• 17 Sep 2012 at 10:49 AM

Let’s Help Treasury Get Out Of GM

I’m pretty sure that there’s one or two or thirty investment bankers currently handholding at the U.S. Treasury and General Motors in their debate over when and at what price Treasury should get rid of its remaining GM shares. I’m also pretty sure that those bankers are fed up with their principals’ childishness. Thus, I guess, this Wall Street Journal article. On the one hand, you’ve got Treasury and its unfamiliarity with the concept of sunk costs:1

Earlier this summer, GM floated a plan with Treasury officials to repurchase 200 million of the roughly 500 million shares the U.S. holds in the auto maker, according to people familiar with the discussions. Under the plan, Treasury would sell the remaining shares through a public stock offering.

But Treasury officials aren’t interested in GM’s offer at the current price and aren’t in a rush to offload shares, according to people familiar with the matter. The biggest reason: A sale now would leave the government with a hefty loss on its investment.

At GM’s Friday share price of $24.14, the U.S. would lose about $15 billion on the GM bailout if it sold its entire stake. While GM stock would need to reach $53 a share for the U.S. to break even, Treasury officials would consider selling at a price in the $30s, people familiar with the government’s thinking have said.

On the other hand, you’ve got, um, this: Read more »

  • 13 Sep 2012 at 2:12 PM

Greece Doesn’t Need You!

Greece doesn’t need any of you! Read more »

A thing I sometimes enjoy is reading research papers examining questions like:

  • if you are a bank, and you are likely to be bailed out, do you take more risks than a bank all on its lonesome, and
  • once you’ve been bailed out, what then?

We’ve looked at a BIS paper on international banks, which on certain assumptions found that (1) banks that were in fact bailed out took more risks pre-bailout than banks that weren’t (unsurprising) and (2) after the bailouts they pretty much stayed riskier (maybe surprising). And then there was a Fed paper about TARP banks, which on certain different assumptions found sort of the same results.

Anyway in the spirit of completism and also charts here is a Bank of Canada paper:

“Supported” banks seem to have been a wee bit less risky than regular banks before the crisis, and quite a bit less risky afterwards, somewhat contradicting those other findings. Here is a stab at an explanation: Read more »

The banking system is a machine to transform risk: people put their money into a bunch of risk-free-ish-or-so-they-think banks, and those banks lend that money to risky businesses, and the banks make money on their ability to price that risk appropriately and/or on their ability to get a government bailout when they price it inappropriately. From this description you can rough out some boundary cases – a bank that loaned money only to risk-free businesses wouldn’t make very much money or serve very much purpose, while a bank that was a massively levered conduit for moving depositor money into Ponzi schemes would also not serve much social purpose – but that leaves a broad middle ground where banks need to evaluate risk carefully enough to avoid blowing up but not so carefully that they constrain promising but risky investment.

But that middle ground is where the action is so you get papers like this one, from the Bank for International Settlements, about one flavor of lending and two flavors of banks. The lending is syndicated lending, and the banks are “bailed out banks” and “not bailed out banks,” and here are some suggestive charts:

The restrained conclusion in the BIS paper is “Although the riskiness of loan signings started diminishing across the board in 2009, we do not find consistent evidence that rescued banks reduced their risk relatively more than non rescued banks during the crisis.” And in particular, in 2010, banks that had been bailed out still had more levered, higher-yield syndicated loans than banks that had avoided a bailout. Read more »

  • 11 Jun 2012 at 12:03 PM

And Now, Spanish CDS

Did you think you could avoid it?

So the deal is this. Spain has some banks, and those banks have some loans, and those loans have some problems. And so Spain wants to bail out its banks via a thing called the Frob, which is perhaps more confidence-inspiring in Spanish than it is in English? The Frob has the small problem of not having money, and this weekend the problem was solved by Europe – I like saying “Europe” because the actual institutions in these things always seem pretty ad hoc but in this case it means mostly the European Stability Mechanism but also the European Financial Stability Facility – promising it up to €100bn.

Now one thing about Europe is that it wants its money back, so the ESM loans will likely be senior to existing Spanish government debt. In some ways this is weird – Spain is financing a subordinated investment in the financial sector of its economy with a senior lien on all of its economy, and subordinated bailouts could both create more flexibility and give Europe upside in any recovery – but in other ways, this is the way the world works. As Zero Hedge put it, “the FROB loan is effectively a priming DIP”: when you really need the money, and you can’t afford to pay for it in rate, you pay for it in seniority.

This leads, theoretically, to sadness if you are a Spanish government creditor, because now you are subordinated. On the other hand, it leads, theoretically, to happiness because Spain is now funded through means other than a bond market that may shut at any moment, so it should be able to keep afloat and service its debt, including your debt, which is what you really want. Your expected recovery on default has gone down, but so has your probability of default, so there are offsetting effects. Which effect is bigger? That does not seem susceptible to an a priori answer but as of late this morning lower recovery seems to be winning: Read more »

  • 21 Feb 2012 at 2:38 PM

This Is Really Only The “Second” Greek Bailout?

If you’re into Greece you’ve probably already read all about it and if you’re not I can’t make you. But in brief: Greece is fixed and we will NEVER HEAR ABOUT ANY PROBLEMS EVER AGAIN. In less brief:
(1) Some folks stayed up all night and produced a statement.
(2) Greece’s private creditors will be offered the long-anticipated opportunity to voluntarily exchange their old bonds for new bonds, which will for the most part be the same as the old bonds except for minor differences including but not limited to a greatly extended maturity (to 2042), a 53.5% reduced face amount, and a 3.6% blended interest rate.
(3) If they don’t voluntarily exchange, which they will because – hilariously – they’ve already taken accounting writedowns (and also because I guess it’s better than a disorderly default), private holders will get CAC’ed, which may or may not be as bad as it sounds, but in any case at least CDS will pay out, unless it doesn’t.
(4) Also the public sector will do various helpful, confusing things.
(5) In exchange for this, Greece will enact horrible austerity, and because no one believes that Greece will actually do that, there will be escrow accounts and what Reuters ominously calls “permanent surveillance by an increased European presence on the ground.”
(6) Everyone is pretty sure we’ll be doing this again in six months and, look, just fair warning, I will not be writing about it then, because feh.

We haven’t had a serious international bankruptcy, which this pretty much is, since I started paying attention to the financial markets, two months ago, so I mostly think about insolvency from a US bankruptcy law perspective. One thing that happens in bankruptcy is that, like, really really roughly speaking, the creditors stop being creditors and become the owners. This isn’t always the case but the basic playbook of US bankruptcy law is: Read more »

  • 10 Jan 2012 at 7:16 PM

Jerks To Get Paid More Than Nice People

No, not your comp, though probably that too. The Times and the Journal check in today on the state of play in Greece and it’s kind of how you might expect. From the Times:

For months now, Greece has desperately been trying to persuade its private-sector creditors that it is in their interest to exchange their existing Greek bonds for longer-term securities and accept about a 50 percent loss as part of the bargain. The negotiations are known as the private sector involvement, or P.S.I.

A few months ago the deal looked doable, as the large European banks that held must of this debt, estimated to be around €200 billion, recognized that it was probably a better alternative than default, which could cost them everything. Moreover, the banks were sensitive to political pressure from their home countries, where they have a big stake in remaining on good terms with the government and key officials.

But as the talks have dragged on, many of these banks, especially big holders in France and Germany, have sold their holdings. Among the buyers have been hedge funds and other independent investors who are now questioning why they should accept a loss, known as a haircut, if, as it turns out, the deal remains voluntary in nature and Greece keeps paying interest on its debt.

And as the number of such hedge funds holding Greek debt has grown, so has their ability to forestall a restructuring agreement, thus bringing them closer to being able cash in on their high-stakes gambit.

From the Journal:

There are many potential pitfalls, each, in a way, leading to another pitfall-strewn path.

Ha! Also ha! on the Times’s sort of strange description of what the hedge funds are up to, though what they’re up to doesn’t itself sound strange. If I were a hedge fund here is what I would do:

1. Not buy bonds and then later “question why I should accept a loss”;
2. rather, buy bonds because I plan to get a gain;
3. specifically because I’m planning to be all “oh, man, I must have lost that consent solicitation in the mail, could you send it again” and otherwise generally stall on this voluntary offer until my bonds come due and are paid off with bailout money (maybe?);
4. or, alternatively, because I’ve got CDS against those bonds and have no intention whatsoever of voluntarily exchanging them and voiding my protection.

That or “stay the hell away from this situation.” But, like, the above is at least a strategy. Now, if I were a French or German bank here is what I would do: Read more »

As some of you may remember, back in fall 2008, Congressman Dennis Kucinich was not at all happy about the idea of bailing out Wall Street. “Let Wall Street bailout Wall Street,” he screeched. “The bailout bill is the dumbest thing I’ve ever seen,” he said. “Is this the United States Congress or the Board of Directors Of Goldman Sachs?” he asked, losing his shit. He was taking this thing very, very hard and some wondered if perhaps he was having some personal problems. In fact, he was.

You see, just a month after Bear Stearns went down for the dirt nap, and a few prior to Lehman biting the big one, Dennis had an unfortunate run-in with some olives. Olives that he thought were pitted, considering the sandwich on which he purchased them was represented as such. Such, however, was not the case. Those fuckers had pits in them and resulted in an unknowing Kucinich suffering serious emotional and physical distress. We know this because now, three years later, he’s suing the cafeteria that sold him the sando, for $150,000. Read more »