Blog on the Run: Reloaded

Tuesday, November 17, 2009 8:42 pm

Odds and ends, Nov. 17

  • Our eyes are on Afghanistan, but the prize is energy-rich Uzbekistan. So they boil political opponents alive. Big freakin’ deal.
  • The Special Inspector General of the fed bank bailout program says we need to audit the Fed already. Fine minds agree. So let’s audit the Fed already.
  • Tim Geithner’s pissing away of taxpayer money earlier this month, to the benefit of — surprise!! — Goldman Sachs and AIG —  would’ve been grounds for dismissal, if not execution, in any country that wasn’t already a banana republic. Unfortunately, we’re all now singing the Chiquita song:

This, Mr. Geithner, is what moral hazard is all about. Thanks to your actions you have doomed the U.S.’s formerly free and efficient equity markets to the biggest capital market bubble in history, which, like any ponzi, has only two outcomes: it either keeps growing in perpetuity as greater fools crawl out of the woodwork to keep it growing, albeit at ever slower marginal rates (note, this did not work out too well for Madoff), or it eventually pops. And the longer it takes to pop, the greater the ultimate loss of value: one day Madoff’s business was worth $50 billion, the next day it was $0. And that is precisely the same fate that American capital markets will have at some point in the upcoming months or years. When future historians look back at what specific action caused the biggest crash in U.S. capital markets history, Mr. Geithner’s cataclysmally botched negotiation of the AIG counterparty bailout will undoubtedly be at the very top of the list. In the meantime, just like in the Madoff case where the trustee is trying hard to trace where any stolen money may have been transferred to, to see the fund flows in our ongoing “ponzi in progress”, look no further than the bank accounts of Goldman bankers as they receive their biggest ever bonus this year …

 

  • Relatedly, I’m a lot less bothered about Obama bowing to an Asian leader than I am about his bowing to Goldman Sachs.
  • Question of the day, from Michael Lind: Shouldn’t the government pledge allegiance to the people, rather than the other way around?
  • Nice punking of an anti-immigration crowd. Not-so-nice behavior of the cops on hand, who were shoving around nonviolent counterprotesters rather than the anti-immigration folks who started the fisticuffs.
  • Time to revoke David Broder’s membership in the Wise Old Mainstream Media Pundits’ Club: When you say it’s more important to do something, anything, now than to do the right thing, you’re reckless. When you say that about a decision over whether to start, or expand, a war of choice, you’re just batsh*t insane definitely not supporting the troops.
  • Faith may well complement competent psychiatric care, but it is no substitute, a fact that appears to have escaped the Department of Veterans Affairs. And this is just one facet, albeit a particularly annoying one, of the VA’s utter failure to cope competently with the mental-health problems of veterans of the fighting in Iraq and Afghanistan. My senior senator, Richard Burr, ranking Republican on the Senate Veterans Affairs Committee and a guy with a DSCC bulls-eye on his back this election year, could do himself a lot of political good, in addition to doing a lot of real-world good for a lot of deserving people, if he just rode this issue like a beast across the plains of Mongolia.
  • And speaking of Richard Burr, call the WAAAAmbulance. Apparently, Senate Republicans are concerned that TV commercials about them supporting government contractors who let their employees get gang-raped may engender bad feelings against … um, well, the 30 Senate Republicans who supported government contractors who let their employees get gang-raped. (Here’s the one on Burr:)
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Thursday, August 13, 2009 8:20 pm

Reality gap

Filed under: We're so screwed — Lex @ 8:20 pm
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I qualify as an economics expert, if, by “expert,” one means, “someone who can generally balance his checkbook each month with the help of some very sophisticated proprietary software.” So maybe I’m not even qualified to ask this question. But because one of the big rules of journamalism is that there’s no such thing as a stupid question, I’ll ask anyway.

Let’s say there’s this bank. And let’s say that in its report to the SEC for the quarter ending June 30, the bank reports that the actual market value of loans on its books is $22.8 billion less than what the company’s books say they’re worth. Let’s further say that shareholder equity in this bank is — oh, let’s be generous and say $18.7 billion.

So if not for the accounting gimmickry — current rules don’t require bank directors to value such loans accurately until the underlying losses are considered “probable,” even if, as Bloomberg’s Jonathan Weil dryly notes, that time comes long after the losses are foreseeable — our bank would be worth … um, eight minus seven, borrow a one, subtract the eight … looks like negative $4.1 billion.

My question is: Why is this bank still in business? How is this not like Wile E. Coyote running off the edge of the cliff and continuing to run … until his feet stop moving and he looks down?

Since I’ve already got my hand up, I’ll also ask: Is this sort of thing common?

And, not for the first time in my life, I’m sorry I asked:

While Regions may be an extreme example of inflated loan values, it’s not unique. Bank of America Corp. said its loans as of June 30 were worth $64.4 billion less than its balance sheet said. The difference represented 58 percent of the company’s Tier 1 common equity, a measure of capital used by regulators that excludes preferred stock and many intangible assets, such as goodwill accumulated through acquisitions of other companies.

Wells Fargo & Co. said the fair value of its loans was $34.3 billion less than their book value as of June 30. The bank’s Tier 1 common equity, by comparison, was $47.1 billion.

The disparities in those banks’ loan values grew as the year progressed. Bank of America said the fair-value gap in its loans was $44.6 billion as of Dec. 31. Wells Fargo’s was just $14.2 billion at the end of 2008, less than half what it was six months later. At Regions, it had been $13.2 billion.

Other lenders with large divergences in their loan values included SunTrust Banks Inc. It showed a $13.6 billion gap as of June 30, which exceeded its $11.1 billion of Tier 1 common equity. KeyCorp said its loans were worth $8.6 billion less than their book value; its Tier 1 common was just $7.1 billion.

And unfortunately, it’s not just the big banks, either:

Another useful data point is the disclosure on the total Level 3 Asset Exposure at March 31, 2009. Compliments of the FASB, over $650 billion in “assets” are being marked-to-model, and most likely overestimate the true worth of these assets by about 50%. That’s $300 billion in hot air on the banks’ balance sheets.

I’d really, really like to believe that these numbers do not mean we’re screwed, particularly inasmuch as Bank of America and Wells Fargo/Wachovia employ a lot of people in this state. But Rule 5 of investigative reporting is do the math, and the corollary to Rule 5 is that when the math doesn’t add up — and you know your own (lack of) math skills aren’t the reason — there’s almost never a benign explanation.

Monday, August 10, 2009 8:41 pm

How the money gets moved from your pockets to the rich people’s pockets

Filed under: I want my money back. — Lex @ 8:41 pm
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Well, here’s one way, anyway:

US banks stand to collect a record $38.5bn in fees for customer overdrafts this year, with the bulk of the revenue coming from the most financially stretched consumers amid the deepest recession since the 1930s, according to research. The fees are nearly double those reported in 2000.

These banks would include some that have gotten tens of billions in tax money, supposedly to extend credit, take bad mortgages off their books or otherwise do things that would 1) keep the bank alive while 2) benefiting the larger economy.

I’m thinking the government, whose taxpayers provide the insurance that make it possible for banks to even be in business in the first place, should put a serious cap on overdraft fees. Failing that, it should tax overdraft revenue at a rate of 100%. You could rework a lot of crummy mortgages with $38.5 billion.

Friday, July 31, 2009 8:21 pm

More on Goldman greed and the screwing of taxpayers …

Filed under: I want my money back. — Lex @ 8:21 pm
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from a former managing director in the belly of the beast:

Keep in mind that by virtue of becoming a bank holding company, Goldman received a total of $63.6 billion in federal subsidies (that we know about—probably more if the Fed were ever forced to disclose its $7.6 trillion of borrower details). There was the $10 billion it got from TARP (which it repaid), the $12.9 billion it grabbed from AIG’s spoils—even though Goldman had stated beforehand that it was protected from losses incurred by AIG’s free fall, and if that were the case, would not have needed that money, let alone deserved it. Then, there’s the $29.7 billion it’s used so far out of the $35 billion it has available, backed by the FDIC’s Temporary Liquidity Guarantee Program, and finally, there’s the $11 billion available under the Fed’s Commercial Paper Funding Facility.

Tactically, after bagging this bounty, Goldman asked the Fed, its new regulator, if it could use its old risk model to determine capital reserves. It wanted to use the model that its old investment bank regulator, the SEC, was fine with, called VaR, or value at risk. VaR pretty much allows banks to plug in their own parameters, and based on these, calculate how much risk they have, and thus how much capital they need to hold against it. VaR was the same lax SEC-approved risk model that investment banks such as Bear Stearns and Lehman Brothers used, with the aforementioned results.

On February 5, 2009, the Fed granted Goldman’s request. This meant that not only was Goldman getting big federal subsidies, but also that it could keep betting big without saving aside as much capital as the other banks. Using VaR gave Goldman more leeway to, well, accentuate the positive. Yes, Goldman is a more risk-prone firm now than it was before it got to play with our money. [This is discussed in a little more detail near the end of this post — Lex]

Which brings us back to these recent quarterly earnings. Goldman posted record profits of $3.4 billion on revenues of $13.76 billion. More than 78 precent of those revenues came from its most risky division, the one that requires the most capital to operate, Trading and Principal Investments. Of those, the Fixed Income, Currency and Commodities (FICC) area within that division brought in a record $6.8 billion in revenues. That’s the division, by the way, that I worked in and that Lloyd Blankfein managed on his way up the Goldman totem pole. (It’s also the division that would stand to gain the most if Waxman’s cap-and-trade bill passes.)

Since Goldman is trading big with our money, why not also use it to pay big bonuses? It’s not like there are any strings attached. For the first half of 2009, Goldman set aside $11.4 billion for compensation—34 percent more than for the first half of 2008, keeping them on target for a record bonus year—even though they still owe the federal government $53.6 billion, a sum more than four times that bonus amount. …

As for JPMorgan Chase, its profit of $2.7 billion was up 36 percent for the second quarter of 2009 vs. the same quarter last year, but a lot of that also came from trading revenues, meaning its speculative endeavors are driving its profits. Over on the consumer side, the firm had to set aside nearly $30 billion in reserve for credit-related losses. Riding on its trading laurels, when its consumer business is still in deterioration mode, is not a recipe for stability, no matter how much cheering JPMorgan Chase’s results got from Wall Street. Betting is betting.

Let’s pause for some reflection: [Goldman and JPMorgan] made most of their money on speculation, got nearly $124 billion in government guarantees and subsidies between them over the past year and a half, yet saw continued losses in the credit products most affected by consumer credit problems. Both are setting aside top-dollar bonuses. JPMorgan Chase CEO Jamie Dimon mentioned that he’s concerned about attracting talent, a translation for wanting to pay investment bankers big bucks—because, after all, they suffered so terribly last year, and he needs to stay competitive with his friends at Goldman. This doesn’t add up to a really healthy scenario. It’s more like bad déjà vu.

Rigged game

Filed under: I want my money back. — Lex @ 12:05 pm
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More documentation of how U.S. taxpayers are getting screwed by the banking industry, from the office of New York Attorney General (and, let it be assumed, ambitious Democratic politician) Andrew Cuomo:

As one would expect, in describing their compensation programs, most banks emphasize the importance of tying pay to performance. Indeed, one senior bank executive noted recently that individual compensation should hot be set without taking into strong consideration the performance of the business unit and the overall firm. As this executive put it, “employees should share in the upside when overall performance is strong and they should all share in the downside when overall performance is weak.”

But despite such claims, one thing is clear from this investigation to date: there is no clear rhyme or reason to the way banks compensate and reward their employees. In many ways, the past three years have provided a virtual laboratory in which to test the hypothesis that compensation in the financial industry was performance-based. But even a cursory examination of the data suggests that in these challenging economic times, compensation for bank employees has become unmoored from the banks’ financial performance.

Thus, when the banks did well, their employees were paid well. When the banks did poorly, their employees were paid well. And when the banks did very poorly, they were bailed out by taxpayers and their employees were still paid well. Bonuses and overall compensation did not vary significantly as profits diminished.

An analysis of the 2008 bonuses and earnings at the original nine TARP recipients illustrates the point. Two firms, Citigroup and Merrill Lynch suffered massive losses of more than $27 billion ateach firm. Nevertheless, Citigroup paid out $5.33 billion in bonuses and Merrill paid $3.6 billion in bonuses. Together, they lost $54 billion, paid out nearly $9 billion in bonuses and then received TARP bailouts totaling $55 billion.

I haven’t had a chance to read the whole report (22-page pdf), but I hope to soon. More importantly, I hope Congress, the SEC, the Justice Department and the other 49 state AGs read it, too.

Monday, June 1, 2009 6:21 am

Accountability and its discontents utter nonexistence

Matt Taibbi thinks more, not less, populism might be a healthy thing:

… there has been almost nothing in the way of punishment of the major figures responsible for this [economic] crisis.  If there were a real correlation between public anger and government policy, we’d have seen at least something in that area. Maybe there wouldn’t have been public floggings, but there would have been some serious frog-marching of unscrupulous [jerks] to prison. And this isn’t about vengeance, it’s about policy: if the “consequence” for blowing a $4 trillion hole in the economy is seeing masses of government officials line up to hurl billions of taxpayer dollars at you, that doesn’t provide much of an incentive to fix your behavior. This is one area where there should have been a seamless melding of public outrage and government policy: we should have swooped in, rounded up 200 of the most guilty executives, hauled them before congress in a public trial, and packed them all off to a Supermax in Florence, Colorado to do real time with murderers, rapists and terrorists.

Q: What do you call rounding up 200 of the most guilty executives, hauling them before Congress in a public trial, and packing them all off to the Supermax in Florence, Colorado, to do real time with murderers, rapists and terrorists?

A: A good start.

Monday, April 13, 2009 2:33 pm

Shorter banking industry

Filed under: You're doing WHAT with my money?? — Lex @ 2:33 pm
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“It’s un-American for the US Government to try to save the banking system in spite of the fact that the people running it are such short sighted, greedy, self centered jackasses that they refuse to be saved unless they get to [mess] things up all over again. (Oh, and make a killing doing it.)”

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