This Weekend's Contemplation - Where the Capital Markets are Now!
Many people are confused as to where the capital markets are today, mostly because there are so many moving parts it is hard to keep them straight. The following article from Yahoo.com gives a good summary of where everything is. Text in bold is my emphasis.
Investors start the final quarter of 2008 this week in an increasingly dysfunctional global market, after weeks of historic turbulence that have prompted a near seizure in lending between banks.
While Washington's $700-billion bailout package is crucial in tackling the worst financial crisis since the Great Depression, doubts remain as to how it could immediately thaw the frozen money and credit market.
This week's data highlight is the U.S. employment report for September but the indicator is unlikely to fully capture the massive shock to the labor market, broader economy and consumer confidence of the events of the past two weeks.
Interbank money markets are experiencing historically high tensions after the collapse of Lehman Brothers, Washington Mutual and the firesale of Merrill Lynch and UK bank HBOS, while a global ban on short selling has caused trading volumes in major stock exchanges to dwindle.
The liquidity crisis is spreading to the Arab Gulf, other emerging markets and Scandinavia, and the U.S. commercial paper market, a vital source of funding for many companies' daily operations, has shrunk to its smallest in almost two years.
All that has backed a stampede into safe-haven U.S. government debt that has sent short-term yields to near zero as prices rocketed.
"It's the most dysfunctional market I can remember in my career of 20 years," said Chris Iggo, chief investment officer at AXA Investment Managers.
"It is the complete questioning of the very fundamentals of how the financial system works. The real key to everything we do is a matter of trust and there is evaporation of trust."
"That's why banks are not lending to each other and people are worried about the creditworthiness of debt and there's a lack of belief in the ability of equities to deliver the earnings that analysts are forecasting."
After more than a week of negotiations, U.S. lawmakers on Sunday were set to sign off on a deal to create a $700 billion government fund to buy bad debt from ailing banks.
Britain might claim another victim to the 13-month-old credit crisis this week. The BBC reported on Sunday the country will nationalize troubled mortgage firm Bradford & Bingley after it took Northern Rock into public ownership in February.
On Friday, the cost of borrowing dollars for three months in the interbank market stood at 3.76188 percent, a full two percentage points above expected official U.S. interest rates -- a record premium.
Numerous liquidity interventions by central banks -- so far the only coordinated action -- have failed to eliminate money market tensions stemming from a global shortage of dollars.
Pressure is growing for policymakers to do more to contain the fast-spreading financial crisis -- delivering an ensemble cut in interest rates for example.
"The clear signal from the market is that these liquidity operations are not working. The money is not getting where it needs to go," said Nick Parsons, head of market strategy at nabCapital. "So, if changing the quantity of money has not worked, then it's time to change its price."
The European Central Bank, which meets on Thursday to decide on interest rates, is unlikely to lower the cost of borrowing until December because it remains worried about persistent inflation pressures.
According to interest rate futures, investors are betting on a 1-5 chance of a half-point interest rate cut from the Federal Reserve by late October.
"Credit is rapidly becoming either completely unavailable or punitively expensive ... The countdown to a dramatically bad economic outcome is therefore running at very high speed," said Tim Bond, head of asset allocation at Barclays Capital.
"Unchecked, the current crisis would turn into a self-reinforcing vortex of defaults, bank capital contraction and deep recession within a matter of weeks."
In these uncertain times, options for investors to invest their capital are diminishing rapidly as stocks and commodities fall, while government bonds are already expensive with some U.S. yields close to zero.
"Investors are trying to do everything they can to safeguard capital. The implication is the continued deleveraging of the financial system and the continued consolidation of financial institutions," Axa's Iggo said.
"There is no credit available to finance consumption and investment. Globally there is a major economic slowdown that's going to last for a considerable amount of time."
Tuesday's release of Reuters September global asset allocation polls will give a useful pointer on how money managers are shifting their assets in surveys conducted after the collapse of Lehman Brothers.
Even emerging markets -- the star performers of the past few years -- are suffering from a departure of foreign capital as investors flee higher-risk assets.
Morgan Stanley analysts say the bank industry panic in the developed world could cause capital inflows into emerging markets to fall by a quarter to $550 billion in 2009, increasing the risk of a global recession and even a currency crisis.
Emerging market stocks, measured by MSCI, are down 34 percent this year, after five straight years of double digit gains. Their developed market counterpart is down 22 percent since January.
In Ukraine, a mix of political and economic uncertainty has led to a sharp fall in the local currency, depleting currency reserves and threatening a full-blown currency crisis.
"Not only will the emerging market economies experience a material slowdown, but the world's capital flows to emerging markets will also likely be significantly reduced, undermining emerging market currencies," Stephen Jen, Morgan Stanley's chief currency economist, said in a note to clients.
Sunday, September 28, 2008
Saturday, September 27, 2008
Wachovia is Looking for a Suitor
I never thought Wachovia would fail, but they are weak. I always thought that with their brach and retail system that someone would buy them. Personally, I always thought it would be Wells Fargo because this would be their best chance to "jump the Mississippi" into the eastern US.
A couple of things to infer from this:
1.) The bail-out may not be as rich as originally proposed or Wachovia would wait.
2.) Let's see what Citibank and Wells Fargo do. It might give an indication of their health and willingness to expand.
3.) Will the Fed OK the purchase of a major US bank by a foreign bank?
From Yahoo.com:
Wachovia Corp has begun early merger talks with several suitors, according to published reports, all of which spurned Washington Mutual Inc prior to that lender's seizure by the U.S. government.
Wachovia, the sixth-largest U.S. bank by assets, began preliminary talks with Citigroup Inc, the New York Times said on Friday, citing people briefed on the matter.
Meanwhile, the Wall Street Journal said Wachovia has entered preliminary merger talks with Citigroup, Banco Santander SA, and Wells Fargo & Co, citing a person familiar with the situation. Bank executives are expected to be in New York this weekend for talks, it said.
Wachovia spokeswoman Christy Phillips-Brown declined to comment on merger discussions. The other banks either declined to comment or were not immediately available.
The market value of Wachovia was about $21.6 billion as of Friday's market close, Reuters data show. Citigroup's was $109.7 billion, Santander's was $99.8 billion and Wells Fargo's was $123.4 billion, the data show.
Talks would underscore the pressure that Charlotte, North Carolina-based Wachovia, the sixth-largest U.S. bank by assets, has faced from investors, largely because of a $122 billion portfolio of option adjustable-rate mortgages that Chief Executive Robert Steel classifies as "distressed."
The bank suffered a record $9.11 billion loss in the second quarter and some analysts have said it may need more capital after raising $8.05 billion in April.
Wachovia came under further pressure on Friday as investors worried about the fate of a $700 billion government bailout of the financial sector.
JPMorgan Chase & Co's decision to write down $31 billion of loans it took over when it bought much of Washington Mutual Inc banking operations on Thursday for $1.9 billion may foreshadow greater losses at Wachovia, analysts said.
Earlier this month, Wachovia began merger talks with Morgan Stanley following the bankruptcy of Lehman Brothers Holdings Inc, but people familiar with the matter said earlier this week that those talks had ended.
For Citigroup, combining the two companies would create by far the largest U.S. retail brokerage, with close to 30,000 brokers before attrition. Citigroup would also get the major U.S. retail banking presence it has long lacked, and make it a strong rival to Bank of America, JPMorgan and Wells Fargo.
The bank also raised well over $40 billion of capital in late 2007 and early 2008, leaving Chief Executive Vikram Pandit perhaps better positioned for acquisitions than rivals that failed to raise enough and could not do so now.
Any Wachovia merger talks would come amid uncertainty of the fate of the industry bailout proposed by Treasury Secretary Henry Paulson. The bank would be a prime candidate for help, depending on the types and amounts of securities the government would accept.
I never thought Wachovia would fail, but they are weak. I always thought that with their brach and retail system that someone would buy them. Personally, I always thought it would be Wells Fargo because this would be their best chance to "jump the Mississippi" into the eastern US.
A couple of things to infer from this:
1.) The bail-out may not be as rich as originally proposed or Wachovia would wait.
2.) Let's see what Citibank and Wells Fargo do. It might give an indication of their health and willingness to expand.
3.) Will the Fed OK the purchase of a major US bank by a foreign bank?
From Yahoo.com:
Wachovia Corp has begun early merger talks with several suitors, according to published reports, all of which spurned Washington Mutual Inc prior to that lender's seizure by the U.S. government.
Wachovia, the sixth-largest U.S. bank by assets, began preliminary talks with Citigroup Inc, the New York Times said on Friday, citing people briefed on the matter.
Meanwhile, the Wall Street Journal said Wachovia has entered preliminary merger talks with Citigroup, Banco Santander SA, and Wells Fargo & Co, citing a person familiar with the situation. Bank executives are expected to be in New York this weekend for talks, it said.
Wachovia spokeswoman Christy Phillips-Brown declined to comment on merger discussions. The other banks either declined to comment or were not immediately available.
The market value of Wachovia was about $21.6 billion as of Friday's market close, Reuters data show. Citigroup's was $109.7 billion, Santander's was $99.8 billion and Wells Fargo's was $123.4 billion, the data show.
Talks would underscore the pressure that Charlotte, North Carolina-based Wachovia, the sixth-largest U.S. bank by assets, has faced from investors, largely because of a $122 billion portfolio of option adjustable-rate mortgages that Chief Executive Robert Steel classifies as "distressed."
The bank suffered a record $9.11 billion loss in the second quarter and some analysts have said it may need more capital after raising $8.05 billion in April.
Wachovia came under further pressure on Friday as investors worried about the fate of a $700 billion government bailout of the financial sector.
JPMorgan Chase & Co's decision to write down $31 billion of loans it took over when it bought much of Washington Mutual Inc banking operations on Thursday for $1.9 billion may foreshadow greater losses at Wachovia, analysts said.
Earlier this month, Wachovia began merger talks with Morgan Stanley following the bankruptcy of Lehman Brothers Holdings Inc, but people familiar with the matter said earlier this week that those talks had ended.
For Citigroup, combining the two companies would create by far the largest U.S. retail brokerage, with close to 30,000 brokers before attrition. Citigroup would also get the major U.S. retail banking presence it has long lacked, and make it a strong rival to Bank of America, JPMorgan and Wells Fargo.
The bank also raised well over $40 billion of capital in late 2007 and early 2008, leaving Chief Executive Vikram Pandit perhaps better positioned for acquisitions than rivals that failed to raise enough and could not do so now.
Any Wachovia merger talks would come amid uncertainty of the fate of the industry bailout proposed by Treasury Secretary Henry Paulson. The bank would be a prime candidate for help, depending on the types and amounts of securities the government would accept.
Friday, September 26, 2008
WAMU Fails and is Taken Over by J P Morgan Chase
WAMU failed last night and the assets were purchased by J P Morgan Chase. This should come as no surprise and this is also probably the last large bank failure for the time being. In one year the large investment banks and a number of large S&Ls have disappeared. Stay tuned this is not over. The financial institutions that are left standing are the heavily regulated commercial banks. Does this mean that free enterprise without regulation does not work? Does not mean that un-fettered free enterprise does not work? We learned that lesson during the Great Depression. Are we about to learn it again? Text in bold is my emphasis. From Bloomberg:
JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.
Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.
WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that the savings and loan valued at $4 a share.
``This is a fabulous franchise,'' Dimon, 52, said in an interview. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''
WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.
In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.
David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''
New York-based JPMorgan, which separately announced plans to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody's Investors Service. Moody's left its Aa2 rating on JPMorgan unchanged.
JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy. . . .
. . . . JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said. . . .
. . . . JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.
Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.
The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.
WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984. . . . .
. . . . WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.
During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets. . . . .
. . . . WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.
WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively. . . . .
Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.
Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.
Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans. . . . .
. . . . JPMorgan said in a regulatory filing that it expects to record $1.5 billion in pretax related costs related to the purchase of WaMu's branch network. It expects to close less than 10 percent of combined branches. The deal will 60 cents a share to JPMorgan's 2010 earnings, and 70 cents a share in 2011, the firm added.
WAMU failed last night and the assets were purchased by J P Morgan Chase. This should come as no surprise and this is also probably the last large bank failure for the time being. In one year the large investment banks and a number of large S&Ls have disappeared. Stay tuned this is not over. The financial institutions that are left standing are the heavily regulated commercial banks. Does this mean that free enterprise without regulation does not work? Does not mean that un-fettered free enterprise does not work? We learned that lesson during the Great Depression. Are we about to learn it again? Text in bold is my emphasis. From Bloomberg:
JPMorgan Chase & Co. became the biggest U.S. bank by deposits, acquiring Washington Mutual Inc.'s branch network for $1.9 billion after the thrift was seized in the largest U.S. bank failure in history.
Customers of WaMu withdrew $16.7 billion from accounts since Sept. 16, leaving the Seattle-based bank ``unsound,'' the Office of Thrift Supervision said late yesterday. WaMu's branches will open today and depositors will have full access to all their accounts, Sheila Bair, chairman of the Federal Deposit Insurance Corp., said on a conference call.
WaMu is the latest casualty of a financial crisis that drove Lehman Brothers Holdings Inc. and IndyMac Bancorp out of business and led to the hastily arranged rescues of Merrill Lynch & Co. and Bear Stearns Cos., which was itself absorbed by JPMorgan. WaMu in March rejected a takeover offer from JPMorgan Chief Executive Officer Jamie Dimon that the savings and loan valued at $4 a share.
``This is a fabulous franchise,'' Dimon, 52, said in an interview. ``We think we got this at a price that protects us, where if we were wrong, it still protects us.''
WaMu collapsed as its credit rating was slashed to junk and its stock price tumbled. Facing $19 billion of losses on soured mortgage loans, the lender put itself up for sale last week. WaMu fired CEO Kerry Killinger on Sept. 8 and replaced him with Alan Fishman, who was awarded a $7.5 million signing bonus and $1 million salary.
In most bank seizures, little or nothing is left for shareholders. WaMu, down 95 percent in the past year, dropped to 45 cents in extended trading following the announcement, which came after the close of regular trading.
David Bonderman's TPG Inc., which led a $7 billion capital infusion for WaMu earlier this year, lost most of its initial $2 billion investment. TPG, based in Forth Worth, Texas, said in a statement yesterday it was ``dissatisfied with the loss'' and that the WaMu investment was a ``small part of assets.''
New York-based JPMorgan, which separately announced plans to raise $8 billion by selling common stock, had its outlook lowered to negative by Moody's Investors Service. Moody's left its Aa2 rating on JPMorgan unchanged.
JPMorgan won't acquire WaMu's liabilities, including claims by shareholders and subordinated and senior debt holders, the FDIC said. JPMorgan paid $10 a share for Bear Stearns in March as the New York-based securities firm teetered on the brink of bankruptcy. . . .
. . . . JPMorgan will add branches in California, Washington and Florida, among other states, and will have 5,400 offices with about $900 billion in deposits, the most of any U.S. bank. The branches and credit cards will carry the Chase brand and will be integrated by 2010, JPMorgan said. . . .
. . . . JPMorgan is taking on $176 billion in mortgage-related assets and writing down the value of it and other portfolios by about $31 billion, the company said. The bank will make a one- time payment of $1.9 billion to the FDIC as part of the deal.
Citigroup Inc., which had been among five potential acquirers, elected not to bid for WaMu because presumed loan losses outweighed benefits from the deposits, said a person familiar with the situation. Wells Fargo & Co., Banco Santander SA and Toronto-Dominion bank had expressed interest in buying all or parts of WaMu, said a person with knowledge of the process.
The acquisition may add 50 cents a share to earnings in 2009, JPMorgan said in a statement yesterday. The firm said it may save $1.5 billion in pretax costs by 2010, offsetting the $1.5 billion it will take in merger-related charges. JPMorgan will close less than 10 percent of the combined retail shops.
WaMu had about 2,300 branches and $182 billion of customer deposits at the end of June. Its $310 billion of assets dwarf those of Continental Illinois National Bank and Trust, previously the largest failed bank, which had $40 billion ($83 billion in 2008 dollars) when it was taken over in 1984. . . . .
. . . . WaMu has $28.4 billion in outstanding bonds, with Capital Research and Management the largest debt-holder, Bloomberg data show. All three major credit agencies rate WaMu junk, the only company in the 24-member KBW Bank Index that's below investment grade.
During the past three quarters, WaMu lost $6.3 billion. It kept skidding even after joining a list of financial companies the U.S. Securities and Exchange Commission protected from short selling in an effort to stabilize stock markets. . . . .
. . . . WaMu was the second-biggest provider of option ARMs, behind Wachovia Corp., with $54 billion held in its portfolio in the first quarter, according to Inside Mortgage Finance. Of the $230 billion in loans secured by real estate at the end of the second quarter, $16.9 billion were subprime mortgages. WaMu, which ranked sixth among U.S. mortgage companies last year, was the 11th-biggest subprime lender in 2006, according to Inside Mortgage Finance.
WaMu estimated losses of as much as $19 billion in the next 2-1/2 years. Standard & Poor's cut the bank's credit rating twice in nine days, leaving it at CCC. Fitch Ratings and Moody's Investors Service cut WaMu to junk this month and have BBB- and Ba2 ratings, respectively. . . . .
Killinger, WaMu's ousted CEO, joined Washington Mutual in 1982 when the company bought a securities firm. He was promoted to president in 1988 and CEO two years later, assuming control of a company with about $7 billion in assets.
Beginning in 1995, Killinger went on a shopping spree, making at least 14 acquisitions in the next seven years and boosting assets to more than $300 billion.
Between 1990 and the end of 2006, Washington Mutual shares jumped almost 20-fold, while the Standard & Poor's 500 Index quadrupled. Then the subprime rout started and defaults hit a record, as falling home prices and rising mortgage rates left borrowers with the weakest credit unable to repay their loans. . . . .
. . . . JPMorgan said in a regulatory filing that it expects to record $1.5 billion in pretax related costs related to the purchase of WaMu's branch network. It expects to close less than 10 percent of combined branches. The deal will 60 cents a share to JPMorgan's 2010 earnings, and 70 cents a share in 2011, the firm added.
Thursday, September 25, 2008
A View of the Future of US Financial Markets from Europe
The following view from the German Finance Minister of where the US is headed is worth a read. I don't believe most people appreciate the irreparable harm that that was done to international markets by the US. Only time will tell for sure. Text in bold is my emphasis. From Market Watch:
Germany's finance minister on Thursday laid the blame for the global banking crisis on the Anglo-American free-market model's quest for ever-higher near-term profits, predicting the United States would soon lose its role as the world's dominant financial power.
"The U.S. will lose its status as the superpower of the global financial system, not abruptly but it will erode," Finance Minister Peer Steinbrueck told the lower house of Germany's parliament in Berlin, according to published reports. "The global financial system will become more multi-polar." (Let me add that this was going to happen anyway.)
Steinbrueck criticized the United States for failing to adequately regulate investment banks and said free-market policies embraced by the United States and Great Britain that emphasized a short-term "insane drive for higher and higher profits" were partly to blame for the crisis.
"Wall Street will never be what it was," he said.
The finance minister said he would push for a global ban on speculative short selling and would use next month's meeting of the Group of Seven finance ministers and central bankers in Washington to press for new rules that would prevent banks from fully securitizing loans and selling them to third parties.
Steinbrueck said U.S. authorities were late in undertaking rescue efforts, but said he welcomed the decision to attempt to bail out only organizations whose collapse would threaten the world financial system.
He repeated that he felt there was no need for Germany or Europe to echo the U.S. Treasury's proposal to spend around $700 billion to buy up toxic assets from distressed banks' balance sheets, saying the financial crisis is largely an "American problem." The minister warned, however, that the fallout from the crisis would make for lower growth in the near future and eventually impact the labor market.
The following view from the German Finance Minister of where the US is headed is worth a read. I don't believe most people appreciate the irreparable harm that that was done to international markets by the US. Only time will tell for sure. Text in bold is my emphasis. From Market Watch:
Germany's finance minister on Thursday laid the blame for the global banking crisis on the Anglo-American free-market model's quest for ever-higher near-term profits, predicting the United States would soon lose its role as the world's dominant financial power.
"The U.S. will lose its status as the superpower of the global financial system, not abruptly but it will erode," Finance Minister Peer Steinbrueck told the lower house of Germany's parliament in Berlin, according to published reports. "The global financial system will become more multi-polar." (Let me add that this was going to happen anyway.)
Steinbrueck criticized the United States for failing to adequately regulate investment banks and said free-market policies embraced by the United States and Great Britain that emphasized a short-term "insane drive for higher and higher profits" were partly to blame for the crisis.
"Wall Street will never be what it was," he said.
The finance minister said he would push for a global ban on speculative short selling and would use next month's meeting of the Group of Seven finance ministers and central bankers in Washington to press for new rules that would prevent banks from fully securitizing loans and selling them to third parties.
Steinbrueck said U.S. authorities were late in undertaking rescue efforts, but said he welcomed the decision to attempt to bail out only organizations whose collapse would threaten the world financial system.
He repeated that he felt there was no need for Germany or Europe to echo the U.S. Treasury's proposal to spend around $700 billion to buy up toxic assets from distressed banks' balance sheets, saying the financial crisis is largely an "American problem." The minister warned, however, that the fallout from the crisis would make for lower growth in the near future and eventually impact the labor market.
Wednesday, September 24, 2008
Two Books You Should Consider Reading
Below are two books that you should consider reading. The first book is the history of the Great Depression. It is written for the academic/professional economist so it can be a bit of tough slog from time to time.
The World in Depression by Charles Kindleberger
The second book is about Depression Economics in the late 20th century and is written for the layman.
I found both books to be scary considering what is going on now.
PS - I am not trying to promote Amazon, I just happen to know their website better.
Below are two books that you should consider reading. The first book is the history of the Great Depression. It is written for the academic/professional economist so it can be a bit of tough slog from time to time.
The World in Depression by Charles Kindleberger
The second book is about Depression Economics in the late 20th century and is written for the layman.
I found both books to be scary considering what is going on now.
PS - I am not trying to promote Amazon, I just happen to know their website better.
The Negotiating Over the Bail-Out Plan is not Over Yet
One of my favorite authors (Paul Krugman) is saying no to the Bail-Out Plan so far and I have to agree with him. But, just remember one thing, Hank for sure, and probably Ben, are excellent "horse traders". So their "testimony" before the Finance Committee is more like watching haggling in an open market (like the Latin America, Asia, or the Middle East) and a lot less like testimony.
By the way, if you have never haggled in the open market you should try it, you will learn a lot about free enterprise, perfect information, rational behavior, and many other assumptions held so dearly in economics and finance theory.
Text in bold is my emphasis. From the NY Times:
The initial Treasury stance on the bailout was one of sheer demand for authority: give us total discretion and a blank check, and we’ll fix things. There was no explanation of the theory of the case — of why we should believe the proposed intervention would work. So many of us turned to our own analyses, and concluded that it probably wouldn’t work — unless it amounted to a huge giveaway to the financial industry.
Now, under duress, Ben Bernanke (not Paulson!) has offered an explanation of sorts about the missing theory. And it is, in effect, a metastasized version of the “slap-in-the-face” theory that has failed to resolve the crisis so far.
Before I explain the apparent logic here, let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership.
That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.
But now Paulson and Bernanke are proposing, very nearly, to do the opposite: they want to buy bad paper from everyone, not just institutions in trouble, while taking no ownership. In fact, they’ve said that they don’t want equity warrants precisely because they would lead financial institutions that aren’t in trouble to stay away. So we’re talking about a bailout specifically designed to funnel money to those who don’t need it.
It took four days before P&B offered any explanation whatsoever of their logic. But as of now, it seems that the argument runs like this: mortgage-related assets are currently being sold at “fire-sale” prices, which don’t reflect their true, “hold to maturity” value; we’re going to pay true value — and that will make everyone’s balance sheet look better and restore confidence to the markets.
As I said, this is really a giant version of the slap-in-the-face theory: markets are getting hysterical, and the feds can calm them down by buying when everyone else is selling.
So, three points:
1. They’re still offering something for nothing. In major financial crises, the beginning of the end comes when the government accepts that it will have to pay some cost to recapitalize the banks. But in this case they’re still insisting that it’s basically a confidence problem, and it we can wave our magic wand — a $700 billion magic wand, but that’s just to impress people — the whole thing will go away.
2. They’re asserting that Treasury and the Fed know true values better than the market. Just to be fair, it’s possible, maybe even probable, that mortgage-related paper is being sold too cheaply. But how sure are we of that? There are plenty of cash-rich private investors out there; how many of them are buying MBS? And isn’t it bizarre to have officials who miscalled so much — “All the signs I look at,” declared Paulson in April 2007, show “the housing market is at or near a bottom” — confidently declaring that they know better than the market what a broad class of securities is worth?
3. Even if it works, the system will remain badly undercapitalized. Realistic estimates say that there will be $800 billion or more of real, medium-term — not fire-sale — losses on home mortgages. Only around $480 billion have been acknowledged by financial institutions so far. So even if the fire-sale discount is removed, we’ll still have a crippled system. And Paulson is offering nothing to fix that — unless he ends up paying much more than the paper is worth, by any standard.
Meanwhile, Paulson and Bernanke seem to be digging in their heels against equity warrants or anything else that would make this a more standard financial rescue. I say no deal on those terms — and if the lack of a deal puts the financial world under strain, blame Paulson and Bernanke, who have wasted most of a week demanding authority without explanation.
One of my favorite authors (Paul Krugman) is saying no to the Bail-Out Plan so far and I have to agree with him. But, just remember one thing, Hank for sure, and probably Ben, are excellent "horse traders". So their "testimony" before the Finance Committee is more like watching haggling in an open market (like the Latin America, Asia, or the Middle East) and a lot less like testimony.
By the way, if you have never haggled in the open market you should try it, you will learn a lot about free enterprise, perfect information, rational behavior, and many other assumptions held so dearly in economics and finance theory.
Text in bold is my emphasis. From the NY Times:
The initial Treasury stance on the bailout was one of sheer demand for authority: give us total discretion and a blank check, and we’ll fix things. There was no explanation of the theory of the case — of why we should believe the proposed intervention would work. So many of us turned to our own analyses, and concluded that it probably wouldn’t work — unless it amounted to a huge giveaway to the financial industry.
Now, under duress, Ben Bernanke (not Paulson!) has offered an explanation of sorts about the missing theory. And it is, in effect, a metastasized version of the “slap-in-the-face” theory that has failed to resolve the crisis so far.
Before I explain the apparent logic here, let’s talk about how governments normally respond to financial crisis: namely, they rescue the failing financial institutions, taking temporary ownership while keeping them running. If they don’t want to keep the institutions public, they eventually dispose of bad assets and pay off enough debt to make the institutions viable again, then sell them back to the private sector. But the first step is rescue with ownership.
That’s what we did in the S&L crisis; that’s what Sweden did in the early 90s; that’s what was just done with Fannie and Freddie; it’s even what was done just last week with AIG. It’s more or less what would happen with the Dodd plan, which would buy bad debt but get equity warrants that depend on the later losses on that debt.
But now Paulson and Bernanke are proposing, very nearly, to do the opposite: they want to buy bad paper from everyone, not just institutions in trouble, while taking no ownership. In fact, they’ve said that they don’t want equity warrants precisely because they would lead financial institutions that aren’t in trouble to stay away. So we’re talking about a bailout specifically designed to funnel money to those who don’t need it.
It took four days before P&B offered any explanation whatsoever of their logic. But as of now, it seems that the argument runs like this: mortgage-related assets are currently being sold at “fire-sale” prices, which don’t reflect their true, “hold to maturity” value; we’re going to pay true value — and that will make everyone’s balance sheet look better and restore confidence to the markets.
As I said, this is really a giant version of the slap-in-the-face theory: markets are getting hysterical, and the feds can calm them down by buying when everyone else is selling.
So, three points:
1. They’re still offering something for nothing. In major financial crises, the beginning of the end comes when the government accepts that it will have to pay some cost to recapitalize the banks. But in this case they’re still insisting that it’s basically a confidence problem, and it we can wave our magic wand — a $700 billion magic wand, but that’s just to impress people — the whole thing will go away.
2. They’re asserting that Treasury and the Fed know true values better than the market. Just to be fair, it’s possible, maybe even probable, that mortgage-related paper is being sold too cheaply. But how sure are we of that? There are plenty of cash-rich private investors out there; how many of them are buying MBS? And isn’t it bizarre to have officials who miscalled so much — “All the signs I look at,” declared Paulson in April 2007, show “the housing market is at or near a bottom” — confidently declaring that they know better than the market what a broad class of securities is worth?
3. Even if it works, the system will remain badly undercapitalized. Realistic estimates say that there will be $800 billion or more of real, medium-term — not fire-sale — losses on home mortgages. Only around $480 billion have been acknowledged by financial institutions so far. So even if the fire-sale discount is removed, we’ll still have a crippled system. And Paulson is offering nothing to fix that — unless he ends up paying much more than the paper is worth, by any standard.
Meanwhile, Paulson and Bernanke seem to be digging in their heels against equity warrants or anything else that would make this a more standard financial rescue. I say no deal on those terms — and if the lack of a deal puts the financial world under strain, blame Paulson and Bernanke, who have wasted most of a week demanding authority without explanation.
Monday, September 22, 2008
Let's Talk About the FDIC
This came out last week, but it is still relevant. Text in bold is my emphasis. From MSNBC.com:
Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.
Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.
Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.
"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.
Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.
But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.
The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.
FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.
The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.
Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.
Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.
A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.
By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.
Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.
Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.
WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.
Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.
These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.
If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.
Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.
But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.
"While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"
Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts — considered to have adequate capital and to be well managed — paid no premiums to the FDIC. Today, all of them do.
There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.
Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets. "More banks will come on the (troubled) list as credit problems worsen," he said. "Assets of problem institutions also will continue to rise."
This came out last week, but it is still relevant. Text in bold is my emphasis. From MSNBC.com:
Banks are not the only ones struggling in the growing financial crisis. The fund established to insure their deposits is also feeling the pinch, and the taxpayer may be the lender of last resort.
The Federal Deposit Insurance Corp., whose insurance fund has slipped below the minimum target level set by Congress, could be forced to tap tax dollars through a Treasury Department loan if Washington Mutual Inc., the nation's largest thrift, or another struggling rival fails, economists and industry analysts said Tuesday.
Treasury has already come to the rescue of several corporate victims of the housing and credit crunches. The government took over mortgage finance companies Fannie Mae and Freddie Mac, and helped finance the sale of investment bank Bear Stearns to J.P. Morgan Chase & Co.
Eleven federally insured banks and thrifts have failed this year, including Pasadena, Calif.-based IndyMac Bank, by far the largest shut down by regulators.
Additional failures of large banks or savings and loans companies seem likely, and that could overwhelm the FDIC's insurance fund, said Brian Bethune, U.S. economist at consulting firm Global Insight.
"We've got a ... retail bank run forming in this country," said Christopher Whalen, senior vice president and managing director of Institutional Risk Analytics.
Treasury Secretary Henry Paulson said Monday that the country's commercial banking system "is safe and sound" and that "the American people can be very, very confident about their accounts in our banking system." FDIC officials also have said 98 percent of U.S. banks still meet regulators' standards for adequate capital.
But fear is growing on Main Street as well as Wall Street about the likelihood of multiple bank failures and the strain that would put on the FDIC.
The fund, which is marking its 75th anniversary this year with a "Face Your Finances" campaign, is at $45.2 billion — the lowest level since 2003. At the same time, the number of troubled banks is at a five-year high.
FDIC Chairman Sheila Bair has not ruled out the possibility of going to the Treasury for a short-term loan at some point. But she has said she does not expect the FDIC to take the more drastic action of using a separate $30 billion credit line with Treasury — something that has never been done.
The FDIC's fund is currently below the minimum set by Congress in a 2006 law. The failure of IndyMac Bank in July cost $8.9 billion.
Next month, Bair plans to propose increasing the premiums paid by banks and thrifts to replenish the fund. That plan is likely to be approved by the FDIC board, which consists of her, Comptroller of the Currency John Dugan, Thrift Supervision Director John Reich and two other officials.
Bair also is considering a system in which banks with riskier portfolios would be charged higher premiums, raising the possibility those costs could be passed on to consumers.
A Washington Mutual failure would dwarf the largest bank collapse in U.S. history — Continental Illinois National Bank in 1984, with $33.6 billion in assets.
By comparison, WaMu and its subsidiaries had assets of $309.73 billion as of June 30 and IndyMac had $32 billion when it shut down.
Arthur Murton, director of the FDIC's insurance and research division, said that when large institutions have failed in recent years, the hit to the fund has been about 5 to 10 percent of the company's assets.
Standard & Poor's Ratings Service late Monday cut its counterparty credit rating on WaMu to junk, action that followed downgrades by both Moody's and Fitch last week. Concern about the Seattle-based thrift, which has significant exposure to risky mortgage securities and other assets, has grown in recent weeks, and the company's stock price has plummeted.
WaMu responded Monday by saying that it did not expect the S&P downgrade to have a material impact on its borrowings, collateral or margin requirements. The bank said its capital at the end of the third quarter on Sept. 30 is expected to be "significantly above" required levels and that its outlook for expected credit losses is unchanged.
Some analyst estimates put the cost of a WaMu failure to the FDIC at more than $20 billion, but other experts say it is very difficult to predict. Unknown, for example, is the amount of advances that institutions may have taken from one of the regional banks in the Federal Home Loan Bank system. Banks and thrifts have significantly increased their requests for advances, or loans, from the 12 regional home loan banks since the mortgage crisis began last year.
These amounts aren't publicly disclosed but must be repaid if a bank or thrift fails, notes Karen Shaw Petrou, managing partner of Federal Financial Analytics.
If the FDIC doesn't have enough cash to cover the initial costs of a bank or thrift failure, one option would be short-term loans from the Treasury. That last happened in 1991-92, during the last part of the savings and loan crisis, when the FDIC borrowed $15.1 billion from the Treasury and repaid it with interest about a year later.
Based on projections of possible scenarios of bank failures, "between the (insurance) fund that we have now and our ability to draw on the resources of the industry ... we do have the resources" needed, Murton said Tuesday.
Though short-term borrowing from Treasury for working capital may be possible, he said, tapping the long-term credit line is unlikely.
But Whalen said the Federal Reserve, the Treasury and Congress should "immediately devise" and announce a plan to backstop the FDIC with up to $500 billion in borrowing authority to meet cash needs for closing or selling failed banks.
"While the FDIC already has a credit line in place and this figure may seem excessive — and hopefully it is — the idea here is to overshoot the actual number to reinforce public confidence," Whalen wrote in a note to clients. "Simply having Treasury Secretary Hank Paulson or Ben Bernanke making hopeful statements is inadequate. Like it says in the movies: 'Show us the money.'"
Before Congress passed the law overhauling deposit insurance in 2006, about 90 percent of all insured banks and thrifts — considered to have adequate capital and to be well managed — paid no premiums to the FDIC. Today, all of them do.
There were 117 banks and thrifts considered to be in trouble in the second quarter, the highest level since 2003, according to FDIC data released last month. The agency doesn't disclose the names of institutions on its internal list of troubled banks. On average, 13 percent of banks that make the list fail. Total assets of troubled banks tripled in the second quarter to $78 billion, and $32 billion of that coming from IndyMac Bank.
Last month, Bair called those results "pretty dismal," but said they were not surprising given the housing slump, a worsening economy, and disruptions in financial and credit markets. "More banks will come on the (troubled) list as credit problems worsen," he said. "Assets of problem institutions also will continue to rise."
The Death of the Investment Bank Industry
Golman Sachs and Morgan Stanley are in the process of becoming national or commercial banks. This ends the long reign of large investment banks in the US. The article below also includes comments on the total cost of the bail-out. Two comments: 1) this is far from over and 2) the success of this effort is far from guarantied. Stay tuned. Text in bold is my emphasis. From Yahoo.com (Reuters):
Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, effectively killing Wall Street's investment banking model of the past two decades.
The move is Washington's latest effort to restore calm to chaotic markets and follows frantic talks between the Bush administration and Congress on a $700 billion bailout to prevent the crisis from pushing the economy into severe recession.
By agreeing to much tighter Fed regulation as bank holding companies, Goldman Sachs Group Inc and Morgan Stanley moved to avoid the fate of rivals that either collapsed or were taken over in the worst financial crisis to sweep Wall Street since the Great Depression.
"We need to see more details from the rescue package. What is missing is the price the U.S. authorities are going to pay for the toxic assets," said Heino Ruland, analyst at FrankfurtFinanz.
The rescue had been cobbled together last week after panic-stricken investors drove Lehman Brothers Holdings Inc to bankruptcy, Merrill Lynch & Co Inc into the arms of Bank of America Corp (BAC.N) and insurer American International Group Inc to nationalization.
With Bear Stearns collapsing earlier this year, Goldman and Morgan Stanley were the last surviving of the big five investment banks which shaped 20 years of Wall Street history, partly by taking greater risks than their Fed-regulated rivals were allowed to.
In return for tighter regulation, Goldman and Morgan Stanley would gain greater access to central bank funds and would find it easier to buy retail banks.
"It creates a perception of greater safety and supervision," said Chip MacDonald, mergers partner at law firm Jones Day.
After the Fed move, a mooted merger with banking group Wachovia Corp (WB.N) was no longer Morgan Stanley's priority, a person familiar with the negotiations said.
Elsewhere Japan's biggest brokerage Nomura Holdings Inc is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said.
In Europe Nomura and Britain's Barclays Plc have pitched bids for parts of Lehman's business, as administrators seek to save as many jobs as possible.
Barclays is interested in Lehman's European equities businesses, a person familiar with the matter said. That could include 1,000 to 1,500 bankers and support staff, mostly in London.
Lehman's collapse shattered investor confidence and threatened to rupture the global financial system, battering stock markets around the world before the bailout plan sparked a rebound on Friday which added more than $1.5 trillion to the value of stocks around the world.
With the economy the No. 1 issue in an election less than six weeks away, lawmakers are striving to get a plan in place by the end of the week, fearing delay could again send markets reeling.
Two key questions remained unanswered even after Treasury Secretary Henry Paulson appeared on four television talk shows to press his case for emergency action: what price will the United States pay for these bad debts? And when will it start buying them?
Paulson cast the proposed market intervention as a lesser evil, arguing the consequences of inaction would be so dire that the large burden on taxpayers would be worth it.
Paulson said the final cost of the bailout should fall well short of the $700 billion initial price tag since the government would be able to hold the debt until markets stabilize and prices recover. "This is the least costly path," he said.
To cover the cost, Treasury asked Congress to raise the government's debt limit to $11.3 trillion from $10.6 trillion.
A $700 billion fund would come on top of other steps already taken by the U.S. authorities and would push the total pledged to combat the crisis to $1.8 trillion, or $15,000 per U.S. household.
The plan would even let the Treasury buy assets from nonfinancial firms and assets not tied to mortgages if it helped promote market stability.
Paulson confirmed, however, that hedge funds -- investment vehicles for the wealthy -- would not be eligible.
"We have a global financial system and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will," Paulson said on ABC.
Lawmakers said Paulson and Fed Chairman Ben Bernanke had offered starkly grave assessments of the economic cost of inaction in private briefings.
What they told us was the contagion here and the depression in the market was such that you were going to see a shutdown of the lending businesses not just on Wall Street," but for all Americans, Barney Frank, chairman of the House Financial Services Committee said on CBS.
Golman Sachs and Morgan Stanley are in the process of becoming national or commercial banks. This ends the long reign of large investment banks in the US. The article below also includes comments on the total cost of the bail-out. Two comments: 1) this is far from over and 2) the success of this effort is far from guarantied. Stay tuned. Text in bold is my emphasis. From Yahoo.com (Reuters):
Goldman Sachs and Morgan Stanley sought shelter with the Federal Reserve to survive a financial storm that destroyed their rivals, effectively killing Wall Street's investment banking model of the past two decades.
The move is Washington's latest effort to restore calm to chaotic markets and follows frantic talks between the Bush administration and Congress on a $700 billion bailout to prevent the crisis from pushing the economy into severe recession.
By agreeing to much tighter Fed regulation as bank holding companies, Goldman Sachs Group Inc and Morgan Stanley moved to avoid the fate of rivals that either collapsed or were taken over in the worst financial crisis to sweep Wall Street since the Great Depression.
"We need to see more details from the rescue package. What is missing is the price the U.S. authorities are going to pay for the toxic assets," said Heino Ruland, analyst at FrankfurtFinanz.
The rescue had been cobbled together last week after panic-stricken investors drove Lehman Brothers Holdings Inc to bankruptcy, Merrill Lynch & Co Inc into the arms of Bank of America Corp (BAC.N) and insurer American International Group Inc to nationalization.
With Bear Stearns collapsing earlier this year, Goldman and Morgan Stanley were the last surviving of the big five investment banks which shaped 20 years of Wall Street history, partly by taking greater risks than their Fed-regulated rivals were allowed to.
In return for tighter regulation, Goldman and Morgan Stanley would gain greater access to central bank funds and would find it easier to buy retail banks.
"It creates a perception of greater safety and supervision," said Chip MacDonald, mergers partner at law firm Jones Day.
After the Fed move, a mooted merger with banking group Wachovia Corp (WB.N) was no longer Morgan Stanley's priority, a person familiar with the negotiations said.
Elsewhere Japan's biggest brokerage Nomura Holdings Inc is to buy the Asian operations of Lehman, a source with direct knowledge of the deal said.
In Europe Nomura and Britain's Barclays Plc have pitched bids for parts of Lehman's business, as administrators seek to save as many jobs as possible.
Barclays is interested in Lehman's European equities businesses, a person familiar with the matter said. That could include 1,000 to 1,500 bankers and support staff, mostly in London.
Lehman's collapse shattered investor confidence and threatened to rupture the global financial system, battering stock markets around the world before the bailout plan sparked a rebound on Friday which added more than $1.5 trillion to the value of stocks around the world.
With the economy the No. 1 issue in an election less than six weeks away, lawmakers are striving to get a plan in place by the end of the week, fearing delay could again send markets reeling.
Two key questions remained unanswered even after Treasury Secretary Henry Paulson appeared on four television talk shows to press his case for emergency action: what price will the United States pay for these bad debts? And when will it start buying them?
Paulson cast the proposed market intervention as a lesser evil, arguing the consequences of inaction would be so dire that the large burden on taxpayers would be worth it.
Paulson said the final cost of the bailout should fall well short of the $700 billion initial price tag since the government would be able to hold the debt until markets stabilize and prices recover. "This is the least costly path," he said.
To cover the cost, Treasury asked Congress to raise the government's debt limit to $11.3 trillion from $10.6 trillion.
A $700 billion fund would come on top of other steps already taken by the U.S. authorities and would push the total pledged to combat the crisis to $1.8 trillion, or $15,000 per U.S. household.
The plan would even let the Treasury buy assets from nonfinancial firms and assets not tied to mortgages if it helped promote market stability.
Paulson confirmed, however, that hedge funds -- investment vehicles for the wealthy -- would not be eligible.
"We have a global financial system and we are talking very aggressively with other countries around the world and encouraging them to do similar things, and I believe a number of them will," Paulson said on ABC.
Lawmakers said Paulson and Fed Chairman Ben Bernanke had offered starkly grave assessments of the economic cost of inaction in private briefings.
What they told us was the contagion here and the depression in the market was such that you were going to see a shutdown of the lending businesses not just on Wall Street," but for all Americans, Barney Frank, chairman of the House Financial Services Committee said on CBS.
Sunday, September 21, 2008
This Weekend's Contemplation - In Case You Thought the Markets Were Not Manipulated
Just in case you wondered whether or not the markets were manipulated. Debating whether this is good or bad is a whole different issue. Text in bold is my emphasis. See the following two articles from Market Watch:
The Treasury Department said on Saturday that its financial rescue plan could permit it to buy assets beyond those backed by mortgages and potentially buy them from foreign holders.
A fact sheet issued by Treasury on legislative proposals it has before lawmakers said the intent was to buy residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans, but added a significant proviso.
"The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
Troubled assets eligible for purchase should come from financial institutions with "significant operations" in the United States. But it said there could be an exemption to that condition by the Treasury secretary, in consultation with the Fed chairman, that broader eligibility is necessary to stabilize financial markets.
Treasury said it would try to set prices for assets it buys using market mechanisms where possible, adding that included the use of "reverse auctions," in which financial institutions would offer their assets for government purchase.
Just in case you wondered whether or not the markets were manipulated. Debating whether this is good or bad is a whole different issue. Text in bold is my emphasis. See the following two articles from Market Watch:
The Treasury Department said on Saturday that its financial rescue plan could permit it to buy assets beyond those backed by mortgages and potentially buy them from foreign holders.
A fact sheet issued by Treasury on legislative proposals it has before lawmakers said the intent was to buy residential and commercial mortgage-related assets, which may include mortgage-backed securities and whole loans, but added a significant proviso.
"The Secretary will have the discretion, in consultation with the Chairman of the Federal Reserve, to purchase other assets, as deemed necessary to effectively stabilize financial markets," the fact sheet said.
Troubled assets eligible for purchase should come from financial institutions with "significant operations" in the United States. But it said there could be an exemption to that condition by the Treasury secretary, in consultation with the Fed chairman, that broader eligibility is necessary to stabilize financial markets.
Treasury said it would try to set prices for assets it buys using market mechanisms where possible, adding that included the use of "reverse auctions," in which financial institutions would offer their assets for government purchase.
The second article from Market Watch:
U.S. and U.K. regulators may have restricted short sales, but investors have other tools to protect themselves from falling share prices, The Wall Street Journal reported.
And some consequences of the restrictions might be unintended, the paper reported.
The U.K. Financial Services Authority on Thursday restricted short sales of financial stocks. The U.S. Securities and Exchange Commission on Friday banned shorting - bets that a security's price would drop - of roughly 800 financial-services stocks through Oct. 2.
Volumes in credit-default swaps, other derivatives trades and options are likely to rise in the wake of the short-sale restrictions, the Journal reported on Saturday.Derivatives like credit-default swaps aren't publicly traded, and their growth and their lack of transparency have raised concern, the Journal reported.
In addition, some exchange-traded funds enable bets against the financial sector, and short-sellers might now turn their attention to financial-related stocks that aren't on the regulators' restricted list, the paper reported.
The short-sale restrictions also could affect the corporate-bond market, the Journal said. Investors who buy convertible bonds will often short the same company's stock as a hedge, the paper said.
Saturday, September 20, 2008
The First of the Bail-Out Laws
This is the first of the big bail-out laws that will help the financial industry and of course will be done with taxpayer money. I assume you always knew we were going to pay for it. I do mind, but let's design things so it does not happen again. From Market Watch:
U.S. lawmakers began hammering out legislative authority on Saturday for the Bush administration to undertake a sweeping, $700 billion rescue of the American financial system.
Lawmakers and administration officials were expected to work through the weekend to hash out details of a multipart package to revive the financial system and sustain the U.S. economy.
The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years, according to a draft of the proposed legislation. It gives the Treasury secretary the authority to buy $700 billion in mortgage-related assets, in a bid to address the root cause of the turmoil that swept through markets this past week and resulted in the filing for bankruptcy by and government takeovers of some of the biggest U.S. financial companies.
It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion. The proposal does not specify what the government would get in return from financial companies for the federal assistance, according to a copy of the brief draft plan.
The administration and Congress are aiming for quick action on the plan as markets remain jittery.
On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.
Treasury Secretary Henry Paulson sent the plan to Capitol Hill on Friday night, a Treasury spokesman said. Lawmakers have pledged rapid action. On Friday, some said they were optimistic it would be approved next week.
Sen. Charles Schumer, D-N.Y., in a statement released by his office, offered a mixed reaction to the proposal.
"This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee were set to meet with Treasury staff Saturday to discuss the proposal.
Democrats on Capitol Hill are expected to demand that the legislation include some of their priorities in return for quick passage of the plan.
Analysts said that this would likely include some mechanism to help homeowners refinance mortgages on homes that have dropped sharply in value.
If approved by lawmakers, the plan would give the Treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by Congress. The plan would require that the congressional committees for budget, tax and financial services be briefed within three months of the government's first use of the act, and every six months after that, according to reports.
President Bush said the package will be costly but is necessary.
The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said.
In the unprecedented action, Paulson has said that he wants to spend "hundreds of billions" of dollars to take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.
The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending.
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets, the Wall Street Journal reported Saturday on its Web site.
The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.
Treasury staff and Hill staff will attend meetings Saturday, while Paulson works the phone with individual members.
Outside experts said it was crucial to know the price that Treasury would pay for the assets.
A deal that is good for banks would be bad for taxpayers, analysts said. A more effective program would also be more costly.
Some legislative add-ons may slow the package. Democrats may want to revisit their proposal of earlier this year to give bankruptcy judges power to lower the principal and interest rate of a home mortgage.
At the moment, bankruptcy judges only have this power over vacation homes. The mortgage industry is firmly opposed to this measure.
Senate Banking Chairman Christopher Dodd, D-Conn., speaking to reporters Friday, said it is important for the final legislation to deal with the record numbers of foreclosures and not just a bailout of financial firms.
"My hope is that this plan will not only allow us to deal with illiquid debt and obligations out there but also focus as well on bringing to a closure the foreclosure problem as well," Dodd said at a press conference.
This is the first of the big bail-out laws that will help the financial industry and of course will be done with taxpayer money. I assume you always knew we were going to pay for it. I do mind, but let's design things so it does not happen again. From Market Watch:
U.S. lawmakers began hammering out legislative authority on Saturday for the Bush administration to undertake a sweeping, $700 billion rescue of the American financial system.
Lawmakers and administration officials were expected to work through the weekend to hash out details of a multipart package to revive the financial system and sustain the U.S. economy.
The plan allows the government to buy the bad debt of U.S. financial institutions for the next two years, according to a draft of the proposed legislation. It gives the Treasury secretary the authority to buy $700 billion in mortgage-related assets, in a bid to address the root cause of the turmoil that swept through markets this past week and resulted in the filing for bankruptcy by and government takeovers of some of the biggest U.S. financial companies.
It would raise the statutory limit on the national debt from $10.6 trillion to $11.3 trillion. The proposal does not specify what the government would get in return from financial companies for the federal assistance, according to a copy of the brief draft plan.
The administration and Congress are aiming for quick action on the plan as markets remain jittery.
On Saturday, President Bush called the crisis "a pivotal moment for America's economy," in his weekly radio address.
Treasury Secretary Henry Paulson sent the plan to Capitol Hill on Friday night, a Treasury spokesman said. Lawmakers have pledged rapid action. On Friday, some said they were optimistic it would be approved next week.
Sen. Charles Schumer, D-N.Y., in a statement released by his office, offered a mixed reaction to the proposal.
"This is a good foundation of a plan that can stabilize markets quickly," he said. "But it includes no visible protection for taxpayers or homeowners. We look forward to talking to Treasury to see what, if anything, they have in mind in these two areas."
Republican and Democratic staff from the Senate Banking Committee and the House Financial Services Committee were set to meet with Treasury staff Saturday to discuss the proposal.
Democrats on Capitol Hill are expected to demand that the legislation include some of their priorities in return for quick passage of the plan.
Analysts said that this would likely include some mechanism to help homeowners refinance mortgages on homes that have dropped sharply in value.
If approved by lawmakers, the plan would give the Treasury secretary broad power to buy and sell the toxic mortgage-related assets without any additional involvement by Congress. The plan would require that the congressional committees for budget, tax and financial services be briefed within three months of the government's first use of the act, and every six months after that, according to reports.
President Bush said the package will be costly but is necessary.
The measures being taken by the administration, the Treasury and the Securities Exchange Commission "require us to put a significant amount of taxpayer dollars on the line," Bush said. "But I'm convinced that this bold approach will cost American families far less than the alternative. Further stress on our financial markets would cause massive job losses, devastate retirement accounts, further erode housing values, and dry up new loans for homes, cars, and college tuitions," he said.
In the unprecedented action, Paulson has said that he wants to spend "hundreds of billions" of dollars to take unsellable mortgage assets off the balance sheets of financial firms. The hope is that this will unclog the financial system and allow banks to lend funds to each other and clients.
The failure of banks to lend is considered a big risk to the economic outlook. Without access to funds, businesses and consumers will cut back spending.
Among the things the government is asking for is the authority to hire asset managers to oversee the buying of assets, the Wall Street Journal reported Saturday on its Web site.
The New York Times reported that Federal Reserve chairman Ben Bernanke warned members of Congress of the risk of a deep and extended recession unless action was taken to clear the toxic mortgage assets from bank balance sheets.
Treasury staff and Hill staff will attend meetings Saturday, while Paulson works the phone with individual members.
Outside experts said it was crucial to know the price that Treasury would pay for the assets.
A deal that is good for banks would be bad for taxpayers, analysts said. A more effective program would also be more costly.
Some legislative add-ons may slow the package. Democrats may want to revisit their proposal of earlier this year to give bankruptcy judges power to lower the principal and interest rate of a home mortgage.
At the moment, bankruptcy judges only have this power over vacation homes. The mortgage industry is firmly opposed to this measure.
Senate Banking Chairman Christopher Dodd, D-Conn., speaking to reporters Friday, said it is important for the final legislation to deal with the record numbers of foreclosures and not just a bailout of financial firms.
"My hope is that this plan will not only allow us to deal with illiquid debt and obligations out there but also focus as well on bringing to a closure the foreclosure problem as well," Dodd said at a press conference.
It is Now Official, This is the Largest Financial Crisis Since the Great Depression
I have thought this for over a year and have discussed it from time to time on this blog. I have discussed it with friends and business colleagues and was usually met with either scoffs or denial, although some quietly agreed. We are now in the greatest financial crisis since the Great Depression. This is not funny, this is not a joke, and it is definitely not time to panic. It is time to take stock of where you are and where your money is and make some strategic moves if you think that is necessary. It is not a time to buy hard assets, but to stay as liquid as possible. Good luck
Text in bold is my emphasis. CNNMoney.com:
Somber. Sobering. Warnings of an economic "meltdown."
That's how participants described an emergency meeting held Thursday night between leaders of Congress and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
The meeting was followed by an announcement from Paulson that he was preparing a far-reaching program - on a scale seen rarely in American history - to intervene in the shaky financial markets.
Paulson gave few details, although the plan's broad outline is for the federal government to buy hundreds of billions of dollars' worth of mortgage assets held by banks, Wall Street firms and other financial institutions. Details of the rescue plan were sent to members of Congress late Friday, according to reports.
What did emerge clearly, however, was a surprising public show of unity by many lawmakers from both sides of the aisle who pledged cooperation to work on a solution with Bush administration officials with whom they often spar.
Official Washington - administration officials and legislative leaders alike - was clearly spooked by the events of the past week and what they heard from Paulson and Bernanke.
"I've never been in a more sobering moment in my 28 years with the language that was used - careful language - by the financial leaders of the ... country," Senate Banking Committee Chairman Christopher Dodd, D-Conn. told reporters on Friday.
Added House Financial Services Chairman Barney Frank, D-Mass., in an interview on C-SPAN: "We're not just talking about somebody on Wall Street losing money. ... We were in danger of there being enormous damage to the financial system."
One major concern: Wall Street firms were in danger of not being able to meet requests for redemptions from normally safe money market funds in which investors expect to get back at least as much as they put in.
This week alone, investors took out $210 billion from money market funds, with the bulk of those withdrawals coming on the heels of news that one fund had "broke the buck" - meaning its shares fell below $1.
On Friday morning, the Treasury said it would insure up to $50 billion in money-market fund investments at financial companies that pay them a fee to participate.
And on Friday, a conference call in which Paulson and Bernanke briefed House GOP members struck a similar tone, according to GOP aides who were on the call.
"The call was very sober, very strong on seriousness and very vague on details," one aide said.
The potential cost of the plan - as high as $500 billion according to leading Republican Senator Richard Shelby, R-Ala. - has raised a lot of concern. But apparently not as much as the concern raised by not doing anything.
"Chairman Bernanke made all too clear the cost of inaction. When I heard his description of what might happen to our economy if we failed to act, I gulped," said Sen. Charles Schumer, D-N.Y. "Everyone put aside their partisan differences and agreed to work together to pass something to address the state of our economy."
Schumer told CNN that while the rescue will be expensive, "the only salvation is it would cost even more" to do nothing.
Senate Budget ranking member Judd Gregg, R-N.H., told the National Journal's Congress Daily that when it came to the potential cost of plan, the choice is to "either put up the money now, or allow the [financial] system to unwind."
"The economy is slowly being strangled," said Lyle Gramley, a former Federal Reserve governor. The administration's case-by-case handling of the crisis so far hasn't worked, he said, "because it hasn't dealt directly with the principle problem, which is a lot of bad mortgage debt."
Banks are having a hard time raising capital because no one knows how to value the mortgage assets on their books. So they're reluctant to lend. Indeed, the flow of credit to consumers and businesses fell 40% in the first quarter and another 35% in the second quarter, Gramley said.
"We've been in a credit crunch that's getting worse," Gramley said. "Businesses can't borrow, which means they can't invest." And if they can't invest, they can't keep people employed.
In the end, the chaotic events in the market this past week convinced President Bush that it was time to act.
"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary," Bush said. "Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential."
I have thought this for over a year and have discussed it from time to time on this blog. I have discussed it with friends and business colleagues and was usually met with either scoffs or denial, although some quietly agreed. We are now in the greatest financial crisis since the Great Depression. This is not funny, this is not a joke, and it is definitely not time to panic. It is time to take stock of where you are and where your money is and make some strategic moves if you think that is necessary. It is not a time to buy hard assets, but to stay as liquid as possible. Good luck
Text in bold is my emphasis. CNNMoney.com:
Somber. Sobering. Warnings of an economic "meltdown."
That's how participants described an emergency meeting held Thursday night between leaders of Congress and Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben Bernanke.
The meeting was followed by an announcement from Paulson that he was preparing a far-reaching program - on a scale seen rarely in American history - to intervene in the shaky financial markets.
Paulson gave few details, although the plan's broad outline is for the federal government to buy hundreds of billions of dollars' worth of mortgage assets held by banks, Wall Street firms and other financial institutions. Details of the rescue plan were sent to members of Congress late Friday, according to reports.
What did emerge clearly, however, was a surprising public show of unity by many lawmakers from both sides of the aisle who pledged cooperation to work on a solution with Bush administration officials with whom they often spar.
Official Washington - administration officials and legislative leaders alike - was clearly spooked by the events of the past week and what they heard from Paulson and Bernanke.
"I've never been in a more sobering moment in my 28 years with the language that was used - careful language - by the financial leaders of the ... country," Senate Banking Committee Chairman Christopher Dodd, D-Conn. told reporters on Friday.
Added House Financial Services Chairman Barney Frank, D-Mass., in an interview on C-SPAN: "We're not just talking about somebody on Wall Street losing money. ... We were in danger of there being enormous damage to the financial system."
One major concern: Wall Street firms were in danger of not being able to meet requests for redemptions from normally safe money market funds in which investors expect to get back at least as much as they put in.
This week alone, investors took out $210 billion from money market funds, with the bulk of those withdrawals coming on the heels of news that one fund had "broke the buck" - meaning its shares fell below $1.
On Friday morning, the Treasury said it would insure up to $50 billion in money-market fund investments at financial companies that pay them a fee to participate.
And on Friday, a conference call in which Paulson and Bernanke briefed House GOP members struck a similar tone, according to GOP aides who were on the call.
"The call was very sober, very strong on seriousness and very vague on details," one aide said.
The potential cost of the plan - as high as $500 billion according to leading Republican Senator Richard Shelby, R-Ala. - has raised a lot of concern. But apparently not as much as the concern raised by not doing anything.
"Chairman Bernanke made all too clear the cost of inaction. When I heard his description of what might happen to our economy if we failed to act, I gulped," said Sen. Charles Schumer, D-N.Y. "Everyone put aside their partisan differences and agreed to work together to pass something to address the state of our economy."
Schumer told CNN that while the rescue will be expensive, "the only salvation is it would cost even more" to do nothing.
Senate Budget ranking member Judd Gregg, R-N.H., told the National Journal's Congress Daily that when it came to the potential cost of plan, the choice is to "either put up the money now, or allow the [financial] system to unwind."
"The economy is slowly being strangled," said Lyle Gramley, a former Federal Reserve governor. The administration's case-by-case handling of the crisis so far hasn't worked, he said, "because it hasn't dealt directly with the principle problem, which is a lot of bad mortgage debt."
Banks are having a hard time raising capital because no one knows how to value the mortgage assets on their books. So they're reluctant to lend. Indeed, the flow of credit to consumers and businesses fell 40% in the first quarter and another 35% in the second quarter, Gramley said.
"We've been in a credit crunch that's getting worse," Gramley said. "Businesses can't borrow, which means they can't invest." And if they can't invest, they can't keep people employed.
In the end, the chaotic events in the market this past week convinced President Bush that it was time to act.
"Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary," Bush said. "Given the precarious state of today's financial markets - and their vital importance to the daily lives of the American people - government intervention is not only warranted, it is essential."
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