Lordie, do we have any rule of law in this country? Presumably, the twisted logic of forcing money on to bank in return for taking perpetual preferred was that making the banks ask for it would create a taint. But even with the Treasury’s sweeping new powers under the $700 billion rescue package, one wonders how it compelled banks to cooperate. The process by which this was done is alarming.
But here we go, virtually no restrictions (the Bloomberg article mentions executive comp limits, but given Paulson’s stance, expect this to be cosmetic), no (a la Sweden) having a disciplined process to figure out who was worth salvaging and concentrating rescue dollars on them, and having a strategy (consolidation, liquidation, spinning bad assets off into an Resolution Trust type “bad bank” vehicle) for the ones that didn’t make the cut.
The Swedish government showed a profit by taking deliberate action. Throwing money at a dartboard isn’t likely to produce good outcomes.
From Bloomberg (hat tip readers Jim Bianco, Robert R, boldface ours0:
The Bush administration will announce a plan to rescue frozen credit markets that includes spending about half of a total of $250 billion for stakes in nine major banks, according to people briefed on the matter.
The companies are Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co., Bank of America Corp., Goldman Sachs Group Inc., Morgan Stanley, State Street Corp., and Bank of New York Mellon Corp., the people said. One of the people also said Merrill Lynch & Co. will receive an investment.
The injections represent a new approach for Treasury Secretary Henry Paulson’s attempts to prevent a financial market meltdown from sending the U.S. economy into a prolonged recession. He’s following similar interventions by European leaders and using broad powers Congress gave him earlier this month to save the country’s banking system.
“They’ve decided they need to do something drastic and this is drastic,” said Gerard Cassidy, a bank analyst at RBC Capital Markets in Portland, Maine.
None of banks getting government money was given a choice about it, said one of the people familiar with the plans. All of the banks involved will have to submit to compensation restrictions, said the person.
The government will also guarantee the banks’ newly issued senior unsecured debt, making it easier for them to refinance their liabilities, the person said.
Allocating Money
The Treasury plans to spend $25 billion each for stakes in Citigroup and JPMorgan, people said. Another $25 billion will be divided between Bank of America and Merrill, which agreed last month to be acquired by Bank of America. Goldman and Morgan Stanley will each get $10 billion, while State Street and Bank of New York will get injections of about $3 billion each, people said.
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I would not have beleived that this could happen in the United States.
Do the shareholders not realize that their stakes have been diluted for a ‘guarantee’ that they make neither wanted nor needed.
The whole scheme smacks of a means to get money into GS/MS/JPM and not make it look like that. If that means hurting shareholders in C and BAC, hey you have to break eggs to make an omlette.
As I posted below, not sure what MS/GS are supposed to do with this new capital.
Start an exchange to compete with the CME? Offer investment advice in commodities? Options on Nth to Default CDS? Inverse CDOs?
Also, what if the Sec Tsy in the next administration says, “we don’t think that you have enough branches in Wyoming and this outsourcing to India needs to be stopped”
Paulson: virtually no restrictions.
Congress: yeah, right (cracking their knuckles for hearings after hearings).
Wait till GS announces its bonus pool.
Injecting “sufficient” equity into the banks is a DRAMATICALLY moving target.
We have waves of financing being FORCED back on to the bank’s balance sheet through SLCs (standby letters of credit) being drawn upon by customers unable to afford or obtain commercial paper as the credit squeeze tightens.
Matt
In a ham and cheese omelet, the hen and cow are involved but the pig is committed.
Bankers, treasury and fed are the cows and hens but the poor tax payer is the freaking pig who is slaughtered.
Most likely, every major US bank is technically insolvement and needs capital.
Did the gov’t force them to accept an investment? Or does it make for better appearances?
It is difficult to imagine the current administration would have done this unless there was a gun pointed at their heads. Is it possible we’ve finally reached the point where the rest of the world is losing interest in funding US fiscal imbalances? That – eg – withdrawal for Treasury auctions was threatened by the big holders of Treasury and Agency debt?
Again – I know the current administration is not the most ideologically consistent crew we’ve ever seen – but this seems way way beyond what their playbook suggests as reasonable measures.
Note: I’m not thumbs-down or thumbs-up on the plan, just trying to understand why this is actually happening.
Just now on the cover of the web version of The Times there’s a wonderful photograph of Mack and Pandit leaving the Treasury. Smiling.
It’s priceless, and likely will evoke the emotional response of pure disgust amongst many.
With “virtually no restrictions”, no voting rights, no conversion rights and no equity dilution, how does this differ from debt? (other than being behind the bondholders)
what’s the advantage to the taxpayer? if there’s no control at all, wouldn’t it be better to be a super-senior bond?
I don’t see any legal way in which Paulson could have compelled agreement, other than using some carrot/stick the Treasury has. (Maybe this is a precondition for being eligible for participation in future purchases of mortgage securities?)
It would surprise me if the “non-voluntary” part is being emphasized so that B of A, Citi, and JPM can deny they have any solvency problems.
Would you prefer to invest in the bank that says they didn’t need the government’s money or the one that admits they did?
Every single bank will disseminate rumors that they were forced at gunpoint to accept the government’s plan.
What does this do the the exsiting preferred shares???? Are they now suborniated to this new pef. equity?
AM I WRONG OR DO I STILL LIVE INT HE US? I don’t know anymore!!
Dick In VA
This is another death nail in the i-banks’ coffins. With all this new capital (MS has recieved ~$34bn in 24 hours and now has a tier 1 ratio close to 18%), the ROE is in the very low teens to high single digits. Surely, the game is up for these bank-brokers. Retail banking ROEs of 15-18% will look stellar compared to MS’s ROE of 12. Time for a new game; the asset mgmt game is also up given the recent horrid performance of bank owned asset mgmt firms. At this point, the better staff must be exiting the door realizing that compensation levels will sharply fall. Paradigm shift for an broken industry.
Where is the $250 billion coming from? Normally the US exports this inflation to China or Japan, but I doubt they are willing customers anymore.
“Lordie, do we have any rule of law in this country? Presumably, the twisted logic of forcing money on to bank in return for taking perpetual preferred was that making the banks ask for it would create a taint. But even with the Treasury’s sweeping new powers under the $700 billion rescue package, one wonders how it compelled banks to cooperate. The process by which this was done is alarming”
Yes, it is, but it is the same process that was followed in deciding to wipe out shareholders of the GSE’s, which was widely applauded even as it set off massive capital flight. Apparently it was ok to wipe out those shareholders because the companies were villains? The time to launch a defense of private property rights was when the GSEs were confiscated. Or when WM was confiscated. Or WB.
Now at last comes the realization that unchecked government power doesn’t only victimize the other guy.
Hopefully someone will ask why it is that the government is going to put billions of dollars of cash into THESE companies while taking no permanent equity stake, but it put no cash at all into FNM, FRE, WM, or WB and wiped out or assisted in the wipeout of almost all the equity.
This is good news. Probably only the beginning but this is one hell of a lot better than buying all that toxic crap. At least this way the tax payer is one step away from it.
This may or may not be of interest to someone:
Under the Federal Reserve Board’s risk-based capital guidelines for bank
holding companies the minimum ratio of total capital to risk-adjusted assets
(including certain off-balance sheet items, such as stand-by letters of credit)
is 8%. At least half of the total capital is to be comprised of common stock,
minority interests and noncumulative perpetual preferred stock (“Tier 1
capital”). The remainder (“Tier 2 capital”) may consist of hybrid capital
instruments, perpetual debt, mandatory convertible debt securities, a limited
amount of subordinated debt, other preferred stock, and a limited amount of loan
and lease loss reserves.
Shiller: Everybody Calm Down. A Government Hand In the Economy Is as Old as the Republic.
“The most important question is not, “What form should these temporary bailouts take?” It is, “What are we really learning from all this?”
I’m pulling rabbits out of my hat and they have rabies:
Title 12: Banks and Banking
PART 560—LENDING AND INVESTMENT
Subpart A—Lending and Investment Powers for Federal Savings Associations
http://law.justia.com/us/cfr/ tit….30.1.42.9.html
560.40 Commercial paper and corporate debt securities.
2) Corporate debt securities must be:
(i) Securities that may be sold with reasonable promptness at a price that corresponds reasonably to their fair value
(ii) At the time of purchase, the cost of such securities must be written down to an amount that represents the investment value of the securities considered independently of the conversion feature; and
(iii) Federal savings associations are prohibited from exercising the conversion feature.
Yes, it is, but it is the same process that was followed in deciding to wipe out shareholders of the GSE’s, which was widely applauded even as it set off massive capital flight. Apparently it was ok to wipe out those shareholders because the companies were villains? The time to launch a defense of private property rights was when the GSEs were confiscated. Or when WM was confiscated. Or WB.
Now at last comes the realization that unchecked government power doesn’t only victimize the other guy.
Ahem. If you were invested in mortgage-exposed banks, you were investing in unchecked government power anyway.
The US mortgage industry has been a (highly profitable) state-backed arm of federal housing policy since at least the New Deal.
So go and crying about state power now is pretty damn funny.
How exactly is this preferred “equity”, if there is no dilution of common equity?
It sounds like this is just the govt’s way of getting around the problem that buying troubled assets would take some time and thought. This is like buying the large-cap troubled bank index and losing the stock certificates – fast, and maybe it will work, but maybe it should be called “deprecated equity” instead of “preferred”.
I bet the next Republican president will say we should give this stuff out in lieu of Social Security payments, it’s that bad.
I’m not upset about government investment, I’m upset about how and who. Like Yves points out, no triage, no punishment for shareholders or management, and no option to convert to common shares as share prices recover. What’s in it for taxpayers?
ScottB
Laughter in middle of stock market madness. Details below:
http://marketwarnings.blogspot.com/2008/10/laughter-in-middle-of-stock-market.html
Today gave me a chance to get rid of all sorts of crap in my files, e.g:
But the falling of firewalls has elevated the importance of sections 23A and 23B of the Federal Reserve Act. These provisions both limit the amount of credit flow from banks to their affiliates and require that such transactions be collateralized and made at market prices. GLB extended these provisions to the fund flows between banks and their own financial subsidiaries and even in some respects between holding companies and the financial subsidiaries of banks.
Anybody…. ?
FYI (remember): Section 23A of the Federal Reserve Act ( Act ), originally enacted aspart of the Banking Act of 1933, is designed to prevent the misuse of abank s resources through non-arm s-length transactions with its affiliatesand to limit the ability of a bank to transfer its federal subsidy to its affiliates…
http://www.clevelandfed.org/Statistics/ppts/LargeBankConference/pdf/handouts23AandB.pdf
Also see (and hear): speaking in tongues: Our findings that glossolalia can be easily learned through direct instruction, along with demonstrations that tongue speakers can initiate and terminate glossolalia upon request and can exhibit glossolalia in the absence of any indexes of trance[…]support the hypothesis that glossolalia utterances are goal-directed actions rather than involuntary happenings.
Yah, and I love derivatives
A couple thoughts.
First, Broke Forever, wrote that this is better than buying the toxic crap. Actually, that mission has been passed off to Fannie and Freddie. We are actually doing both.
Second, there were some prescient comments about political interference with the newly owned banks. I would agree completely. Limitations on compensation is just the opening salvo. As I read the U.K. bailout, the authorities there are mandating lending activity equal to 2007 levels. I guess you just throw out underwriting criteria and shovel out the money. The potential for real harm is unlimited.
Third, and this is really a question, to what extent have we just started down the road of one upmanship. If Germany decides to create super banks via further injections are we forced to do the same to protect the industry?
But even with the Treasury’s sweeping new powers under the $700 billion rescue package, one wonders how it compelled banks to cooperate. The process by which this was done is alarming.
OK, Goldman Sachs sold Buffett preferred at 10% with very valuable conversion rights. Now they’re being “forced” to sell it at 5%, without conversion right. How hard do you think that was for them? Oh, and they get a blanket guarantee on future unsecured debt – which might as well be a blanket guarantee on all debt as they issue new debt to pay the old debt off. All they surrender for a far below-market loan and a perfect credit rating is some probably toothless executive compensation requirements. “Force?” “Don’t throw me in that Briar patch”, indeed!
Not every bank on that list was Morgan Stanley or Goldman (although note the number that was just done on Mitsubishi). I got a report from someone who saw Jamie Dimon leaving that meeting, and he supposedly looked mighty angry.
Either way, I hope its enough to get them moving again. Anyone think their other capital is still worthless enough to cause most of them to just sit on the money anyways? I sure do.
I expect this plan to quickly morph into a pork barrel: Senator Foghorn Leghorn will demand to know why a cherished hometown institution, Cretin Savings, is less deserving of government money than those rich big city banks — Cretin Savings supports the Boy Scouts, its president is the brother of the largest real estate developer in the area (coincidentally the bank’s largest borrower), local jobs are at stake, and the principle of fairness requires equal treatment for all banks `caught up in these troubled times’, big or small.
“Throwing money at a dartboard isn’t likely to produce good outcomes.”
How much can the money be worth if it’s being thrown at a dart board?
Funny visual.
So FairEconomist and Anon of 12:38, you’ve got the issue in a sandwich, yes. If the eurozone is busy making massive capital infusions and broad guarantees to its mega-banks, if the US _does not_ do so the major banks here are exposed to severe capital flight potentials. This alone would have been inducement enough, to me, to get all of them except JPM in line. JPM now IS the primary broker market given the share it controls, and I suspect Jamie Dimon would like nothing better than to continue cutting the throats of his competitors from behind while making a killing and collapsing the industry into his own citadel.
Then as FE says, the terms our Treasury Fuerher is ‘forcing’ upon these folks are laughably favorable to them: far below market in price, NO conversion rights, further complete gifts in exchange for worthless warrants, no derivative suspension, complete Guvmint guarantee of all their new debt with NO Guvmint control in the form or issuance of said debt, and a cap on 15% total government stake (if I read the proposal correctly). Put this in perspective: these behemoths face further massive losses, and absolutely would have to raise tens of billions more in equity from private investors if they are going to make it. That $34B of Tier 1 at MS?: don’t be surprised if they will record twice that in losses during the next two years. So existing equity in these institutions is going to be massively diluted NO MATTER WHAT. The real question is, can the firms survive? The real question for existing management-reivers in these firms is, will they be retained and continue to be allowed to loot their firms unchecked by toothless boards? Paulson’s response to that is, “Yes, my sons, Washington saves all sinners if they take the wafer publicly.” This plan has the visuals of socialism, but if you read it closely we’re back very nearly to corporate fascism. It is in no way a nationalization; rather the banks are being given money and guarantees with very little public control of what they do with that backing.
The Paulson proposal is dishwater weak, and shamelessly pro-industry. On the other hand, it is the necessary minimum to slow down and perhaps avoid systemic collapse. Furthermore, what Paulson is actually proposing is very close to what a _good_ plan capable of passage in Congress would have looked like three weeks ago. Consider that: this is the salable Good of the Public version. It is amazing how much Paulson is the wrong man in the right place at the wrong time. To me, he will go to any lengths achievable to favor the top of the food chain predators in the financial industry, to the greater detriment of the rest of the industry and the public. He has to be dragged every step of the way away from the public till and toward the public gavel. What a well-greased schlemiel.
And yes, the crypto-TARP is carrying off the wounded via the MASH units up at Foney and Fraudey. If would be very interesting to know _who_ they are buying crap MBSs from right now.
Why on earth are BoNY and State Street on that list? What’s so hair-raisingly risky about global custody all of a sudden? Does the Treasury just not know which banks are in a pickle or how badly?
4:47am —Hope it's not that any you'd think of between the top 7 and those 2 is not worth the scarce capital.
Come to think of it, they're probably not extending the infusion to foreign subsidiaries …
So the Goldman Sachs TreasSec and the Goldman Sachs SubSec of Financial Looting, Kash ‘n Karry, are taking the peoples’ money and handing it over to … Goldman Sachs.
This is not merely flagrant looting. It’s a declaration of war. Act accordingly — your financial future has no value to this gang of predatory hoodlums. They’ll feed every penny your children earn into their securitization meat grinder and dole out the residual tranches as food stamps and Medicaid, whilst they jet off to Antigua for the holidays with their fat rakeoffs.
Ask a Goldman Sachs i-bankster where he works. “I work for the People. Our headquarters is on Red Square.”
To each according to his need, comrade. And those accumstomed to “unlimited liquidity” need a lot more than we do. Or so they would have us believe.
Me, I’d settle for unlimited ammo. The political reaction will be delayed, but this is inning three of a nine-inning contest. And frankly, I don’t wanna be around for the end of the game. The next Declaration of Independence won’t be crafted in such polite language.
— Juan Falcone
Now Congress has to force oversight of the FED and Treasury…
With the Brits and Euros doing some heavy lifting US trying to get away with a low fat option.
Should the Brits and Euros lower their levels of cooperation with US financial policy moves to deal with the free-rider problem? Or just “encourage” their banks to take stakes in the 9 horsemen of the US recovery?
The decision to take equity stakes? Take is the operative word here.
http://www.washingtonpost.com/wp-dyn/content/article/2008/10/13/AR2008101300184.html
“The Treasury Department’s decision to take equity stakes in banks represents a significant reversal, coming just weeks after Treasury Secretary Henry M. Paulson Jr. had opposed the idea. In a momentous meeting yesterday afternoon in Washington, Paulson, flanked by top financial regulators, told the executives of nine leading banks that they needed to participate in the program for the good of the national economy, two industry sources said on condition of anonymity because they were not authorized to speak publicly. “
Left out of the quote was the gun at their heads.
and then this from the esteemed Bernanke,
“The most immediate responsibility of policy makers and elected officials is to restore confidence in our credit markets.”
Well they have actually done something either out of a St Paul moment on the way to Rome or more likely their voices are so horse they can’t speak having been screaming fire at the top of their lungs for the last few weeks. Yes great leadership skills on the part of these titans.
Back to Plan C, enjoy it while it lasts because while this one honors Benito of yore Plans E and F are going to even be worse.
Pass the popcorn if you would.
And lest you think I’m being harsh in my treatment of these buffoons you definitely don’t want to read this piece. Laid out in a time series is the gruesome litany of incompetence on an epic scale. Fran and Ollie, Abbot and Costello? That’s a tough call.
http://bigpicture.typepad.com/comments/2008/10/no-time-to-wast.html
Via Kate Wellings commentary at Weedon comes this delightful skewering of Hank Paulson’s understanding of the housing, market and credit crisis much earlier in its development
“In short, any jot of credibility that the Secretary may have had surely cannot withstand this inarguable evidence of aberrant thinking; the inconsistency alone is staggering. These quips run the full gamut from puerile denial to deliberate understatement to bald-faced demagoguery, right on down to yesterday’s call for patience. Suffocated by his unabashed, unprincipled and incessant manure-spreading, I honestly wonder how the heck it is that we are not on the WH lawn . right this instant . pitchforks in hand.
I am a firm believer that crises are not a time for ideology, and we must do what is necessary to save the financial system from bringing down the entire economy.
That having been said, how on earth are we ever going to wean these banks off of negative real interest rates, the alphabet soup of liquidity facilities (TAF, PDCF, TSLF, etc.), TARP purchases of troubled assets, direct capital injectsions, etc. without provoking another crisis?
“Lordie, do we have any rule of law in this country?”
No. Best bumper sticker I’ve seen:
Bush/Cheney ’08!!! Why let the constitution stop us now?
Based on the term sheet, this thing is a gift to the banks. There’s no way any private investor would touch this thing at anywhere near close to par. So much for encouraging private capital to go side-by-side with the government…
“We can’t make this punitive or dilutive, that would make it not voluntary!”
Give me a break. Pathetic.
I expect this plan to quickly morph into a pork barrel: Senator Foghorn Leghorn will demand to know why a cherished hometown institution, Cretin Savings, is less deserving of government money than those rich big city banks
How dare those hayseeds think they deserve the same treatment as New York money center institutions! They should know their place, which is to cough up the bucks and bow ‘n scrape before the Big Apple’s best and brightest.
Keep it up, jerkos. 20% of the population already openly admit to seccessionist sentiments. Once people discover that “Change” really meant a Soros sock puppet that number will rise.
More and more people are deciding the best bailout is just build a militarized border fence around metro NYC.
I wouldn’t be so quick to assert that there will be no triage of the weaker banks. This first step is an attempt to guarantee continuity of the largest financial institution — which is profoundly offensive but necessary to prevent tremendous economic dislocation in the short-term. Weaker banks with poor CAMEL ratings (ie, banks with no real deposit franchise and deep asset quality problems) will not be eligible for the bailout.
This is terrible for America’s future, but the alternative is worse. It at least gives us a chance to de-lever with less dislocation than letting the financial system flush itself down the toilet.
Jamie is pissed. I have several friends who work for JPM and word is filtering down that there is a big sense of injustice over there that they feel as if this capital raise (and the attendant compensation limits) is being forced on them unnecessarily.
Jamie is pissed. I have several friends who work for JPM and word is filtering down that there is a big sense of injustice over there that they feel as if this capital raise (and the attendant compensation limits) is being forced on them unnecessarily.
He should resign immediately to demonstrate the sincerity of his outrage. I’m sure he can easily double or triple his annual $55 million pay package in this environment.
Richard (Kline), I always appreciate your comments. Would you say that the current course of actions by this administration is globally shifting the risk from the finance industry to the US government as a whole? Henceforth making such a catastrophic default have a very larger impact on the “real” economy.
Yves,
1. The purpose of this whole exercise was to “provide” GS (and probaly MS) $10 billion each to buy a regional bank without having to raise expensive capital required.
2. Jamie Dimon was unhappy because his competitive advantage in running his shop well and able to raise capital to buy WAMU just got wiped away.
Hirsch V Gupta
Jamie has the biggest CDS book in the US: $10.4 Trillion as of June 30, 2008, up from $8 Trillion as of March 31, 2008. He — albeit unknowingly — bet the company on that crap just like everyone else.
“Hopefully someone will ask why it is that the government is going to put billions of dollars of cash into THESE companies while taking no permanent equity stake, but it put no cash at all into FNM, FRE, WM, or WB and wiped out or assisted in the wipeout of almost all the equity.”
Yes! But you forgot to mention the biggest loser of all Lehman Bros. who got nothing whatsoever.
Maybe Richard Fuld was schlepping Mrs. Paulson?