Yay... Gimme some o' THAT bailout!!!

As reported all over the place, including the FT, the Obama administration is avoiding the word "Bad Bank" and going for "Aggregator Bank" in a public-private partnership. Implying that the risks and rewards will be shared equitably between private investors and the US taxpayer, unlike a bad bank scheme (what we in Asia used to call an AMC, or Asset Management Company in the good old bad old days) in which the taxpayer bears all the cost (bad bank => bad scheme!)

"The exact details of how the private-public partnership will work are not known. One option discussed by policymakers is for the authorities to co-invest alongside private investors in a “bad bank” or “aggregator bank” that would purchase the toxic assets." (FT)

Head fake.

What it is starting to look like is a scheme whereby the US taxpayer limits the downside to the private investor (hedge funds and the like) while handing them all the upside, should there be any. An (almost) free option - especially if the hedge funds get cheap govt financing to buy that stuff in the first place!

If it was possible to properly price the toxic assets with upside potential across a basket of the assets, the hedge funds would already be buying them off the banks... and it would just leave an even bigger (if not terminal) hole in bank balance sheets as the assets would be marked to the sale price (rather than to model or market.)

"Many (probably most, possibly all but a handful) high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking - zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money. They have indeterminate but possibly large remaining stocks of toxic - hard or impossible to value - assets on their balance sheets which they cannot or will not come clean on." (Willem Buiter in the FT)

It certainly IS necessary to take the toxic crap off the books of banks to help them to start providing credit again. We in Asia know this - because that's what had to happen before our banks got recapitalized in the '90s. (Yes, that's the right order of things - keep up!) But, in my view, that does not entail a bailout of the existing equity holders of those banks, and certainly does not require (OK, almost) free options to be handed out to hedge funds (especially those borrowing at government rates and/or on a non-recourse basis to do so.)


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Here's more on the potential lunacy of marking to market... from Willem Buiter of the FT, again. (Though look at it from the effect on the balance sheet: as the liabilities get written down, the bite on the other side is out of the equity base, which makes sense... but it does also make it sound awfully odd on the P&L.)

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Mark to Make-Up? Fiat Bank!

From today's FT: "The financial sector, down as much as 4.7 per cent soon after the open, rallied as much as 4.1 per cent after speculation swept through trading floors that Washington could suspend mark-to-market accounting requirements for illiquid assets."

If you follow the chain to its logical conclusion, it looks like the SEC is creating fiat money with fiat bank balance sheets.

Bank balance sheets? (That actually balance?) Ya gotta have Faith-a-faith-a-faith-ahhhhhhh!



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Dirt Bag on Wall Street - who knew?!

From "The Epicurean Dealmaker", linked at left, a great piece on Goldman: The Dirt Bag Chronicles.

"Seriously, now, can we all just agree to put a stake once and for all in this Goldman Sachs reputation-thingy? I have repeatedly shaken my head in wonder over the years at Goldman Sachs' apparently preternatural ability to maintain an absolutely spotless public image while simultaneously soiling itself in full view of everyone in the most miserable and abject manner possible." [more]

Not much for me to add, but to point out that while the halo still shines somewhat brightly against its peers, (peer, I mean... and, to fill some chart space, Citi,) GS is still off some 60% from the start of 2007. Crappy performance, but much much better than Morgan Stanley (and the S&P500) off some 60% with Citi giving up 95% (okay, okay, 94%.)


(So when is it Joisey Governor Jon Corzine's turn? He was, at one point in time, the boss of Paulson, Rubin and Thain. And Jim Cramer. And possibly Erin Burnett...)

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How the government froze my money market

From super-sharp financials guru Bill Stacey of global theme players AviateGlobal in HK:

G7 governments are now trying mightily to fix problems that they largely caused and certainly exacerbated. Consider the following policy measures that systematically, if not intentionally, undermined key markets – eventually feeding into the money market.

• Inconsistent bail outs of banks (bond holders protected in Freddie, Fannie, Wachovia but not WAMU) dries up term debt for banks
• Presence of potential government guarantees stops equity investments without government support
• Uncertainty about TARP and related programmes stopped the emerging market for “toxic” assets and eliminated price discovery
• Offers of deposit guarantees in some countries creates “beggar thy neighbor” responses in all countries to do the same
• Government equity injections to banks and talk of warrants creates massive risk of dilution for existing shareholders in financial institutions and creates panic selling
• Ban on short selling eliminates a pool of liquidity and source of buying support in the financial sector
• Ban on short selling undermines some hedge funds, causes losses and redemptions and creates retrenchment in one of the most active groups of investors. It also undermines the convertible market
• Talk about government support for household mortgages in the US, likely creates a moral hazard that will lead to more defaults, stop the market moving to clearing levels for property and extend the work out in the underlying pressured market
• Guarantees in money market funds divert money that would otherwise have flowed to banks away to securities and creates a shortage of treasury paper as funds seek to exit financial and corporate short term exposure

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"Brownie, you're doing a heck of a job"

"Brownie, you're doing a heck of a job"... from feather duster to rooster in one easy week...

And Nobel Laureate Krugman concurs...!

(UPDATE: Cassandra not quite so positive...)
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Recipe for Banks in Trouble

1. Extract cr@p assets - in the process of being done under TARP etc
2. Recap (Temasek, HM Govt, Buffett, MUFG, US Treasury... wherever, whoever) - on the way
3. Force inflation on the economy - coming next, hence steepening, below:



That's basically it.

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From William Pesek of Bloomberg on the "United Socialist States of America" on Sept 22nd:

First, here's a memo that the U.S. Treasury team, of which the New York Federal Reserve president was a member, might have written a decade ago.

To: Asian Finance Officials

From: U.S. Treasury

Subject: Worsening Regional Crisis

As economies reel amid instability and as investors flee, it's important that Asian policy makers heed this 10-point plan:

1. Raise interest rates to support currencies;
   
2. Cut government spending and debt;
   
3. Don't blame speculators and hedge funds;
   
4. Let property prices slide. It's a correction, not a crash;
   
5. Don't save those who made bad decisions. Moral hazard is bad;
   
6. Increase transparency in the corporate sector;
   
7. Subsidies of any kind are always and everywhere bad;
   
8. Get banks to write down bad loans immediately;
   
9. Avoid blaming the media for your problems;
   
10. Follow the free-market policies that drive U.S. prosperity.

Now for the message emanating from the U.S. Treasury these days:

1. Disregard all of the above.

Classic.

(And then there's this one from Sept 19th - "Back in the US... Back in the US...")
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PalinDrone - on the Big Bank Bailout

From Gail Collins' column in the NYT today referencing Sarah "Not-Flat-Busted" Palin on Katie Couric's CBS show:

“Not necessarily this, as it’s been proposed, has to pass or we’re gonna find ourselves in another Great Depression. But there has to be action taken, bipartisan effort — Congress not pointing fingers at this point at ... one another, but finding the solution to this, taking action and being serious about the reforms on Wall Street that are needed.”  

So say we all.

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"Financial experts are saying we are entering a new chapter in the American economy. I believe it's Chapter 11." --Jay Leno

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The central cause of American economic distress

The NYT has an Saturday opinion piece entitled 'But Will it Work?': 

If the plan works, it will attack the central cause of American economic distress - the continued plunge in housing prices. If banks resumed lending more liberally, mortgages would become more readily available. That would give more people the wherewithal to buy homes, lifting housing prices or at least preventing them from falling further. This would prevent more mortgage-linked investments from going bad, further easing the strain on banks. As a result, the current downward spiral would end and start heading up.

"It's easy to forget amid all the fancy stuff - credit derivatives, swaps - that the root cause of all this is declining house prices," Mr. Blinder said.

I agree, the immediate "root cause of all this is declining house prices" but I maintain that the "central cause of American economic distress" was that people who were not in an economic position to own their own homes had been seduced/ frightened/ duped into doing so by bankers who were way way liberal enough with their lending... because they could almost instantly shove the risk (and moral responsibility?) off to some other sucker through securitization - ie to other financial institutions (aka shills), investors and... er... The US taxpayer.

So any solution that does not address, directly or indirectly, the "central cause" is doomed to fail.

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Spread 'em

The TED Spread has been flagged again quite frequently recently (most notably by Paul Krugman here, here, here...) as a measure of "financial jitters," or the inverse of risk appetite.  (Risk Appetite is the Opposite of Fear, and is also  known in the financial markets as "greed.")

Supposed to be using 3 month Euro-Dollar futures vs T-Bill futures of the exact same maturity, but I am just using generic LIBOR and T-Bill rates from Bloomberg.  (Remind me... how safe are Treasuries again??)

Top part of the chart shows LIBOR popping up and T-bill (yields) going through the floor.  The bottom shows the spiking up of FEAR.

FYI, this is the 20 year chart of the same. 

Monthly data, so last night's spike not there... 

... we're at about 300bps now - way high, way way high.

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Bloomberg Financial Definition: 

Ted Spread. The price difference between three-month futures contracts for U.S. Treasuries and three-month contracts for Eurodollars having identical expiration months.

The Ted spread can be used as an indicator of credit risk. This is because U.S. T-bills are considered risk free while the rate associated with the Eurodollar futures is thought to reflect the credit ratings of corporate borrowers. As the Ted spread increases, default risk is considered to be increasing, and investors will have a preference for safe investments. As the spread decreases, the default risk is considered to be decreasing.

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First: North Carolina, then: New York, then... THE WORLD!!!! (mwa-ha-ha-ha-haaa...)

Bank of America:

Bank of America Corp Center

100 North Tryon Street

Charlotte,NC 28255

BUYS

Merrill Lynch:

250 Vesey Street

4 World Financial Center

New York,NY 10080

Wachovia:

One Wachovia Center

Charlotte,NC 28288

?BUYS?

Morgan Stanley:

1585 Broadway

New York,NY 10036

Relevant (?) Factoid:

John J Mack, Chairman and CEO of Morgan Stanley...

... born and bred in: North Carolina

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How big is TOO BIG (to fail)?

"Too big to Fail"

"Too big to Fail"

"Too big to Fail"

We've been hearing a lot about this bank being too big to fail, or that bank (or GSE or commercial bank or investment bank or insurance company or hedge fund or money market fund or... central bank or... deposit insurance corporation or...) but what does that mean?  Yes yes yes, systemic risk etc, but Nemo over at newly-discovered (to me) self evident has done a bit (a lot) of work to find out at least what scale of bigness we're dealing with these days.  Read the posts here: Part 1, Part 2 & Part 3 but for example, here's what he (/she?) writes about Merrill, AIG and LTCM:

Merrill Lynch has $966 billion in assets and $931 billion in liabilities.  They are counterparty to $4.2 trillion in derivatives trades.   They get brownie points for including HTML anchors in their 10-Q.  (Do we still use the phrase “brownie points” after Katrina?)

AIG (10-Q) has $1.0 trillion in assets (10-Q page 1) and $972 billion in liabilities (page 2). They are counterparty to at least $447 billion in credit default swaps (page 87).  But that does not include the old-fashioned insurance operations, and who knows what else because I am tired of slogging through this stuff.  Executive summary: What would happen if an insurer with $1 trillion in assets were to fail?  I have no idea; and neither, I suspect, does anyone else.

In 1998, Long-Term Capital Management nearly collapsed.  They had $129 billion in assets and $124 billion in liabilities.  But the real problem was that they were counterparty to $1.25 trillion in derivatives trades.  Because their collapse might have created a chain-reaction throughout the financial system, then-President of the NY Fed William McDonough called together the heads of the major commercial banks and investment banks and politely asked them to cooperate.  The banks bailed out LTCM without any government backstop.  (Bear Stearns declined to participate in the bail-out, a fact never forgotten by its peers.)

Great stuff.  Scary reading.

(Just updated my blogrollthing at left)

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"You've Got The Fed" (from Versus Plus)

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