New York Fed
Hank Greenberg Still Can’t Sue The Government For That Time It Saved The Not-In-Need-Of-Saving-According-To-Hank-Greenberg AIGBy Jon Shazar
One way to characterize US regulators’ new leverage ratio rules is that they require big banks to raise some $80-odd billion of capital, but that’s perhaps more alarmist than necessary. The banks don’t have to raise that money in the sense of going out and selling $80bn of stock or whatever. They make money every year, and all they have to do is hang on to a little of it (and not lose money!). DealBook quotes Goldman bank analyst Richard Ramsden saying “I am surprised by the [meh-to-positive] market reaction. It’s a fairly demanding proposal,” but Ramsden’s note today1 says:
While we estimate up to a $66bn capital shortfall today, this is mitigated by 1) prospects for changes in asset calculations in the final rule, 2) potential asset optimization strategies by the banks if not, and 3) a phase-in period through 2018 (with ~$80bn of aggregate annual net earnings).
Even ignoring the potential rule changes and “asset optimization,” $80bn of annual earnings over 5 years = $400bn, of which $66bn, give or take, or 17%, needs to go to increasing capital. You can pay out the rest. It’s not that demanding. We’re not savages here: nobody’s gonna make you raise equity. It’s just a question of how fast you can return equity to shareholders.
Coincidentally today the New York Fed has a blog post about banks’ share repurchases during the financial crisis. The point here is basically that while, yes, banks were embarrassingly continuing their dividends throughout 2008 while also requiring bailouts, more or less funneling money directly from TARP to shareholders,2 they dramatically reduced their share buybacks starting in late 2007, so at least they were funneling less money to shareholders, so yay: Read more »
A New York Fed underling helped save AIG. Now, he’s going to help it win $10 billion from Bank of America. Read more »
One reason that it’s silly to get worked up about banks gambling with your deposits is that they’re mostly not. Your deposits have a tendency to be structurally senior, insured, at regulated subs, etc.; nothing all that bad will happen to them. Banks are gambling with your money market funds, and with the securities-lending proceeds from your mutual funds. Which are not insured, or particularly regulated, but which fund something like $1.9 trillion of securities dealers’ inventory through tri-party repo, as well as providing some $6 trillionish in other collateralized funding for dealer and hedge fund inventories. And this is really much worse, crisis-wise. Since deposits are insured, runs on them are rare. Runs on repo probably caused the financial crisis. Maybe.
NY Fed President William Dudley gave a pretty good speech about this stuff today; you should read it, or read some summaries here or here. The most fun parts for me had to do with the tri-party repo market.
First of all, if you’re following that market you may be aware that the Fed is moving to get rid of “the unwind,” in which
- by day, cash investors deposit their cash at JPMorgan and BoNY and JPM/BoNY lend cash to securities dealers, but
- by night, those cash investors lend the cash directly to the dealers in the freaky unregulated shadow banking market.
Those two activities sort of live on a continuum – traditional(ish) banking by day, shadow banking by night, but still the same provision of credit to the same people based on the same collateral. It’s just that during the day the cash investors’ risk is wrapped in the gentle embrace of the clearing bank; at night the cash investor snuggles up directly with the collateral. Dudley argues that this combined the risks of shadow banking with the complacency of regular banking: Read more »
Have you ever wanted to hold a mock trial of Hank Greenberg’s lawsuit over the AIG bailout from the comfort of your own home? If so, you’re in luck, because yesterday AIG filed with a federal court the complete AIG Mock Trial Deluxe Kit. It’s all here:
- A written protocol for conducting the mock trial
- Briefs, reply briefs, and sur-reply briefs from Hank Greenberg’s investment vehicle Starr International, the Treasury, and the New York Fed
- A polite letter from the Department of Justice declining the invitation to attend1
- PowerPoint presentations of both sides2
- A transcript of highly respected lawyers arguing both sides
The mock trial was, of course, conducted by AIG’s board a few weeks ago as part of the board’s consideration of whether to join Greenberg’s lawsuit against the government claiming that AIG’s bailout was an unconstitutional taking of shareholder property. The board, unsurprisingly, went with no, and yesterday it filed the full mock trial kit with the court hearing Greenberg’s claims.
The transcript is a very good read; I will mostly pick out a few amusing points but that shouldn’t detract from the facts that (1) there is a legitimate serious interesting issue here, beyond the “ooh look at the ingrates” surface, and (2) both sides did a good job of arguing it. David Boies, Greenberg’s lawyer, has the harder case – that the government unconstitutionally took 80% of AIG’s equity by entering into a voluntary credit agreement approved by AIG’s board that included a grant of equity – but he does a good job with it, resting his argument largely on Section 13(3) of the Federal Reserve Act (which permits the Fed to lend to non-banks but which does not on its face allow the Fed to, for instance, punitively demand lots of equity in excess of what it needs to compensate it for that lending) and on public statements by government officials to the effect of “AIG’s bailout was harsh because we wanted to make an example of them.” Read more »
Let’s disclose some conflicts of interest. I want to be all “go read this post from the NY Fed’s Liberty Street blog about the Facebook IPO greenshoe, it’s good, you’ll like it,” but I have this nagging sense that I’m mostly saying that because the New York Fed cited Dealbreaker, and what are the odds of that, so I want you to see it with your own eyes. But the post is fun, if you like this sort of thing, so, now you’ve got the recommendation and the disclosure, make your own call.1
Anyway the Fed researchers look at the Facebook IPO and the underwriters’ price stabilizing activity on its first trading day, Friday May 18. And they note, as I did, that there was a whole lot of buying at the IPO price of $38, which was probably largely due to the underwriters and which kept the stock above $38 going into the weekend before it cratered Monday morning. But they also note that there was a whole lot of buying at $40, which kept the stock above $40 for … 15 minutes.
Based on this they deduce: Read more »