Category Archive 'Mortgage Mess'
07 Apr 2009
Jeffrey Sachs, at the Huffington Post, explains that the Geithner-Summers toxic asset plan will allow banks selling such assets to bid on the same kind of assets being sold by other banks, setting up the opportunity for massive wealth transfers from the Treasury to the banks involved.
Insiders can easily game the system created by Geithner and Summers to cost up to a trillion dollars or more to the taxpayers.
Here’s how. Consider a toxic asset held by Citibank with a face value of $1 million, but with zero probability of any payout and therefore with a zero market value. An outside bidder would not pay anything for such an asset. All of the previous articles consider the case of true outside bidders.
Suppose, however, that Citibank itself sets up a Citibank Public-Private Investment Fund (CPPIF) under the Geithner-Summers plan. The CPPIF will bid the full face value of $1 million for the worthless asset, because it can borrow $850K from the FDIC, and get $75K from the Treasury, to make the purchase! Citibank will only have to put in $75K of the total.
Citibank thereby receives $1 million for the worthless asset, while the CPPIF ends up with an utterly worthless asset against $850K in debt to the FDIC. The CPPIF therefore quietly declares bankruptcy, while Citibank walks away with a cool $1 million. Citibank’s net profit on the transaction is $925K (remember that the bank invested $75K in the CPPIF) and the taxpayers lose $925K. Since the total of toxic assets in the banking system exceeds $1 trillion, and perhaps reaches $2-3 trillion, the amount of potential rip-off in the Geithner-Summers plan is unconscionably large.
The earlier criticisms of the Geithner-Summers plan showed that even outside bidders generally have the incentive to bid far too much for the toxic assets, since they too get a free ride from the government loans. But once we acknowledge the insider-bidding route, the potential to game the plan at the cost of the taxpayers becomes extraordinary. And the gaming of the system doesn’t have to be as crude as Citibank setting up its own CPPIF. There are lots of ways that it can do this indirectly, for example, buying assets of other banks which in turn buy Citi’s assets. Or other stakeholders in Citi, such as groups of bondholders and shareholders, could do the same.
Mike Rorty explains further:
I was out at â€œDebaser Nightâ€, a 90s-music dance party in San Francisco, with some friends. A riot grrl rock cover band opened, followed by lots of great singles. I was getting a bit nostalgic. A friend of mine, who used to be on an energy trading desk back in the early 2000s, was listening to me talk about the government plan. He couldnâ€™t believe what I was telling him about letting the banks that are selling auctions also bid on them. In the middle of my explanation, he had his own wave of nostalgia: â€œMan does that bring back memoriesâ€¦.â€ …
[W]hy did my energy trading friend get all nostalgic? â€œBecause what you are telling me brings back some great memories from what Enron was up to back in the day. All of us energy traders back then watched with our jaws on the floor. 2000 was a hell of a year.â€
It is August, 2000. Letâ€™s say you are a trader for Enron. You know your energy in California is worth $50, and you also know the energy that Reliant Energy has is worth $50. You call your buddy up, the trader at Reliant, and make a deal. Happens all the time – you even have a nickname for it, The Daisy Chain Swap. You go to bid, and you bid $80 for Reliantâ€™s energy. Then you wait. If Reliant doesnâ€™t come through, you are screwed out a lot of money. And hey, isnâ€™t this wrong? Well, you are pretty sure one of those Rubin-protÃ©gÃ© government whiz-kids has given someone who knows someone you know a wink-wink about this. You take a drink, steady the nerves. Then, the bid comes back for your energy – $80 from Reliant. You have each bid up each others assets and traded them. And now the government is screwed, because it has to pay you $80. …
What is really exciting, from the evil point of view, is the idea that we are going to get to see one giant, massive, Enron Death Star put into play.
The Death Star strategy (yes, they called it that) was where Enron would take a fee for relieving a congested market of its excess supply by moving it elsewhere. Just like our legacy assets! There are too many of them, it is clogging up trade, letâ€™s get them to someone else who wants them. However Enron would just move the energy in a circle, collecting a fee for not doing what it was supposed to. As their memo famously said, they are paid â€œfor moving energy to relieve congestion, without actually moving any energy or relieving any congestion.â€ And, it appears, that the large banks are gearing up to do just that; with the Geitner Death Star that theyâ€™ll just be collecting a large fee to run them in a circle, without actually moving any of them off their collective books. …
Mind you that was the electrical grid of California – this appears to be at the scale of the entire financial market. In case you are wondering, traders out there are licking their lips to try and find ways to game this even better than Enron.
See? Obama is really an equal opportunity redistributionist. He’s not only redistributing taxpayer monies to ACORN and the dÃ©soeuvrÃ©; he’s redistributing to the bankers, too.
Hat tip to Daniel Lowenstein
05 Apr 2009
Stuart Varney, in the Wall Street Journal, explains that the administration is actually resisting TARP repayments from certain banks. This Administration’s economic policies aren’t about money. They are about power and control.
I must be naive. I really thought the administration would welcome the return of bank bailout money. Some $340 million in TARP cash flowed back this week from four small banks in Louisiana, New York, Indiana and California. This isn’t much when we routinely talk in trillions, but clearly that money has not been wasted or otherwise sunk down Wall Street’s black hole. So why no cheering as the cash comes back?
My answer: The government wants to control the banks, just as it now controls GM and Chrysler, and will surely control the health industry in the not-too-distant future. Keeping them TARP-stuffed is the key to control. And for this intensely political president, mere influence is not enough. The White House wants to tell ’em what to do. Control. Direct. Command.
It is not for nothing that rage has been turned on those wicked financiers. The banks are at the core of the administration’s thrust: By managing the money, government can steer the whole economy even more firmly down the left fork in the road.
If the banks are forced to keep TARP cash — which was often forced on them in the first place — the Obama team can work its will on the financial system to unprecedented degree. That’s what’s happening right now.
Here’s a true story first reported by my Fox News colleague Andrew Napolitano (with the names and some details obscured to prevent retaliation). Under the Bush team a prominent and profitable bank, under threat of a damaging public audit, was forced to accept less than $1 billion of TARP money. The government insisted on buying a new class of preferred stock which gave it a tiny, minority position. The money flowed to the bank. Arguably, back then, the Bush administration was acting for purely economic reasons. It wanted to recapitalize the banks to halt a financial panic.
Fast forward to today, and that same bank is begging to give the money back. The chairman offers to write a check, now, with interest. He’s been sitting on the cash for months and has felt the dead hand of government threatening to run his business and dictate pay scales. He sees the writing on the wall and he wants out. But the Obama team says no, since unlike the smaller banks that gave their TARP money back, this bank is far more prominent. The bank has also been threatened with “adverse” consequences if its chairman persists. That’s politics talking, not economics.
01 Apr 2009
Bad economic news has proven good news for the left, who first used public dissatisfaction over the economy to win the election last November, and who have since gleefully taken every market plunge and corporate insolvency as the basis for another power grab.
Russ Smith observes the happy leftwing American elite making hay while clouds fill the sky.
Thereâ€™s presently a school of thought, mostly among the liberal intelligentsia, that the devastating recession has morphed from sheer panic to sour resignation throughout the nation. As a result, weâ€™re now seeing the first wave of magazine and newspaper articles that assess the wreckage and grandly speculate upon the future of American society. This â€œfirst draft of historyâ€ is prematureâ€”in fact, the Las Vegas-tinged economy, where the rules are constantly changing, remains enveloped in gut-wrenching uncertaintyâ€”but Iâ€™m not an armchair sociologist with a sinecure at a prestigious university or think tank, or insulated by the downturn from inherited wealth or celebrity.
These pundits, left-leaning economists, and other designated â€œexperts,â€ differ on the precise ramifications of the vanished â€œAmerican Dream,â€ but the crux is similar: weâ€™re entering a long, long era of reduced expectations and simpler way of life. Considering the sourcesâ€”and academia is the epicenterâ€”itâ€™s not surprising that â€œReaganismâ€ is now a filthy word, Wall Street money-grubbers are and will be considered pariahs on the order of pornographers and ambulance-chasing lawyers, and high taxes are both necessary and desirable. An element of this commentary is the lingering resentment of the Bush yearsâ€”the â€œstolenâ€ election of 2000, Kerryâ€™s loss in â€™04, and the supposed philistinism of the former presidentâ€”but the larger theme is, hey, weâ€™re now in charge!
Hat tip to Bird Dog.
27 Mar 2009
South Park explains the federal decision making process used by both the Bush and Obama Administrations for dealing with the current economic downturn.
Hat tip to Andrew Sullivan.
26 Mar 2009
Barack Obama recently told the press that he thought about it for some time before deciding to go ahead and unleash attacks on AIG employees receiving contractually-specified compensation for job performance or as retention incentives. Doubtless, the president talked over whether it would be a good idea to use the White House as a platform to whip up public emotion into outraged anger directed at ordinary private citizens with his Chief of Staff Rahm Emanuel.
Rahm Emanuel, as the Chicago Tribune reports, had at the time already long since collected his own bonus for passive collaboration on the board of the Federal Home Loan Mortgage Corporation “Freddie Mac” in the policies directly responsible for the mortgage default crisis, unlike Jake DeSantis, for example, who would soon be nationally targeted despite having no actual real connection.
Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.
One of those allegedly asleep-at-the-switch board members was Chicago’s Rahm Emanuelâ€”now chief of staff to President Barack Obamaâ€”who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort. …
The Freddie Mac money was a small piece of the $16 million he made in a three-year interlude as an investment banker…
He was named to the Freddie Mac board in February 2000 by Clinton, whom Emanuel had served as White House political director…
The board met no more than six times a year. Unlike most fellow directors, Emanuel was not assigned to any of the board’s working committees, according to company proxy statements. Immediately upon joining the board, Emanuel and other new directors qualified for $380,000 in stock and options plus a $20,000 annual fee, records indicate.
ACORN probably won’t be busing any demonstrators over to Representative Rosa DeLauro’s house (where Emanual lives in the basement) to threaten him though, will they?
25 Mar 2009
The New York Times published yesterday’s resignation letter from Jake DeSantis, executive vice president of the American International Groupâ€™s financial products unit, to Edward M. Liddy, the chief executive of A.I.G.
Dear Mr. Liddy,
It is with deep regret that I submit my notice of resignation from A.I.G. Financial Products. I hope you take the time to read this entire letter. Before describing the details of my decision, I want to offer some context:
I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in â€” or responsible for â€” the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.
After 12 months of hard work dismantling the company â€” during which A.I.G. reassured us many times we would be rewarded in March 2009 â€” we in the financial products unit have been betrayed by A.I.G. and are being unfairly persecuted by elected officials. In response to this, I will now leave the company and donate my entire post-tax retention payment to those suffering from the global economic downturn. My intent is to keep none of the money myself.
I take this action after 11 years of dedicated, honorable service to A.I.G. I can no longer effectively perform my duties in this dysfunctional environment, nor am I being paid to do so. Like you, I was asked to work for an annual salary of $1, and I agreed out of a sense of duty to the company and to the public officials who have come to its aid. Having now been let down by both, I can no longer justify spending 10, 12, 14 hours a day away from my family for the benefit of those who have let me down. …
The profitability of the businesses with which I was associated clearly supported my compensation. I never received any pay resulting from the credit default swaps that are now losing so much money. I did, however, like many others here, lose a significant portion of my life savings in the form of deferred compensation invested in the capital of A.I.G.-F.P. because of those losses. In this way I have personally suffered from this controversial activity â€” directly as well as indirectly with the rest of the taxpayers. …
But you also are aware that most of the employees of your financial products unit had nothing to do with the large losses. And I am disappointed and frustrated over your lack of support for us. I and many others in the unit feel betrayed that you failed to stand up for us in the face of untrue and unfair accusations from certain members of Congress last Wednesday and from the press over our retention payments, and that you didnâ€™t defend us against the baseless and reckless comments made by the attorneys general of New York and Connecticut. …
I have decided to donate 100 percent of the effective after-tax proceeds of my retention payment directly to organizations that are helping people who are suffering from the global downturn. This is not a tax-deduction gimmick; I simply believe that I at least deserve to dictate how my earnings are spent, and do not want to see them disappear back into the obscurity of A.I.G.â€™s or the federal governmentâ€™s budget. Our earnings have caused such a distraction for so many from the more pressing issues our country faces, and I would like to see my share of it benefit those truly in need.
On March 16 I received a payment from A.I.G. amounting to $742,006.40, after taxes. In light of the uncertainty over the ultimate taxation and legal status of this payment, the actual amount I donate may be less â€” in fact, it may end up being far less if the recent House bill raising the tax on the retention payments to 90 percent stands. Once all the money is donated, you will immediately receive a list of all recipients. …
This choice is right for me. I wish others at A.I.G.-F.P. luck finding peace with their difficult decision, and only hope their judgment is not clouded by fear. …
24 Mar 2009
OBAMA SEEKS EXPANDED POWER TO SEIZE FIRMS
The Washington Post puts it slightly differently, but Drudge is more accurate.
20 Mar 2009
Carol Baum, at Bloomberg, reads today’s news and finds herself living in a Rand novel.
Somewhere John Galt is smiling.
The hero of Ayn Randâ€™s â€œAtlas Shruggedâ€ is smiling because heâ€™s seen it all before: the governmentâ€™s intervention in the private sector; the constraints placed on business in the name of the people; the desperation on the part of government bureaucrats when they realize their leverage is limited; and — this part is still fiction — the decision on the part of business leaders to walk away from the enterprises they built.
Thatâ€™s all I could think about when I read that American International Group Inc., recipient of $173 billion in taxpayer funds, was paying out $165 million in bonuses to employees of its financial-products group, the poster boy for risk and greed.
The Obama administration, Congress and the public are outraged taxpayer dollars are going to enrich the folks who got us into this mess. So am I.
Members of Congress want to blame Edward Liddy, the former chief executive officer of Allstate Corp., who was recruited by former Treasury Secretary Hank Paulson in September to steer AIG away from the shoals.
Liddy is paid $1 a year for his efforts. â€œMy only stake is my reputation,â€ Liddy said in a March 16 open letter to Treasury Secretary Timothy Geithner.
His only crime, as far as I can tell, is inheriting compensation contracts providing for retention bonuses for certain AIG derivative traders, some of whom have left the company, and listening to lawyers on his options. …
Iâ€™m not alone in noting the parallels in the governmentâ€™s evolving response to the financial crisis. For a year Iâ€™ve been waiting for Paulson or Geithner to announce â€œthe John Galt Plan to save the economy,â€ which is right out of Randâ€™s novel.
It wasnâ€™t until the AIG bonus brouhaha broke last weekend and I watched government officials flailing to contain the fallout that I realized the government is losing its leverage. Or maybe it never had any leverage to begin with.
Let me explain. The government has been propping up teetering financial institutions, including AIG, Citigroup and Bank of America, creating the illusion that the banks need the government.
The government doesnâ€™t care about these institutions. It cares about the stability of the financial system: the totality, not the parts.
Congress can refuse to allocate more money to institutions in which it already owns a share (80 percent in the case of AIG). It can levy a tax on the AIG bonus payments or withhold them from the next $30 billion cash infusion, although who would notice? And it can install new management.
Why hasnâ€™t the government put in its own people already? Maybe no one wants the job.
The government needs Liddy and Citigroupâ€™s Vikram Pandit and Bank of Americaâ€™s Ken Lewis to continue working to restore their firms to prosperity in the same way the looters in Randâ€™s novel need Hank Reardon and Francisco dâ€™Anconia and Dagny Taggart, respectively, to run their steel mills, copper mines and railroad.
From their perches as chairmen of the House Financial Services Committee and Senate Banking Committee, respectively, Democrats Barney Frank and Chris Dodd fulminate about the lack of regulation and about inflated CEO compensation. For Dodd, itâ€™s a good opportunity to deflect attention from his sweetheart mortgages from former Countrywide CEO Angelo Mozilo and his questionable real estate deal in Ireland.
All thatâ€™s left for life to imitate art completely is for these CEOs to quit. Let Barney Frank and Chris Dodd run AIG. Letâ€™s see how they fare.
The government needs these companies to survive — and buy back the governmentâ€™s ownership stake — more than they need the government. Most of these CEOs are already wealthy. They donâ€™t need a job working for the government, which is what running a bank amounts to today.
Whatâ€™s in it for them? One dollar of compensation? Their reputations? The house on the lake looks more appealing by the day.
Is anyone surprised sales of â€œAtlas Shruggedâ€ have spiked in recent months as reality comes to resemble Randâ€™s fiction?
20 Mar 2009
Charles Krauthammer puts into perspective the scale of the AIG bonuses which have occasioned such histrionics in Washington. Targeting executives as overpaid is a handy way of diverting the public’s attention from the really significant looting going on at the hands of Congress itself.
A $14 trillion economy hangs by a thread composed of a comically cynical, pitchfork-wielding Congress, a hopelessly understaffed, stumbling Obama administration, and $165 million.
That’s $165 million in bonus money handed out to AIG debt manipulators who may be the only ones who know how to defuse the bomb they themselves built. Now, in the scheme of things, $165 million is a rounding error. It amounts to less than 1/18,500 of the $3.1 trillion federal budget. It’s less than one-tenth of 1 percent of the bailout money given to AIG alone. …
[A] contract is a contract. The AIG bonuses were agreed to before the government takeover and are perfectly legal. Is the rule now that when public anger is kindled, Congress summarily cancels contracts?
Even worse are the clever schemes now being cooked up in Congress to retrieve the money by means of some retroactive confiscatory tax. The common law is pretty clear about the impermissibility of ex post facto legislation and bills of attainder. They also happen to be specifically prohibited by the Constitution. We’re going to overturn that for $165 million?
Nor has the president behaved much better. He too has been out there trying to lead the mob. …
It is time for the president to state the obvious: This recession is not caused by excessive executive compensation in government-controlled companies. The economy has been sinking because of a lack of credit, stemming from a general lack of confidence, stemming from the lack of a plan to detoxify the major lending institutions, mainly the banks, which, to paraphrase Willie Sutton, is where the money used to be.
19 Mar 2009
Michael Graham, at the Boston Herald, observes that the 4th District of Massachusetts’ representative in the House has a lot more to do with the current financial mess than AIG does.
The only thing more painful than watching 180 billion tax dollars swirl down the AIG drainpipe is listening to Barney Frank bloviate about it.
I donâ€™t know The Worldâ€™s Most Expensive Legislator personally, but I hear heâ€™s quite a cut-up at cocktail parties. However, as legislator and politician, he is an unmitigated disaster. Frank combines the economic success of AIG, the business ethics of Enron and the personal accountability of Ruth Madoff.
Frank began his career opposing Reaganomics, an opposition that stubbornly resisted 25 years of nearly constant economic growth. In the 1990s, Frank sat on the Banking Committee regulating Fannie Mae, even as his then-partner, Herb Moses, worked as a Fannie exec.
Is it a coincidence that Frank has been a die-hard advocate for expanding Freddie/Fannie at any cost?
Since at least 2002, Frank fought an ever-growing drumbeat of calls to slow down the Fannie Mae/Freddie Mac train wreck.
In 2003, he famously said that Freddie and Fannie were â€œnot in a crisis,â€ that they were â€œfundamentally sound financially.â€ He repeated that expert testimony in 2005, all the while rejecting the argument that the taxpayers were responsible for Freddie and Fannieâ€™s bills.
And in 2007, he actually proposed raising the caps on Fannie/Freddieâ€™s portfolios – exposing taxpayers to even more risk – and then dumping the new money into (drum roll, please) even more subprime mortgages.
Less than a year later, the Fannie/subprime/derivatives catastrophe was upon us. And the cheerleader for all three? Our Barney.
Which is why it so astonishes that anyone takes him seriously as the self-declared watchdog of Wall Street. Please, Barney, just shut up.
16 Mar 2009
Tigerhawk is willing to give credit where credit is due.
To the extent that Americans, mostly Democratic Americans, believed that the gap between rich and poor was a bigger problem than the absolute prosperity of the poor, I suspect that on the final crunching of the numbers social scientists will discover that most of the widening of the last couple of decades has been suddenly erased. Well, there’s one problem solved!
Americans’ Net worth down $15.5 trillion.
The number of American households with a net worth of $1 million or more, excluding the value of their primary residence, fell 27% to 6.7 million in 2008 from an all-time high of 9.2 million the year before, according to a report from market research firm Spectrem Group.
“America has a lot fewer millionaires than when this economic crisis began,” said George Walper, president of Spectrem Group, in a written statement.
But don’t weep only for the 2.5 million fewer millionaires. The report, which is based on surveys of 3,000 affluent households, also showed the number of both multi-millionaires and aspiring millionaires plummeted last year.
Affluent households, defined as those with a net worth of $500,000 or more, declined 28% to 11.3 million from 15.7 million.
10 Mar 2009
Phillip Broughton lays the blame right at the doorstep of some buildings on the Charles.
If Robespierre were to ascend from hell and seek out todayâ€™s guillotine fodder, he might start with a list of those with three incriminating initials beside their names: MBA. The Masters of Business Administration, that swollen class of jargon-spewing, value-destroying financiers and consultants have done more than any other group of people to create the economic misery we find ourselves in.
From Royal Bank of Scotland to Merrill Lynch, from HBOS to Leh-man Brothers, the Masters of Disaster have their fingerprints on every recent financial fiasco.
I write as the holder of an MBA from Harvard Business School â€“ once regarded as a golden ticket to riches, but these days more like scarlet letters of shame. We MBAs are haunted by the thought that the tag really stands for Mediocre But Arrogant, Mighty Big Attitude, Me Before Anyone and Management By Accident. For todayâ€™s purposes, perhaps it should be Masters of the Business Apocalypse.
Harvard Business School alumni include Stan Oâ€™Neal and John Thain, the last two heads of Merrill Lynch, plus Andy Hornby, former chief executive of HBOS, who graduated top of his class. And then of course, thereâ€™s George W Bush, Hank Paul-son, the former US Treasury secretary, and Christopher Cox, the former chairman of the Securities and Exchange Commission (SEC), a remarkable trinity who more than fulfilled the mission of their alma mater: â€œTo educate leaders who make a difference in the world.â€
It just wasnâ€™t the difference the school had hoped for.
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