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.

Nouriel Roubini and Nassim Taleb on CNBC

From Talking Points Memo:

TPM Reader JC sent me to this interview with Nouriel Roubini and Nassim Taleb on CNBC. Here's what JC wrote: "In this clip, Nouriel Roubini and Nassim Taleb are still being treated as a circus sideshow by CNBC... They're predicting the end of finance, and offering the only clear path out of this mess that I've seen offered (with the knowledge to back it up), and CNBC keeps asking them for stock tips. It's ludicrous. Wall Street media -- CNBC at least -- doesn't realize how bad this is yet. They're stuck in a bubble where they think everything will go back to normal in a few months...."

Watch the viedo - it's insane! I saw the interview live this morning, and was amazed at the sheer stupidity of the CNBC folks. They have no idea what's going on!

Much More Change You Can Stick in Your Crack Pipe and Smoke it!

From ABC News:

The Obama Administration today announced that it would keep the same position as the Bush Administration in the lawsuit Mohamed et al v Jeppesen Dataplan, Inc.

The case involves five men who claim to have been victims of extraordinary rendition -- including current Guantanamo detainee Binyam Mohamed, another plaintiff in jail in Egypt, one in jail in Morocco, and two now free. They sued a San Jose Boeing subsidiary, Jeppesen Dataplan, accusing the flight-planning company of aiding the CIA in flying them to other countries and secret CIA camps where they were tortured.

A year ago the case was thrown out on the basis of national security, but today the Ninth U.S. Circuit Court of Appeals heard the appeal, brought by the ACLU.

A source inside of the Ninth U.S. District Court tells ABC News that a representative of the Justice Department stood up to say that its position hasn't changed, that new administration stands behind arguments that previous administration made, with no ambiguity at all. The DOJ lawyer said the entire subject matter remains a state secret.

What a Real President Would Do...

Roger Ehrenberg argues that all financial institutions must mark their assets to market immediately. I agree. It's the first step to fixing the financial mess, but Obama does not have the guts to do it:

What needs to happen, right now, is to make EVERY financial institution apply mark-to-market accounting to their portfolios. No readily observable market? Have an administrator apply an independent third-party valuation that takes into account polling possible buyers. The only circumstance under which mark-to-market accounting can be avoided is if an institution has the intention of holding an asset to maturity and has the term financing in place to carry it. The two biggest problems with the current accounting regime relate to leverage and illiquidity. Banks have been financed largely with short-term capital, piled on top of a sliver of equity. But when assets have maturities extended either due to a changing rate environment (e.g., rising term rates cause mortgage-backed securities to experience longer maturities) or to rising illiquidity (e.g., CDOs, CDS', high-yield bonds, leveraged lending commitments, etc.), the lack of term capital puts them in a very precarious position almost overnight. These kinds of surprises could have been avoided by forcing mark-to-market treatment, as we would have seen a precipitous decline in carrying values much faster than we did and dealt with the problem far more quickly.

An Inside Look at Walls Street's Junk Factory

Third is a series of interesting articles from, of all places, the Fox Business website:

From 2004 to mid 2007, Merrill Lynch was Wall Street’s biggest underwriter of CDO deals built on shaky assets such as loans from places that were essentially mortgage mills. CDOs again are pools of bonds, they are typically made up of dozens of bonds backed by hundreds, even thousands of loans.

Merrill reaped hundreds of millions of dollars in fees by assembling and selling these eventually soured securities.

For example, Merrill Lynch made a lot of money as a part owner of California-based Ownit Mortgage Solutions, a mortgage mill that eventually collapsed in December 2006, [Janet] Tavakoli (a professor at U. Chicago School of Business) points out. Merrill built and sold securities backed by Ownit’s loans.

Ownit issued crazy 45-year ARMs and no-income-verifications loans. In the words of William D. Dallas, its founder and CEO: “The market is paying me to do a no-income-verification loan more than it is paying me to do the full documentation loans.”

Michael Blum, Merrill Lynch’s head of global asset-backed finance, sat on the board of Ownit Mortgage Solutions. When Ownit imploded in December 2006, Blum faxed in his resignation, Tavakoli says.

But Merrill continued to sell securities, or derivatives, based on Ownit’s loans well into 2007, even after Ownit collapsed, Tavakoli says.

For example, in early 2007, Merrill created a package of securities deals backed by loans issued by Ownit, Tavakoli says.

However, the securities were built on sand. Around 70% of the borrowers of these Ownit loans had not provided full documentation of either their income or assets, Tavakoli says.

Most of the loans were for the full appraised value of homes, meaning they were no down payment loans, loans given at a time when home prices were already starting to crumble.

But in her read of the deal documents, Tavakoli says Merrill only disclosed that Ownit went bankrupt, and did not mention it was Ownit’s largest creditor.

Can Merrill say it did an “arms-length” transaction with Ownit when a Merrill officer sat on the Ownit’s board and Merrill was Ownit’s largest creditor, Tavakoli asks?

In early 2007, both Moody’s Investors Service and Standard and Poor’s, the credit rating agencies, downgraded the Triple-A rated tranche of this Merrill deal to junk status, “an investment they had previously rated as ‘super safe’ with almost no possibility of loss. That meant investors were “likely to lose their shirts,” Tavakoli says.

Moody’s later forecasted that 60% of the original portfolio value could eventually be lost, Tavakoli says.

However, the SEC as a regulator of the investment banks had the power to stop this nonsense, but it did nothing to halt this securitization activity.

“Instead, investment banks accelerated securitization activity in the first part of 2007,” Tavakoli says.

A Long, Detailed Essay in Der Spiegel About That A*hole Pope Benedict

Awesome article from Germany, where they take this kind of crap seriously. And what a great title: "A German Pope Disgraces The Catholic Church"

And then there is the question that has the entire world worried: How can it be that a German pope, of all people, is pardoning a Holocaust denier? Did the pope underestimate the impact of his gesture? Did Benedict XVI have a plan, or was his decision based on the occasionally obscure theological logic of the Vatican's clerical bureaucrats? Does the pope, a man of books throughout his life, still understand the world outside his palace walls?

Frank Rich on Obama's Crony Capitalists

Rich nails it:

Key players in the Obama economic team beyond Geithner are also tied to Rubin or Citigroup or both, from Larry Summers, the administration’s top economic adviser, to Gary Gensler, the newly named nominee to run the Commodity Futures Trading Commission and a Treasury undersecretary in the Clinton administration. Back then, Summers and Gensler joined hands with Phil Gramm to ward off regulation of the derivative markets that have since brought the banking system to ruin. We must take it on faith that they have subsequently had judgment transplants.

Neat Graphics About How We're All Screwed!

Simple graphics from the Guardian newspaper in the UK make it clear that we are screwed! The upshot:
(1) Global central bank gold reserves: $845Bn
(2) Global cash in circulation: $3.9Tn
(3) Traditional banking system assets (loans to be paid back): $39Tn
(4) Total global asset values at the height of the bubble: $290Tn (What are the losses on this? 50%? 80%?)
(5) Global bailout so far: $1.9Tn - This is likely low, as I have seen estimates of the Fed and Treasury backstopping up to $8Tn
There is not enough money in the world to bail us out of this!

Hitchens on the un-Excommunication of Richard Williamson

Most interesting article in Newsweek about the rightward tilt of the Catholic Church under Benedict:

When excesses are committed by the religious (something which does indeed seem to happen from time to time), you often hear it argued that these are only perversions of the "true" or "real" or authentic teachings. What makes the present case so alarming is that concessions are being made to Holocaust-deniers and anti-Semites, and that this is not a departure from "original intent" Catholicism but rather part of a return to traditional and old-established preachments.

Too Much Consumption!

Really interesting post by Dr. Housing Bubble. He's got lots of cool graphs, and makes the point that between the mid-1950's and early 1980's, the average US household consumption rate was about 65% of GDP, and that by 2008 we were at 73%, all financed with easy credit. Since GDP = consumption + investment + government spending + (exports - imports), an 8% drop in the household consumption rate, which would merely return us to average, pre-credit-crazyness consumption rates, would result in an 11% drop in GDP, assuming the other GDP factors remain constant. Investment will likely go down, as well as exports and imports, and government spending will increase to try to cushion the blow, but that 11% drop is huge!

The Minority View...

But Ramsey Su of the Wall Street Journal is right nonetheless:

Preventing foreclosures has become a top priority of politicians, economists and regulators. In fact, allowing foreclosures to happen has merit as a free-market solution to the crisis.

If the intent is to help homeowners, then foreclosure is undoubtedly the best solution. Household balance sheets have been destroyed by taking on too much debt via the purchase of inflated assets. With so little savings, a household with negative equity almost implies negative net worth. Walking away from the mortgage immediately repairs the balance sheet.

Credit may be damaged, but homeowners can rebuild it. And by renting something they can afford, instead of the McMansion they cannot, homeowners are most likely to have some money left over each month that they can save toward a down payment on a house they can eventually afford.