Relevant and even prescient commentary on news, politics and the economy.

I Told You So

Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners.

Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That’s not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.

Note that the acronym FDIC doesn’t appear.

*Sorry for the brief uninformative title. I foolishly precommitted to the title:

OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

What is a Bank, then?

I was trying to avoid mentioning this, partially because I half-suspected it was deliberately over the top, and I’m not reading tone well these days. After all:

Virtually every BHC has elected to become an FHC. Under 12 U.S.C. § 1843(k)(4)(H), FHCs are allowed to make “merchant banking investments” in nonfinancial companies, on a principal or agency basis, through affiliated private equity funds or other invesment funds. (Private equity affiliates are dealt with at length in 12 C.F.R. § 225.173.) Goldman carried out the investment in Greely Automotive Holdings through one of its private equity funds, GS Capital Partners VI Fund LP.

I find it very difficult to believe that any serious bankers, no matter how “annoyed,” wouldn’t have known this. [links in original]

is difficult to treat seriously, given the infodump being followed by the snideness. But so it goes.

Until today, when Brad DeLong made it ones of his links of the day. Because now we have to go into context and depth, and remember a year ago.

Bear was sold to JPMChase in March. Six months later, IBs still had not lowered their leverage ratios, and credit was more difficult to find. So the IB that had six months to return to some semblance of sanity—Lehmann Brothers—dangled on the edge for a while and finally fell off, “murdered” we’re now told. (Whether it was murdered by its own CEO is left as an exercise.) But the best was yet to come.

So the weekend was going to be a rocky one. And various plans in various stages were executed:

  1. Endangered IB #3, the successor firm to Merrill Lynch Pierce Fenner & Smith, looked around for a sucker, saw Ken Lewis, and locked in their bonuses.
  2. Endangered IB #4, the successor firm to Dean Witter Sears, teetered on the edge, hoping for a life preserver. And, apparently, it was more like Leo-in-Titanic than anyone wanted to admit.
  3. Endangered IB #5, The Vampire Squid, called its buddies at Treasury.

Maybe it didn’t go exactly like that, but by the end of the weekend, there was the declaration that, so long as they re-incorporated as a Bank Holding Company (BHC), IB#4 and IB#5 would have full access to lootsupport from the U.S. Treasury.

And now we are told—in answer to the question Simon Johnson initially raised:

If this is temporary, is it envisaged that Goldman will cease being a bank holding company, or that it will divest itself shortly of activities not usually allowed (and with good reason) by banks? Or will all bank holding companies be allowed to expand on the same basis. (The relevant rules appear to be here in general and here specifically; do tell me what I am missing.)

Increasingly, the issue of “too big to regulate” in the public interest is being brought up – an issue that has historically attracted the interest of the Department of Justice’s Antitrust Division in sectors other than finance. Should Goldman Sachs now be placed in this category? [italics mine; links, again, from the original]

The response appears to be that those regulations can be circumvented with impunity. Or, as Simon unbelievingly snarked initially, Goldman is doing nothing any other bank cannot do.

But all that does is beg the question: if a BHC can do everything that GS used to be able to do, what was the actual cost to Goldman and Morgan Stanley of converting their business. Or was it just a way for the Fed to save face while letting the taps flow wide?

Why is Obama asking for new power for the Treasury?

By Divorced one like Bush

This past weekend I wrote about the OCC, Office of the Comptroller of the Currency and 4 rulings that this office has made over the last two presidencies.
1. Preventing state AG’s and the state banking departments from investigating and regulating national banks. 2004.
2. Allowing Banks to become real estate developers and managers to including wind mill operations. 2006
3. Asserting that credit card insurance via telemarketing was not insurance and thus again immune from state AG’s and the state insurance departments. 2002 This particular ruling being the result of the Gramm-Leach-Bliley Act of 1999. The act that is now pegged as THE deregulating action of the current economic mess.
4. Allowing banks to sell insurance. 1996.

All four are clearly rulings that can have lines drawn directly to the what we are hearing today as to why the alphabet soup of “financial products” created by “to big to fail” entities have required a combination of delivering funds and pledging funds to the tune of around $9.5 trillion dollars. I googled the current number and could only find numbers dating from December 2008 such as this site suggesting then the total was $8.5 trillion.

We really need to start talking about the OCC. It is a player, if not the behind the scene player of a lot of what has become our financial system. Note, I did not say banking system. That is key.

Ok, yesterday it was proposed that as part of the solution, our Treasury head needs some new power. Already leadership is say “Yes”.

This call for power with an already announced “Yes” immediately sets off my suspicion meter. After 8 years of power being concentrated into the hands of the one (Homeland Security), unitary executive powers still being exercised by Obama, lobbyist run wild, departments turned from working for the people to working for the industry (see labor, FDA, military), no bid contracts and their results, $9 billion in bundled crisp new hundred dollar bills missing in Iraq, Paulson asking for $750 billion, not strings attached (add yours here)…

You want to give the power to say “yeh” or “nay” on a financial institution to one person? Have we not learned?

Then it dawned on me. Think about the 1996 OCC ruling and the 2002. Think about the praise for the FDIC and the job it has been doing. Here is an entire entity congress created to take care of failed banks. Ah, you say entities like AIG are not banks, so there is no jurisdiction. At least that is what we are being told. However, being that the OCC has in it’s rulings merged the banking, real estate and insurance industries (specifically ruling what was and was not insurance) I will not accept that all those smart lawyers in congress and the one that heads the White House would not be able to produce a winning argument that by the actions of the OCC rulings, the FDIC already has the authority to do to AIG what it has currently been doing.

That lead me to look at the FDIC web site. In particular, it’s “About” page:

The Federal Deposit Insurance Corporation (FDIC) is an independent agency created by the Congress that maintains the stability and public confidence in the nation’s financial system by insuring deposits, examining and supervising financial institutions, and managing receiverships.

It does not say “banks”. It says “financial systems” and “managing receiverships”.

Not enough for you. Consider there was an advisory committee created in 2002 by the then Chair Donald Powell.

Scope and Objectives: The Committee will provide advice and recommendations on a broad range of issues relating to the FDIC’s mission and activities, including, but not limited to: the delivery of services by the FDIC, its corporate infrastructure, and policy initiatives in the areas of deposit insurance, supervision of financial institutions, resolutions and management of failing and failed institutions, and other issues impacting the financial services industry.

It did not say “banking” or “banks” here either. And it specifically talks about exactly what we have here today: failed and failing institution. You can not get away from the all inclusive “financial services industry”.

Want more? Consider the bio of the current chair:

Before her appointment to the FDIC, Ms. Bair was the Dean’s Professor of Financial Regulatory Policy for the Isenberg School of Management at the University of Massachusetts-Amherst since 2002.

The FDIC is already the entity with the power that Obama is now requesting for his surrogate. On the plus side in my book, it is an agency created from the destruction of the last time we were here. It is a New Deal institution and that makes it clean in my mind (at least cleaner than more recently created entities). So, even if I’m wrong, and I don’t think I am because this nation for 13 years now has been blurring the line between banks, insurance and recently real estate to the point that it is one big industry and that counts when you go in front of a judge, the correct request that we should have been hearing from Obama is to expand the definition of banking to clarify all these new mongrel banking entities such that the entity this nation created specifically to do what the Treasury is asking for can do the job without question of jurisdiction. Simple, neat, maintains separation of power and not bureaucracy expanding.

So why didn’t he?