Sunday, March 15, 2009

Last Call

Josh Marshall takes a look at AIG's list of counterparties and comes up with a doozy.
The 'toplines' don't seem terribly different from what had been assumed. European banks show up disproportionately among the highest payouts. Barklays $7B in payments to counterparties by US Securities Lending, $.6B through Maiden Lane III, $.9B in collateral postings under AIGFP CDS.

The biggest recipient seems to be France's Societe Generale for about $12B. Deustche Bank got slightly less.

The one thing I had not heard of previously was $12.1B that went to municipalities in twenty states.

Yesirree Bob, your local government had pension and investment plans with AIG! One billion to California, another billion to Virginia, half a billion to Ohio, almost $300 million to Kentucky...the list goes on. AIG turned around and lost all that money and more. You paid for it after all when they bailed AIG out and they paid off these counterparties. So not only did you pay for it the first time when these governments collected the taxes and then invested it with AIG, you paid for it a second time when you bailed out AIG.

You would think a company like that with billions of state government dollars would attract more oversight.

You'd of course be wrong.

The Cincy Tea Party

Instagoober reports that the Cincy Tea Party rocked the universe and redefined the history of protest! Or not.

Couple thousand people showed up to say "We don't like bailouts or Barack Obama!" These things are popping up all over. Yeah, you have to figure that with a 60ish approval rating, about a third of the public doesn't like the President so far. They're organizing on the internet and peacefully protesting something they don't like. You can do that in America.

But as these same people told people like me over the last eight years, "You guys lost the election. Get over it. He's our President now."

The Ultimate Bad Bank Plan

After several wrenching weeks, it's looking like Timmy The Invisible Boy, Helicopter Ben, and Team Treasury have come up with the plan to save the banks through wishful thinking.
Officials said President Obama has largely signed off on the plan in discussions with Treasury Secretary Tim Geithner and the president's economic team. A meeting was scheduled today at the White House to discuss the plan. But some details of the so-called Public Private Investment Fund, or PPIF, had yet to be worked out and officials cautioned that could delay the announcement to the following week.

Still, officials say the broad outlines of the plan have been decided. Several competing funds will be established with capital from both public and private sources. The hope is to have these funds bid on the assets weighing down the balance sheets of the nation's banks and create a market price through the competition.

The administration plans to begin the program, to be overseen by the Treasury, the Federal Deposit Insurance Corporation and the Federal Reserve, with purchases of up to $500 billion in assets. It could be expanded to $1 trillion.

The bidders will be offered low-cost government financing to buy the assets and some form of insurance to protect them against downside risk. Taxpayers, in turn, will also have a way of profiting on the upside if the assets appreciate.

So, if I'm reading this right:

  1. The government will create funds to compete to purchase toxic crap, leaving good bank assets behind.
  2. The government expects private investors to put money into these funds to see which one can buy the most toxic shit for the best price.
  3. The reason private money would ever show up in these funds is that the taxpayer will pick up the inevitable losses.
  4. Ergo, the government is setting prices for these assets through the funds, effectively giving the banks free money for crap assets.
  5. The taxpayer then is stuck hoping these assets go up in value at some point, which is wishful thinking.
Banks get free money and get bailed out. We get toxic crap that will continue to fall in value because nobody will in turn purchase these assets from the government funds. They know they are worthless. If they were worth something, companies would be buying them without the government having to do it.

Once again I fail to see how this is anything other than giving $500 billion to $1 trillion more in free money to banks and sticking taxpayers with the bill. If the funds pay too high a price, the taxpayer will never get their money back. If the funds pay too low a price, the banks go under and private investors will never put in any money.

This still comes down to the problem being "what's the correct valuation of toxic assets" when the question should be "How do we break apart these insolvent zombie banks safely?"

Timmy and Ben are wasting our time with this plan, not to mention another trillion bucks. If this is what Obama is relying on, then yeah, we're done for.

If You Walk Down The Middle Of The Road... get hit by the bus. I appreciate that California Democrat Ellen Tauscher and her Sensibly Centrist "New Democrats" caucus in the House want to get things done, but what they want to do is in fact keep Obama from doing much of anything.
"This is a healthy reprise (of) what we had in the Clinton administration. We were go-to people on the pro-growth area and on balancing the budget, and on making sure that we were competitive in the trade environment," said California Rep. Ellen O. Tauscher, head of the New Democrats. "We've got members strategically placed throughout all the big committees. ... We can really deliver votes."
Deliver votes. Right, like backing Clinton on health care reform, and stopping Bush's massive tax cuts for the rich, and not rubber stamping Bush for the last eight years. Evan Bayh of Indiana is no different in the Senate.
"Our group is not to be a counterweight to anyone or to obstruct anything. On the contrary, our group is to get things done," Bayh said. "You've got to get to 60 votes in the Senate most of the time, and our group will be a key to making that happen."
You've got to get 60 votes in the Senate most of the time because these moderates are obstructing votes through fillibuster, rather than letting majority votes pass. The DINOs are just using the GOP's tactics against their own Democratic collegues in order to gain influence. Blocking Bush's legislation on FISA, wiretapping, the Patriot Act, torture, endless Iraq War funding...that wasn't worth obstructing becuase "Bush was our President during times of crisis." Obama is trying to clean up all this mess, and these same Senators decide that this loose cannon he has to be stopped at all costs.

I'm with BooMan on this one. It's time to clean out the DINOs in 2010, starting with bad Democrats like Ellen Tauscher. Primary them now.

Or do we have to wait another 16 years for a shot at health care reform?


Roubini calls last week's rally "a dead cat bounce". I'd heed his advice if I were you.
So it is no wonder that Citi, Bank of America and JP Morgan can argue that they will be making this year a profit “before provisions for writedowns”. That is the most important caveat: while operational margins can be positive if you borrow at 0% and lend at much higher rates, the actual P&L and balance sheet of banks and broker dealers depends also on writedowns. And delinquencies, charge-off rates and writedowns are rising rapidly as both the loans and securities are showing mounting losses given the worsening of the economic recession. Losses are spreading from subprime to near prime and prime mortgages; to commercial real estate; to credit cards, auto loans and student loans; to leveraged loans and corporate boans; to industrial and commercial loans; to loans to real estate developers; to muni bonds and sovereign bonds of emerging markets and European economies where sovereign spreads are rising; and to the entire alphabet soup of credit derivatives that securitized these loans and mortgages (MBS, CMBS, CDOs, CLOs, CMOs, CPDOs, ABS, etc.). So for the major banks to argue that they are profitable before provisions on losses is a joke: such losses are now officially over $1.2 trillion globally (and $900 billion for US financial institutions) and they will be at least $2.2 trillion (according to the conservative estimates of the IMF and of Goldman Sachs) and as high as $3.6 trillion according to the peak time estimates of such losses according to our most recent study.

And according to independent analysts of the financial system – Meredith Whitney, Chris Whalen – charge off rates on loans – let alone additional losses on securities – are rising at alarming rates: they are already at levels twice as high as in the 1990-91 recession and they will soon enough – given recent trends be much higher double further. So, regardless of whether you got smarter management or not (i.e. it does not matter if you are JP Morgan and run by someone as brilliant as Jamie Dimon) the macro picture trumps any other bank-specific factors (the loan book of JP Morgan is as exposed to residential and commercial mortgages, consumer credit and other loans as any other major bank): i.e. with the unemployment rate going above 9% in 2009 and highly likely to reach 10% in 2010, with GDP growth likely to be 1% or lower in 2010, with home prices likely to fall – conservatively - at least another 15%, with commercial real estate rents now falling about 40 to 50% and valuation bound to fall 30 to 40% then losses on any category of banks loans and mortgages and consumer credit will sharply rise over time; and losses on the assets that securitized these loans/mortgages will increase over time.

In other words, this ain't the bottom kids. We're not out of the woods yet.

Not even close. We're going to soon be wishing the Dow was at 7,000.

Tortured Logic, Con't

Yes, we tortured people in the name of national security, as Mark Danner explains in his new NY Times bombshell.

Their stated goal was to produce a report that would “provide a description of the treatment and material conditions of detention of the 14 during the period they were held in the C.I.A. detention program,” periods ranging “from 16 months to almost four and a half years.”

As the Red Cross interviewers informed the detainees, their report was not intended to be released to the public but, “to the extent that each detainee agreed for it to be transmitted to the authorities,” to be given in strictest secrecy to officials of the government agency that had been in charge of holding them — in this case the Central Intelligence Agency, to whose acting general counsel, John Rizzo, the report was sent on Feb. 14, 2007.

The result is a document — labeled “confidential” and clearly intended only for the eyes of those senior American officials — that tells a story of what happened to each of the 14 detainees inside the black sites.

A short time ago, this document came into my hands and I have set out the stories it tells in a longer article in The New York Review of Books. Because these stories were taken down confidentially in patient interviews by professionals from the International Committee of the Red Cross, and not intended for public consumption, they have an unusual claim to authenticity.

Indeed, since the detainees were kept strictly apart and isolated, both at the black sites and at Guantánamo, the striking similarity in their stories would seem to make fabrication extremely unlikely. As its authors state in their introduction, “The I.C.R.C. wishes to underscore that the consistency of the detailed allegations provided separately by each of the 14 adds particular weight to the information provided below.”

Beginning with the chapter headings on its contents page — “suffocation by water,” “prolonged stress standing,” “beatings by use of a collar,” “confinement in a box” — the document makes compelling and chilling reading. The stories recounted in its fewer than 50 pages lead inexorably to this unequivocal conclusion, which, given its source, has the power of a legal determination: “The allegations of ill treatment of the detainees indicate that, in many cases, the ill treatment to which they were subjected while held in the C.I.A. program, either singly or in combination, constituted torture. In addition, many other elements of the ill treatment, either singly or in combination, constituted cruel, inhuman or degrading treatment.”
This was done in my name, your name, our names.

Bush is a war criminal. Obama is heading down the same path. America's moral authority has collapsed.

We are a rogue nation. History will not be kind to us. Already, the present isn't being too kind to us as it is.

Paying For It All

Obama had better be damned careful how he proceeds on this NY Times story.
The Obama administration is signaling to Congress that the president could support taxing some employee health benefits, as several influential lawmakers and many economists favor, to help pay for overhauling the health care system.

The proposal is politically problematic for President Obama, however, since it is similar to one he denounced in the presidential campaign as “the largest middle-class tax increase in history.” Most Americans with insurance get it from their employers, and taxing workers for the benefit is opposed by union leaders and some businesses.

In television advertisements last fall, Mr. Obama criticized his Republican rival for the presidency, Senator John McCain of Arizona, for proposing to tax all employer-provided health benefits. The benefits have long been tax-free, regardless of how generous they are or how much an employee earns. The advertisements did not point out that Mr. McCain, in exchange, wanted to give all families a tax credit to subsidize the purchase of coverage.

At the time, even some Obama supporters said privately that he might come to regret his position if he won the election; in effect, they said, he was potentially giving up an important option to help finance his ambitious health care agenda to reduce medical costs and to expand coverage to the 46 million uninsured Americans. Now that Mr. Obama has begun the health debate, several advisers say that while he will not propose changing the tax-free status of employee health benefits, neither will he oppose it if Congress does so.

At a recent Congressional hearing, Senator Ron Wyden, an Oregon Democrat whose own health plan would make benefits taxable, asked Peter R. Orszag, the president’s budget director, about the issue. Mr. Orszag replied that it “most firmly should remain on the table.”
This is something that can and will kill Obamacare period unless he gtes out in front of this. Any move to tax health care benefits will meet with brutal voter resistance and really does make him look like a complete hypocrite.

Granted, this story is an attempt to kill Obamacare. But it will be successful unless Obama can define his plan solidly, quickly. And details are not something Team Obama has been big on as of late.

AIG Stands For Awful, Insensitive Greed

Apparently AIG is contractually obligated to pay $100 million in bonuses to the division that lost them billions.
So Secretary Geithner told AIG CEO Edward Liddy that the these bonuses would not fly. Liddy said: sorry. We're contractually obligated to pay these bonuses. And if we don't we could open ourselves to legal liability. We could get sued.

Now, as a narrow legal matter, I don't doubt there is a contractual obligation. But bankruptcy disrupts contractual obligations. I'm actually not sure where employees with contractual bonuses come in line in a bankruptcy proceeding. But I bet it's really far toward the end of the line. And in business terms AIG was bankrupt. Not just bankrupt but driven to bankruptcy entirely by the division that these execs work at. It is only because -- rightly or wrongly -- the government believes that allowing AIG to founder would threaten the entire economy that we have agreed to let the taxpayer take the hit for all these reckless actions.

It's bad enough that AIG is doing this, but the real problem is that Timmy The Invisible Boy didn't anticipate this, nor can he stop this. This is Geithner's problem. If AIG is able to do this, that means the bailout was designed so badly that it's a failure.

This is pretty much prima facie evidence that Plan N needs to be applied as soon as possible. Outrage doesn't begin to describe this: it's more like applied extortion of the American taxpayer.

If Geithner can't even get this right, he needs to be replaced by somebody who can.

[UPDATE] Folks on both sides of the aisle are pissed.

White House officials and some members of Congress reacted strongly Sunday to news that insurance giant AIG had intended to pay out $165 million in bonuses and compensation. The company has received at least $170 billion in federal bailout money.
I can see the excuses even now. "Gosh, we're only using a tenth of one percent of the bailout money for bonuses. What's the big deal?"

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