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HomeElizabeth Warren Calls for New Bank Stress Tests
Posted by Larry Doyle on February 11th, 2010 9:34 AM |
The initial Bank Stress Tests run by Treasury Secretary Geithner were largely a sham. I questioned as much last April in writing, “Bank Stress Tests: Major Sham?”:
As with any test, the results are only meaningful if the process and proctor have unquestioned integrity. The proctors for the Bank Stress Test are none other than Treasury Secretary Tim Geithner and Fed chair Ben Bernanke. Why is a testing authority of the magnitude of FDIC, led by Sheila Bair, not more involved in the process? Ms. Bair is the one individual in our country with the greatest level of interaction with and understanding of the student body, that being the banking industry as a whole and individual banks specifically.
What does the FDIC, led by Ms. Bair, have to say about the upcoming Bank Stress Tests? The New York Post provides a CHILLING perspective: (more…)
Will Geithner ‘Walk the Walk?’
Posted by Larry Doyle on November 18th, 2009 9:35 AM |
Do you have any confidence that Washington even knows how to properly address our massive and growing fiscal deficit? Rahm Emanuel, Tim Geithner and others understand that from a political standpoint they need to start talking about deficit control, but will that talk lead to action?
Do you think Congressional leaders, specifically Harry Reid and Nancy Pelosi, have the character and fortitude to ‘tighten the belt?’
The first real test for this crowd is already upon us. How so? The TARP, with a $700 billion commitment, expires on December 31, 2009. Of that $700 billion, $400 billion has actually been spent. Why wasn’t the other $300 billion spent? Well, don’t forget that Obama’s Stimulus Bill totaled $770 billion and assorted other programs implemented by Treasury have run into the trillions. As a result, Geithner did not immediately need to allocate those funds.
The question begs as to what will happen to that $300 billion. While Emanuel and Geithner are starting to ‘talk’ the fiscal discipline ‘talk,’ will they ‘walk the walk?’ (more…)
Sheila Bair Trumps Tim Geithner
Posted by Larry Doyle on October 29th, 2009 9:52 AM |
FDIC Head Sheila Bair
“Too big to fail.”
Do you think the American public is sufficiently sickened by that phrase? No doubt.
How will our ‘wizards in Washington’ handle this monstrous issue going forward? Is there any doubt that the industry itself should be held accountable to provide the necessary capital to unwind firms deemed ‘too big to fail?’ Of course not. However, the execution of that policy is where the rubber meets the road and where we learn who in Washington is truly working for the American public and who is working for the financial industry. How so? Let’s navigate. (more…)
FHA and FDIC Getting Ready to Ask Uncle Sam for a Bigger Allowance
Posted by Larry Doyle on September 18th, 2009 12:27 PM |
It was only a matter of time before both the Federal Housing Administration (FHA) and the Federal Deposit Insurance Corporation (FDIC) would walk over to the U.S. Treasury and ask for a ‘bigger allowance.’ That time has come, despite what some officials may say. High five to MC for bringing the FHA story to my attention.
The Wall Street Journal highlights the FHA’s predicament in writing, FHA Tightens Credit Standards, Sees No Bailout:
The Federal Housing Administration said Friday its cash cushion will dip below mandated levels for the first time, but officials insist it won’t need a taxpayer rescue.
The agency, a growing source of funds for first-time home buyers, faces mounting concerns that it will soon need a taxpayer bailout. As of this summer, about 17% of FHA borrowers were at least one payment behind or in foreclosure, compared with 13% for all loans, according to the Mortgage Bankers Association.
Rising defaults mean the FHA’s reserves may sink below the 2% mark required by federal law. The FHA says a study being sent to Congress in November is expected to show that ratio dipping below required levels for the first time.
Please recall that FHA-insured loans require only a 3% down payment. In writing a previous blog post focused on the FHA, a well informed reader shared with us that builders will often offer rebates which effectively cover that down payment. What is the result? Homeowners purchasing properties with no money down, otherwise known as ‘no skin in the game.’ This practice was prevalent throughout the irresponsible stage of sub-prime lending. Make no mistake, plenty of this is continuing today with the support and backstop of Uncle Sam . . . all in hopes of filling that growing hole in the housing dike.
The FHA will certainly need more capital unless and until mortgage delinquencies, defaults, and foreclosures stabilize and decline. None other than Wells Fargo CEO John Stumpf shared the other day that he does not see a slowing on those fronts.
In regards to the FDIC, the insurance fund has exhausted the bulk of the initial $50 billion which it had prior to bank failures starting in 2008. The costs of these failures have far exceeded that $50 billion figure. How so? Some very large profile failures were brokered to stronger hands with FDIC support but without the FDIC having to make an initial outlay of funds.
The WSJ highlights the current dire straits of the FDIC in writing, FDIC Mulls Borrowing from Treasury:
Federal Deposit Insurance Corp. Chairman Sheila Bair said Friday her agency may tap its $500 billion credit line with the U.S. Treasury to replenish its deposit insurance fund, though she appeared cautious about doing so.
“We are carefully considering all options” including borrowing from the Treasury, Ms. Bair said Friday after a speech in Washington.
Ms. Bair has already warned banks that they may face an assessment increase to bolster the fund. Friday, she said there are also other little-known options available to the agency, including requiring banks to prepay assessments. The FDIC board of directors will meet at the end of this month to consider how to replenish the fund, she said.
Individually, the FHA and FDIC stories are both significant. However, in the midst of bailouts of other institutions (large banks, Freddie and Fannie, AIG, GM, and Chrysler), the funds likely to be injected into these entities are treated as merely adding another leaf to Mom’s dining room table for Thanksgiving dinner.
Is the American public grateful for the undisciplined and greedy lending practices that have crippled the FHA and FDIC? Perhaps I should rephrase that question: are these institutions grateful for the American public putting their taxpayer dollars on the line?
LD
Citigroup Still Milking Uncle Sam
Posted by Larry Doyle on September 16th, 2009 11:42 AM |
A number of banking institutions have repaid Uncle Sam’s TARP funds. The truth be told, a few of these institutions never wanted Uncle Sam’s money in the first place. Now we learn that the biggest financial beneficiary of Uncle Sam’s largesse, that being Citigroup, wants to begin discussions for Uncle Sam’s exit.
Be mindful that Uncle Sam (that’s you and me, boys and girls) owns upwards of 40% of Citi and that this giant would be dead and buried without Sam’s bailout. If I am Citi, I would also like to get out from under the grand old Uncle’s watch. The Wall Street Journal highlights this story in writing, Citigroup Explores Bid to Pare U.S. Stake:
Citigroup Inc., eager to shed the stigma of being a ward of the state, is working on a plan to reduce the U.S. government’s 34% stake.
Top Citigroup executives have been devising plans for a possible multibillion-dollar stock offering in which the New York company would issue new shares to the public, while the Treasury Department would sell at least a portion of its Citigroup holdings, according to people familiar with the matter.
Citigroup hasn’t held in-depth talks with the government. Over the weekend, Citigroup called a Treasury official and said the company wanted to start talking about paring down the Treasury investment, according to people familiar with the matter. On the call, Citigroup officials said they planned to raise outside capital in order to repay the outstanding bailout funds. Treasury officials responded to Citi that they didn’t object to the company paying back Washington as long as Citi first raised offsetting capital, these people said.
![[citigroup bailout]](http://s.wsj.net/public/resources/images/MI-AY766_CITI_NS_20090914190901.gif)
It is regrettable that the WSJ did not juxtapose this story of Citigroup’s grand vision to regain its independence with the fact that Citigroup continues to milk Uncle Sam via the FDIC-backed debt program. What is that?
The FDIC-backed debt allows Citigroup to issue debt which is effectively government guaranteed. In the process, Citi generates a significant cost savings because this debt falls into the ‘heads we win, tails you lose’ category. How much of this ‘milk’ did Citi just suck? Try a nice steady stream totalling $5 billion. The Financial Times sheds some light on this ’stall’ in writing, Citi Raises $5 Billion in Bail-Out Bonds:
People close to the situation said Citi was in early talks with the US Treasury over a plan that would enable the company to raise capital by selling shares and enable the authorities to pare their holding.
But Citi’s decision to sell two and three-year bonds backed by the Federal Deposit Insurance Corporation could reinforce the perception that the bank, which has received $45bn in federal aid, is still not back to full health.
The hypocrisy of it all is par for the course, but for Citi, this milk tastes Mmmm…Mmmmm good!!
LD
Auctions Across America
Posted by Larry Doyle on August 28th, 2009 4:07 PM |
How does an entity sell a massive amount of assets? Individual sales are too time consuming. Personal negotiations would be too onerous. How about utilizing the internet and engaging a wider audience? That is, in fact, exactly what is happening as America goes on sale via auctions. That’s right, folks.
From the state of California to small banks and all points in between, there are and will be ongoing liquidations via auctions for the foreseeable future.
How does one receive a list of items for sale? Check out the following to start:
>> Great California Garage Sale held by the California Department of General Services.
I have two rhetorical questions:
1. What will these auctions mean for consumer spending and retail sales going forward?
2. What will these auctions mean for the pace of inventory buildup?
All part of the new dynamic within the Uncle Sam economy.
Have fun shopping.
LD
Uncle Sam:Geppetto as Citi and BofA:Pinocchio
Posted by Larry Doyle on July 16th, 2009 1:32 PM |
If you did not think we are entering into a Brave New World of an Uncle Sam economy, then today is a day which should help change your mind.
Independent Wall Street firms, such as Goldman Sachs and JP Morgan, would like a return to business as usual. Their outsized profits are nothing more than “to the victors go the spoils.” They will fight and lobby to make sure they get to take home these 
profits in the form of compensation.
Meanwhile back in the toy shop, Geppetto (in the form of Uncle Sam) is pulling the strings and watching Pinocchio (in the form of Citigroup and Bank of America) dance along. While Geppetto has been exceptionally busy, the taxpaying public has been kept very much in the dark. We see evidence of Geppetto’s ‘dark workroom‘ on three fronts today.
1. The Wall Street Journal offers Lawmakers Spread Blame on Merrill Deal:
House lawmakers lambasted former Treasury Secretary Henry Paulson and Bank of America Corp. Chief Executive Kenneth Lewis on Thursday, suggesting officials looked the other way as major mistakes at the bank required a $20 billion bailout of the firm at the expense of taxpayers.
“While all of this was going on, the American people, investors and the Congress were kept in the dark,”(LD’s highlight) said Rep. Edolphus Towns (D., N.Y.), suggesting negotiations over the bank completing its deal for Merrill Lynch & Co. was a “good, old-fashioned Brooklyn shakedown.”
Rep. Dennis Kucinich (D., Ohio), citing internal Federal Reserve documents obtained by the committee, said Mr. Paulson and Fed Chairman Ben Bernanke ignored evidence that bank management had withheld material information from shareholders, as well as indications that Mr. Lewis’s management of Bank of America “was seriously deficient.”
While Paulson is being grilled, there is little doubt that he believes he did what was in the best interest of the country and the economy – - if not necessarily the interests of Bank of America shareholders. Paulson offered that he was not qualified to provide a legal opinion on his engagement with Lewis.
2. If there were ever any doubt about Geppetto’s lack of confidence in Ken Lewis (aka Pinocchio), it is brought to bear today by news of a ’secret regulatory sanction’ imposed upon him and the BofA board. The WSJ highlights U.S. Regulators to BofA: Obey or Else:
Bank of America Corp. is operating under a secret regulatory sanction that requires it to overhaul its board and address perceived problems with risk and liquidity management, according to people familiar with the situation.
Rarely disclosed publicly, the so-called memorandum of understanding gives banks a chance to work out their problems without the glare of outside attention. Financial institutions that fail to address deficiencies can be slapped with harsher penalties that include a publicly announced cease-and-desist order.
The order was imposed in early May, shortly after shareholders of the Charlotte, N.C., bank stripped Chief Executive Kenneth Lewis of his duties as chairman. Bank of America faces a series of deadlines, some at the end of July and others in August, these people said.
3. In the final act of today’s puppet show, we also learn from the Financial Times Citi Close to Secret Deal with Regulator:
Citigroup is close to a secret agreement with one of its main regulators that will increase scrutiny of the US bank and force it to fix financial, managerial and governance issues.
The proposed agreement requires, among other things, that Citi strengthens its board and governance, improves asset quality, better manages expenses and provides more information to regulators on its capital and liquidity, these people added.
The regulator’s action highlights concern over Citi’s financial health, governance and the strength of its management team, led by Vikram Pandit, chief executive. The FDIC is known to be frustrated with the slow pace of Citi’s “toxic” assets sales, its losses and the lack of commercial banking experience at the top.
What are we to learn from all of these developments? Very simply, do not accept anything at face value at this stage in our new economy. There is a reason why Geppetto is working in the dark. That is, the embedded losses in these institutions would sink these firms if not the entire economy.
Historical measures of value and economic behavior need to be looked at in the context of how Geppetto is pulling the strings!!
Enjoy the show!!
LD
How Will Bank Failures Impact Economy?
Posted by Larry Doyle on August 28th, 2009 1:04 PM |
Analysts discount the impact that the expected massive number of bank failures will have on the U.S. economy.
Additionally, analysts also discount the fact that the FDIC fund to cover depositors of failed institutions is close to zero. This fund can be replenished by the FDIC imposing an assessment on remaining banks or, if need be, tapping an emergency line of credit at the U.S. Treasury.
What will be the real impact of bank failures? In my opinion, American consumer confidence and small business owners will bear the brunt of the pain from the bank failures. Why?
>> The reality of further job losses at these banks and those they support within local economies.
>> The psychological impact of seeing small and community banks fail.
>> The lack of credit availability to consumers and small business owners in communities across America.
What are the plans to stem the tide and plug the holes created by bank failures?
1. Have larger banks take over these institutions. What are the risks in this transition? Many of these banks are already filled with underperforming and delinquent loans. The acquiring banks typically want the cheap deposit base of the failed banks and little more.
2. Private equity buyers will have the opportunity to purchase failed banks. What are the risks in this process? The private equity buyers will have to maintain higher capital ratios. Another risk is that the private equity buyers may utilize the cheap deposit base as a pool of liquidity and capital for higher return undertakings than traditional lending in the local communities.
In my opinion, the gap dividing Wall Street and Main Street is only going to grow wider in the midst of these bank failures. The party on Wall Street has little appreciation for this reality on Main Street.
John Kanas, the former chairman and CEO of North Fork Bank, and his private equity firm purchased BankUnited in Florida this past May. Kanas addresses these topics in an interview on CNBC.
LD
Related Commentary:
Halting Recovery Divides America in Two
by Cari Tuna, Liz Rappaport, and Julie Jargon
The Wall Street Journal (August 29, 2009)
Tags: bank failures, FDIC, Halting Recovery Divides America in Two in Wall Street Journal, how will bank failures be handled, how will bank failures be handled by private equity buyers, impact of bank failures on consumer confidence, impact of bank failures on consumers, impact of bank failures on credit availability, impact of bank failures on economy, impact of bank failures on employment, impact of bank failures on FDIC fund, impact of bank failures on investor psychology and consumer psychology, impact of bank failures on small business owners, John Kanas comments on bank failures, the gap between Wall Street and Main Street, what will bank failures mean to economy
Posted in Banking Institutions, General | 3 Comments »