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Home12th Street Capital Reviews FASB 166 and 167 and Tells Us Why Wall Street Will Need More Capital
Posted by Larry Doyle on November 4th, 2009 12:00 PM |
Money makes the world go round. Right now the world is not going around all that well because there is neither sufficient capital nor sufficient demand for capital from a global standpoint. That said, profits and bonuses are back on Wall Street so they must have sufficient capital, right? Not so fast.
While our wizards in Washington and on Wall Street are projecting an image of ‘come on in, the water’s fine,’ a crowd based in Norwalk, Connecticut has plans that hold major implications for our markets and economy. What crowd is this? The Financial Accounting Standards Board, otherwise known as FASB.
Recall that last spring Congress, supported by a heavy influence from Wall Street, rammed through a relaxation of the FASB’s accounting rule requiring fair value mark-to-market accounting. Regardless of what you think of that legislation, I think there is no doubt that the change allowed banks to mismark a wide array of assets and forestall losses. The need for the accounting rule change could be and will be debated ad nauseum. I believe the powers that be at FASB felt emasculated in the process.
Fast forward and let’s review the next major piece of accounting legislation emanating from FASB. That being FASB 166 and 167. I will admit I am no accountant, but I understand enough about the markets and accounting to know that the implementation of these rules, scheduled to go into effect in January of 2010 (in November 2009 for certain institutions depending on their fiscal calendar), will likely have a major impact on a wide array of financial institutions. (more…)
What Did We Learn Last Night in NY, NJ, and VA?
Posted by Larry Doyle on November 4th, 2009 8:30 AM |
Off year elections are always interesting in terms of getting a pulse on the American public. Yesterday’s elections, with the primary focus on the gubernatorial elections in VA and NJ, the mayoral race in NYC, and the Congressional race in upstate NY, strike me as having some similar themes. What were they?
1. A rising tide of discontent with incumbents.
I sense that not only in the NJ gubernatorial election but primarily in the mayoral race in NYC. Michael Bloomberg spent over $100 million, was estimated to hold close to a 20 point lead, and won by only 5 points.
I definitely sense this anti-incumbent discontent in Connecticut, as well. Both Senators Dodd and Lieberman are under real pressure.
2. An inability of the Obama administration to turn out the vote that brought him to Washington. (more…)
Mortgage Fraud Deserves Jail Time
Posted by Larry Doyle on November 3rd, 2009 10:34 AM |
Fraudulent actions must have consequences.
How is it that with trillions in financial losses and a variety of financial frauds readily apparent, very few individuals have been held accountable? FL, a loyal reader of Sense on Cents, has banged this drum repeatedly.
Why hasn’t this fraud been more aggressively combated? The influence of the banking lobby, primarily over the federal regulatory oversight of the financial industry.
What a shame. Are there some new sheriffs, those being state attorneys general, getting ready to ride into this mess? It would appear they are. I immediately thought of our friend FL upon reading The New York Times report, States Are Pondering Fraud Suits Against Banks.
The banking industry at large has worked in concert with its lobbyists and trade associations to keep regulators and law enforcement at bay. At the federal level, the banks have largely been successful. That success begs the question as to how deeply embedded the lobbyists are in the regulatory community. (more…)
Royal Bank of Scotland: Welcome to Nationalization
Posted by Larry Doyle on November 3rd, 2009 6:50 AM |
Why are companies, both financial and non-financial, hoarding cash? Having addressed that question yesterday in writing, Hoarding: ‘Cash Is King’, we did not have to wait long for hard evidence and billions of reasons for this hoarding phenomena. Let’s navigate across the pond.
What does a nationalized bank look like? Welcome to the Royal Bank of Scotland, the recipient of more government assistance than any other bank worldwide. With another 25.5 billion pounds of ‘bailout bonanza’ flowing into RBS today, the bank has now accepted 45.5 billion pounds of government assistance. In the process, the UK has an 85% ownership stake in this bank. If that is not the definition of nationalization, I don’t know what is.
Why does RBS need more government assistance? Continued losses on those dreaded toxic assets. Oh, you mean those toxic assets are still around? Where did you think they went? In addition to direct government assistance, RBS is receiving a government backstop in the form of insurance on 282 billion pounds of toxic assets. (more…)
Hoarding: ‘Cash is King’
Posted by Larry Doyle on November 2nd, 2009 4:22 PM |
Why would corporations hoard cash? A variety of reasons. Let’s review two stories today that highlight this economic dynamic.
Bloomberg reports, Pandit’s ‘Near Death’ Hoard Signals Lower Bank Profits:
Citigroup Inc. and JPMorgan Chase & Co. are hoarding cash as if another crisis were on the way.
Citigroup has almost doubled its cash to $244.2 billion in the year since Lehman Brothers Holdings Inc. filed for bankruptcy, the biggest such stockpile of any U.S. bank. The lender, which last year came so close to a funding shortfall it had to get a $45 billion government infusion, is under pressure from the Treasury Department and regulators to keep more money on hand for emergencies, even as markets improve.
The caution, which may help restore confidence in the financial system, offers little comfort to shareholders, who can expect to see shrinking returns as banks put money into liquid investments that yield one-twelfth the interest rates of loans.
“It’s a smart longer-term move, but it will take down the rates of returns these companies can generate,” said Eric Hovde, chief executive officer of Washington-based Hovde Capital Advisors LLC, a hedge fund with $1 billion of financial-industry and real estate investments. “If you start to see more economic stabilization, then liquidity levels would start dropping, but they’ll never go back to the insane level they were pre- crisis.” (more…)
Wall Street Scams Main Street: SIPC Investor Insurance for $150 Premium
Posted by Larry Doyle on November 2nd, 2009 12:25 PM |
Of all the insults, and all the fraud, and all the arrogance that has emanated from Wall Street over the last few years, there is no doubt that one of the greatest unknown travesties perpetrated on the American public is the insurance purchased by Wall Street firms to protect investor interests. How so?
For those listening to my interview with noted attorney Helen Davis Chaitman of Phillips Nizer last evening, you would have heard how the Securities Investor Protection Corporation funds itself. Who exactly is SIPC? From SIPC’s website we learn:
When a brokerage firm is closed due to bankruptcy or other financial difficulties and customer assets are missing, SIPC steps in as quickly as possible and, within certain limits, works to return customers’ cash, stock and other securities. Without SIPC, investors at financially troubled brokerage firms might lose their securities or money forever or wait for years while their assets are tied up in court.
Although not every investor is protected by SIPC, no fewer than 99 percent of persons who are eligible get their investments back from SIPC. From its creation by Congress in 1970 through December 2008, SIPC advanced $520 million in order to make possible the recovery of $160 billion in assets for an estimated 761,000 investors.
Thus we learn SIPC is an insurance fund launched in 1970 to protect investor interests. Sounds like a good idea.
Ms. Chaitman informed us that SIPC has reserves of $1.7 billion dollars. Is that good, bad, or indifferent? Well, for an industry with trillions in exposure, reserves of $1.7 billion seem rather light. (more…)
UPDATE: CIT-go Into Bankruptcy? Yes…and American Taxpayers Likely To Lose $2.3 Billion
Posted by Larry Doyle on November 2nd, 2009 9:08 AM |
Did the American taxpayer unnecessarily take a $2.3 billion hit on financing provided to the now bankrupt entity known as CIT? You bet. It’s only money we don’t have, right? This is also true.
In the midst of so many other dramatic developments on our global economic landscape, people may lose sight of the fact that the handwriting was on the wall ten months ago for this middle market lender. That bankruptcy handwriting was crystallized this past July. I addressed the likelihood in my commentary of July 21st, “CIT-go Into Bankruptcy?”, and posed the following questions at that time:
I thought CIT pulled the rabbit out of the hat in arranging $3 billion in financing yesterday. What happened? Let’s navigate this institution and shed some light where Wall Street may care to keep us in the dark.
> Why is the stock plummeting and why are analysts speculating it may very well file for bankruptcy?
> What did the $3 billion financing accomplish?
> Were certain unsecured creditors just abused by this transaction?
> Are CIT shareholders about to be wiped out?
> Will CIT be a precursor for other lenders to the middle and smaller markets?
Now let’s review the particulars we learn about the prepackaged bankruptcy filed over the weekend by CIT. Bloomberg provides details in CIT’s Bankruptcy May Help Bondholders and Erase Taxpayers Stake:
CIT Group Inc.’s decision to seek court protection probably will keep money flowing to bondholders and 1 million customers of the 101-year-old commercial lender. Shareholders and taxpayers won’t be as fortunate.
CIT’s Chapter 11 bankruptcy may give bondholders new notes at 70 cents on the dollar plus new common stock, and Chief Executive Officer Jeffrey Peek said clients will be able to get funds. Common stock owners could be mostly wiped out, and the U.S. Treasury Department said it won’t recoup much, if any, of the $2.33 billion of taxpayer money that went into CIT, the largest firm to go bankrupt after getting a federal bailout.
The question begs as to why the wizards in Washington allowed CIT to convert to a bank-holding company last December in order to receive TARP funds. In my opinion, the lack of discipline displayed by the Washington crowd in this CIT bankruptcy is rampant across a wide number of other situations. Washington neither has the political will nor courage to truly protect taxpayer interests.
I firmly believe CIT will be the first of many bankruptcies in which Washington’s ploy to “extend and pretend” entities which are already toast ultimately cost American taxpayers more in the long haul.
LD
Related Sense on Cents Commentary:
No ‘Get Out of Jail Free’ Card for CIT (July 10, 2009)
Random Thoughts on CIT (July 16, 2009)
CIT Gets ‘Don Corleone Financing’ (July 22, 2009)
No Quarter Radio’s Sense on Cents with Larry Doyle Welcomes Helen Davis Chaitman, Sunday Evening at 8pm EST
Posted by Larry Doyle on October 31st, 2009 3:49 PM |
UPDATE: This episode of NQR’s Sense on Cents with Larry Doyle has concluded. You can listen to a recording of the episode in its entirety by clicking the play button on the audio player provided below. Once the audio begins, you can advance or rewind to any portion of the episode by clicking at any point along the play bar. We did have some technical difficulties connecting with our guest at around the 12 minute mark of the show. You can listen up to that point, and then advance it to the 24 minute mark when Helen Davis Chaitman joins the program.
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Who truly protects the average American investor? Our financial regulators are licking their wounds and playing catch up from seemingly 20-plus years of being asleep at the wheel. Banks and brokers are fighting tooth and nail against instituting a fiduciary code of conduct. Why do more and more investors not trust Wall Street? Where should one turn to navigate this corner of our economic landscape?
Welcome to No Quarter Radio’s Sense on Cents with Larry Doyle as I welcome Helen Davis Chaitman this Sunday evening at 8pm EST. Helen Davis Chaitman is a prominent attorney and partner in the New York based law firm Phillips Nizer LLP. Her career spans a vast part of our economic landscape.
Helen Davis Chaitman is a nationally recognized litigator with a diverse trial practice in the areas of lender liability, bankruptcy, bank fraud, RICO, professional malpractice, trusts and estates, and white collar defense. In 1995, Ms. Chaitman was named one of the nation’s top ten litigators by the National Law Journal for a jury verdict she obtained in an accountants’ malpractice case. Ms. Chaitman is the author of The Law of Lender Liability (Warren, Gorham & Lamont 1990) which is periodically updated and, since 1987, has authored the monthly newsletter, The Lender Liability Law Report. In early 2009, Ms. Chaitman spearheaded the firm’s pro bono representation of investors in Bernard L. Madoff Investment Securities LLC. She has been an outspoken advocate for the victims of Madoff’s Ponzi scheme and for the government failures which caused massive losses to innocent investors. (more…)
October 31, 2009 Market Review: Cinderella’s Ball?
Posted by Larry Doyle on October 31st, 2009 8:34 AM |
HAPPY HALLOWEEN!! Is the clock getting ready to strike twelve? Is it time to get home? Is the magical ball that has enchanted many market participants about to end? How so? As quantitative easing programs around the world end and global governments start to increase interest rates, will we experience a double dip in the global economy?
Or, are the Uncle Sam economy and numerous global economies blazing new trails and redefining the economic landscape?
As with most things economic and market related, the answers are never ‘crystal’ clear nor do they fit like a ‘slipper,’ but let’s do our best to read the October market moves and project our way forward.
ECONOMY
The U.S. economy came out of recession in the 3rd quarter with a positive 3.5% print. While that number surprised to the upside, please review my post “Grossly Distorted Product” or “Christmas in July” to get a pulse on just how weak the American consumer remains. Further confirmation of a subdued American consumer is reflected in the decidedly weak Consumer Confidence report highlighted in my post, “Jobs + Housing = Consumer Confidence.”
Around the globe, non-Japan Asia is generating some real growth. To wit, we have already seen Australia raise interest rates to stem fears of inflation. Who next raised rates? Norway. The U.K remains mired in a recession. Eastern Europe is struggling while Germany is leading the EU. If we know anything about Germany, they have little interest in any hints of inflation.
While there are pockets of strength around the globe, many economies – including the U.S. – remain challenged. What will continue to happen? International trade tensions as weak countries try to generate greater exports via weak currencies.
Let’s review market returns. (more…)
