As featured on p. 218 of "Bloggers on the Bus," under the name "a MyDD blogger."
Friday, October 02, 2009
Don't Cry For Me Bank Of America Stockholders
My bank's CEO will step down at the end of the year, a fitting end for someone with a role in nearly destroying the world financial markets, as well as nearly toppling his own company after the purchase of Merrill Lynch, with shares down 50% year over year. When someone intimately involved with such bad performance steps down in the real world, they are lucky if no tomatoes hit them on the way out the door. Because this is Wall Street fantasy land, Lewis will collect $53 million dollars.
Ken Lewis doesn't have a golden parachute, but he's all set for a comfortable landing -- unlike his long-suffering shareholders.
The Bank of America (BAC, Fortune 500) chief executive officer said Wednesday he'll step aside at year-end after eight years at the helm. Based on the company's most recent proxy statement, he will have $53 million in pension benefits waiting for him when he leaves.
That should give him about $3.5 million a year in pension payouts for the rest of his life -- at a time when people who bought the stock when he took the reins in 2001 are underwater on their investments.
Although the bank swore off employment contracts and eliminated golden parachutes seven years ago, Lewis can thank a pension plan that dates back decades for his rich retirement rewards.
I'd say that parachute is golden enough, thanks.
I don't want to start railing against pensions, because most people pay into them and earn what they get. But I think a cap slightly below $53 million dollars is probably sufficient. Especially for people like Ken Lewis.
Maybe Everyone In The Country Can Send A YouTube Testimonial
Ann Minch sent a debtor's revolt video to YouTube a couple weeks ago, refusing to pay off her credit card debt with Bank of America unless the company negotiated a lower rate, which they could easily do since they are receiving interest-free loans from the Federal Reserve. After some Internet notoriety and a handful of conversations, she actually succeeded in getting BofA to lower her interest payment.
The executive "tried to get me to agree to 16.99 percent and I said, 'No, nope, I believe because you guys are getting your money from the Fed at zero percent interest... that 12.99 percent is a more than generous profit margin for you guys.' So he did finally agree to that and he also agreed to send me that in writing."
Unfortunately, it's not practical for everyone facing an exorbitant usury fee from a major bank to shame them into compliance. We need the federal government undertaking a debtor's revolt, not individuals who don't have the same leverage.
However, with respect to Bank of America we may be turning a corner. The SEC is broadening its investigation against the bank, perhaps in response to the company's foot-dragging on compliance with that probe. BofA just missed a Congressional deadline to turn over documents to the House Oversight Committee about the takeover of Merrill Lynch. And as Chris Dodd sought to hammer banks for their automatic overdraft fees to customers, BofA and other banks are moving to change their practices.
Well, huzzah, the stress tests are here, and good news, everything's OK, just a matter of $75 billion dollars and we're ready to roll, just a rounding error, really. I can see why everyone's so excited. After all, if you can come up with a solution to a capitalization problem that involves "get(ting) the government to pay them more than three times the market value of their stock," I don't think you'd have anything to worry about either. And of course, the more that investors consider the banks to be healthy, the more healthy they quantitatively are, in a sense.
So my best guess is that this is a quite deliberate effort (there are credible reports of active efforts to squeeze short sellers) to pump up the bank stocks to facilitate their fundraising. John Dizard had urged central banks sponsoring road shows nearly a year ago to help them raise the needed equity. I'd prefer an open sales effort to this mingling of hucksterism with supposed regulatory policy. And they have clearly been intermingled. Note how the prime objective of the stress tests has been above all to restore confidence. Huh? The most important aim should be to assess their condition so as to determine what if anything needs to be done. To subordinate proper regulatory action to reassuring "the markets" is backwards. If the public had faith in the integrity of the process, the need for a confidence exercise would vanish.
One problem for the banksters: the outliers. Several bigger banks do need a good degree of capital, and at least in the case of GMAC, a lot more capital, comparatively speaking.
The federal government has ordered the financing arm of General Motors to raise $13.1 billion in new capital to ensure the firm's stability in the face of heavy losses in mortgage and auto lending and costs related to taking over new loans for Chrysler dealers and customers, said sources familiar with talks between government and industry officials.
The sum is among the biggest required for any U.S. financial institution, and could prove difficult for GMAC to raise because of the limited nature of its business and poor quality of its loans. The firm has struggled in the past to raise money from private investors and has already received $5 billion in federal assistance. It is likely that the federal government would end up providing much, if not all, of the needed capital, but it remained unclear where that money would come from.
About $4 billion of the total would be needed to cover the cost of assuming Chrysler Financial's dealer and retail auto loans, said one senior financial industry executive.
As James Kwak notes, this means that GMAC has negative capital at the moment, which, um, means insolvency.
Some smart people at the Times' Room for Debate series give their thoughts. I basically consider this a sham based on rosy scenarios and grade-grubbed by the subjects, but as has been said, we lost the debate inside the White House, and they're going to do what they must to keep the banks afloat. I think we have to focus on this Pecora Commission idea that's passed both houses of Congress (some helpful background here), which can lay the groundwork for major regulatory reform, through investigation of what happened to create the crisis. Obviously this comes out of Congress, so who knows what kind of teeth it will have, and historically blue-ribbon panels don't have much of a track record, but take a look at the potential of this thing:
The Financial Markets Inquiry Commission is empowered to hold hearings and to issue subpoenas either for witness testimony or documents and will have more than twenty substantive areas of focus, including:
the role of fraud and abuse in the financial sector state and Federal regulatory enforcement tax treatment of financial products credit rating agencies lending practices and securitization corporate governance and executive compensation Federal housing policy derivatives GSEs short-selling
Additionally, the bill requires the commission to examine the role of fraud and abuse towards consumers in the mortgage sector, examine the extent to which the legal and regulatory structure governing financial institutions creates the opportunity for financial institutions to engage in regulatory arbitrage, examine the role of credit default swaps and the impact of financial institutions that are “too big to fail” on market expectations, and examine the causes of major financial institutions that failed or were likely to fail without government assistance. The Commission will report their findings and conclusions to Congress by December 15, 2010 and is required to refer any person who may have violated U.S. law in relation to the financial crisis to the Attorney General (AG) or state AGs.
We can put people in jail. We can set the future. We can shrink the financial sector. And we can do it through this panel. Let's push for a real commission.
Congratulations, everyone! We ended the banking crisis because the biggest banks only need $65 billion in new capital!
The findings, to be released Thursday by the Obama administration, suggest that the rescue money that Congress has already approved will be enough to fill the gaps. If so, the big bailouts for the banks may be over.
All of this assumes that the economy does not take another turn for the worse, which would result in even more losses at the banks — and the need for even more money to prop them up. But hopes that the tests will be a turning point in this financial crisis electrified Wall Street on Wednesday and some overseas markets the next day. Financial shares soared, lifting the broader American stock market to its highest level in four months. The Dow Jones industrial average rose 101.63, or 1.2 percent, to close at 8,512.28 Wednesday, while Japan's Nikkei index rose more than 4 percent by midday Thursday [...]
After news this week that Bank of America and Citigroup would be required to bolster their finances again, word came Wednesday that regulators had determined that Wells Fargo and GMAC, the deeply troubled financial arm of General Motors, would need to do so as well. But regulators decided that American Express, Capital One, Bank of New York Mellon, Goldman Sachs, JPMorgan Chase and MetLife would not need to take action. The official word is due at 5 p.m. Thursday.
So no great shakes, just $65 billion or so, which can easily be accomplished through the conversion of government preferred shares into common stock. And Bank of America, the bank in the biggest trouble, may only be in the situation they're in because they were forced to eat Merrill Lynch despite the negative impact on the firm. Good job on that one, Henry Paulson!
Kevin Drum is confused. It's not just that circumstances haven't changed, but hard data from economists around the world show the banks to be much worse off than the stress tests display.
All I can say at this point is that I'm baffled. If Geithner is right, then everything is fine and the banking system was never really in very big trouble. $65 billion is nothing. But if the IMF is right, American banks are nearly $300 billion short. If Nouriel Roubini is right, the shortfall might be even greater.
So who is right? I have no idea. "All Americans should be confident that these institutions are going to be viable institutions going forward," Geithner said tonight, and I sure hope that's the straight dope. But these discrepancies are simply too large to wave away. Somebody is way, way off base, and I'd sure like to know who it is.
We actually know this already. The stress tests were simply not that stressful. We can see that in the sentence in the Times beginning "All of this assumes that the economy does not take another turn for the worse." That's the POINT of a stress test! Regulators were supposed to look at how the banks would react to stress. Not to mention the fact that the banks lobbied for new results to the stress tests after the initial data were released.
Anyway, the Treasury announced that they would serve as a backstop for any bank that showed difficulty raising the necessary capital. So no stress! Simon Johnson and James Kwak argue that we've reached a place of co-dependency between the government and the banks.
Since February, however, the government has clearly communicated that it has no such intentions, for example in Geithner’s insistence that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.” Even as the capital shortfall numbers have leaked out over the past few days, the government has emphasized that no banks will actually be allowed to fail, or even be allowed to be put into a conservatorship; instead, they will first attempt to raise capital from the private sector, and failing that they can convert their TARP preferred stock into common stock. Even if this results in significant government ownership, there is no evidence that shareholders or creditors will be forced to take losses. As rfreud said in a comment here, “The stress tests results are confidence-building in that they signal the low likelihood of nationalization or seizure. Reform at the moment seems a distant prospect.”
In short, relationships between the government and the large banks have never been closer, with large amounts of money flowing in one direction, and complete co-dependency going in both directions. Those relationships are not entirely friendly, which is not surprising. In any crisis when public resources are called on to bail out the private sector, not all of the oligarchs will survive; Bear Stearns and Lehman have already vanished. But the winners - which should include Jamie Dimon of JPMorgan Chase and Lloyd Blankfein of Goldman - will emerge even more powerful and influential than before.
In rejecting “nationalization” (regulatory takeover and conservatorship), the government has not ensured a private, properly functioning banking system. Instead, it has muddled into a broken-down, undercapitalized system that is nominally in private hands, but is able to tap the state for apparently limitless support. And to date, that support has flowed on one-sided terms, with the taxpayer accepting downside risk but limited upside potential. No wonder bank shareholders are comfortable with this outcome.
Not only that, but the recent consolidation due to those banks and investment firms that failed has led to higher market shares for those that survived. All that cheap money from the government means higher profit margins on the back end. The banks are comfortable with this approach - they don't have to care about their overall health, they retain their power with the government, and they collect a nice bonus at the end of the year.
It really has been comical to see the leaks of the stress tests trickle out, first with full confidence in the strength of the banks, then less, then less, and now a situation where Bank of America needs $34 billion dollars. Their total market capitalization right now is only $70 billion. The word "insolvent" comes to mind.
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.
If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.
It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.
But that would make the government one of the bank’s largest shareholders.
The company has certain assets they could sell, if anyone's in the market for a bank right now. But the most likely scenario makes the US government a near-controlling interest in Bank of America. Citigroup, which already has converted government preferred shares to common stock, needs an additional $10 billion or so, according to this report. It's not all that reassuring to hear BofA spokesmen claim that they'll be able to make $30 billion a year in income once the recession clears, which I think is more than Exxon.
Unfortunately, this is a fight that's already lost, Obama dinners with Paul Krugman aside. The banks will not be nationalized, and most likely they will be propped up until the crisis lifts. Geithner and Summers have their reasons for this, and the Administration doesn't see Congress playing along with anything that might damage the banksters too heavily (see cramdown) or allocating the money that would be needed for a restructuring. Mike Lux offers a couple post-TARP solutions that I think make sense:
The first is to really invest in long-term organizing and institutional building on the finance issue. While it is disappointing that Obama hasn't used this economic crisis and the populist anger it invoked to more fundamentally change the system that brought us to this pass, it's not like finance issues are going away or recede in importance in years to come. Now is the time to build institutions with the grassroots, political, and intellectual firepower to battle the banks in the years to come. We clearly have a stable of economists and business people who get what is going on, including George Soros, Joseph Stiglitz, Paul Krugman, Dean Baker, Rob Johnson, Simon Johnson, Leo Hindery, and others. What we need is long term institutional political power to build the constituency that will fight this fight effectively.
Just as importantly, we need to work constructively with the Obama administration to be prepared with a plan B if what they are doing begins to show significant weaknesses. If, as we restructuring advocates fear, the Geithner/Summers plan does not work to rebuild the economy, and/or the plan is gamed by the big banks to create other AIG bonus style scandals, Obama will be forced to turn to a plan B. If that happens, as I wrote a few weeks ago, progressives should avoid going into I-told-you-so mode, and instead be ready with a strong progressive plan that they can push with the administration. The economic thinkers listed above ought to be working together right now to come up with a strong plan B option. If we can keep a constructive dialogue going with the White House, and mobilize our friends in Congress and in the media, such a plan has a chance of being adopted.
Banks that want to return Troubled Asset Relief Program funds will have to demonstrate their ability to wean themselves off another major federal program, according to senior government officials, making it less attractive for some banks to return the money.
The other program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have $332.5 billion of debt outstanding under this program, which began last fall.
If you don't need assistance, prove it. Either you stay on the government dole or leap off. And either way, the government will regulate you in the future so you can't borrow using 30-1 leverage and take up half the national economy. If this is the result, I can basically live with it. But of course, this only applies to those few banks healthy enough to weather the storm. The Bank of Americas of the world? We're going to need a Plan B for them.
Another day, another new leak about those stress tests due for release on Thursday.
The results of the bank stress tests to be released by the Obama administration this week are expected to include more detailed information about individual banks — assessing specific parts of their loan portfolios — than many analysts have been expecting.
Using these results, the administration seems prepared to argue that, while a few banks may need additional money, the broad financial system is healthier than many investors fear [...]
The administration is expected to make the case that the needs of the troubled banks can be met with the bailout funds that Congress has already approved. That would be a departure from what administration officials were saying as recently as March and evidently reflects the recent improvement in banks’ conditions.
“None of these banks are insolvent,” said a senior government official, who did not want to be identified before the public release of the test results.
The official added: “These are manageable losses.”
The problem at this point is that the grade-grubbing from the banking industry has destroyed the credibility of these tests, making them really useless and making the insistence of solvency hollow. The stress tests also focus on the wrong liabilities.
There is another way the stress tests fall short. As was revealed earlier, the tests are focusing on bank loan exposures. Ahem. The real risk to the system is not in not-too-difficult to value (and sell) loans, but in the complex dreck and derivatives exposures at the big capital markets players, namely Citi and Bank of America. Even if a bank as big as Wells Fargo, a very big bank but in traditional retail and wholesale businesses, were to prove terminally impaired, it might be costly to resolve, but procedurally it would not be pathbreaking.
It's the capital markets firms that pose the real systemic risk. The powers that be still have yet to develop procedures for an orderly resolution. The reason being that their large trading books depend on ongoing credit from counterparties; if a firm is put into receivership or bankruptcy, a counterparty can't continue to trade with it (otherwise, it gets downgraded. So when a big trading firm gets into trouble, counterparties are fast to shut off credit, putting the firm, a la Bear, into a death spiral. Indeed, we've been saying since the Bear collapse that the first orders of business should have been an intrusive and thorough assessment of the big credit intermediaries and the creation of a special resolution regime should anyone go asunder. How many months have passed? And tell me, how much progress have we made?
Given that even the modest recommendations from the stress tests face resistance from the banksters, and that they don't even focus on the proper liabilities, I really don't know their purpose. Other than to give everyone a shot of confidence. I guess we're going to build an empire on a base of sand again.
Dick Durbin's Searing Indictment of Banksters On The Senate Floor
Dick Durbin is speaking about the destructive greed of the banksters right now, the ones who torpedoed his amendment to allow bankruptcy judges to modify loan terms on primary residences the way they can on second homes, yachts, cars, and other pieces of property. He was unsparing and did not shy away from the statement he made on local radio in Illinois recently, that the bankers "own the place". He set the needs of regular homeowners, who "don't have any paid lobbyists," against the desires of banks who took hundreds of billions of dollars of taxpayer money and face seemingly no consequence for their bad decisions.
Durbin is a close ally of the President and I feel he wouldn't make a statement like this if he thought it too embarrassing to the Administration. He is trying to spark the American people to demand some change. Obama has done this too, albeit with more subtlety. We need to get their backs.
Here are a couple of excerpts (I'm transcribing):
One other argument that I think takes the cake: "Senator, you understand the moral hazard here. People have to be held responsible for their wrongdoing. If you make a mistake, darn it, you've gotta pay the price. That's what America is all about." Really, Mr. Banker on Wall Street? That's what America is all about? What price did Wall Street pay for their miserable decisions creating rotten portfolios, destroying the credit of America and its businesses? Oh, they paid a pretty heavy price. Hundreds of billions of dollars of taxpayer's money sent to them to bail them out, to put them back in business, even to fund executive bonuses for those guilty of mismanaging. Moral hazard, huh? How can they argue that with a straight face? [...]
At the end of the day, this is a real test of where we're going in this country. Next up, after mortgages, credit cards. Next week, the same bankers get to come in and see how much might and power they have in the Senate when it comes to credit card reform. And the question we're going to face, is whether or not this Senate is going to listen to the families facing foreclosure, the families facing job loss and bills they can't pay, or whether they're going to listen to the American Bankers Association, which has folded its arms and walked out of the room. Well, I hope that we have the courage to stand up to them. I hope this is the beginning of a new day in the Senate, a new dialogue in the Senate, that says to the bankers across America that your business as usual has put us in a terrible mess, and we're not going to allow that to continue. We want America to be strong, but if it's going to be strong, you should be respectful, Mr. Banker, of the people who live in the communities where your banks are located. You should be respectful of those families who are doing their best to make ends meet in the toughest recession that they've ever seen. You should be respectful of the people that you want to sign up for checking accounts and savings accounts, and make sure that they have decent neighborhoods to live in. Show a little loyalty to this great nation instead of just your bottom line when it comes to profitability. Take a little consideration of what it takes to make America strong...
I'll offer this Durbin amendment as I did last year. When I offered it last year, they said, "Not a big problem, only two million foreclosures coming up." They were wrong. It turned out to be eight million. And if the bankers prevail today, and we can't get something through conference committee to deal with this issue, I'll be back. I'm not going to quit on this [...] At some point, the Senators in this chamber will decide, the bankers shouldn't write the agenda in the United States Senate.
There's really not much to add to that. Especially when you see the Senate vote, which is happening right now, surely a defeat for the Durbin amendment. The Senators against this bill have lined up with the banksters, and for good reasons - they fund the campaigns, they throw the best parties, they share the interests and perspective of those disproportionately wealthy politicians. Last night, at Obama's press conference, he offered another hint of how the federal government is so immense that he cannot wield the power to "get the banks to do what I want them to do." Today he lashed out at the small group of hedge funds who forced Chrysler into bankruptcy, not just because they thought they could get a better deal from the bankruptcy judge, but because they'll get paid off on their credit default swaps due to the bankruptcy.
The Obama budget, mostly laudatory, stripped out those elements which would have taxed wealth, instead protecting it in many instances. The system of government in this country has become a system of fealty to oligarchs. Democrats like Durbin made one concession after another on the bankruptcy bill, and still couldn't get enough members of the Senate on board.
We have a major problem in this country, when the banksters hold this much control in the corridors of power. Dick Durbin is opening the window and showing the sick, decayed underbelly inside. Actions like the shareholder revolt ousting Ken Lewis from the chairmanship of Bank of America need to happen more and again. At some point, we can affect these people personally, and really damage them where they live. It's the only way, through a broad-based movement, to overturn this horrible dynamic of financial industry control of government.
UPDATE: 45 Yea, 51 Nay, motion fails. Abominable. Will update with a roll call. This Senate is useless.
UPDATE II: Roll call. Nays included all Republicans and Baucus, Bennet, Byrd, Carper, Dorgan (?), Johnson, Landrieu, Lincoln, Nelson (NE), Pryor, Specter, Tester. Also, some video of Durbin's speech here.
UPDATE III: Ryan Grim shouts out to Ted Kaufman, the first Senator from Delaware to vote against the banks maybe in history. Being a caretaker Senator not planning on running for re-election will do that.
Banks Still Rule Washington, But The Shareholder Meetings?
The bad news is that the Senate is on the verge of gutting that mortgage "cram-down" bill, removing the ability for bankruptcy judges to modify the terms of loans for primary residences of people facing foreclosure.
Democrats Ben Nelson (Neb.), Mary Landrieu (La.) and Jon Tester (Mont.) have indicated to the Huffington Post that they oppose the bill's central measure -- giving bankruptcy judges the power to reduce, or cramdown, a homeowner's mortgage payment under bankruptcy proceedings.
That provision is on the chopping block.
"The bill that the House sent us is a very, very good bill, a very good bill," said Reid. "It would be a terrific bill if we had cramdown in it and it'll still be a good bill if that's not in it."
Cramdown, however, is the guts of the bill, House Speaker Nancy Pelosi (D-Calif.) told the Huffington Post.
"Well, it wouldn't be a bankruptcy reform bill without cramdown in it," she said.
The two versions of the bill would need to be reconciled in a conference committee. "I strongly support [cramdown], but we'll see what happens on the Senate floor," said Pelosi.
I can tell you what will happen, the banking lobby refuses to relinquish the power they hold, and will squash efforts to write down these loans. Because the banks, in the words of Dick Durbin, own the place. So despite the facts that the lenders committed clear acts of fraud on practically all of their customers when handing out the loans, the people will get no relief with the only tool available to them to ensure a level playing field when they try to rewrite the terms.
On the flip side, a shareholder revolt led by institutional investors, state pension funds, union leaders and everyday people got Ken Lewis fired as the chairman of Bank of America. He remains on as CEO but lost the chairmanship to Walter Massey. This may not mean a hell of a lot on its own, but it's a powerful symbol of the anger felt by people out in the country with the banksters. And this will only grow. If Congress refuses to take action on these executives, maybe the people will hold them to account.
Regulators have told Bank of America Corp. and Citigroup Inc. that the banks may need to raise more capital based on early results of the government's so-called stress tests of lenders, according to people familiar with the situation.
The capital shortfall amounts to billions of dollars at Bank of America, based in Charlotte, N.C., people familiar with the bank said.
Executives at both banks are objecting to the preliminary findings, which emerged from the government's scrutiny of 19 large financial institutions. The two banks are planning to respond with detailed rebuttals, these people said, with Bank of America's appeal expected by Tuesday.
The findings suggest that government officials are using the stress tests to send a tough message to struggling banks. Bank of America and Citigroup have been the highest-profile problem children in recent months, but it is unlikely that they are the only banks the Federal Reserve has determined might need more capital.
I don't think the rebuttals will exactly help. Of course BofA and Citi will insist that they're well-positioned. They've been saying that since well before receiving $45 billion dollars a piece in government money. Which helped mitigate the worst effects, but did not solve the problem, as we can plainly see.
And then there's that ominous last line, that it's "unlikely" that they're the only banks shown to be in trouble by the stress tests. Regions Financial Corp., Fifth Third Bancorp and Wells Fargo & Co. are mentioned as possibles. We've gone from zero banks in trouble to a healthy portion of the 19 studied in a matter of days. There's also a wonderful line in there where government officials say "banks directed to raise more capital shouldn't be viewed as insolvent." Um, isn't that the purpose of the stress test and the very definition of an insolvent firm? Apparently not, says Edward Harrison.
"Instead, the capital is intended to cushion the banks against potential future losses under dire economic conditions. Federal officials say they won't allow any of the top 19 banks to fail.
Still, it is unclear how flexible the government will be about adjusting the results, especially as banks plead their cases individually. Banks have until the middle of this week to lodge their formal responses to the tests. Bankers expect that will set the stage for several days of intense negotiations between the banks and their examiners."
Ah, I see, it is all a sham.
It sounds a lot like a test where the student banks who just failed go to the teacher regulator with mommy and daddy bank lobbyists in tow to see if they can get their grades changed higher. See, the stress are just a scheme to make us think the Federal government is actually doing something about the under-capitalized banking system in the U.S.. In reality, the Obama Administration is just buying more time in order to let us grow our way out of this problem.
While Larry Summers does appear to now believe that financial industry growth has been outsized, he adamantly asserts that the stress tests were designed to get the banks the capital they need, not to reveal their essential insolvency. No bank will be able to recapitalize entirely with private funds. This imagining of the stress tests is simply a recipe for more government largesse. While we may be on the right track to putting in the proper amount of sand in the gears to ensure this never happens again, I'm extremely troubled by the way out being seen as feeding the giant maw of the banks over and over and over again.
You may have noticed that I am not an economist. I like to keep up with these matters, but at times it feels like, to quote one of my favorite authors, intellectual mountaintop air so rarified I have to constantly swallow to pop my ears. This adequately appropriates my experience with the Public-Private Investment Plan (PPiP) for toxic assets (or legacy assets, or whatever you want to call them). I can link to a bunch of very smart takes about whether or not it will work:
Simon Johnson and James Kwak, closest to my view, I think, say that the plan could work, but only if the banks agree to sell at reasonable prices, an unlikely scenario; and that ultimately, the problem is the outsized influence and power of the big banks.
"I'm a market liberal. My party that I used to lead, the Moderate Party, is the conservative party in Sweden and the parallel to the Republican Party in America," Lundgren said. "When I nationalized the banks, it wasn't because I wanted to: It was crisis management. Their owners had been wiped out, the banks were black holes, they had no equity left, and there was no alternative but to take them over." [...]
The Obama administration's initial plans have fallen short, Lundgren said, because they failed to reassure investors that the banking system was genuinely backed by the government and private sector.
"There are similarities [to Sweden's case]," Lundgren said. "There are three things any plan must do—the first is to maintain liquidity, that's taken care of by the Fed. The second thing is to restore confidence, and that hasn’t been done so far and obviously the first proposal to buy toxic assets wasn't enough. And then you need capital injections so banks can keep lending at the levels needed for the economy as a whole."
However, Lundgren said that Obama was correct in observing that a similar nationalization scheme might be more difficult given America's size and preeminent role in world finance compared to Sweden.
"With Japan and Sweden, the crises we had, even if it was a very long process with Japan, they were crises that we had on our own," Lundgren said. "The rest of the world economy managed to be not perfectly good but still reasonably good. This time it's worse; it's a kind of financial tsunami."
My point is that there are a lot of opinions here, all of them valid in one way or another, since so much of economics is based on modeling and theoreticals (cue the old "we'll assume a can opener" joke). So I'm going to put my thoughts into some bite-sized portions.
1) Getting a reasonable price for the assets seems to be the key. If Geithner manages to get authorization to wind down big firms like bank holding companies, that could be a powerful bargaining chip for eventual nationalization, which would incentivize the banks to sell.
2) Judging from Geithner's comments, I'm guessing that he saw nationalization as too costly and too risky, because the government would assume all the potential losses. There's some truth to this - the largest FDIC receivership of recent vintage, IndyMac, cost much more than the government expected, about 1/3 of its value. The range of options indeed are from bad to worse. But if you have to go back to receivership after this plan fails anyway, I don't see how it could be cheaper. Plus, the government is putting up 90% of the risk in this scenario, anyway. To quote Dean Baker, "It implies there are real big losses there, but those losses are there whether we take them over or not. It's very likely that we're looking at a larger hole than the administration has been acknowledging and to my mind that argues for a takeover strategy."
4) Chris Bowers' post on how and when we will know if these economic policies succeeded is worth a read.
5) Even in Roubini's (somewhat) positive account, he says that "The administration should be transparent in making clear that there is still a wealth transfer taking place here - from taxpayers to investors and banks." We were always going to pay dearly for this - the debate is on the margins of whether we pay a lot or a whole heckuva lot.
A lot of the crisis in the banking sector is attributable to legal practices, like changes in the law that allowed 30-1 leveraging and the rise of the shadow banking system. The biggest problem is that we allowed the financial sector to become far too large a part of the economy, when it should only exist to allow the efficient flow of capital and facilitate small business and manufacturing. It's not just that the banks are too big to fail; it's that they're too big. We have to rebalance our economy.
But a fair bit of it was just outright fraud. I'm not just talking about Ponzi schemers like Bernie Madoff, who is set to plead guilty (and his wife should not be allowed to keep $67 million dollars in the exchange, by the way), but the fraudulent tactics of bankers in several areas. A lot of members of Congress, in particular Alan Grayson, have been talking about that, and now Barney Frank is going public with his desire to seek justice.
House Financial Services Chairman Barney Frank (D-Mass.) is pressing state and federal authorities to seek criminal and civil penalties on financial actors that helped cause the current crisis.
"Rules don't work if people have no fear of them," Frank said at a press conference Thursday.
He announced a hearing March 20 with Attorney General Eric Holder, bank regulators and the Securities and Exchange Commission as witnesses to discover what their plans are to prosecute irresponsible and in some cases criminal behaviors.
I think the biggest thing troubling the public with respect to the financial meltdown is the lack of accountability. They see activities that they would surely be arrested for if they tried them, and yet nobody is being held responsible. Of course, the financial sector has gotten so big, and accrued a certain power along with their wealth, that they have a status somewhere above the law, despite statements like this from members of Congress. So we have to see the follow through.
One great initiative is what Change to Win is doing with Bank of America. As a fairly large shareholder in the bank through their pension funds, they are making known their dissatisfaction with the CEO, and preparing for a fight.
Now CtW has upped the ante on Bank of America, amid reports that B of A is seeking to quash a subpoena of records that show senior Merrill Lynch execs earned more money when B of A took over their struggling company than before.
The CtW Investment Group, in a letter to B of A's lead director, conveyed a simple message: Fire Ken Lewis, the bank's CEO, or CtW will encourage shareholders to vote him and other independent bank directors out of office during the company's next annual meeting.
Shareholders do have some power to force decisions on the corporate structure. But ultimately, if we're talking about criminality, this is a matter for the Justice Department.
The Politico writes a hit piece about Alan Grayson today (no link, they're trolling for one). They, and by proxy the Villagers and Republican concern trolls, are just horrified at his uncouth statements like calling Rush Limbaugh a "has-been hypocrite loser” who “was more lucid when he was a drug addict.” (I think Rush is a constituent, so good luck winning back his vote!)
What they're really mad about is that he hired a blogger, Matt Stoller, as his senior policy adviser, and he asked officials of the Federal Reserve what they're doing with nearly $2 trillion dollars of taxpayer money. This has become a feature of the financial meltdown - the utter lack of disclosure.
Banks like BofA will not disclose the timing of the bonuses Merrill Lynch handed out when they were on the verge of collapse, to the extent that people like Andrew Cuomo have to issue subpoenas to get some transparency. UBS will not disclose the names of thousands of Americans hiding their cash in Swiss bank accounts to dodge taxes, to the extent that Congress is attempting to rewrite the laws to crack down on offshore tax havens. AIG will not disclose the counterparties who are getting hundreds of billions of dollars in bailout money from the government, which is a major and evolving scandal that Josh Marshall and the TPM crew are trying to wrap their arms around. This in particular appears to be an unbelievable scheme, almost a black bag job, where the Fed drops money into an account and AIG picks it up so that everyone can maintain the fiction that it isn't a direct cash transfer. There's more here, including a description of how derivative counter-parties got away with murder in the 2005 bankruptcy bill, and how their taking all the equity if AIG went down would trigger a real and thoroughgoing collapse (as if one isn't imminent anyway).
But it's more than just AIG. The Fed won't release the names of any of the recipients of nearly $2 trillion in loans over the past two years. Bernie Sanders has legislation to force disclosure. CREW is filing a Freedom of Information Act request to find out. In fact, such requests have already been filed, by Bloomberg News and Fox News, only to be refused, despite being subject to FOIA.
As CREW explained in its request, the documents it seeks are essential to understanding and assessing the government's response to the devastating economic financial crisis our nation faces. CREW's Chief Counsel, Anne Weismann, put it like this:
Telling Americans that they are not entitled to know which banks are receiving 2.2 trillion dollars of taxpayer money is unacceptable under any terms. This administration has promised transparency and we expect it to deliver.
“In the meantime, the massacre in financial markets and among financial firms is continuing. The debate on “bank nationalization” is borderline surreal, with the U.S. government having already committed–between guarantees, investment, recapitalization and liquidity provision–about $9 trillion of government financial resources to the financial system (and having already spent $2 trillion of this staggering $9 trillion figure).
Thus, the U.S. financial system is de facto nationalized, as the Federal Reserve has become the lender of first and only resort rather than the lender of last resort, and the U.S. Treasury is the spender and guarantor of first and only resort. The only issue is whether banks and financial institutions should also be nationalized de jure.
. . . AIG, which lost $62 billion in the fourth quarter and $99 billion in all of 2008 and is already 80% government-owned. With such staggering losses, it should be formally 100% government-owned. And now the Fed and Treasury commitments of public resources to the bailout of the shareholders and creditors of AIG have gone from $80 billion to $162 billion.
News and banks analysts’ reports suggested that Goldman Sachs got about $25 billion of the government bailout of AIG and that Merrill Lynch was the second largest benefactor of the government largesse. These are educated guesses, as the government is hiding the counter-party benefactors of the AIG bailout.”
The inability to disclose is intuitively linked to an inability to tell the truth - the banks are insolvent, the government already essentially owns them, and this inability to admit what's completely obvious is destined to cripple the economy permanently unless action is taken.
Here’s how the pattern works: first, administration officials, usually speaking off the record, float a plan for rescuing the banks in the press. This trial balloon is quickly shot down by informed commentators.
Then, a few weeks later, the administration floats a new plan. This plan is, however, just a thinly disguised version of the previous plan, a fact quickly realized by all concerned. And the cycle starts again.
Why do officials keep offering plans that nobody else finds credible? Because somehow, top officials in the Obama administration and at the Federal Reserve have convinced themselves that troubled assets, often referred to these days as “toxic waste,” are really worth much more than anyone is actually willing to pay for them — and that if these assets were properly priced, all our troubles would go away [...]
So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.
But this refusal to face the facts means, in practice, an absence of action. And I share the president’s fears: inaction could result in an economy that sputters along, not for months or years, but for a decade or more.
This is why the establishment is mad at Alan Grayson. He's willing to say this kind of thing out loud.
Senate Banking Committee Chairman Christopher Dodd said banks may have to be nationalized for “a short time” to help lenders such as Citigroup Inc. and Bank of America Corp. survive the worst economic slump in 75 years.
“I don’t welcome that at all, but I could see how it’s possible it may happen,” Dodd said today on Bloomberg Television’s “Political Capital with Al Hunt” to be broadcast this weekend. “I’m concerned that we may end up having to do that, at least for a short time.”
Bank of America and Citigroup, which received $90 billion in U.S. aid in four months, tumbled as much as 36 percent today on concern they may be nationalized. The Obama administration today said a “privately held” banking system is the “correct way to go” and House Financial Services Committee Chairman Barney Frank said nationalization ought “to be avoided.”
Sen. Charles Schumer (D-N.Y.) believes that failed "zombie" banks, no matter what their size, should be taken over by the government, which should then wipe out shareholders, fire management, clean up the banks and quickly resell them into the marketplace. Such a move, he cautioned, should come only if the "stress tests" being conducted by Treasury Secretary Timothy Geithner determine a bank to be insolvent.
Schumer argued that there are good and bad ways to nationalize banks, and that the loaded nature of the term often leads to confusion. "'Nationalization' means many different things to many different people, and somebody needs to clear it up," said Schumer. "We have to distinguish. I like the good and don't like the bad."
Schumer also pressed that nationalization should be a last resort. "It should be the last arrow in the quiver. The danger here is when a government takes [a bank] over, it drives down shares of other banks that might not be in as bad shape," he said. "Let me be clear about this because I want to be very careful: I am not speaking of any specific institution, just a general comment about a general situation. And I don't have -- and please write this -- I don't have any specific institution in mind."
These aren't backbenchers. They're the Chair of the Senate Banking Committee and Wall Street's man in Washington. And they're merely saying out loud what already has the markets in a panic. The right will try to pin any erosion of the banks on Dodd and Schumer, surely, but the problem is not loose lips, but that many banks are insolvent:
We are not talking about fears that leftist radicals will expropriate perfectly good private companies. At least since last fall the major banks — certainly Citi and B of A — have only been able to stay in business because their counterparties believe that there’s an implicit federal guarantee on their obligations. The banks are already, in a fundamental sense, wards of the state.
And the market caps of these banks did not reflect investors’ assessment of the difference in value between their assets and their liabilities. Instead, it largely — and probably totally — reflected the “Geithner put”, the hope that the feds would bail them out in a way that handed a significant windfall gain to stockholders.
What’s happening now is a growing sense that the federal government, in return for rescuing these institutions, will demand the same thing a private-sector white knight would have demanded — namely, ownership.
And they'd better get to it soon before the whole financial sector goes over the cliff.
Simon Johnson has a really interesting aricle at TPM Café that puts the next massive economic decision to be made by the Obama Administration - what to do with insolvent banks - into an international perspective.
There comes a time in every economic crisis or, more specifically, in every struggle to recover from a crisis, when someone steps up to the podium to promise the policies that - they say - will deliver you back to growth. The person has political support, a strong track record, and every incentive to enter the history books. But one nagging question remains.
Can this person, your new economic strategist, really break with the vested elites that got you into this much trouble? The form of these vested interests, of course, varies substantially across situations, but they are always still strong, despite the downward spiral which they did so much to bring about. And fully escaping the grip of crisis really means breaking their power.
Not only is this a standard way of thinking about crisis resolution in many developing and post-communist countries, it also turns out to be a good guide to thinking about the US today. We have a powerful banking industry that has mismanaged its way into deep trouble. Yet these banks obtained an initial bailout - the Troubled Asset Relief Program, or TARP - on generous terms, and have consistently failed to use the opportunity provided by this government support to turn their operations around. Not only that, but they have flaunted their power - and their arrogance - through paying themselves large and largely inappropriate bonuses.
We come now, this week, to the podium.
You've doubtless heard some reports about what Treasury Secretary Timothy Geithner plans to say at that podium, and he is sadly more likely to protect elites and offer them welfare than do anything to admit their insolvency and break their power. In fact, he's likely to rely on private money from hedge funds and private equity firms to buy the toxic assets from the banks - no doubt with substantial favors from the government in return (like guaranteeing a floor value for the securities). The inescapable fact is that here, as it is in banana republics and oligarchies throughout the world in similar crises, no progress can possibly be made as long as the same people who caused the problem remain in control.
Mr. Geithner wants to use taxpayer dollars to keep bankrupt banks in business. In effect, he wants to tax teachers, fire fighters, and Joe the Plumber to protect the wealth of the banks' shareholders and to pay high salaries to their top executives. No readers of this piece would understand that this is the process being described.
The Post editorial page carried on with this deception. An editorial on saving the banks dismissed nationalization because it would involve the government in running the banks. Then it discusses the idea of buying bad assets and warns, "but there is a huge risk that the government would badly overpay in the first place."
Actually, this is not a risk, this is the point. If the government paid the market price for these assets the banks would be bankrupt and we would be back to step 1, nationalization. The point of buying the bad assets is to pay too much, so that the banks can get enough money to stay solvent.
Barack Obama plays the populist well on TV on occasion, whether by railing against executive pay bonuses or, today, backing the cram-down provision that would let bankruptcy judges modify mortgage terms for those facing foreclosure. But ultimately, his pretensions to populism, his belief that he has the best interests of the people in mind, will face the pressure from elites to make whole the banking system, the executives and the shareholders, and to use taxpayer funds to do it. The banks played casino night in unregulated markets for decades, racking up huge gains on paper and accruing enormous amounts of financial and political power. They practically bankroll most election campaigns, certainly at the Senate and Presidential level, and they used this leverage to wall themselves off from any assault on their power and influence from inside the Capitol. As Johnson says:
Ending the financial crisis is relatively straightforward - a forced recapitalization and change of ownership/management in the banking system - although this will not immediately lead to an economic recovery (more on that here). But seen in deeper political terms, decisive action to restructure large banks is almost impossible. Such action would require overcoming perhaps the single strongest interest group in the United States today.
How can you do it? The answer must be by splitting this powerful interest group into competing factions, and taking them on one by one. Can this be done? Definitely, yes. In particular, bank recapitalization - if implemented right - can use private equity interests against the powerful large bank insiders. Then you need to force the new private equity owners of banks to break them up so they are no longer too big to fail. And then... there is always more to do to contain the power of a lobby that is boosted by any boom and which, the more it succeeds, the more likely it is to ruin us all.
I see this as an unlikely scenario, but one way to reduce elite power is to give sunlight to arrogance like this in the hopes that popular anger will box in elites and their enablers in Washington so that they are unable to do anything but offer concessions. That's basically how the New Deal came about, although it was fought tooth and nail at every step.
Last month, Theresa Hatt died at 52, after a brief struggle with cancer.
Hatt, who lived in Portland, Maine, and worked for the city of Scarborough, had had several credit cards in her name. So, shortly after her death, Hatt's son, Paul Kelleher, began the sad task of calling his mother's creditors, to inform them of her passing.
The calls were uneventful, if depressing, until Kelleher got to Bank of America. Here is how he says his conversation with a representative of the company's estates unit went:
Paul Kelleher: Yes, I'm calling to inform you that my mom died on the 24th of January.
Bank of America Estates representative: I'm sorry. Oh, it looks like she never even missed a payment. That's too bad. Well, how are you planning to take care of her balance?
PK: I'm not going to. She has no estate to speak of, but you should feel free to just go through the standard probate procedure. I'm certainly not legally obligated to pay for her.
BOA: You mean you're not going to help her out?
PK: I wouldn't be helping her out -- she's dead. I'd be helping you out.
BOA: Oh, that's really not the way to look at it. I know that if it were my mother, I'd pay it. That's why we're in the banking crisis we're in: banks having to write off defaulted loans.
Right now, on the issue of the banks Obama is paying lip service to the populists and siding with the elites. The kind of people who try to con the bereaved and blame their own troubles on the dead. There is mass anger around this kind of buck-passing, anger that can be channeled into action. Another bailout for the wealthy and connected would do that.
The creditor of a Chicago plant where laid-off employees are conducting a sit-in to demand severance pay said Tuesday it would extend limited loans to the factory so it could resolve the dispute, but the workers declared their protest unfinished.
The Republic Windows and Doors factory closed last week after Bank of America canceled its financing. About 200 laid-off workers responded by staging a sit-in at the plant, vowing to stay until getting assurances they would receive severance and accrued vacation pay [...]
Leah Fried, a spokeswoman for the union representing the workers, said Tuesday that it was too soon to know whether the sit-in will be called off. She said that workers would have to vote to end the action but that negotiations among the bank, the company and union representative continued.
I say "small victory" because it's not like the workers will have a job to go back to, and because this is the first of what are likely to be many strikes and worker actions as a consequence of the deep recession we're trapped in.
Still, the labor movement can be proud of their work on this. Now it's time to get that kind of representation at the banks:
(CNN) -- The powerful Service Employees International Union has decided that, because of the $700 billion financial-system bailout, it wants to organize bank workers.
Banks that get taxpayer money need to "ensure their workers have a voice," a union spokeswoman says [...]
"We believe there is special responsibility for companies who receive taxpayer dollars to ensure their workers have a voice on the job," SEIU's Lynda Tran said. "And those workers should have a seat at the table at the companies where decisions that impact the future of their families and the companies that employ them" are made.
"We are talking to workers really broadly in banking," she said.
Of course, Bank of America, the company that denied financing to Republic Windows and Doors, took billions in bailout money.
Jerry Brown Did More To Help Homeowners Than The Entire US Government
Yesterday, Bank of America announced that they would settle their lawsuit with a parade of states Attorneys General that began before BofA bought out the defendant, Countrywide Financial. The initial suit alleged that Countrywide engaged "in deceptive advertising and unfair competition by pushing homeowners into mass-produced, risky loans for the sole purpose of reselling the mortgages on the secondary market." At the time I thought it would be difficult to hold Countrywide responsible for what the mortgage market is intended to do, but I suppose they didn't want to face a jury at a time when the financial industry is melting down.
This settlement, which could provide up to $8.68 billion dollars for as many as 400,000 homeowners nationwide (and up to $3.5 billion in California), has some very laudable parts to it:
Under the terms of the settlement, eligible subprime and pay-option mortgage borrowers with loans from Countrywide will be able to avoid foreclosure by obtaining modified and affordable loans. Here is the information released by Brown’s office:
The loans covered by the settlement are among the riskiest and highest defaulting loans at the center of America’s foreclosure crisis. Assuming every eligible borrower and investor participates, this loan modification program will provide up to $3.5 billion to California borrowers as follows:
• Suspension of foreclosures for eligible borrowers with subprime and pay-option adjustable rate loans pending determination of borrower ability to afford loan modifications;
• Loan modifications valued at up to $3.4 billion worth of reduced interest payments and, for certain borrowers, reduction of their principal balances;
• Waiver of late fees of up to $33.6 million;
• Waiver of prepayment penalties of up to $25.6 million for borrowers who receive modifications, pay off, or refinance their loans;
• $27.9 million in payments to borrowers who are 120 or more days delinquent or whose homes have already been foreclosed; and
• Approximately $25.2 million in additional payments to borrowers who, in the future, cannot afford monthly payments under the loan modification program and lose their homes to foreclosure.
This is exactly what should have been in the bailout bill - a large-scale workout for homeowners on the brink of foreclosure to modify their loans and stay in their homes. It's arguably costlier to the bank at this point for the mortgages to go completely bust and to deal with the foreclosure. In addition, BofA is SUSPENDING subprime loans and negative amortization loans as well as loans with little or no documentation from the borrower, which is in a way more significant because that's at the root of the financial crisis.
These are also the kind of steps that Ted Lieu sought in his AB 1830 which was vetoed by the Governor - banning predatory lending and unsustainable mortgage loans. Ultimately, Attorney General Brown was forced to seek remedy in the courts because the regulatory structure had broken down and the Congress was unable or, more likely, unwilling to give struggling homeowners a hand.
This shouldn't be Jerry Brown's job, but the systemic failure fell to him, and he performed brilliantly. And he's not done:
And this is not the end of this chapter. The settlement does not include Angelo Mozilo, the former Chairman and Chief Executive of Countrywide Financial Corporation or David Sambol, formerly the President of Countrywide Home Loans and the President and Chief Operating Officer of Countrywide Financial Corporation. Brown will continue to prosecute separately his case against Mozilo and Sambol.
Lawmakers like Dianne Feinstein and others should be a little ashamed that they were able to do so little in the wake of this crisis while Jerry Brown could do so much more.
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