• 25 Jan 2010 at 11:17 AM

Geithner And Bernanke: Bros Before Hos

geithnermad.jpgBrothers in arms Timmy G. and Ben B. will stand for each other ’til the end. In an interview with Politico, Timmy boy warned that the financial markets would react negatively, Armageddon will come and there will be locust showers if Ben isn’t confirmed.
So there you go. He warned you. In the meantime, there’s no word from Ben supporting Tim in anticipation of his testimony, Wednesday about his (non-)involvement in the AIG saga.

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  • 16 Jun 2009 at 4:40 PM

California Learns The Government Won’t Bail Out Everyone

Governator.jpgApparently there is a limit to the government’s willingness to serve up bailouts. While GM and Chrysler were worthy of a helping hand, the state of California is being left to its own devices. As the California State Controller warned the state could be out of cash in a few weeks, White House spokesman Robert Gibbs took the opportunity to draw the administration’s line in the sand.

“We’ll continue to monitor the challenges that they have, but this budgetary problem unfortunately is one that they’re going to have to solve,” Gibbs said.

Evidently California does not qualify as a systemically critical/too-big-to-fail entity.
White House dashes hopes of California budget help [Reuters]

  • 16 Jun 2009 at 12:02 PM

The Everyman’s Bailout

Bailoutman.jpgYou know there are some vibrant green shoots when major credit card issuers are voluntarily taking 65% haircuts on some outstanding balances.

Consider Bedros Alikcioglu, a gas station owner in Newport Beach, Calif. He owed $112,000 on four cards and was paying $3,000 a month in interest and late fees. “It was so hard to earn that money, and paying it to nowhere didn’t make sense anymore,” said Mr. Alikcioglu, 75.
He signed up with a debt settlement company named Hope Financial, which negotiated deals with his creditors to settle for about 35 percent of his balance. Hope Financial is charging Mr. Alikcioglu about 12 percent of his original debt.

So banks with major consumer exposure are now faced with a rather peculiar situation. The overly leveraged consumer who is chronically delinquent now has leverage over the banks because it’s increasingly likely the value of that debt to the bank will be zero in the coming months. You don’t need the threat of cramdown legislation when things are this bad.
Credit Bailout: Issuers Slashing Card Balances [NYT]

  • 16 Jun 2009 at 10:11 AM

Structured Products Back In The Line Of Fire

lawsuits.jpgIt seems small retail investors are still a glutton for punishment. A number of retail investors learned a harsh lesson last year when the convertible feature of their reverse convertible bonds kicked in and their high yielding bonds morphed into rapidly sinking equities. There are certain varieties of structured products that retail investors can take issue with because they weren’t fully aware of a seemingly minor structural mechanic that came back to bite them. This isn’t one of them. Even by retail investor standards, the key mechanic, the knock-in level, is spelled out clearly.

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  • 29 May 2009 at 9:00 AM

Are You Listening, Tim Geithner?

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You could probably find a lot of people who are against bailouts but this morning the most unintentionally hilarious one is Craig T. Nelson. Coach went on Glenn Beck last night to promote this message. He’s pretty steaming mad about all this (“I’m just sick and tired of it”), and you know what he’s going to about it? Stop paying his taxes, that’s what. Whether or not they see eye-to-eye on the whole bailout nation situation, T. Geith’s ears will surely perk up when it’s put that way.
Beck: Are you saying you personally won’t pay income tax anymore?
Nelson: I’m really thinking about it, Glenn. As a fiscally responsible grandfather, there are programs they’re asking me to fund that I refuse to fund. They should be allowed to go bankrupt! We’re a capitalistic society. I go into business, I don’t make it, I go bankrupt. They’re not going to bail me out. I’ve been on food stamps and welfare,* anyone bail me out? No. I’m just SO SICK AND TIRED OF IT. I’m sick and tired of it!
*When was this?

  • 26 Jan 2009 at 10:19 AM

The Virtues Of Insurance

Typically when Congress can’t get the political backing to actually pass a bill to pay for something, they do the next best thing: get the political backing to guarantee something, or insure any losses. At the very least this reduces the cost of capital for the activity. Throw some tax benefits in and you go a long way to encouraging the behavior you are trying to stimulate. So potent can the effect be that you don’t even necessarily need a direct guarantee. (The “too big to fail” condition and the “implicit guarantee” of a Fannie Mae is a good example here).
Alea points us to a Financial Times piece this morning that hints at the use of that kind of backing. To wit:

Forcing institutions to raise capital, be it private or public, at panic-driven fire sale prices threatens enormous dilutions to already shell-shocked shareholders, further exacerbating uncertainty and fuelling the downward spiral. This is self-defeating.
The question then is whether it is feasible to run a (nearly) capital-less financial system until panic subsides. If it is, then a solution to the financial crisis is in sight since it would free up trillions of dollars of hard to raise funds, covering more than even the most extreme estimate of losses.
I believe it is feasible to run such a system for a while, because, essentially, distressed financial institutions need (regulatory) capital for two basic purposes: To act as a buffer for negative shocks, and to reduce their risk-shifting incentives by exposing them to their losses.
However these two functions can be replaced, respectively, by the provision of a comprehensive public insurance, and by strict (and intrusive) government supervision while this insurance is in place.

We call the plan “Back Up and Bully.”
The problem with this level of insurance is that while it preserves public capital (and prevents dilution) you can write a lot of insurance before anyone starts to notice that you are on the hook for, well, a lot of insurance. (See e.g., Fannie and Freddie).
Caballero is thin on details, particularly the part about how the day-to-day operations of a “capital-less” bank work. We wonder after these details. In the present situation a good share of the capital being raised is likely to actually cover losses. An interesting side effect of mark-to-myth accounting is that you might not trigger capital and margin calls based on those marks right away, but they could well be coming in short order. We tend to think that the Treasury knew a bit more than it was telling about the state of bank balance sheets early in the crisis. A capital-less solution might not be as practical as it looks here. Still, it’s fun to dream- and not every case is a lost cause for this solution.
A capital-less financial system [The Financial Times]

  • 16 Jan 2009 at 11:57 AM

The Credit Perspective

The Across the Curve blog often has insightful and potent analysis, with a focus on credit markets that reveals some real expertise in the area. Today, however, its author, originally a weak supporter of government intervention, has made a rather public about-face.
We are forced to agree with him. Matters are quickly getting out of hand and deeper government involvement in the essential engines of the economy, and the deficit spending required to entrench it, is looking less and less desirable by the day.

From the outset, I have always been a supporter of government intervention as a means to prevent this unique crisis from taking the system down. I have always believed that the consequences of inaction were greater than the cost of government involvement. I question that assumption now.
The bailouts began with the deal in which JPMorgan took control of Bear Stearns with government assistance and continues to this day with the government intervention in the Bank of America union with Merrill Lynch.
The Federal government will now be an integral part of the financial system for a very long time and will influence decision making and risk taking in that sector during the time in which taxpayers are a partner in those businesses.
I now think that we would have been better off with some truly cathartic event which would have curbed the animal spirits of traders but which would have established a basis for a market prescribed recovery. Succinctly stated, the government is not in the business of taking risk and I would argue is in the business of risk avoidance.
In retrospect, the commonweal would have been better served had nature taken its course and allowed for capitalism to travel its natural course. I fear that this new course has placed on us a path to a very slow recovery and one in which innovation and risk taking will be viewed through the narrow and ill begotten prism of some bureaucrat.

Some Opening Comments [Across The Curve]

  • 12 Jan 2009 at 6:17 PM

Breaking: Made-off Not Out Of The Woods

The U.S. Government Will Appeal The Madoff Bail Ruling.
They really don’t like this guy.