WSJ does a portrait. It's as bad as I feared. I'm sticking with the nick, "Cash-and-Carry".
Tuesday, October 14, 2008
A Lincoln Portrait: Paulson's Man Friday
Bush - Everything in Iraq is Going According to Plan
PHASE THREE OF THE WAR HAS BEEN CAREFULLY PLANNED
Bush this morning, on this White House's prodigious ability to make decisions covering all the bases ...:
(paraphrase) "...these steps have been carefully planned."
Carefully planned?
The Plan sounds like something someone blurted out, after raising their hand ... soon, we'll find a power-point, with phase-three of this crisis ... unarticulated, with a Rumsfeld note, "democracy is untidy".
WHY DID PAULSON DO IT? 'WE CAN BE HEROES'
Here's the Paulson conundrum.
If the system is really in trouble - I mean seriously in trouble, like avoiding Great Depression II, then giving $20 billion to mega banks and $10 billion to investment banks is ... peanuts.
If the system needs only a little capital or no capital at all, then Paulson looks like a hero.
Why did Paulson do it?
Why would JP Morgan Chase need more capital?
They just raised $10 billion, $2 billion more than they said they would, in the most choppy and difficult markets in decades, a week ago or so.
No wonder their shares were ... down in today's up trading day. They just got "involuntarily injected".
Does he think the market will not eventually see through this cloak-and-dagger routine and wonder why $10 billion more is enough for Morgan Stanley and Goldman, presently, but the $11 billion equity raise that Lehman did months before their downfall was ... not enough.
I'll bet Citigroup is pissed that they didn't try to bid more, now that the taxpayers are subsidizing BOA's purchase of Wachovia (with an "extra" $5 billion "injection").
WE SHOULD HAVE KNOWN
This is what happens when you hired investment bankers. They do deals.
NEXT WEEK'S HEADLINES
What would you do if someone forced you to take capital?
I'd buy back either high-yielding debt or common shares.
update: it appears that you cannot buy common shares, while the government is involved.
Or, I'd write down the worst of my assets, like my commercial real-estate portfolio, my buyout loans ...
I'd hang onto my sub-prime junk. Why? I might get to sell it to Paulson's Cash-and-Carry guy for an above-market price.
To be charitable, maybe there is something we don't know. Maybe they need the money, so they can comply we conservative accounting principles for assets? ... this is still the Bush Administration. Would you put a high probability on that?
update: a second possibility - the government is setting up a few large players to consolidate the industry's laggards, the ones the FDIC is expected to "process" in the upcoming quarters.
Monday, October 13, 2008
"HOPE NOW ALLIANCE" Didn't Make the Final Cut
Beggars at the feast:
Among the banking chiefs attending the meeting were Richard M. Kovacevich (Wells Fargo), Kenneth D. Lewis (Bank of America), John J. Mack (Morgan Stanley), John A. Thain (Merrill Lynch), Lloyd C. Blankfein (Goldman), James L. Dimon (JPMorgan), Vikram S. Pandit (Citi) and Robert P. Kelly (Bank of New York Mellon)
TARP goes to WARP speed, to avoid scrutiny
YIPPEE! DUE TO UNQUANTIFIED, ASSERTED 'SYSTEMIC RISK', YOU NOW OWN SHARES IN FAILING BANKS
Instead of owning plain, old real-estate, by buying up defaulted mortgages and stemming the problem at its source, we're going to own financial institutions, all kinds of exotic securities that no one understands widely, and ... all the bank management that we've come do love, over these days.
I love my AIG. Those guys have got it going on!
I'm sure all these guys will work overtime to reduce "systemic risk" for all of us.
ORWELLIAN DOUBLE-SPEAK FROM BUSH ADMINISTRATION
It even lands on the front pages of the New York Times.
Savor this. Dividends don't count, because they are not ... paid out of earnings.
The goal is to inject massive liquidity into the banking system. The government will purchase perpetual preferred shares in all the largest U.S. banking companies. The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings.
HUMOR IN UNIFORM
It it too soon to start calling Paulson's go-to guy (Kashkari), by his new nickname, "Cash-and-Carry"?
Why TARP without Upfront Regulatory Fix Is Dangerous
I still find some of the best stuff in comments on great blogs.
Here's one that made my day, from a poster named barry (hang in there until the end, on E.F. Hutton):
I seem to have lived in some alternative universe. The essence of Reaganomics was use of government resources opportunistically to help advance GOP interests and to help select firms.
We can start with the nationalization of Continental Illinois Bank in 1984 (in the middle of an election) and use of government funds to bailout all depositors for the full amount (not just the FDIC limit).
We can continue with the seizure of Franklin Savings and Loan (a healthy financial instituion with never a losing year) on the grounds of improprer ‘hedge accounting’. The assets of the institution were sold at a discount to connected Wall Street firms.
We can go onto the ’sale’ of a bunch of Texas banks to Nationsbank for a pittance and with a put option. The government gave Nationsbank a free call option (an option that belonged to the shareholders of the Texas banks and the taxpayer).
E. F. Hutton is an amusing diversion. Here was comapany charged with everything from check kiting to wire fraud. The Reagan Justice Department was reluctant to move against them. State Attorney Generals in NY and PA were about to get indictments in state court. The Feds moved with amzaing rapidity. E. F. Hutton (the company) pleaded guilty to various crimes in a court room in Wilkes Barre, PA (not Philly or NYC where there would have been media). Not a single officer of E. F. Hutton was charged. E. F. Hutton should have lost its broker/dealer license but the SEC swiftly came in with an exemption. The CFTC should have debarred E. F. Hutton but another exemption was forthcoming. E. F Hutton’s President, one Scott Pierce was happy. He called his sister Barbara and thanked her. She said that she would pass on the good news to her husband, George Bush.
We could go on and on. But the statement that Ronald Reagan had something to do with free markets seems divorced from reality.
We can start with the nationalization of Continental Illinois Bank in 1984 (in the middle of an election) and use of government funds to bailout all depositors for the full amount (not just the FDIC limit).
We can continue with the seizure of Franklin Savings and Loan (a healthy financial instituion with never a losing year) on the grounds of improprer ‘hedge accounting’. The assets of the institution were sold at a discount to connected Wall Street firms.
We can go onto the ’sale’ of a bunch of Texas banks to Nationsbank for a pittance and with a put option. The government gave Nationsbank a free call option (an option that belonged to the shareholders of the Texas banks and the taxpayer).
E. F. Hutton is an amusing diversion. Here was comapany charged with everything from check kiting to wire fraud. The Reagan Justice Department was reluctant to move against them. State Attorney Generals in NY and PA were about to get indictments in state court. The Feds moved with amzaing rapidity. E. F. Hutton (the company) pleaded guilty to various crimes in a court room in Wilkes Barre, PA (not Philly or NYC where there would have been media). Not a single officer of E. F. Hutton was charged. E. F. Hutton should have lost its broker/dealer license but the SEC swiftly came in with an exemption. The CFTC should have debarred E. F. Hutton but another exemption was forthcoming. E. F Hutton’s President, one Scott Pierce was happy. He called his sister Barbara and thanked her. She said that she would pass on the good news to her husband, George Bush.
We could go on and on. But the statement that Ronald Reagan had something to do with free markets seems divorced from reality.
I wonder if Barry followed the amusing case, during this era under Bush-fils, of how aggressively SEC Chairmen Cox looked into that matter of insider trading, Pequot, and John Mack, Chairman of Morgan Stanley. Maybe there was nothing there - I certainly have no reason to think one way or the other. Still, we'll never know.
Thought for the Day
True or false: you can get by with $1 in capital, if everyone believes in your assets/investments.
[much more today at sister blog, on 2008 Financial mess]
It pays to have an Exchequer
Sometimes the best prep is to be Chancellor of the Exchquer for ... gosh, it seems like it was forever.
Krugman gushes.
Krugman Annoited
A ONE HANDED ECONOMIST TAKES THE NOBEL PRIZE
Congratulations to Krugman-sensei.
I hope he doesn't start to believe in theory, even more, because of this.
The Face of TARP
"I'M FROM THE GOVERNMENT AND I'M HERE TO HELP YOU" - Cue 'em Up, October 13, 2008
What's that old saying that there is no problem too complex that it cannot be made worse?
Now we have to listen to Paulson's go-to guy trumpeting how the government is quickly contracting with law firms, asset managers, and ... otherwise setting itself up as a mega financial manager.
Were your eye's rolling back in your head?
Truly, we are very near the point at which the Bush Treasury should ... stop talking.
A BRADY-PLAN FOR RMBS
I have just one, two sentences that would accomplish more, more quickly:
"I can announce today that the government will begin to offer terms to lenders on defaulted mortgages, of the sub-prime and alt-a category, and those terms will share, probably 50/50, in home price declines, where negative equity exists. We expect this activity will exist within the framework of existing real-estate law."
Two, three more, and I've got just about the whole thing:
"For now, we are encouraging the Fed to continue to expand its use of special facilities, on a temporary basis, so that firms can manage their liquidity across a spectrum of asset classes and, thereby, meet short-term calls for collateral and the like.
While the banking system, including the finance-arms of companies that drive consumer credit availability, adjusts until it is fully repaired, we will engage in a certain amount of making sure that financing is available to the business sector, by providing such capital relief, in a variety of forms*, as allows asset qualities to be conservatively accounted for, until investor confidence is restored.
G7 finance ministers are working with central banks to reduce and neutralize many off balance-sheet exposures, efficiently and quickly, so that the system is no longer burdened by these uncertainties and burdened by systemic risk factors magnified, in the current environment, by instruments outside the control of regulators."
While the banking system, including the finance-arms of companies that drive consumer credit availability, adjusts until it is fully repaired, we will engage in a certain amount of making sure that financing is available to the business sector, by providing such capital relief, in a variety of forms*, as allows asset qualities to be conservatively accounted for, until investor confidence is restored.
G7 finance ministers are working with central banks to reduce and neutralize many off balance-sheet exposures, efficiently and quickly, so that the system is no longer burdened by these uncertainties and burdened by systemic risk factors magnified, in the current environment, by instruments outside the control of regulators."
*there are various forms of capital requirement relief. off hand, there is the obvious capital-injection. There is also the possibility of lower regulatory capital requirements (cf Japan, 1990s). Last, there is consolidation, in which some investors lose their capital so that others can offer a 'stronger hand' behind risky assets management.
Update: I forgot. The Federal Reserve is now paying interest on so-called "reserves" held at the Fed. That may not seem like a lot, but, over the course of a year, it really adds up, for the banks!
Moving ....
FYI, for regular readers, I've moved most of the running punditry comments and analysis on the ongoing financial crisis to the sister blog.
This blog, here, will probably atrophy, over time. Who knows. It seems like Andrew needs less bootstrapping than ever, these days.
Saturday, October 11, 2008
Bush has 100 Days Left in Office
Milestone.
Of course, there is still a LOT of time. Remember, Napoleon didn't *start* his retreat from Moscow, until 19 October ...
America's three-branch conservatism, 2000-2008, mapped out as Napoleon's campaign to Moscow:
Von Hoffman
AS finds a quote that defined the last market peak, in 1999. I looked for it earlier this week, but could not find it, so I just did a Dow 10,000 post, instead.
I recall making prognostications, on the heels of Glassman and Haslett's opus, at the beginning of this decade (from memory):
"...loss looms to the downside, threatening an end to the cult of equity.'
Oh, dear.
Anyway, if you believe in the Glassman and Hassett thesis (it's a theory which you cannot prove wrong...), these are the times of your life: Buy, buy, buy!
The End of Unsecured Lending?
THE SPICE MUST FLOW
The spice is flowing (see pic). There has been a reduction in the amount that businesses can place directly, but it is in line with recent dips and the slack has been picked up by dealer placements.
The price of this unsecured lending has gone up, but the spice is flowing.
How much and why the price has gone up requires more data. A few data points and a survey summary statistic ... are insufficient.
Whatever the case, the oft-repeated line about companies not meeting payroll appears to be, as I mentioned, urban legend, repeated to the highest levels of government, even. Is that Orwellian, or just par for the course?
To the extent that it is simply balance-sheet capacity that is driving up the cost of CP or investor skittishness (money market funds getting spooked?), then the Fed has done a very smart thing to insulate the non-financial sector, the real-economy, if you will, from the ongoing vagaries of Wall Street banks and mutual fund complexes...
source: Fed's weekly CP release (h/t to CalcRisk) The "Currency" (in the chart title) is USD - it got cut off the chart, sorry.
Lehman Redux
One scary figure is that there were some $400 billion in Lehman CDS to sort out (still looking for confirmation of that notional / face amount). Felix Salmon reports, however, that nets down to a mere $5 billion. In other words, after all the you-owe-me-what-I-owe-you-back, the "real" figure 'at risk' for pay-up was circa $5 billion (some portion of which may or may not have been collateralized or hedged, already).
Now, I know there are people who think that Lehman should not have been allowed to fail. Frankly, my eyebrows raised. Lehman was no Bear, Stearns, afterall.
Still, from a systemic perspective, if the system cannot handle $5 billion in off-balance sheet exposures, if the financial system that supports our $14 Trillion dollar economy cannot handle that, then we are ... worse than Banana Republic. We are a Kumquat Republic.
It's true, nevertheless, that that $5 billion might have not been spread around "evenly" among financial institutions, with some having net amounts far greater than that. In that case, we'd be on pins and needles waiting, as we do seem to be, to find out who was ...a "winner" and who was a "loser", who was lopsided or ridiculously lopsided, since no one is forced to disclose their ... lopsidedness to investors.
Of course, the chief worry, I suppose, of those more disturbed about Lehman's failure was its impact on confidence, the blow it may have made to an already weakened system, a cascading blow, even, to the credit markets.
CONFIDENCE MAKER, NOT CONFIDENCE BREAKER
The jury is still out and that verdict is not in yet, I don't think. Clearly, there was a problem with Lehman top management. It cannot be a bad thing that their business and business risks are now concentrated in stronger hands, with managements who, presumably, are still standing because they have a better grip (and understanding) of the overall risks they are running...
Besides, we're learning from this failure, perhaps, how to set up a new financial system, one in which the overseers have a real-time picture of the 'systemic risk' in the system, including off balance-sheet risks, like swaps and so forth, and one that covers non-bank financials (i.e. AIG).
Friday, October 10, 2008
Palin Implodes - Does McCain Get His 11th Hour Game Changer
My only question about troopergate is, if Palin steps aside, is Mitt Romney back in the picture?
Problem Misspecification - If We Had Only Had Hearings, Expert Testimony
THROWING WATER ON AN OIL FIRE
Well, Paulson just came out and said he was going to use a Class A fire extinguisher on a Class D fire. In other words, we're throwing water on an oil fire ...
Let's hope he's right ... he certainly didn't say what he would do if he was ... wrong, if the problem with mortgages keeps getting bigger, for instance.
Altogether, I interpret it that Morgan Stanley - or other large investment banks - will not be allowed to fail. (At least, as far as one can tell, reading the tea leaves, that's the institution that they have in mind - do you know who else they are talking about?).
TAKE TWO
Lots of people want the inter-bank market backstopped. Here is my write-up on that, if you missed it.
Be careful what you wish for ... (Not surprisingly, there are folks on CNBC "convinced" that it is now the "number one" thing to do - until next week. Oy!)
WHAT TO DO
Here's what may be the problem, in terms of process, of why it is taking so long for the "collective conscience" to figure out what to do?
People go and talk to CEOs and accountants. They don't understand the problems, because many of them do not have markets experience and don't understand the financial products they sell, from a risk perspective, so they give prescriptions that make sense to them. We need this, we need that. We need capital. We need price-discovery, so we can get liquidity. We need to stop mark-to-market. It's the short-sellers.
So far, this theory of what is going on accounts for the piecemeal approach we've seen so far, including the inability to size up the scope of the problem initially.
GET PAST THE TOP-LAYER OF "MANAGEMENT" - A Brady-plan for RMBS
They need to get past the top-layer (and lobbyists?) and start talking to the people who value, trade, and invest in the securities that are "distressed".
It's the best way to get to a robust policy prescription.
What's more, it's easy to figure out and easy to explain. No one will like it, politically, conservative or liberal, but that's the way it is ... with "medicine".
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