firm of solicitors may have purchased an office 20 years ago for 100,000. In their books that may very well still be the value shown! The problem starts when people borrow against inflated valuations or anticipated approvals, and unfortunately, as you know, the way these are bundled and moved on has become deliberately complicated. If on your books you think you have 1 billion of property related assets there is no reason that I can see that would prevent you, in your company, revaluing that asset down to an educated guess as to where the likely final value may actually be. It is adjusting your assets not your liabilities. You are prudently making allowance.

Auditor #9 wrote:

The money would come from the Fed initially and then gradually there would be a return from the bad mortgages over their lifetime which would presumably be more manageable. The dodgy borrowers might be the principal gainers in this whole mess of gambling.

As far as i know the money from the Fed is a separate issue. It is to improve liquidity. Banks have a percentage of mortgages that are failing, and assets that they have difficulty selling without major loss. Like ever other business they have their costs to meet. Banks borrow short and lend long. Problem is they no longer trust each other so the only source of money is the FED. Basically many are insolvent. I don't see how dodgy borrowers are likely to gain out of this unless they deliberately ran up liabilities and salted the money away. But if you think that someone with a mortgage is not going to be made to pay up, dream on. They will change the law if necessary.

They are all talking about regulation, but I doubt that any regulation could solve this one. It requires a fundamental change of attitude. It has become corrupt, lazy and decadent.

rockyracoon wrote:

Well, Auditor #9, very interesting developments. I can't give it much attention tonight but will have a look tomorrow. On the surface, it seems to tell me that the US financial system is dead in the water. This scheme is a tacit acknowledgement that the day to day running of the banking system has failed. No one in the banking industry believes the other fella is telling the truth or possibly doesn't know or can't calculate the worth of their respective balance sheets.

The question is: is the US financial system "holed" below the waterline and is it sinking?

One thing I will note before I retire for the night is all the talk about "confidence in the system" or "consumer sentiment". There's some sort of notion floating about that once confidence is stabalised and sentiment turns positive that all will be well. The scheme outlined above plus the present melt-down of the US financial system belies a problem much more complex than mere confidence or sentiment provisions. There are fatal flaws in the system; in the way in which the US is handling its entire economy; the way in which the US views the use of debt; and most importantly on the moral imperative by which business and finance are conducted. Unless these fundamental issues are adressed, they can only postpone the day of reckoning imo.

End of the day for me too. Underneath all this we have a hugely indebted US State which has drifted from the industrial power house of the world to a low income economy with "rust bucket" industry. The wage of a US industrial worker 30-40 years ago would have bought a house and kept a family. Now its two or three Walmart level incomes trying to pay a mortgage. The well paid jobs are on the other side of the world. The US is no longer the main oil producer and steel maker.

People who went to College see their children leaving school and they can't afford to send them to college and they can't get a job. I read a post today by a guy, working, who couldn't afford the dollar to go through a road toll. He is reading about brokers on a million dollars a year, who loaned him a high interest rate non-prime mortgage, getting a bail out at the tax payers expense. At the same time, the US is fighting wars as though it was rich - there are companies like Haliburton that are beneficiaries of the wars, but the State has spent a trillion dollars and its rising.

It seems to me that ordinary Americans can't afford houses, for all they work so hard and that is the problem. At the same time some US individuals and firms under the deregulation and union crushing of the last ten years have made enormous money at the expense of the poor.

I don't think any kind of "bail out" can fix this, there is a gap here between what people have and what they expect to have, and between rich and poor.

The invisible hand has not been apparent in sorting this out.

rockyracoon

Very interesting posts.

On the subject of lawyers and complexity, some structures require more than a strong cup of coffee and a hour or two to vaguely comprehend. The ordinary investor has no chance and often those with more clout don't question until the cracks become obvious.

We all try to reduce our tax liabilities, fair enough, but often these structures enable very dubious accounting and practice. Fraud is extremely easy to set up and hide. But you could also argue that countries that set tax regimes to encourage individuals or companies to relocate are also part of the problem. Ireland with its low Corporation tax is bound to cause some to twist their structures to maximise the advantage.

The FED turning on the printing press suggests that investing in Chillington manufacturers of Wheelbarrows could be a good investment.



Just the thing to bring the wages home in.

The question of the Fed printing money is a big one. It seems to be an inevitable consequence of running out of money and still spending it, related to what I was saying up above about the US economy. A new thread tomorrow?
What will we call it?

rockyracoon wrote:

Weimar USA, anyone? Here's a video from pvt citizen USA. He's be a bit OTT but if what he's saying is true. Hmmm . . . (this could deserve its own topic actually if his thesis is correct!)

https://www.youtube.com/watch?v=kqtAzRNhTTY

Just finally got to listen to this rockyracoon. Is he factually correct that the Fed is broke and printing money? and is it as unusual as he says - don't the Banks do it all the time? What was the alternative to a bail out of AIG - wouldn't it have been catastrophic collapse anyway? And how would this RTC thing be funded? It looks to me like a choice between a rock and a hard place. Isn't it inevitable that the dollar will lose value under all the circumstances?

Having someone like Paulson who was a head of one of the finance banks deal with this does not seem like a good idea, no matter what.

boi to be taken over by banco santander?

anglo to take over irish nationwide?

cactus flower wrote:

. . .Having someone like Paulson who was a head of one of the finance banks deal with this does not seem like a good idea, no matter what.

I'd like to repsond to the other parts of the post, but I have work to catch up on today as I want to spend the weekend charting just what went on this past week. Truely historic times.

I think you've hit the nail on the head CT.

"The losses incurred by Bear Stearns and other large broker-dealers were not caused by 'rumours' or a 'crisis of confidence,' but rather by inadequate net capital and the lack of constraints on the incurring of debt."

--Lee Pickard, former diretor, SEC trading and markets divisions. (The Securities and Exchange Commission was set up in the early part of the 20th century to oversee and regulate brokerage firms and trading floors. Mssrs Bernake, Chairman of the Fed, and Paulson, Secretary of the Treasury, are on record saying they want to review the scope of the SEC and replace some of its powers with "gentlemen's" agreements to be carried out by the Fed and Treasury.

I'm posting some snippets of Nouriel Roubini, professor of finances at NYU (one of my old schools ), weekly article. He has become rather famous as a steadfast predictor, since back in 2007, of a US financial crisis and an attendant massive recession. His weekly article which is published on Friday hasn't appeared and instead these are quotes from an article written before the Lehman and AIG collapses. His analysis on this week will be "must be" reading. The site which these quotes are taken is a premium fee site, RGE Monitor, so I can't post a web link.

". . . Massive amount of creative accounting and other forms of balance sheet window dressing is occurring to prevent banks from recognising their true losses. . . While FASB 157 should prevent manipulation of the valuation of such illiquid assets, forbearance by the SEC, the Fed and other regulators allows a massive amount of fudging. An insider told me that in a major financial institution the approach is as follows now: top management decide in advance what the announced writedowns should be and folks dealing with the toxic/illiquid assets come up with a totally ad hoc assumptions to make sure that such illiquid assets are valued consistently with decided-in-advance amount of writedowns and losses. This is not earnings smoothing; this is active manipulation and falsification of financial results aimed at creating even more obfustication of the true state of financial institutions. This obfustication is actively abetted by the SEC, the Fed and all other regulators that are now in forebearance crisis management stage where the objective is to avoid at any cost anything that may trigger a financial meltdown. Thus, most of these earnings reports are not worth the paper they are written on.

. . . The Fed has been actively beefing up the earnings and balance sheets of financial institutions in four major ways. First, as 325 basis basis points [3.25%] reduction in the Fed Funds rate sharply reduced the cost of borrowing for banks and allowed them to enjoy a nice intermediation margin (the difference between longer term interest rates at which they lend and the much lower short term interest rate at which they borrow). This steepening of the yield curve is a major subsidy to financial institutions. Second, the Fed has created a range of new liquidity facilities - the TAF, the TSLF, the PDCF - that allow banks and now non-bank primary dealers to swap their illiquid toxic asset backed securities for liquid Treasuries and that provides for non-banks - and now also Fannie and Freddie - to [access] the Fed's discount window liquidty. Third, the bailout of Bear Stearns creditors - JP Morgan and many other counterparties of Bear - not only avoided a systemic meltdown and a certain run on the other broker dealers but it has lead the Fed to take on a significant credit risk by taking off the balance sheet of Bear Stearns over $29 billion of toxic securities. So the Fed has directly and indirectly systemically subsidized and propped up the financial system and the earnings of bank and non-bank financial institutions. Forth, a variety of forebearance regulatory actions - starting with the waiver of Regulation W for some majorbanks - have been used to beef up the profits and earnings of financial institutions and reduce their reported writedowns."

The general thesis is that bankers have been rewarded for making bad loans. They have socialised the risk by off loading their toxic loans onto the US taxpayer, while many bankers still collect their massive weekly paychecks. However, the powers-that-be have fraudulently manipulated all accounting and regulatory systems in order to cover up the true extent of the malaise.

Remeber this was written before the Lehamn and AIG fiascos. The full report is depressing reading because he predicts this systemic fraudulent behavior occurs in many smaller banks and insurance underwriting firms. It's endemic and widespread. The subsequent failures of Lehmans and AIG are proof, if proof were needed.

Also, unless you think these practices are restricted to the savage Yanks, you might want to review the action of the BOE and to a lesser extent the ECB. Also, I believe Irish banks have come up with a "new" loan stress category - ie they're not writing down their bad debt either. Also it's been reported that a large Irish insurer barred its door to the financial regulator. Literally sent them packing. Go figure and gl.

rockyracoon that all sounds just as it appears to be from the one corner of Irish banking I know about. Somehow Nick Leeson comes to mind.

Quote :

20/09/2008 - 14:50:23
The Bush administration is asking Congress to let the government buy US$700bn (€485.5bn) in bad mortgages as part of the largest financial bailout in decades.

The plan would give the government broad power to buy the bad debt of any US financial institutions for the next two years.

It also would raise the statutory limit on the national debt from $10.6 trillion (€7.35 trillion) to €11.3 trillion (€7.8 trillion) - making room for the massive rescue.

A draft of the proposal does not specify what the government would get in return from financial companies for the federal help.

President George Bush says he decided to act boldly on bailout after realising how severe the financial problems were and the administration would work with Congress to pass a financial bailout bill quickly.

So what happens next and now?

The Property Pin people think the dollar will collapse and the Amero rise up from the ashes. This will happen, they think, through printing of the dollar. Does the Fed have to print all that 700 billion in one go? Is America broke? Hardly.

Surely they'll shovel this crap out to different institutions - like we saw today Goldman Sachs is noising about buying some. Surely over time a lot of that money will get recovered but does the system really need 700 billion printed straight away?

I need 700 printed straight to pay my credit card bill

Auditor #9 wrote:

So what happens next and now?

The Property Pin people think the dollar will collapse and the Amero rise up from the ashes. This will happen, they think, through printing of the dollar. Does the Fed have to print all that 700 billion in one go? Is America broke? Hardly.

Surely they'll shovel this crap out to different institutions - like we saw today Goldman Sachs is noising about buying some. Surely over time a lot of that money will get recovered but does the system really need 700 billion printed straight away?

Tickerman makes the point that it is not 700 billion, it is a conduit through which money can flow indefinitely. As presented by Paulson it is pure and simple a bail out of the rich by the poor.

Janet Tavokoli - another investment consultant - is on Bloomberg now ranting ranting ranting about that 700 billion and how it should not happen and that her grandparents didn't come to this country to have bills like this passed and that the money would be better spent on jobs for America.

We'll see more of this kind of thing I hope.

Here's another take on how to deal with the banks, a little different to Paulson's option.

Russia Today says that its "Socialism for the rich, capitalism for the rest".

It is interesting that both the right and left agree.

The rescue package in the form proposed stinks.

You will not solve the market problems until you address issues of confidence. You need to be able to pick up the balance sheet, be able to understand it and know that it accurately reflects the business.

It is high time we treated white collar crime in the same way as you would any other crime. A lot of what I am seeing looks very like fraud. A bit of fast tracking the justice system would seem appropriate. Oh and if sentenced they should be sent to the same prisons as everyone else.

Squire wrote:

It is interesting that both the right and left agree.

The rescue package in the form proposed stinks.

You will not solve the market problems until you address issues of confidence. You need to be able to pick up the balance sheet, be able to understand it and know that it accurately reflects the business.

It is high time we treated white collar crime in the same way as you would any other crime. A lot of what I am seeing looks very like fraud. A bit of fast tracking the justice system would seem appropriate. Oh and if sentenced they should be sent to the same prisons as everyone else.

Paulson's personal role in all this, the role of Goldman Sachs, and the links with government, are extraordinary: http://www.wsws.org/articles/2008/sep2008/paul-s23.shtml

He appears to stand to gain personally from his proposed bail out to the tune of hundreds of millions.

cactus flower wrote:

Squire wrote:

It is interesting that both the right and left agree.

The rescue package in the form proposed stinks.

You will not solve the market problems until you address issues of confidence. You need to be able to pick up the balance sheet, be able to understand it and know that it accurately reflects the business.

It is high time we treated white collar crime in the same way as you would any other crime. A lot of what I am seeing looks very like fraud. A bit of fast tracking the justice system would seem appropriate. Oh and if sentenced they should be sent to the same prisons as everyone else.

Paulson's personal role in all this, the role of Goldman Sachs, and the links with government, are extraordinary: http://www.wsws.org/articles/2008/sep2008/paul-s23.shtml

He appears to stand to gain personally from his proposed bail out to the tune of hundreds of millions.

These people know no limits. The concept of placing yourself in an invidious position does not seem to occur to them. You can't serve two masters, there is a clear conflict of interests.

Needs a good clean out and I do think some of it has to be viewed in the context of criminal activity.

On being questioned on competitive bidding for consultancy to the programme Paulson says " We have procedures here to deal with conflicts but we're under time pressure of time and we can't go through the detail of them here..." (to the Senate Committee - 2 minutes ago)

cactus flower wrote:

On being questioned on competitive bidding for consultancy to the programme Paulson says " We have procedures here to deal with conflicts but we're under time pressure of time and we can't go through the detail of them here..." (to the Senate Committee - 2 minutes ago)

That's a bit of a cop out.