How Bank of America Screwed the Pooch With the Merrill Lynch Purchase

Cool article in Forbes looks at seven ways Bank of America failed its fiduciary duties to its shareholders in its purchase of Merrill Lynch:

By definition, these key decision makers are required to exercise a fiduciary duty to put the interests of shareholders first in all corporate decisions. When executives or boards fail to uphold this standard of loyalty, care and due diligence, shareholders can be financially harmed. Since the initial merger announcement last September, they have lost over $150 billion, and the sheer speed in which these sizable losses occurred, warrant further investigation.

And the people who blew it are still in charge!

"Produce the Note"

Found this clip from GMA on the website Blown Mortgage:



Blown Mortgage comments: Now, to me this just seems like a way to increase the costs of banks which in the end make home lending more expensive. And the woman who refinanced her home from $39,000 to almost $150,000 isn’t the shining example of responsibility; but when you’re desperate you’re desperate. Regardless if you’re behind on your payments or not you’re entitled to certain rights. One of those rights is the right to a copy of the note your signed.

Simple Splanation of the Financial Mess

The Crisis of Credit Visualized from Jonathan Jarvis on Vimeo.

Exactly How AIG Came To Suck So Many Donkey Balls

Great article in the New York Times. A few interesting graphs:

To be sure, most of A.I.G. operated the way it always had, like a normal, regulated insurance company. (Its insurance divisions remain profitable today.) But one division, its “financial practices” unit in London, was filled with go-go financial wizards who devised new and clever ways of taking advantage of Wall Street’s insatiable appetite for mortgage-backed securities. Unlike many of the Wall Street investment banks, A.I.G. didn’t specialize in pooling subprime mortgages into securities. Instead, it sold credit-default swaps.

These exotic instruments acted as a form of insurance for the securities. In effect, A.I.G. was saying if, by some remote chance (ha!) those mortgage-backed securities suffered losses, the company would be on the hook for the losses. And because A.I.G. had that AAA rating, when it sprinkled its holy water over those mortgage-backed securities, suddenly they had AAA ratings too. That was the ratings arbitrage. “It was a way to exploit the triple A rating,” said Robert J. Arvanitis, a former A.I.G. executive who has since become a leading A.I.G. critic.

Why would Wall Street and the banks go for this? Because it shifted the risk of default from themselves to A.I.G., and the AAA rating made the securities much easier to market. What was in it for A.I.G.? Lucrative fees, naturally. But it also saw the fees as risk-free money; surely it would never have to actually pay up. Like everyone else on Wall Street, A.I.G. operated on the belief that the underlying assets — housing — could only go up in price.

Read all of it - it's pretty nuts!

Citigroup Deal Was & Is Pretty Retarded

Barry Ritholtz is none too happy:

To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.

At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion.

So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.

Pretty good deal, eh?

That $45 billion dollar stake now has a market value of just over a billion.

And, its about to get even worse.

Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.

Bank Bail-Outs & Stress Tests?

From The Economist Blog:

I RECENTLY complained to another economist about the vagueness of the plans to restore the financial sector coming out of the Treasury. All this dithering over nationalisation, good banks/bad banks, formation of new banks, and so on, is wearing thin. Each plan has its merits, enormous potential downsides (can the government honestly even manage a behemoth of a bank like Citi with everything else on its plate?), and the ultimate decision should not be hastily implemented. But all the indecision and uncertainty just wreaks havoc on the markets. At this stage, I joked, I’d be just as happy with them simply saying, "We have a strategy, we will continue to inject capital to prop up zombie banks indefinitely. That’s pretty much the whole plan and we’re counting on it bringing the financial sector back to life someday, somehow.".

True that! comment from the same blog:

Doug Pascover wrote:

The stress test is kind of funny to me. How about "Is the bank solvent right now?" May want to start there.

And from Naked Capitalism:

We have been skeptical that the pending Treasury stress tests on banks, designed to ascertain their state of health, were inadequately staffed and therefore could not do the job properly. Our big concerns were that they had too few bodies to test financial data versus underlying documentation adequately (usually done on a sampling basis) and they lacked the expertise (and perhaps the mandate) to vet risk models (which we all know have performed impeccably over the last two years.

Is it a test if the results are pre-determined? Apparently Team Obama thinks so.

From CNBC (hat tip reader Early Withdrawal):

Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

Who Sucks Donkey Balls?

According to Joe Stiglitz, the following:

1) the April 1998, decision of President Clinton's Working Group on Financial Markets to quash a proposal by Brooksley E. Born, head of the Commodity Futures Trading Commission, to regulate derivatives;
2) enactment of Gramm-Leach-Bliley Act on November 12, 1999 allowing consolidation of commercial and investment banks;
3) passage of the Commodity Futures Modernization Act of 2000 removing derivatives from federal oversight;
4) the Bush tax cuts of 2001 and 2003;
5) the failure of the Federal Reserve to take responsibility for regulating derivatives; and
6) the Securities and Exchange Commission decision in April, 2004, to allow large investment banks to increase their debt-to-capital ratio from 12 to 1 to 30 to 1, or higher.

What each of these actions (and inactions) has in common is that Greenspan either initiated or endorsed them.

China "Hates Us Guys."

Unbelievable! From the 2/11/09 Financial Times:

Luo Ping, a director-general at the China Banking Regulatory Commission, said after a speech in New York that China would continue to buy Treasuries in spite of its misgivings about US finances.

Mr Luo, speaking at the Global Association of Risk Management’s 10th Annual Risk Management Convention, said: “Except for US Treasuries, what can you hold?” he asked. “Gold? You don’t hold Japanese government bonds or UK bonds. US Treasuries are the safe haven. For everyone, including China, it is the only option.”

Mr Luo, whose English tends toward the colloquial, added: “We hate you guys. Once you start issuing $1 trillion-$2 trillion [$1,000bn-$2,000bn] . . .we know the dollar is going to depreciate, so we hate you guys but there is nothing much we can do.”

On Republican Obstructionism

Andrew Sullivan nails it:

The GOP has passed what amounts to a spending and tax-cutting and borrowing stimulus package every year since George W. Bush came to office. They have added tens of trillions to future liabilities and they turned a surplus into a trillion dollar deficit - all in a time of growth. They then pick the one moment when demand is collapsing in an alarming spiral to argue that fiscal conservatism is non-negotiable. I mean: seriously.

The bad faith and refusal to be accountable for their own conduct for the last eight years is simply inescapable. There is no reason for the GOP to have done what they have done for the last eight years and to say what they are saying now except pure, cynical partisanship, and a desire to wound and damage the new presidency. The rest is transparent cant.

Martin Wolf of the Financial Times Thinks Obama Has Already Screwed the Pooch!

Looks pretty bad:

Why then is the administration making what appears to be a blunder? It may be that it is hoping for the best. But it also seems it has set itself the wrong question. It has not asked what needs to be done to be sure of a solution. It has asked itself, instead, what is the best it can do given three arbitrary, self-imposed constraints: no nationalisation; no losses for bondholders; and no more money from Congress. Yet why does a new administration, confronting a huge crisis, not try to change the terms of debate? This timidity is depressing. Trying to make up for this mistake by imposing pettifogging conditions on assisted institutions is more likely to compound the error than to reduce it.

A Lot of People Think the Fed Sucks!

And some of them are conservatives:

The way Ron Paul tells it, his more than 30 years of speaking and writing about money, inflation, and the Federal Reserve System attracted only limited interest outside libertarian and constitutionalist circles. The subject, and Paul as its spokesman, were scarcely to be found in the media, even—or perhaps especially—on the business networks.

But Paul’s 2008 presidential bid changed that. Suddenly the Fed was on the table for discussion for the first time since Congress established it in 1913. With Paul making the evils of central banking and fiat money a theme of his campaign, the issue took on a vigor that few expected. Even calling for the Fed’s outright abolition was no longer unheard of on the television news networks.

Looks Like Canada is Not in the Crapper!

Fareed Zakaria explains why it's good to be Canadian:

Guess which country, alone in the industrialized world, has not faced a single bank failure, calls for bailouts or government intervention in the financial or mortgage sectors. Yup, it's Canada. In 2008, the World Economic Forum ranked Canada's banking system the healthiest in the world. America's ranked 40th, Britain's 44th.

How You Doin'?

Dick Cheney's Senior Year High School Yearbook Photo. Smokin'!

10 Trillion Dollars! Or Thereabouts...

Interesting post about all the spending and back-stopping the government is doing - the numbers are huge!

Bloomberg News reported yesterday (Monday) that the tally of U.S. government spending could reach as much as $9.7 trillion - enough to pay off more than 90% of the nation’s home mortgages.

[snip]

$9.7 trillion would be enough to send a $1,430 check to every man, woman and child alive in the world, Bloomberg reported.

And what's the upshot after spending all this money? The banks are still in really bad shape:

Bank losses from the write-offs of bad loans and faulty derivatives add up to $1.5 trillion so far. Additionally, regulators are forcing banks to account for $5 trillion to $10 trillion worth of off-balance-sheet structured investment vehicles.

Given that banking rules require banks to keep assets on hand equal to 10% of those funds, banks will need as much as $1 trillion in the next year. Adding $1.5 trillion in losses means banks will need as much as $2.5 trillion in new capital to remain solvent under current rules.

“The banking system simply has no capital. All the money that’s been allocated so far has been like pouring water into a bucket with a hole in the bottom.” Satyajit Das, a credit expert from Johannesburg, South Africa, told MSNBC.

Good Point Homes!

Excellent point by a Dish reader regarding Geithner's bank recovery non-plan:

Just f*cking do it already. Pick a price, buy up the toxic crap clogging up their balance sheets and let the chips fall where they may. If a few banks and their common shareholders get screwed, so be it. If instead, the taxpayers end up getting screwed by paying too much, too damn bad. It's not like we aren't used to it.

But no, Geithner doesn't want to crush his old pals and they want to pretend that taxpayers' interests are front and center. So, we get nothing of value and the pain just lingers on. Here's the thing. All this debt we've incurred and are incurring is gonna end up being inflated down to size eventually anyway. It's the only way out and it's the path that will end up being taken. So what the hell is another trillion on top of what's already been piled up? Far, far better to rip the bandaid off asap, let the system adjust and shorten the path to renewed growth of some degree. As it is, the fiddling around they're doing now is gonna drag this thing out much longer than it needs to be.