TARP

The Journal had an article this morning about how cash equities traders are getting used to having computers as coworkers but I say unto you: can a computer do this?1

52. On March 31, 2010, Customer A, an investment adviser to a private fund, asked Jefferies to find buyers for several MBS, including Lehman XS Trust Series 2007-15N 2A1 (LXS 2007-15N 2A1) and Harborview Mortgage Loan Trust Mortgage Loan Pass-Through Certificates, Series 2006-10 2A1A (HVMLT 2006-10 2A1A). [Jefferies trader Jesse] Litvak approached a representative at AllianceBernstein about buying the MBS.

53. Litvak told the AllianceBernstein representative that the seller had offered to sell the HVMLT MBS at 58-00 and the LXS MBS at 58-8:

Litvak:

he will sell to me 20mm orig of hvmlt 0610 @ 58-00 but he is being harder to knock back on the lxs bonds … said that he thinks that one is much cheaper yada yada yada … he told me he would sell them to me at 58-8 (30mm orig) … I would be fine working skinnier on these 2 … but think you are getting good levels on these …

Representative:

is he paying u or am I?

Litvak:

all the levels I put in this room are levels he wants to sell me … I will work for whatever you want on these …. so to recap levels he is offering to me:
hvmlt 06-10 2a1a (20mm orig) @ 58-00
lxs 40mm orig at 58-8…

Bot em

Representative:

Can u wash the hvmlt and [add] 5 ticks to lxs?…

Litvak:

thats fine.

54. Litvak misrepresented to AllianceBernstein the prices at which Jefferies had acquired the MBS for re-sale. Litvak bought the HVMLT MBS at 57-16 (not the “58-00” he told Alliance Bernstein) and he acquired the LXS MBS at 56-16 (not “58-8” he represented).

55. Litvak also misrepresented the compensation that Jefferies would receive for these trades. AllianceBernstein purchased the $20 million HVMLT MBS at 58 and $40 million of the LXS MBS at 58-13. As a result, on the HVMLT trade, Litvak made 16 ticks for Jefferies; he did not work for free (or “wash” the trade) as he had agreed. And, on the LXS MBS, Litvak made 61 ticks for Jefferies; he did not work for “5 ticks” as agreed.

56. As a result of his misconduct, Litvak made over $600,000 more for Jefferies on the LXS trade and over $50,000 more on the HVMLT trade.

That’s from the SEC’s complaint against former Jefferies trader Jesse Litvak, who apparently made a habit of this sort of thing. He would (allegedly!) tell a potential buyer (seller) of RMBS bonds that he had a seller (buyer), but he would inflate (deflate) the price that he was supposedly getting from the other side in order to inflate his spread. This worked 25 times – that the Feds caught – and allegedly made Jefferies $2.7 million in deceptive profits. This is particularly lovable: Read more »

  • 20 Dec 2012 at 11:01 AM

GM Is Buying Some Stock

One thing to savor about Treasury’s plan to get out of GM is how many corporate-governance hot buttons it gently caresses. “GM will purchase 200 million shares of GM common stock from Treasury at $27.50 per share” translates into news reports as “Treasury is losing a bazillion dollars,” since after all Treasury paid rather more than $27.50 per share originally, but there are other ways to look at it. One is that Treasury seems to have agreed a deal with GM after the 12/18 close at $27.50 for a stock that had closed at $25.49 and hasn’t touched $27 in ten months; i.e. GM overpaid for stock from a favored/nudgy insider by $400mm. Normally, privately negotiated buybacks from favored shareholders at a premium to market prices are criticized. Normally, privately negotiated buybacks from nudgy, “ooh-don’t-buy-a-corporate-jet” activist shareholders are called greenmail.

That doesn’t mean such buybacks aren’t market-pleasing, by the way. Much like Buffett’s recent slightly-above-market buyback, GM’s above-market buyback seems to have boosted the stock. Delightfully part of the boost is accounting-related. From the Journal: Read more »

  • 11 Dec 2012 at 5:47 PM

AIG’s Remaining Bailout Reduced To Rounding Error

A while back I built a spreadsheet to do math about AIG, and it took me a long time and led to basically one short post with what I still think was a rather lovely blobby picture, so I’m just going to shamelessly reuse that spreadsheet with slight updates and be all OOH LOOK AN IRR:

So yeah: as the AIG bailout saga comes to its sort-of conclusion, we can sort of conclude that the government made a 5.6% return on its money. Assumptions etc. in the original post; the accounting profit ties out reasonably well, if you squint, with the Treasury’s official math.

Herewith some random observations and questions on AIG:1 Read more »

Being in certain rooms at certain times seems to be a good predictor of selling a book. Bin Laden’s bedroom on the night of his death is an obvious one, and various days in the Oval Office have or may soon have their chroniclers, though the world still awaits the unabridged memoirs of the guy who cleaned out Jeff Gundlach’s office at TCW. But the Treasury Department conference room where regulators imposed TARP on eight big banks seems to have been especially fecund; by my count Hank Paulson has already published his account, somebody in the room seems to have contributed to this account, and now Sheila Bair has written a book that includes hers, which was excerpted in Fortune today.

This is weird because – well, one, because a bunch of guys (and Sheila Bair) in suits discussing the terms of a preferred stock purchase in a conference room is not necessarily the first place you’d look for thrilling literature, but also, two, because the accounts are all pretty similar. Here’s Bair’s take on the bankers’ reaction to the TARP terms:

I watched Vikram Pandit scribbling numbers on the back of an envelope. “This is cheap capital,” he announced. I wondered what kind of calculations he needed to make to figure that out. Treasury was asking for only a 5% dividend. For Citi, of course, that was cheap; no private investor was likely to invest in Pandit’s bank. Kovacevich complained, rightfully, that his bank didn’t need $25 billion in capital. I was astonished when Hank shot back that his regulator might have something to say about whether Wells’ capital was adequate if he didn’t take the money. Dimon, always the grownup in the room, said that he didn’t need the money but understood it was important for system stability. Blankfein and Mack echoed his sentiments.

Coincidentally, Dimon is always the grownup in these accounts, too; what is new here is really Bair’s take as the head of the FDIC:1 Read more »

“Make banking boring again” is a favorite reaction to news that JPMorgan was screwing up its VaR modelling of its attempt to get long gamma with improperly delta-hedged tranches of the CDX.NA.IG.9 and, sure, maybe, but don’t tell Treasury:

The U.S. Treasury may pool stakes in small banks bailed out during the financial crisis to entice potential investors as the Obama administration winds down the Troubled Asset Relief Program.

“Some of the investments are smaller and it may not be possible to auction them individually,” Tim Massad, the Treasury Department’s assistant secretary for financial stability, said in an interview. “So one of the things we’re looking at is pooling those investments together.”

You can see how much TARP money remains outstanding at all the wee banks at pages 240-257 here; on a quick look the smallest seems to be the $1.4mm subordinated debentures at Frontier Bancshares of Austin, TX, and there are plenty of other single-digit-millions remaining slugs of preferred or sub debt.* The notion that it would be impossible to sell something at auction for less than $50mm seems weird to me – it’s done all the time by, um, auction houses – but you get the idea: these are subordinated fixed-income instruments of small banks that have run into trouble in the recent past; the risks are significant and the potential rewards – particularly in absolute dollar numbers – may not justify the investment of time and effort to understand and bid on them. Read more »

  • 07 Mar 2012 at 6:06 PM
  • Banks

TARP Charts!

The Federal Reserve has this new paper out about TARP that does a bit of highly suggestive eyebrow raising about some banks that shall remain nameless. They start from the awkward fact that TARP wanted everything in one bag but didn’t want the bag to be heavy, or as they put it:

The conflicted nature of the TARP objectives reflects the tension between different approaches to the financial crisis. While recapitalization was directed at returning banks to a position of financial stability, these banks were also expected to provide macro-stabilization by converting their new cash into risky loans. TARP was a use of public tax-payer funds and some public opinion argued that the funds should be used to make loans, so that the benefit of the funds would be passed through directly to consumers and businesses.

So you might reasonably ask: were TARP funds locked in the vault to return the recipient banks to financial health, or blown on loans to risky ventures, or other? Well, here is Figure 1 (aggregate commercial and industrial loans from commercial banks in the U.S.):

So … not loaned then. But that’s not important! The authors are actually looking not primarily at aggregate amounts of loans but at riskiness of loans and here’s what they get: Read more »

Criticism that “moral hazard” is the main legacy of U.S. taxpayer-funded bailouts is unfair, a Treasury Department official said. “We recognize that moral hazard is a real and significant concern” in the Troubled Asset Relief Program, Timothy Massad, acting assistant secretary for financial stability, said in a hearing before a House Oversight Committee panel today. “But to suggest that it is TARP’s main legacy is to ignore the facts, and to confuse the response to a crisis with the need to address the causes of the crisis.” Massad was responding to criticism from Neil Barofsky, special inspector general for TARP. Barofsky told the House panel’s TARP subcommittee today that the program’s “most significant legacy may be the exacerbation of the problems posed by ‘too big to fail,’ particularly given the manner in which Treasury executed the bailout.” [Bloomberg]