Bloomberg is reporting that the US is considering a conservatorship for AIG. Their story will follow. If you’re in a rush to get the news, however, you can read our version from three hours ago.
UPDATE: Bloomberg’s story is now up.
UPDATE: CNBC is reporting that there are doubts at Treasury about the legal authority of placing AIG into a conservatorship, as we reported in our original story.
(Image via Barry.)
Institutional buyers have no more appetite for the debt or preferred equity of financial companies, the manager of the world’s biggest bond fund said in an interview with CNBC’s Erin Burnett. Bill Gross, who manages the $130 billion Pimco Total Return Bond Fund, added that he didn’t expect retail investors had very many funds left to make further investments either.
After the interview Jim Cramer and Burnett speculated that Gross was trying to force the hand of Hank Paulson, who was authorized by Congress to use federal money to bail out government chartered mortgage giants Fannie Mae and Freddie Mac but has held back. If Fannie, Freddie and other financial institutions find themselves unable to raise money, the Treasury may believe it has to begin the bailout.
Gross this morning called for an even broader bailout of the housing market, calling on the Treasury to use funds to bail out mortgages as well as financial companies. And he seems to be betting on that bailout, saying that Pimco finds distressed mortgages an attractive investment.
Combined with word from HSBC that wealthy individuals are moving into cash and away from both stocks and bonds, this could put enormous pressure on the Treasury to act. Paulson colorfully explained that the authority to bail out Fannie and Freddie could be enough to forestall their collapse by saying that if you carry a pistol you might have to use it but if you carry a bazooka you probably won’t.
Gross seems to be saying that it’s time to take out that bazooka.
So what’s going on between the Treasury Department and the GSEs? This morning Barron’s said that a government bailout of Fannie Mae and Freddie Mac was becoming more likely, in part because the mortgage giants were unlikely to be able to raise enough money in the open markets. The Treasury kinda-sorta put down the idea, saying it had “no plans” to use the authority lawmakers gave it to rescue Fannie and Freddie.
“As the secretary said many times before, we have no plans to use the authority that we’ve been given, so I’m not going to comment on any speculation,” Treasury
resident hottie spokeswoman Jennifer Zuccarelli told a news briefing on Monday.
Those with memories that stretch back beyond the current crisis will recall that five days before Paulson was named Treasury Secretary, President George Bush responded to questions about the rumor resignation of John Snow, Paulson’s predecessor, by saying he knew of “no plans” for Snow to step down.
Of course, the Treasury’s denials are almost entirely besides the point. No one is asserting that the Treasury has current plans–like a schedule–to inject new capital or loans into Fannie and Freddie. Rather, Barron’s was analyzing the likelihood that the government will need to do so to keep them afloat. We suspect that the Fed was sending a subtle message that it didn’t necessary disagree with Barron’s by issuing this half denial.
Interestingly, speculation began to increase today that the Treasury may ultimately try to split apart Fannie. The idea would be to build a “Good Bank” of a securitizing Fannie that could continue as an independent entity borrowing at market costs without an implicit guarantee, and a “Bad Bank” loaded up with Fannie’s awful portfolio and ill-advised loan guarantees.
Last week we learned that the Treasury Department, shortly after receiving authority to help shore up Fannie Mae and Freddie Mac, hired Morgan Stanley to advise it on the rescue plan. While the Treasury is only paying Morgan Stanley a $94,000 fee for the transaction, Morgan’s role here still raises serious questions. First and foremost: why was Morgan Stanley hired?
We hear that Treasury Department spoke with a variety of Wall Street firms to discuss the advisory role. Presumably, Morgan Stanley got the mandate because it was willing to give up certain market positions that would have created conflicts of interest with its advisory role. (Goldman, which thrives at the nexus of conflicted interest, probably wanted nothing to do with this.)
But the very idea of hiring a Wall Street firm to provide “market analysis and financial expertise” in connection with Fannie and Freddie is strange. No one on Wall Street has the requisite experience for reforming or rescuing government sponsored entities that are now explicitly backed by a bailout package. What’s more, the small size of the advisory fee and its structure provides no incentives for Morgan Stanley to provide advice that will keep Fannie and Freddie out of trouble in the future. Indeed, their client relationships and ties to the securitization and mortgage market may well create incentives for them to push Fannie and Freddie right back into the mortgage bubble inflating business.
We’re sure the people at Morgan Stanley, however, are bright enough and perhaps even honest enough to resist these incentives. But the first thing this deal obviously does is remove accountability for a future failure of Fannie or Freddie. Morgan Stanley’s low fee means that they probably can’t be penalized for giving bad advice. Politicians and regulators, the folks who ordinarily would be held accountable for the collapse of government sponsored entities, will be able to point to Morgan Stanley . In other words, everyone’s ass is covered.
This looks, in short, like a way to free Fannie and Freddie from oversight rather than to provide it. Government guarantees already have freed the companies from market oversight–they simply cannot fail. Now outsourcing the reform has largely freed them from political oversight. Fannie and Freddie may be more autonomous after all this is done than they ever have been before. And once Hank Paulson and his crew–who are genuinely pro-market skeptics with an appetite for reigning in Fannie and Freddie–have passed from the scene, the checks on them may well be removed.
The special Federal Reserve borrowing facility for Wall Street securities firms is only temporary, a top Treasury official said Wednesday. Robert Steel, US Treasury undersecretary for domestic finance, stressed the word “temporary” in his remarks on the facility to the Wall Street Journal’s dealmaking conference on Wednesday.
The new discount window that allows securities firms to borrow from the Federal Reserve, a privilege reserved for depository commercial banks in normal times, was opened amidst the collapse of Bear Stearns. It has somewhat calmed fears that another large Wall Street firm could collapse in the fashion of Bear Stearns, but lately Fed officials seem to have been indicating that the window poses serious “moral hazard” threats.
Much of the discussion on Wall Street and in the media has centered around the likely regulation that would accompany any continuation of the window beyond September. Indeed, much of the coverage of Steel’s remarks concentrated on this issue. But this seems to overlook the very real possibility that the window will be shut permanently.
When asked if the window would remain open beyond its schedule September expiration, Mr Steel said, “I stressed the word temporary.” The interviewer then pointed out that the word temporary was not used in Merrill Lynch CEO John Thain’s discussion of the window earlier in the conference. Steel reiterated: “Notice I used it twice.”
With government officials stressing the dangers of the window and its temporary nature, it’s a wonder that Wall Street continues to widely believe that the window is permanent. The mainstream financial media is also stuck in this story line. Not one wire story or newspaper report on Steel’s remarks even used the word “temporary.” How many times does Steel have to say “temporary” before the message gets through?
Just one day after Merrill Lynch chief John Thain urged that the Federal Reserve borrowing facility for securities firms be made permanent, a treasury official sounded the warning that this new investment banking borrowing window may be closed when it ends its initial run in September.
Under Secretary Robert Steel, whose bailiwick covers the domestic financial system, seemed to have crafted his remarks as a response to Thain’s. Yesterday Thain told attendees at a Wall Street Journal dealmakers conference in midtown Manhattan that he hoped the facility would be continued after its scheduled expiration. Speaking a the same conference today, Steel went out of his way to emphasize that the facility is temporary.
After he referred to the facility as the “temporary borrowing facility for primary broker-dealers,” Steel added: “Notice the first word in that phrase is temporary.”
When the moderator pointed out that Thain hadn’t used the word “temporary” when discussing the facility the day prior, Steel acknowledged that his remarks diverged from Thain’s.
“Notice I just used the word twice,” he said.
Steel left open the possibility that the window could remain open after expiration, adding that the regulatory framework for institutions permitted to borrow from the window remains unclear. The major commercial banks–including, most recently, Bank of America CEO Ken Lewis speaking to the conference this morning–have urged that investment banks be subject to the same regulations that restrict commercial banking. Yesterday Thain said he thought a less restrictive regulatory framework was more appropriate.
Treasury Secretary Hank Paulson’s “blueprint” for revamping the financial regulatory system is already coming under fire from powerful agency heads. As early as Friday, even before the details of the plan were widely-known, the plan was lambasted by John Reich, the director of the Office of Thrift Supervision, which oversees the savings and loan industry. Immediately after Paulson’s speech this morning, Commodity Futures Trading Commission big shot Bart Chilton released a colorful and blisteringly critical statement describing the plan as “moving boxes around in Washington DC.”
Paulson’s plan would combine the Securities and Exchange Commission, which regulates equities and debt markets, with the Commodity Futures Trading Commission, which that regulates the exchanges trading commodities and financial futures. The two commissions have very different regulatory approaches, with the SEC favoring direct regulation and a rules-based approach and the CFTC favoring a principles based approach that relies heavily on self-regulation by commodities and futures exchanges. SEC head Chris Cox has been described as being disposed to supporting the plan.
After the jump, we delve into the dirty, metaphor-strewn past of the CFTC commissioner.
It’s often been said that we’re in the worst financial crisis since the 1930s. So perhaps its no surprise that we seem on the verge of the biggest financial regulatory overhaul since the Great Depression. But we certainly didn’t expect anything this sweeping to come out of the Bush administration. We clearly underestimated these guys. Talk about shock and awe.
But we’re getting ahead of ourselves. Over the weekend Treasury Secretary Hank Paulson released the outline of his controversial and sweeping a plan to overhaul financial regulation. He would eliminate thed SEC, FDIC, CFTC, OTS and OCC. And after dumping out this bowl of alphabet soup, he would fill it right back up again with the Prudential Financial Regulatory Agency , the Conduct of Business Regulatory Agency, the Federal Insurance Guarantee Corporation and the Corporate Finance Regulator. It’s going to take some time to digest these changes.
Later this morning, Paulson will give a speech about this plan. In the meantime, the plan is already coming under criticism. Barney Frank worries that the plan may take too much power away from states, particularly (from what we’ve been lead to understand) in the area of regulating insurance. Larry Ribstein worries that the new, more concentrated structure of regulation could result in losing significant flexibility in financial innovation.
“On this latter point, consider that the CFTC’s replacement, CBRA is likely to be less accommodating,” Ribstein writes. He adds that “with one regulatory agency we’re likely to get fewer new financial products.”
We’re going to hold back for now, as we attempt to work through what’s known about the plan. Let’s see what Paulson has to say. More later today.
Paulson Plan Begins Battle Over How To Police Market
Paulson’s big bang [Ideoblog]