(c) 2010 F. Bruce Abel
David Brooks writes pieces that are often hard to categorize, but I read everything he writes. This one deserves note and reading over and over again. It covers an interesting class view that fits with my own.
Knowing Brooks's Republican political-history, this piece is not of small import. David Brooks is slowly feeling his way into a world-view that is anti-establishment, anti-corporate. Far from where he was during the Bush years. Click on and start at the beginning.
Op-Ed Columnist - An Economy of Grinds - NYTimes.com: "Since the princes are nicer and more impressive, it is easy to be seduced into the belief that they also are more trustworthy. This is false. During the last few years, for example, the princes at Citigroup, Bear Stearns, Goldman Sachs and Lehman Brothers behaved with incredible stupidity while the hedge fund loners often behaved with impressive restraint."
Showing posts with label c. Show all posts
Showing posts with label c. Show all posts
Wednesday, July 14, 2010
Wednesday, April 14, 2010
Magnetar -- Remember This Name
(c) 2010 F. Bruce Abel
This posting by James Kwak (skip over the Simon Johnson piece for the moment), is a must, must read.
The Baseline Scenario
--------------------------------------------------------------------------------
Greek Bailout, Lehman Deceit, And Tim Geithner
Posted: 13 Apr 2010 04:53 AM PDT
By Simon Johnson
We live in an age of unprecedented bailouts. The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.
The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures. Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?
But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).
The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand. But there is no new program that would bring order to Greece’s troubled public finances.
It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year.
If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.
This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful. Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.
If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties. If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.
Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve. Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash). If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.
The Greeks will now:
Lobby for a large multi-year program from the IMF. They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform. The eurozone will again accept because it feels the spillovers otherwise would be too negative.
The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets. If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
The Greek authorities will add a ground game against the European Central Bank, saying things like: “the ECB is too tight, so we need more funds”. We’ll see how that divides the eurozone.
In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact. Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers. Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.
As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.
The Cover-Up
Posted: 12 Apr 2010 06:59 PM PDT
By James Kwak
Wall Street is engaged in a cover-up. Not a criminal cover-up, but an intellectual cover-up.
The key issue is whether the financial crisis was the product of conscious, intentional behavior — or whether it was an unforeseen and unforeseeable natural disaster. We’ve previously described the “banana peel” theory of the financial crisis — the idea it was the result of a complicated series of unfortunate mistakes, a giant accident. This past week, a parade of financial sector luminaries appeared before the Financial Crisis Inquiry Commission. Their mantra: “No one saw this coming.” The goal is to convince all of us that the crisis was a natural disaster — a “hundred-year flood,” to use Tim Geithner’s metaphor.
I find this incredibly frustrating. First of all, plenty of people saw the crisis coming. In late 2009, people like Nouriel Roubini and Peter Schiff were all over the airwaves for having predicted the crisis. Since then, there have been multiple books written about people who not only predicted the crisis but bet on it, making hundreds of millions or billions of dollars for themselves. Second, Simon and I just wrote a book arguing that the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself. Since, probabilistically speaking, most people will not read the book, it’s fortunate that Ira Glass has stepped in to help fill the gap.
This past weekend’s episode of This American Life includes a long story on a particular trade put on Magnetar (ProPublica story here), http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going a hedge fund that I first read about in Yves Smith’s ECONned. The main point of the story is to show how one group of people not only anticipated the collapse, and not only bet on it, but in doing so prolonged the bubble and made the ultimate collapse even worse. But it also raises some key issues about Wall Street and its behavior over the past decade.
This will require a brief description of what exactly Magnetar was doing. (If you know already, you can skip the next two paragraphs.) It’s now a cliche that a CDO is a set of securities that “slices and dices” a different set of securities. But it’s slightly more complicated than that. First there is a pile of mortgage-backed securities (or other bond-like securities) that are collected by an investment bank. The CDO itself is a new legal entity (a company) that buys these MBS from the bank; that’s the asset side of its balance sheet. Its liability side, like that of any company, includes debt and equity. There’s a small amount of equity bought by one investor and a lot of debt, issued in tranches that get paid off in a specific order, bought by other investors. The investment bank not only sells MBS to the CDO, but it also places the CDO’s bonds with other investors. Whoever buys the equity is like the “shareholder” of this company. There is also a CDO manager, whose job is to run the CDO — deciding which MBS it buys in the first place, and then (theoretically) selling MBS that go bad and replacing them by buying new ones. The CDO itself is like an investment fund, and the CDO manager is like the fund manager.
According to the story, in 2006, when the subprime-backed CDO market was starting to slow down, Magnetar started buying the equity layer — the riskiest part — of new CDOs. Since they were buying the equity, they were the CDOs’ sponsor, and they pressured the CDO managers to put especially risky MBS into the CDOs — making them more likely to fail. Then Magnetar bought credit default swaps on the debt issued by the CDOs. If the CDOs collapsed, as many did, their equity would become worthless, but their credit default swaps on the debt would repay them many, many times over.
The key is that Magnetar was exploiting the flaws in Wall Street’s process for manufacturing CDOs. Because the banks made up-front fees for creating CDOs, the actual human beings making the decisions did not particularly care if the CDOs collapsed — they just wanted Magnetar’s money to make the CDOs possible. (No one to buy the highly risky equity, no CDO.) Because the ratings agencies’ models did not particularly discriminate between the contents that went into the CDOs (see pages 169-71 of The Big Short, for example), Magnetar and the banks could stuff them with the most toxic inputs possible to make them more likely to fail.
Now, one question you should be asking yourself is, how is this even arithmetically possible? How is it possible that a CDO can have so little equity that you can buy credit default swaps on the debt at a low enough price to make a killing when the thing collapses? You would think that: (a) in order to sell the bonds at all, there would have to be more equity to protect the debt; and (b) the credit default swaps would have been expensive enough to eat up the profits on the deal. Remember, this is 2006, when several hedge funds were shorting CDOs and many investment banks were looking for protection for their CDO portfolios.
The answer is that nothing was being priced efficiently. The CDO debt was being priced according to the rating agencies’ models, which weren’t even looking at sufficiently detailed data. And the credit default swaps were underpriced because they allowed banks to create new synthetic CDOs, which were another source of profits. So here’s the first lesson: the idea that markets result in efficient prices was, in this case, hogwash.
By taking advantage of these inefficiencies, Magnetar made the Wall Street banks look like chumps. This American Life talks about one deal where Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.
But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)
So who’s to blame? The first instinct is to get mad at Magnetar. But this overlooks a Wall Street maxim cited by TAL: you can’t blame the predator for eating the prey. Magnetar was out to make money for its limited partners; if it had bet wrong and lost money, no one would have bailed it out. Although I probably wouldn’t have behaved the same way under the circumstances, I have no problem with Magnetar.
I do have a problem with the Wall Street bankers in this story, however. Because losing $880 million of your own company’s money to make a quick buck for yourself is either incompetent or just wrong. And allowing Magnetar to create CDOs that are as toxic as possible — and then actively selling their debt to investors (that’s where the banks differ from Magnetar, in my opinion) — is either incompetent or just wrong. But even so, I don’t think the frontline bankers are ultimately at fault. Maybe they were simply incompetent. Or maybe, they were knowingly exploiting the system to maximize their earnings — only in this case the system they were exploiting was their own banks’ screwed-up compensation policies, risk management “systems,” and ethical guidelines.
In which case the real blame belongs to those who created that system and made it possible. And that would be the bank executives who failed at managing compensation, risk, or ethics, endangering or killing their companies in the process. And that would be the regulators and politicians who allowed these no-money down no-doc negative-amortization loans to be made in the first place; who allowed investment banks to sell whatever they wanted to investors, with no requirements or duties whatsoever; who allowed banks to outsource their capital requirements to rating agencies, giving them an incentive to hold mis-rated securities; who declined to regulate the credit default swaps that Magnetar used to amass its short positions; who allowed banks like Citigroup and JPMorgan Chase to get into this game with federally insured money; and who failed at monitoring the safety and soundness of the banks playing the game.
The lessons of Magnetar are the basic lessons of the financial crisis. Unregulated financial markets do not necessarily provide efficient prices or the optimal allocation of capital. The winners are not necessarily those who provide the most benefit to their clients or to society, but those who figure out how to exploit the rules of the game to their advantage. The crisis happened because the banks wanted unregulated financial markets and went out and got them — only it turned out they were not as smart as they thought they were and blew themselves up. It was not an innocent accident.
This posting by James Kwak (skip over the Simon Johnson piece for the moment), is a must, must read.
The Baseline Scenario
--------------------------------------------------------------------------------
Greek Bailout, Lehman Deceit, And Tim Geithner
Posted: 13 Apr 2010 04:53 AM PDT
By Simon Johnson
We live in an age of unprecedented bailouts. The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.
The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures. Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?
But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).
The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand. But there is no new program that would bring order to Greece’s troubled public finances.
It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year.
If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.
This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful. Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.
If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties. If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.
Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve. Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash). If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.
The Greeks will now:
Lobby for a large multi-year program from the IMF. They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform. The eurozone will again accept because it feels the spillovers otherwise would be too negative.
The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets. If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
The Greek authorities will add a ground game against the European Central Bank, saying things like: “the ECB is too tight, so we need more funds”. We’ll see how that divides the eurozone.
In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact. Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers. Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.
As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.
The Cover-Up
Posted: 12 Apr 2010 06:59 PM PDT
By James Kwak
Wall Street is engaged in a cover-up. Not a criminal cover-up, but an intellectual cover-up.
The key issue is whether the financial crisis was the product of conscious, intentional behavior — or whether it was an unforeseen and unforeseeable natural disaster. We’ve previously described the “banana peel” theory of the financial crisis — the idea it was the result of a complicated series of unfortunate mistakes, a giant accident. This past week, a parade of financial sector luminaries appeared before the Financial Crisis Inquiry Commission. Their mantra: “No one saw this coming.” The goal is to convince all of us that the crisis was a natural disaster — a “hundred-year flood,” to use Tim Geithner’s metaphor.
I find this incredibly frustrating. First of all, plenty of people saw the crisis coming. In late 2009, people like Nouriel Roubini and Peter Schiff were all over the airwaves for having predicted the crisis. Since then, there have been multiple books written about people who not only predicted the crisis but bet on it, making hundreds of millions or billions of dollars for themselves. Second, Simon and I just wrote a book arguing that the crisis was no accident: it was the result of the financial sector’s ability to use its political power to engineer a favorable regulatory environment for itself. Since, probabilistically speaking, most people will not read the book, it’s fortunate that Ira Glass has stepped in to help fill the gap.
This past weekend’s episode of This American Life includes a long story on a particular trade put on Magnetar (ProPublica story here), http://www.propublica.org/feature/the-magnetar-trade-how-one-hedge-fund-helped-keep-the-housing-bubble-going a hedge fund that I first read about in Yves Smith’s ECONned. The main point of the story is to show how one group of people not only anticipated the collapse, and not only bet on it, but in doing so prolonged the bubble and made the ultimate collapse even worse. But it also raises some key issues about Wall Street and its behavior over the past decade.
This will require a brief description of what exactly Magnetar was doing. (If you know already, you can skip the next two paragraphs.) It’s now a cliche that a CDO is a set of securities that “slices and dices” a different set of securities. But it’s slightly more complicated than that. First there is a pile of mortgage-backed securities (or other bond-like securities) that are collected by an investment bank. The CDO itself is a new legal entity (a company) that buys these MBS from the bank; that’s the asset side of its balance sheet. Its liability side, like that of any company, includes debt and equity. There’s a small amount of equity bought by one investor and a lot of debt, issued in tranches that get paid off in a specific order, bought by other investors. The investment bank not only sells MBS to the CDO, but it also places the CDO’s bonds with other investors. Whoever buys the equity is like the “shareholder” of this company. There is also a CDO manager, whose job is to run the CDO — deciding which MBS it buys in the first place, and then (theoretically) selling MBS that go bad and replacing them by buying new ones. The CDO itself is like an investment fund, and the CDO manager is like the fund manager.
According to the story, in 2006, when the subprime-backed CDO market was starting to slow down, Magnetar started buying the equity layer — the riskiest part — of new CDOs. Since they were buying the equity, they were the CDOs’ sponsor, and they pressured the CDO managers to put especially risky MBS into the CDOs — making them more likely to fail. Then Magnetar bought credit default swaps on the debt issued by the CDOs. If the CDOs collapsed, as many did, their equity would become worthless, but their credit default swaps on the debt would repay them many, many times over.
The key is that Magnetar was exploiting the flaws in Wall Street’s process for manufacturing CDOs. Because the banks made up-front fees for creating CDOs, the actual human beings making the decisions did not particularly care if the CDOs collapsed — they just wanted Magnetar’s money to make the CDOs possible. (No one to buy the highly risky equity, no CDO.) Because the ratings agencies’ models did not particularly discriminate between the contents that went into the CDOs (see pages 169-71 of The Big Short, for example), Magnetar and the banks could stuff them with the most toxic inputs possible to make them more likely to fail.
Now, one question you should be asking yourself is, how is this even arithmetically possible? How is it possible that a CDO can have so little equity that you can buy credit default swaps on the debt at a low enough price to make a killing when the thing collapses? You would think that: (a) in order to sell the bonds at all, there would have to be more equity to protect the debt; and (b) the credit default swaps would have been expensive enough to eat up the profits on the deal. Remember, this is 2006, when several hedge funds were shorting CDOs and many investment banks were looking for protection for their CDO portfolios.
The answer is that nothing was being priced efficiently. The CDO debt was being priced according to the rating agencies’ models, which weren’t even looking at sufficiently detailed data. And the credit default swaps were underpriced because they allowed banks to create new synthetic CDOs, which were another source of profits. So here’s the first lesson: the idea that markets result in efficient prices was, in this case, hogwash.
By taking advantage of these inefficiencies, Magnetar made the Wall Street banks look like chumps. This American Life talks about one deal where Magnetar put up $10 million in equity and then shorted $1 billion of AAA-rated bonds issued by the CDO. It turned out that in this deal, JPMorgan Chase, the investment bank, actually held onto those AAA-rated bonds and eventually took a loss of $880 million. This was in exchange for about $20 million in up-front fees it earned.
But who’s the chump? Sure, JPMorgan Chase the bank lost $880 million. But of that $20 million in fees, about $10 million was paid out in compensation (investment banks pay out about half of their net revenues as compensation), much of it to the bankers who did the deal. JPMorgan’s bankers did just fine, despite having placed a ticking time bomb on their own bank’s balance sheet. Here’s the second lesson: the idea that bankers’ pay is based on their performance is also hogwash. (The idea that their pay is based on their net contribution to society is even more absurd.)
So who’s to blame? The first instinct is to get mad at Magnetar. But this overlooks a Wall Street maxim cited by TAL: you can’t blame the predator for eating the prey. Magnetar was out to make money for its limited partners; if it had bet wrong and lost money, no one would have bailed it out. Although I probably wouldn’t have behaved the same way under the circumstances, I have no problem with Magnetar.
I do have a problem with the Wall Street bankers in this story, however. Because losing $880 million of your own company’s money to make a quick buck for yourself is either incompetent or just wrong. And allowing Magnetar to create CDOs that are as toxic as possible — and then actively selling their debt to investors (that’s where the banks differ from Magnetar, in my opinion) — is either incompetent or just wrong. But even so, I don’t think the frontline bankers are ultimately at fault. Maybe they were simply incompetent. Or maybe, they were knowingly exploiting the system to maximize their earnings — only in this case the system they were exploiting was their own banks’ screwed-up compensation policies, risk management “systems,” and ethical guidelines.
In which case the real blame belongs to those who created that system and made it possible. And that would be the bank executives who failed at managing compensation, risk, or ethics, endangering or killing their companies in the process. And that would be the regulators and politicians who allowed these no-money down no-doc negative-amortization loans to be made in the first place; who allowed investment banks to sell whatever they wanted to investors, with no requirements or duties whatsoever; who allowed banks to outsource their capital requirements to rating agencies, giving them an incentive to hold mis-rated securities; who declined to regulate the credit default swaps that Magnetar used to amass its short positions; who allowed banks like Citigroup and JPMorgan Chase to get into this game with federally insured money; and who failed at monitoring the safety and soundness of the banks playing the game.
The lessons of Magnetar are the basic lessons of the financial crisis. Unregulated financial markets do not necessarily provide efficient prices or the optimal allocation of capital. The winners are not necessarily those who provide the most benefit to their clients or to society, but those who figure out how to exploit the rules of the game to their advantage. The crisis happened because the banks wanted unregulated financial markets and went out and got them — only it turned out they were not as smart as they thought they were and blew themselves up. It was not an innocent accident.
Friday, December 18, 2009
Baseline Scenario -- A Good One
(c) 2009 F. Bruce Abel
Simon gets an award and Volcker Picks Up a Bat, very good.
The Baseline Scenario
Paul Volcker Picks Up A Bat
Posted: 17 Dec 2009 04:15 AM PST
For most the past 12 months, Paul Volcker was sitting on the policy sidelines. He had impressive sounding job titles – member of President Obama’s Transition Economic Advisory Board immediately after last November’s election, and quickly named to head the new Economic Recovery Board.
But the Recovery Board, and Volcker himself, have seldom met with the President. Economic and financial sector policy, by all accounts, has been made largely by Tim Geithner at Treasury and Larry Summers at the White House, with help from Peter Orszag at the Office of Management and Budget, and Christina Romer at the Council of Economic Advisers.
With characteristic wry humor, Volcker denied in late October that he had lost clout within the administration: “I did not have influence to start with.”
But that same front page interview in the New York Times contained a well placed shock to then prevailing policy consensus.
Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933 – a highly regulated (and somewhat boring) set of banks to run the payments system, and a completely separate set of financial entities to help firms raise capital (and to trade securities).
This proposal is not just at odds with the regulatory reform legislation then (and now) working its way through Congress; Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk.
Speaking to a group of senior finance executives, as reported in the Wall Street Journal on Monday, Volcker made his point even more forcefully. There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers). Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health.
Volcker only makes substantive public statements when he feels important issues are at stake. He also knows exactly how to influence policy – he has not been welcomed in the front door (controlled by the people who have daily meetings with the President), so he’s going round the back, aiming at shifting mainstream views about what are “safe” banks. Many smart technocrats listen carefully to what he has to say.
This strategy is partly about timing – and in this regard Volcker has chosen his moment well. The economy is starting to recover, but this process is clearly going to take a while and unemployment will stay high for the foreseeable future. At the same time, our biggest banks are making good money – mostly from trading, not much from lending to small business – and they are lining up to pay very big bonuses.
Not only is this contrast – high unemployment vs. bankers’ bonuses – annoying and unfair, it is also not good economics. Bankers are, in effect, being rewarded for taking the risks that created the global crisis and led to massive job losses. And they are being implicitly encouraged to do the same thing again.
The case for keeping big banks in their current configuration is completely lame. Even if we are lucky enough to avoid another major any time soon, the fiscal costs are enormous and coming right at you (and your taxes).
Now that Paul Volcker has picked up his hammer, he will not lightly set it aside. He knows how to sway the policy community and he knows how to escalate when they don’t pay attention. Expect him to pound away until he prevails.
By Simon Johnson
This is a a slightly edited version of a post that previously appeared on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire piece, please contact the New York Times for permission.
Move Over, Bernanke
Posted: 17 Dec 2009 04:00 AM PST
Ben Bernanke is Person of the Year. Matt Yglesias has criticism, although he does say it was an appropriate choice. Now, the Time award is meant to recognize newsworthiness, not necessarily exceptional conduct, and it’s hard to deny that Bernanke has been newsworthy. But I think that 2008 was Bernanke’s year, not 2009–that was the year of the real battle to prevent the collapse of the financial system. As far as the crisis is concerned, I would say the face of 2009 has been Tim Geithner–PPIP, stress tests (largely conducted by the Fed, but Geithner was the front man), Saturday Night Live, regulatory “reform,” and so on. But I can see why Time didn’t want to go there. Besides, I’m not sure that the financial crisis was the story of 2009; what about the recession? They’re related, obviously, but they’re not the same thing.
But in real news, Simon was named Public Intellectual of the Year by Prospect Magazine (UK). (This year they seem to have restricted themselves to financial crisis figures; David Petraeus won in 2008.) Over Ben Bernanke, among others. (Conversely, Simon didn’t make Time’s list of “25 people who mattered”–but Jon and Kate Gosselin did, so that’s no surprise.) The article says that Simon “has also done more than any academic to popularise his case: writing articles, a must-read blog, and appearing tirelessly on television,” which sounds about right to me.
Prospect got one thing wrong, though. The article has a cartoon of Simon holding a sledgehammer and towering over a Citigroup in ruins. But no matter how many times you keep taking whacks at Citigroup, it refuses to die. One hundred years from now, maybe people will still be saying there are two common ingredients in all U.S. financial crisis: excess borrowing … and Citibank.c
By James Kwak
Simon gets an award and Volcker Picks Up a Bat, very good.
The Baseline Scenario
Paul Volcker Picks Up A Bat
Posted: 17 Dec 2009 04:15 AM PST
For most the past 12 months, Paul Volcker was sitting on the policy sidelines. He had impressive sounding job titles – member of President Obama’s Transition Economic Advisory Board immediately after last November’s election, and quickly named to head the new Economic Recovery Board.
But the Recovery Board, and Volcker himself, have seldom met with the President. Economic and financial sector policy, by all accounts, has been made largely by Tim Geithner at Treasury and Larry Summers at the White House, with help from Peter Orszag at the Office of Management and Budget, and Christina Romer at the Council of Economic Advisers.
With characteristic wry humor, Volcker denied in late October that he had lost clout within the administration: “I did not have influence to start with.”
But that same front page interview in the New York Times contained a well placed shock to then prevailing policy consensus.
Volcker, legendary former chairman of the Federal Reserve Board with much more experience of Wall Street than any current policymaker, was blunt: We need to break up our biggest banks and return to the basic split of activities that existed under the Glass-Steagall Act of 1933 – a highly regulated (and somewhat boring) set of banks to run the payments system, and a completely separate set of financial entities to help firms raise capital (and to trade securities).
This proposal is not just at odds with the regulatory reform legislation then (and now) working its way through Congress; Volcker is basically saying that what the administration has proposed and what Congress looks likely to enact in early 2010 is essentially — bunk.
Speaking to a group of senior finance executives, as reported in the Wall Street Journal on Monday, Volcker made his point even more forcefully. There is no benefit to running our financial system in its current fashion, with high risks (for society) and high returns (for top bankers). Most of financial innovation, in his view, is not just worthless to society – it is downright dangerous to our broader economic health.
Volcker only makes substantive public statements when he feels important issues are at stake. He also knows exactly how to influence policy – he has not been welcomed in the front door (controlled by the people who have daily meetings with the President), so he’s going round the back, aiming at shifting mainstream views about what are “safe” banks. Many smart technocrats listen carefully to what he has to say.
This strategy is partly about timing – and in this regard Volcker has chosen his moment well. The economy is starting to recover, but this process is clearly going to take a while and unemployment will stay high for the foreseeable future. At the same time, our biggest banks are making good money – mostly from trading, not much from lending to small business – and they are lining up to pay very big bonuses.
Not only is this contrast – high unemployment vs. bankers’ bonuses – annoying and unfair, it is also not good economics. Bankers are, in effect, being rewarded for taking the risks that created the global crisis and led to massive job losses. And they are being implicitly encouraged to do the same thing again.
The case for keeping big banks in their current configuration is completely lame. Even if we are lucky enough to avoid another major any time soon, the fiscal costs are enormous and coming right at you (and your taxes).
Now that Paul Volcker has picked up his hammer, he will not lightly set it aside. He knows how to sway the policy community and he knows how to escalate when they don’t pay attention. Expect him to pound away until he prevails.
By Simon Johnson
This is a a slightly edited version of a post that previously appeared on the NYT’s Economix; it is used here with permission. If you would like to reproduce the entire piece, please contact the New York Times for permission.
Move Over, Bernanke
Posted: 17 Dec 2009 04:00 AM PST
Ben Bernanke is Person of the Year. Matt Yglesias has criticism, although he does say it was an appropriate choice. Now, the Time award is meant to recognize newsworthiness, not necessarily exceptional conduct, and it’s hard to deny that Bernanke has been newsworthy. But I think that 2008 was Bernanke’s year, not 2009–that was the year of the real battle to prevent the collapse of the financial system. As far as the crisis is concerned, I would say the face of 2009 has been Tim Geithner–PPIP, stress tests (largely conducted by the Fed, but Geithner was the front man), Saturday Night Live, regulatory “reform,” and so on. But I can see why Time didn’t want to go there. Besides, I’m not sure that the financial crisis was the story of 2009; what about the recession? They’re related, obviously, but they’re not the same thing.
But in real news, Simon was named Public Intellectual of the Year by Prospect Magazine (UK). (This year they seem to have restricted themselves to financial crisis figures; David Petraeus won in 2008.) Over Ben Bernanke, among others. (Conversely, Simon didn’t make Time’s list of “25 people who mattered”–but Jon and Kate Gosselin did, so that’s no surprise.) The article says that Simon “has also done more than any academic to popularise his case: writing articles, a must-read blog, and appearing tirelessly on television,” which sounds about right to me.
Prospect got one thing wrong, though. The article has a cartoon of Simon holding a sledgehammer and towering over a Citigroup in ruins. But no matter how many times you keep taking whacks at Citigroup, it refuses to die. One hundred years from now, maybe people will still be saying there are two common ingredients in all U.S. financial crisis: excess borrowing … and Citibank.c
By James Kwak
Monday, April 27, 2009
Krugman -- Money for Nothing
This is a Must Read. Is "it" over and the bankers have won? Krugman hopes not. I hope not. Because they have produced nothing of value except pain.
It occurs to me that May 4th is a key day. Through trading (turned into a "hold") I own 500 Citigroup, and 200 Regions Financial. But still I want there to be some "solution" to the banking problem and some real understanding of what really happened.
The "quants" did this, broadly speaking.
As readers of this blog know, I believe the heads of the banks had no idea what the quants were doing. (I'm not sure "quants" is the right all-inclusive category here, as it also takes "traders" to do the deed.) So, using Brooks's terms, the heads of the banks were "stupid," not "greedy." (If one must choose a dominating term above all.)
Op-Ed Columnist
Money for Nothing
By PAUL KRUGMAN
Published: April 26, 2009
On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.
Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.
All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.
Why is this disturbing? Let me count the ways.
First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”
I’m not just talking about the [1] $600 billion or so already committed under the TARP. There are also the [2] huge credit lines extended by the Federal Reserve; [3] large-scale lending by Federal Home Loan Banks; the [4] taxpayer-financed payoffs of A.I.G. contracts; the [5] vast expansion of F.D.I.C. guarantees; and, [6] more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.
It occurs to me that May 4th is a key day. Through trading (turned into a "hold") I own 500 Citigroup, and 200 Regions Financial. But still I want there to be some "solution" to the banking problem and some real understanding of what really happened.
The "quants" did this, broadly speaking.
As readers of this blog know, I believe the heads of the banks had no idea what the quants were doing. (I'm not sure "quants" is the right all-inclusive category here, as it also takes "traders" to do the deed.) So, using Brooks's terms, the heads of the banks were "stupid," not "greedy." (If one must choose a dominating term above all.)
Op-Ed Columnist
Money for Nothing
By PAUL KRUGMAN
Published: April 26, 2009
On July 15, 2007, The New York Times published an article with the headline “The Richest of the Rich, Proud of a New Gilded Age.” The most prominently featured of the “new titans” was Sanford Weill, the former chairman of Citigroup, who insisted that he and his peers in the financial sector had earned their immense wealth through their contributions to society.
Soon after that article was printed, the financial edifice Mr. Weill took credit for helping to build collapsed, inflicting immense collateral damage in the process. Even if we manage to avoid a repeat of the Great Depression, the world economy will take years to recover from this crisis.
All of which explains why we should be disturbed by an article in Sunday’s Times reporting that pay at investment banks, after dipping last year, is soaring again — right back up to 2007 levels.
Why is this disturbing? Let me count the ways.
First, there’s no longer any reason to believe that the wizards of Wall Street actually contribute anything positive to society, let alone enough to justify those humongous paychecks.
Remember that the gilded Wall Street of 2007 was a fairly new phenomenon. From the 1930s until around 1980 banking was a staid, rather boring business that paid no better, on average, than other industries, yet kept the economy’s wheels turning.
So why did some bankers suddenly begin making vast fortunes? It was, we were told, a reward for their creativity — for financial innovation. At this point, however, it’s hard to think of any major recent financial innovations that actually aided society, as opposed to being new, improved ways to blow bubbles, evade regulations and implement de facto Ponzi schemes.
Consider a recent speech by Ben Bernanke, the Federal Reserve chairman, in which he tried to defend financial innovation. His examples of “good” financial innovations were (1) credit cards — not exactly a new idea; (2) overdraft protection; and (3) subprime mortgages. (I am not making this up.) These were the things for which bankers got paid the big bucks?
Still, you might argue that we have a free-market economy, and it’s up to the private sector to decide how much its employees are worth. But this brings me to my second point: Wall Street is no longer, in any real sense, part of the private sector. It’s a ward of the state, every bit as dependent on government aid as recipients of Temporary Assistance for Needy Families, a k a “welfare.”
I’m not just talking about the [1] $600 billion or so already committed under the TARP. There are also the [2] huge credit lines extended by the Federal Reserve; [3] large-scale lending by Federal Home Loan Banks; the [4] taxpayer-financed payoffs of A.I.G. contracts; the [5] vast expansion of F.D.I.C. guarantees; and, [6] more broadly, the implicit backing provided to every financial firm considered too big, or too strategic, to fail.
One can argue that it’s necessary to rescue Wall Street to protect the economy as a whole — and in fact I agree. But given all that taxpayer money on the line, financial firms should be acting like public utilities, not returning to the practices and paychecks of 2007.
Furthermore, paying vast sums to wheeler-dealers isn’t just outrageous; it’s dangerous. Why, after all, did bankers take such huge risks? Because success — or even the temporary appearance of success — offered such gigantic rewards: even executives who blew up their companies could and did walk away with hundreds of millions. Now we’re seeing similar rewards offered to people who can play their risky games with federal backing.
So what’s going on here? Why are paychecks heading for the stratosphere again? Claims that firms have to pay these salaries to retain their best people aren’t plausible: with employment in the financial sector plunging, where are those people going to go?
No, the real reason financial firms are paying big again is simply because they can. They’re making money again (although not as much as they claim), and why not? After all, they can borrow cheaply, thanks to all those federal guarantees, and lend at much higher rates. So it’s eat, drink and be merry, for tomorrow you may be regulated.
Or maybe not. There’s a palpable sense in the financial press that the storm has passed: stocks are up, the economy’s nose-dive may be leveling off, and the Obama administration will probably let the bankers off with nothing more than a few stern speeches. Rightly or wrongly, the bankers seem to believe that a return to business as usual is just around the corner.
We can only hope that our leaders prove them wrong, and carry through with real reform. In 2008, overpaid bankers taking big risks with other people’s money brought the world economy to its knees. The last thing we need is to give them a chance to do it all over again.
Saturday, April 25, 2009
The Word "Bank"
(c) 2009 F. Bruce Abel
It occurs to me that for the bailout to work we must wipe out a word from our vocabulary: "Bank," as in "Oh, you work for a bank, do you? I don't trust you, even though I work for a bank myself. In fact I don't even trust myself here at this bank, because I am addicted to trading credit default swaps."
We must now create another word, another category.
What is that word? I don't know. What about "Trank." This implies trust. But, now that I think about it, the phrase "Bank Trust Department" must be removed also.
It occurs to me that for the bailout to work we must wipe out a word from our vocabulary: "Bank," as in "Oh, you work for a bank, do you? I don't trust you, even though I work for a bank myself. In fact I don't even trust myself here at this bank, because I am addicted to trading credit default swaps."
We must now create another word, another category.
What is that word? I don't know. What about "Trank." This implies trust. But, now that I think about it, the phrase "Bank Trust Department" must be removed also.
Monday, November 24, 2008
Citi
OK here's the deal: Bobby you go straight down the field. Perry, you block. On three I say "hike."
http://www.nytimes.com/2008/11/24/business/24citibank.html?hp
Saturday, November 22, 2008
Citi
new_york_times:http://www.nytimes.com/2008/11/22/business/22citi.html
By ANDREW ROSS SORKIN and LOUISE STORY
Published: November 21, 2008
With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.
Vikram S. Pandit, center, the chief executive of Citigroup, set up a companywide phone call to reassure anxious employees.
In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.
Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.
The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.
After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama’s choice to be Treasury secretary.
As Citigroup’s stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.
The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.
So far, these people said, most customers and clients remained committed to Citigroup.
But with Citigroup’s troubles opening a new chapter in the long-running financial crisis, government officials said that the Treasury Department was considering whether to ask for the second half of the $700 billion rescue fund approved by Congress in September.
It was unclear whether any of that money would be used to make a cash infusion into Citigroup, which received $25 billion from the government in October. A second financial rescue for banks might be difficult politically at a time that the struggling auto industry is being turned away in Washington.
As Citigroup’s fortunes diminished on Friday, Mr. Pandit, the company’s embattled chief executive, went on the offensive. He worked the phones and held a companywide call to shore up the confidence of anxious employees.
Later in the day, the company held a similar call with large corporate customers. On Sunday, Citigroup plans to run full-page advertisements in major newspapers that acknowledge “our financial markets have been tested in unprecedented ways,” but argue that the company has a broad range of businesses and enough management expertise to pull through. In a nod to the company’s slogan, the text concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”
Still, Citigroup’s executives are not expected to sleep much this weekend as they continue to pursue contingency plans, including what they might need to calm anxious investors before the stock market opens on Monday morning.
One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.
Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.
In September, Richard X. Bove, an analyst at Ladenburg Thalmann, predicted that short-sellers would turn their attention to larger and larger financial companies, including Citigroup, which he said at the time was strong enough to withstand the pressure.
“They’re going to hit a company that is too well grounded, too well capitalized, and I think that will be Citigroup,” he said. Still, while Citigroup is widely regarded as too big and too interconnected to be allowed to fail, its immediate future is uncertain. Executives at other financial firms said that there are not many options left, and that Citigroup’s stock has reached a level that may force government action.
“The reason you have to ‘save’ Citibank is you cannot allow this hysteria,” said Peter J. Solomon, chairman of the Peter J. Solomon Company, a small investment bank.
Investors and executives at other banks said that one way the bank might be able to give itself some breathing room would be for Mr. Pandit, who became chief executive less than a year ago, to step down.
Executives in New York have also begun pointing out that Citigroup has a huge global presence. They suggested that perhaps a government bailout should involve money from other countries in addition to the United States.
“If there’s a flight from Citi’s stock, that’s unfortunate, but I don’t think that’s the government’s business,” said David M. Walker, the president of the Peter G. Peterson Foundation and a former United States comptroller general.
Mr. Walker said that the government should be concerned about Citigroup only if there were a run on the bank that threatened the financial system. The government should not, he said, be concerned about shareholders.
Some executives, however, argued that it was important to protect Citigroup’s shareholders because if they lose their investment, that will send other bank stocks diving.
Among the other ideas being bandied about Washington and the halls of Citigroup would be an assisted merger between Citigroup and another major bank. The merger might be structured with government assistance based on the blueprint that was developed for the Wachovia and Citigroup merger.
That deal ultimately did not go through because Wells Fargo stepped in with a higher offer, but it would have involved the Federal Deposit Insurance Corporation sharing the losses on $312 billion of Wachovia’s loans with Citigroup. Citigroup would have absorbed the first $42 billion in losses, and the government would have absorbed the rest. The F.D.I.C. would have been given $12 billion in warrants and preferred shares of Citigroup in exchange.
That structure could be used in a merger, but this time around, the government would be absorbing losses on Citigroup’s loans. But it remains unclear what other bank is in a strong enough position to merge with Citigroup.
Inside Citigroup on Friday, some angry senior executives said that the government had “allowed” Wells Fargo to take Wachovia from them, people at the firm said. They argued that had Citigroup and Wachovia been allowed to merge “we wouldn’t be in this position,” one executive said.
Another option might be for the government to purchase a large chunk of Citigroup’s assets in one swoop. Such an action could be structured similarly to the proposed deal in Switzerland for UBS. A spokesman for UBS, Mark Arena, said on Friday that the arrangement would allow UBS to have “one of the cleanest balance sheets of our peers.”
At the time of the deal’s announcement in October, Jean-Pierre Roth, president of the Swiss National Bank, said the government had the time to wait for the values of the assets to improve. “UBS does not have time,” Mr. Roth said.
By ANDREW ROSS SORKIN and LOUISE STORY
Published: November 21, 2008
With the sharp stock-market decline for Citigroup rapidly becoming a full-blown crisis of confidence, the company’s executives on Friday entered into talks with federal officials about how to stabilize the struggling financial giant.
Vikram S. Pandit, center, the chief executive of Citigroup, set up a companywide phone call to reassure anxious employees.
In a series of tense meetings and telephone calls, the executives and officials weighed several options, including whether to replace Citigroup’s chief executive, Vikram S. Pandit, or sell all or part of the company.
Other options discussed included a public endorsement from the government or a new financial lifeline, people involved in the talks said.
The course of action, however, remained uncertain on Friday night, these people said, and other options may yet emerge. But after a year of gaping losses and an accelerating decline in share price, Citigroup, which has $2 trillion in assets and operations in scores of countries, is running out of time, analysts said.
After a board meeting early Friday morning, Citigroup’s management and some board members held several calls with Henry M. Paulson Jr., the Treasury secretary, and with the president of the Federal Reserve Bank of New York, Timothy F. Geithner, who later emerged as President-elect Barack Obama’s choice to be Treasury secretary.
As Citigroup’s stock sank during the day, falling 68 cents to close at $3.87, the Federal Reserve was carefully monitoring how much money corporations and other customers were withdrawing from the bank, people involved in the discussions said.
The Fed was trying to ascertain whether the tumult in the stock market could escalate into something worse.
So far, these people said, most customers and clients remained committed to Citigroup.
But with Citigroup’s troubles opening a new chapter in the long-running financial crisis, government officials said that the Treasury Department was considering whether to ask for the second half of the $700 billion rescue fund approved by Congress in September.
It was unclear whether any of that money would be used to make a cash infusion into Citigroup, which received $25 billion from the government in October. A second financial rescue for banks might be difficult politically at a time that the struggling auto industry is being turned away in Washington.
As Citigroup’s fortunes diminished on Friday, Mr. Pandit, the company’s embattled chief executive, went on the offensive. He worked the phones and held a companywide call to shore up the confidence of anxious employees.
Later in the day, the company held a similar call with large corporate customers. On Sunday, Citigroup plans to run full-page advertisements in major newspapers that acknowledge “our financial markets have been tested in unprecedented ways,” but argue that the company has a broad range of businesses and enough management expertise to pull through. In a nod to the company’s slogan, the text concludes: “That’s why now, more than ever, you can feel confident that Citi never sleeps.”
Still, Citigroup’s executives are not expected to sleep much this weekend as they continue to pursue contingency plans, including what they might need to calm anxious investors before the stock market opens on Monday morning.
One maneuver that Mr. Pandit has championed is for the Securities and Exchange Commission to reinstate the “uptick rule,” which prevents short-sellers from betting against companies whose stock price is falling. Mr. Pandit has been lobbying the S.E.C. for the past week, as have other Wall Street chiefs.
Mr. Pandit and others have suggested that Citigroup is a victim of short-sellers, which some have blamed for speeding the demise of other financial companies this year.
In September, Richard X. Bove, an analyst at Ladenburg Thalmann, predicted that short-sellers would turn their attention to larger and larger financial companies, including Citigroup, which he said at the time was strong enough to withstand the pressure.
“They’re going to hit a company that is too well grounded, too well capitalized, and I think that will be Citigroup,” he said. Still, while Citigroup is widely regarded as too big and too interconnected to be allowed to fail, its immediate future is uncertain. Executives at other financial firms said that there are not many options left, and that Citigroup’s stock has reached a level that may force government action.
“The reason you have to ‘save’ Citibank is you cannot allow this hysteria,” said Peter J. Solomon, chairman of the Peter J. Solomon Company, a small investment bank.
Investors and executives at other banks said that one way the bank might be able to give itself some breathing room would be for Mr. Pandit, who became chief executive less than a year ago, to step down.
Executives in New York have also begun pointing out that Citigroup has a huge global presence. They suggested that perhaps a government bailout should involve money from other countries in addition to the United States.
“If there’s a flight from Citi’s stock, that’s unfortunate, but I don’t think that’s the government’s business,” said David M. Walker, the president of the Peter G. Peterson Foundation and a former United States comptroller general.
Mr. Walker said that the government should be concerned about Citigroup only if there were a run on the bank that threatened the financial system. The government should not, he said, be concerned about shareholders.
Some executives, however, argued that it was important to protect Citigroup’s shareholders because if they lose their investment, that will send other bank stocks diving.
Among the other ideas being bandied about Washington and the halls of Citigroup would be an assisted merger between Citigroup and another major bank. The merger might be structured with government assistance based on the blueprint that was developed for the Wachovia and Citigroup merger.
That deal ultimately did not go through because Wells Fargo stepped in with a higher offer, but it would have involved the Federal Deposit Insurance Corporation sharing the losses on $312 billion of Wachovia’s loans with Citigroup. Citigroup would have absorbed the first $42 billion in losses, and the government would have absorbed the rest. The F.D.I.C. would have been given $12 billion in warrants and preferred shares of Citigroup in exchange.
That structure could be used in a merger, but this time around, the government would be absorbing losses on Citigroup’s loans. But it remains unclear what other bank is in a strong enough position to merge with Citigroup.
Inside Citigroup on Friday, some angry senior executives said that the government had “allowed” Wells Fargo to take Wachovia from them, people at the firm said. They argued that had Citigroup and Wachovia been allowed to merge “we wouldn’t be in this position,” one executive said.
Another option might be for the government to purchase a large chunk of Citigroup’s assets in one swoop. Such an action could be structured similarly to the proposed deal in Switzerland for UBS. A spokesman for UBS, Mark Arena, said on Friday that the arrangement would allow UBS to have “one of the cleanest balance sheets of our peers.”
At the time of the deal’s announcement in October, Jean-Pierre Roth, president of the Swiss National Bank, said the government had the time to wait for the values of the assets to improve. “UBS does not have time,” Mr. Roth said.
Monday, September 29, 2008
Wachovia -- $1 a Share???
The comments on this article are amazingly good.
Citigroup to Buy Wachovia Banking Operations for $1 a ShareSeptember 29, 2008, 7:33 am
Citigroup has agreed to buy Wachovia’s banking operations for $1 a share, a move that that would concentrate power within the nation’s banking industry in the hands of a few giant lenders, The New York Times’s Eric Dash and Andrew Ross Sorkin reported Monday morning.
The Federal Deposit Insurance Corporation said in a statement on Monday that Citigroup will assume Wachovia’s senior subordinated debt, and emphasized that Wachovia did not fail.
Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer, which both Citigroup and Wells Fargo had sought.
The sale to Citigroup further concentrates Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup would control more than 30 percent of the industry’s deposits.
Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry, The Times said. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.
For Citigroup, the deal would be its largest acquisition since the landmark merger of Citicorp and Travelers Group a decade ago. It would also be an important milestone for for Vikram S. Pandit, Citigroup’s new chief executive who has been making the case to employees and investors that Citigroup is a “pillar of strength” in turbulent times.
With Wachovia’s branch network, Citigroup would get the domestic retail banking business that has eluded it for years. It would also give Citigroup a bigger platform to sell home loans and credit cards, and would give Citigroup access to more than $400 billion in more stable customer deposits, reducing its dependence on outside investors for funds.
For Mr. Pandit, the deal has symbolic value, too. Although Citigroup has racked up nearly $50 billion in losses since the crisis began last summer and has watched the value of its shares sharply decline, the bank was also among the first to raise large amounts of capital. Mr. Pandit may point to the Wachovia deal as a sign of progress and an indication that the worst for the bank is behind.
It also will be seen as a stamp of approval from regulators. Only a few years ago, the Federal Reserve took the unusual step of banning Citigroup from making “significant acquisitions.” Gaining their approval to do a big deal on such short notice is likely to be viewed as a big vote of confidence in Mr. Pandit’s management team.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Citigroup worked feverishly to cement a deal on Sunday night, with the discussions moving past the midnight hour, according to a person briefed on the talks. Officials from the F.D.I.C. and Treasury Department stayed up late to try to get the transaction done.
Wachovia, like WaMu, has been hobbled by bad mortgages, making a merger more urgent and prompting federal regulators to push for a quick sale. Wachovia’s share price has plunged nearly 74 percent this year.
In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to The Times, which cited people close to the situation.
Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.
As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.
Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker, The Times said. At 8:15 am. on Saturday, Citigroup and Wells reportedly took their first peek at Wachovia’s books.
Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop, The Times said.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along, according to the report. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JPMorgan’s acquisition of Bear Stearns, The Times said, citing people briefed on and involved with the process.
Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people told The times. Bankers had little time to assess the risk.
Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to The Times. For Wells Fargo, a deal would extend its branch banking network across the Mississippi River, creating a nationwide franchise that would compete with Bank of America and JPMorgan Chase.
Citigroup executives consider Wachovia a make-or-break deal for their consumer banking ambitions. If Citigroup were to buy Wachovia, it would gain one of the preeminent retail bank operations after struggling to build one for years. It would also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds. If Citigroup fails to clinch a deal, its domestic retail operations would be far behind Bank of America and JPMorgan Chase. Vikram S. Pandit, Citigroup’s chief executive, was personally overseeing the talks.
With a big presence in California, where home prices have fallen particularly sharply, Wells Fargo has suffered big losses on mortgages and credit card loans. But Wells, unlike many banks, maintained relatively high lending standards, so it has not been crippled by the bust like many of its big competitors.
Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.
3 comments so far...
1.
September 29th,20087:50 am
Dodd, Frank and Schumer created such a disaster. Schumer set the collapse of the banking system in motion when he killed Barclays acquisition of Lehman by issuing his September 11, 2008, letter declaring that banks should not be allowed to foreclose on homes. Since the value of the debt depends on the ability to enforce the terms, Barclays realized that Schumer and other democrats would wipe out the value of the mortgages. Barclays asked the US Govt to give a guarantee that they would not let Schumer’s plan go forward, but were told they could not stop Congress particularly if Obama got elected. This was the end of Lehman, which triggered AIG and nearly caused the collapse of Goldman.
— Posted by Lyle Vos
2.
September 29th,20087:53 am
So this was the secret plan all along!
Brink the country to the verge of collapse. Then buy up the assets of failing banks and create a gigantic monopoly of banking. Now THEY own the United States.
The trust busters, Teddy Roosevelt and William Howard Taft, are rolling in their graves!
Brilliant!
Steffen SchmidtProfessor of Political Science and Public PolicyIowa State University
— Posted by Steffen Schmidt
3.
September 29th,20087:57 am
Why emphasize the rosy potential future for Citigroup? Maybe you might in future discuss percentage foreign ownership of Citigroup.
— Posted by Dr G.
Citigroup to Buy Wachovia Banking Operations for $1 a ShareSeptember 29, 2008, 7:33 am
Citigroup has agreed to buy Wachovia’s banking operations for $1 a share, a move that that would concentrate power within the nation’s banking industry in the hands of a few giant lenders, The New York Times’s Eric Dash and Andrew Ross Sorkin reported Monday morning.
The Federal Deposit Insurance Corporation said in a statement on Monday that Citigroup will assume Wachovia’s senior subordinated debt, and emphasized that Wachovia did not fail.
Although the Federal Reserve and Treasury Department were pushing for a sale, the government was resisting pressure to provide financial guarantees to the buyer, which both Citigroup and Wells Fargo had sought.
The sale to Citigroup further concentrates Americans’ bank deposits in the hands of just three banks: Bank of America, JPMorgan Chase and Citigroup would control more than 30 percent of the industry’s deposits.
Together, those three would be so large that they would dominate the industry, with unrivaled power to set prices for their loans and services. Given their size and reach, the institutions would probably come under greater scrutiny from federal regulators. Some small and midsize banks, already under pressure, might have little choice but to seek suitors.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry, The Times said. Only days earlier, federal regulators seized and sold the nation’s largest savings and loan, Washington Mutual, in one of a series of important deals that have reshaped the financial landscape.
As the credit crisis has deepened, a consolidation in the financial industry that analysts have predicted for years seems to be playing out in a matter of weeks.
The impact will be felt on Main Street, Wall Street and in Washington. While the tie-ups may restore confidence in the industry, they also could leave a handful of big lenders to determine fees and interest rates on everything from home mortgages to credit cards to checking accounts. Some small and midsize banks may be unable to compete with these behemoths.
For Citigroup, the deal would be its largest acquisition since the landmark merger of Citicorp and Travelers Group a decade ago. It would also be an important milestone for for Vikram S. Pandit, Citigroup’s new chief executive who has been making the case to employees and investors that Citigroup is a “pillar of strength” in turbulent times.
With Wachovia’s branch network, Citigroup would get the domestic retail banking business that has eluded it for years. It would also give Citigroup a bigger platform to sell home loans and credit cards, and would give Citigroup access to more than $400 billion in more stable customer deposits, reducing its dependence on outside investors for funds.
For Mr. Pandit, the deal has symbolic value, too. Although Citigroup has racked up nearly $50 billion in losses since the crisis began last summer and has watched the value of its shares sharply decline, the bank was also among the first to raise large amounts of capital. Mr. Pandit may point to the Wachovia deal as a sign of progress and an indication that the worst for the bank is behind.
It also will be seen as a stamp of approval from regulators. Only a few years ago, the Federal Reserve took the unusual step of banning Citigroup from making “significant acquisitions.” Gaining their approval to do a big deal on such short notice is likely to be viewed as a big vote of confidence in Mr. Pandit’s management team.
The talks intensified on Sunday after a weekend of tense negotiations in Washington over a $700 billion rescue for the banking industry. Citigroup worked feverishly to cement a deal on Sunday night, with the discussions moving past the midnight hour, according to a person briefed on the talks. Officials from the F.D.I.C. and Treasury Department stayed up late to try to get the transaction done.
Wachovia, like WaMu, has been hobbled by bad mortgages, making a merger more urgent and prompting federal regulators to push for a quick sale. Wachovia’s share price has plunged nearly 74 percent this year.
In the last two weeks, Wachovia had entered into discussions with several possible suitors. After the collapse of Lehman Brothers, Wachovia held talks with Goldman Sachs and Morgan Stanley and put out inquiries to other banks, according to The Times, which cited people close to the situation.
Last week, it held discussions with Citigroup, Wells Fargo and Banco Santander of Spain, before the foreign bank’s interested cooled.
As lawmakers worked in Washington on the financial bailout this weekend, Wachovia executives huddled in the Seagram Building offices of Sullivan & Cromwell on Park Avenue.
Robert K. Steel, a former top lieutenant of Henry M. Paulson Jr. at both Goldman Sachs and then the Treasury Department, who took over as Wachovia’s chief executive in July, arrived in New York to handle the negotiations in person, along with David M. Carroll, the bank’s chief deal maker, The Times said. At 8:15 am. on Saturday, Citigroup and Wells reportedly took their first peek at Wachovia’s books.
Regulators pressed the parties to move quickly. Senior officials at the Federal Reserve in Washington, and its branches in New York, Richmond and San Francisco held weekend discussions with all the banks involved. Top officials at the Federal Deposit Insurance Corporation and the Treasury were also in the loop, The Times said.
Timothy F. Geithner, the president of the Federal Reserve Bank of New York, personally reached out to executives involved in the process to assess the situation and spur it along, according to the report. Citigroup and Wells pressed regulators to seize Wachovia and let them buy its assets and deposits, as JPMorgan did with WaMu, or provide some sort of financial guarantee, as regulators did with JPMorgan’s acquisition of Bear Stearns, The Times said, citing people briefed on and involved with the process.
Both Citigroup and Wells Fargo are deeply concerned about absorbing Wachovia’s giant loan portfolio, which is littered with bad mortgages, these people told The times. Bankers had little time to assess the risk.
Citigroup and Wells Fargo were unlikely to bid more than a few dollars per share for Wachovia, substantially less than the $10-a-share price where its stock was trading on Friday, according to The Times. For Wells Fargo, a deal would extend its branch banking network across the Mississippi River, creating a nationwide franchise that would compete with Bank of America and JPMorgan Chase.
Citigroup executives consider Wachovia a make-or-break deal for their consumer banking ambitions. If Citigroup were to buy Wachovia, it would gain one of the preeminent retail bank operations after struggling to build one for years. It would also give Citigroup access to more stable customer deposits, allowing it to rely less heavily on outside investors for funds. If Citigroup fails to clinch a deal, its domestic retail operations would be far behind Bank of America and JPMorgan Chase. Vikram S. Pandit, Citigroup’s chief executive, was personally overseeing the talks.
With a big presence in California, where home prices have fallen particularly sharply, Wells Fargo has suffered big losses on mortgages and credit card loans. But Wells, unlike many banks, maintained relatively high lending standards, so it has not been crippled by the bust like many of its big competitors.
Wachovia, by contrast, has been ravaged. Its 2006 purchase of Golden West Financial, a California lender specializing in so-called pay-option mortgages, has proved disastrous. The bank also faces mounting losses on loans made to home builders and commercial real estate developers, and its acquisition of A. G. Edwards, a retail brokerage firm, turned out to be problematic. In June, Wachovia’s board ousted G. Kennedy Thompson, the bank’s longtime chief executive.
3 comments so far...
1.
September 29th,20087:50 am
Dodd, Frank and Schumer created such a disaster. Schumer set the collapse of the banking system in motion when he killed Barclays acquisition of Lehman by issuing his September 11, 2008, letter declaring that banks should not be allowed to foreclose on homes. Since the value of the debt depends on the ability to enforce the terms, Barclays realized that Schumer and other democrats would wipe out the value of the mortgages. Barclays asked the US Govt to give a guarantee that they would not let Schumer’s plan go forward, but were told they could not stop Congress particularly if Obama got elected. This was the end of Lehman, which triggered AIG and nearly caused the collapse of Goldman.
— Posted by Lyle Vos
2.
September 29th,20087:53 am
So this was the secret plan all along!
Brink the country to the verge of collapse. Then buy up the assets of failing banks and create a gigantic monopoly of banking. Now THEY own the United States.
The trust busters, Teddy Roosevelt and William Howard Taft, are rolling in their graves!
Brilliant!
Steffen SchmidtProfessor of Political Science and Public PolicyIowa State University
— Posted by Steffen Schmidt
3.
September 29th,20087:57 am
Why emphasize the rosy potential future for Citigroup? Maybe you might in future discuss percentage foreign ownership of Citigroup.
— Posted by Dr G.
Tuesday, June 24, 2008
Tuesday, April 15, 2008
Friday, March 21, 2008
"Take-Unders"
When Cramer says Citi is subject to a "take-under" he means that Citi is going DOWN. He uses euphemisms that must be caught on the fly. Only the addicts catch this, as Aron Burnett let it get by three or so times during Stop Trading, giving the benefit to those who were up on their toes, but leaving the rest to the opposite impression, as Cramer's overall presentation focused on the words implying it was a takeover and good for Citi.
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