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Mr. Geithner, “I Want Some More”

Posted by Larry Doyle on March 30, 2009 5:15 AM |

Poor Oliver Twist faced the wrath of the workhouse master when he asked for more soup. Why is it that certain banks do not face similar wrath when they go back to Uncle Sam for more “bread” with the soup?

They want more??!!

I have commented extensively on the banks’ need for more capital. Bernanke and Geithner now share that the banking industry has significant embedded losses which need more capital: Geithner Says Some Banks to Need ‘Large Amounts’ of Assistance.

Over and above this fact, it is now widely speculated that significant revenues at certain banks (Citi and BofA) were generated in the last few months via unwinding exposure to AIG. In short, AIG entered into massive transactions with these banks to eliminate further exposure on pre-existing trades. In the process, AIG (taxpayers) incurred larger losses while these banks generated large profits. Why would AIG do this? It’s part of a “going out of business sale” and executed with a “volume discount.”

As an investor, though, am I supposed to think that bank revenues are improving because of positive trends in the economy? No way.

Risks remain extraordinarily high. To that end, I STRONGLY encourage people to listen to the audio recording or the podcast of my interview with Michael Panzner from last evening. Michael has had the economy and the market called for the last few years. His books are comprehensive in laying out a sobering reality and potentially a daunting future.

LD

  • fiscalliberal

    There is a strong feeling here that the banks and auto industry are being treated differently and Washington does not have a clue regarding this disparity.

    Of course they will point to Lehman and the unwind of AIG. However I would counter that we are pouring massive money into the finacial industry and Lehman and AIG are not the total picutre. More over the picture is not seeing signs of improvement.

    I think Panzer agree’s with Krugman in that the Geitner plan will have a marginal effect, BUT WILL NOT SOLVE THE PROBLEM. They need the Resolution Legislation fast to get to the problem.

    I still come back to Merideth Whitney in that we should be pouring this money into the smaller solvent banks. Let the big banks work out their problems as they see fit and stop pouring money into them. So – just like they are treating auto, the need to treat financial the same way.

    • Larry Doyle

      Fiscal…no doubt the frustration levels across the board are growing dramatically.

      I do think that Wagoner became nothing more than a sacrificial lamb at this juncture. Based on the construct of the govt team working on the automotive situation, they need all the help they can get. Wagoner certainly could have helped. He was offered up by Obama to the taxpayers as a sign of progress.

      If I’m Fiat, my bid for Chrysler is going down. Chrysler has NO leverage whatsoever.

      • Andy

        But I think that “the message” of the federal government “demanding” the CEO of a private company (yes, I know one that’s begging for tax-payers money and knocking on the fed. gov,’s door) to resign send a horrible signal to the markets.
        This was different from when the govt’ asked the AIG chief to resign; for the latter was just the govt’ going along with a decision the share-holders had already made….

        I am not defending Wagoner (the guy should have been booted long ago!) but I think there is real fear the govt’s will be calling the shots at every level -if or while- GM survives. Including GM’s dealings with the unions, employees termination compensations, etc etc.

        What say you?

        • Your point is very well taken. GM’s board was effectively decimated/overrun by Uncle Sam.

          The risk in having the government as a partner is the fact that the govt is not in the for profit biz. On a going forward basis, will companies be less entrepreneurial because a failed enterprise will lead to quicker govt intervention.

          All these unintended consequences.

  • Mountainaires

    This is PPIP in layman’s terms, and even that is confusing to me, since calculating odds is a talent I never developed.

    But, it’s worth reading for the sheer convoluted maze-like effect of it all. Simple minds like mine seek simple structures, transparent solutions. Obfuscation always makes me suspicious. It all just looks like a complex scheme to hide a transfer of money from taxpayers to banks…They’re going to bankrupt this country.

    http://www.ritholtz.com/blog/2009/03/ppip-heads-or-tails/#more-22802

    • Larry Doyle

      Mountainaires…you get it. It’s a version of the “heads I win”, “tails you lose” game that Uncle Sam played so well with Freddie and Fannie for so long.

  • Andy

    LD: it seems the fears vis a vis banks is huge. This morning this fact coupled with the automakers troubles are tanking the stock market….
    Here from Reuters:

    “Wall Street sinks on automaker, bank fears”

    http://www.reuters.com/article/hotStocksNews/idUSTRE52T35C20090330

    I missed your show last night but will try to listen later. Seems you had a great guest also.

  • Andy,

    You are right. There remains an approximately $1 trillion hole (embedded losses) in the banking system along with a functionally bankrupt auto industry. We are a LONG way from being out of the woods.






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