WONKESS

Too Little Too Late (about Too Much Too Soon)...

Gretchen Morgenson wrote this weekend in the New York Times on the Federal Reserve efforts to save the financial sector during the Great Recession, at enormous cost to the taxpayers and little benefit to Main Street.

Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.

The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again. (emphasis added)

This is NOT the TARP money bailout that was publicly debated and ultimately Congressionally approved, but additional amounts of money that were lent by the Federal Reserve to large banks (including foreign banks) largely in secret and at minimal interest rates in order to make sure that these banks could meet their minimum liquidity requirements so as to avoid bankruptcy. 

The Fed overnight window is nothing new - the Federal Reserve has long provided short-term liquidity to help grease the wheels of finance.  But the two startling things about these lending programs are (1) the amounts ($1.2 trillion!!!  And we're so worried about our debt problem pshaw!), and (2) the collateral pledged in return for these loans.  Under standard operating procedures, the Fed would only accept bonds with the highest credit grades in return for their cash loans (iow, US treasuries).  So under normal circumstances, the Fed is arguably just swapping almost equivalent goods.  Yes, banks get cash from the Fed, but they are receiving collateral worth as much and almost as liquid. 

Under the 2008 emergency lending programs however, the Fed started accepting all sorts of dreck from the banks.  Stocks, junk bonds, and although not mentioned in the Bloomberg article, I remember they were even accepting asset backed securities, the basically worthless investment vehicles that started all of the big banks' problems in the first place.

Yes, it is true that the Federal Reserve has not (yet) lost money in these lending endeavors, which is what the backers of these programs would argue.  However, think about this practically.  You are the bank.  You are given (as in Morgan Stanley's case) well over $100 billion in cold hard cash.  In return, you give the Fed some paper that you own which, if you had to mark-to-market at that moment (which you didn't, thanks to new accounting rules that came into place at around the same time changing MTM rules), would be worth - for arguments sake - a quarter of that (and maybe less).  If you just invest that money in a basket of S&P 500 stock, you will see returns of 27% and 14% over the next two years.  And even though you can't see the future, your calculations has to run something like this: if I bet big and it pays off, I get to keep all the upside less the 1.1% interest that the Fed is asking for its money.  If the bet doesn't pay off, I lose a bunch of worthless paper (the collateral being held by the Fed) and go bankrupt.  Which I would be anyways, if I didn't take this money. 

Hmmmm.... hard choice.

As far as I'm concerned, the Fed gave the financial sector carte blanche to play fast and loose with a whole lotta taxpayer cash.  Yes, this time it "worked out", but given that the reason for this weekend's NYT article is the fact that there are hints that the spigots are about to be turned on again, just how lucky does the Fed feel?

Do you feel lucky?  Well, do you, Bernanke?

Read the excellent Bloomberg article here and its associated data here.

Cross-posted at Momocrats.

Numb3rs...

Totally random observation of the day.  Why is it that in two of my more favored sci-fi series of the past decade, the token hot blonds were both (1) part machine and (2) numerically named?

Voilà:

 

Sicko...

It's disheartening to read this:

[B]anksters giving their right to loot their companies top priority, and the greater fool public be damned, with Goldman the most egregious sinner. That firm’s self serving protestations to the contrary, it was a ward of the state, and would not exist now were it not for the munificence of taxpayers. It continues to profit from a raft of subsidies, ranging from FDIC guaranteed debt, a whole alphabet soup of special Fed facilities, and super low interest rates. As Linda Beale points out:

A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks. That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk. That advantage may amount to as much as 48% of the TBTF banks’ profits this year (or as ‘little’ as 9%, on very conservative assumptions). The government, by the way, gets nothing for this implicit guarantee–unlike a commercial guarantor, it is not being paid a regular premium for the service.

So a significant portion of Goldman and other big bank profits are effectively windfall profits due to government largesse. And they are paying themselves bonuses on it...

Goldman, per the Independent, is out, as usual, to have its cake and eat it too, to enjoy the benefits of all the rescue subsidies but not bear the related tool:

Goldman Sachs has threatened the UK Treasury with plans to move up to 20 per cent of its London-based staff [where there is a proposal to levy a supertax on financial institution bonuses] to Spain in a standoff over tax and bonuses.

And watch this

Watch CBS News Videos Online

In the same day and not feel violently ill. 

Inequality! Huh! What is it good for...

From the Krug:

TOP 0.01% OF THE ENTIRE US POPULATION!!! 0.01%!!!

Don't tell me that there certain people don't have a vested interest in keeping things exactly the way they are...

A Stimulus Package for the Hard Times...

Still on hiatus, but OMG!  (h/t She Says)

I really needed that.  My final is tomorrow!

24 (hour WTF)...

Saw this today at Paul Kedrosky's site (later picked up by Jr. Deputy Accountant):

This is Representative Paul Kanjorski (D-PA) explaining why the TARP happened in such a harried and undisciplined manner, and how there was never any intention for the money to be used for the purpose of "stimulating lending in the first place". According to the Congressman

It was about September 15th [sic]. … On Thursday at about 11 o’clock in the morning the Federal Reserve noticed a tremendous drawdown of, uh, money market accounts in the United States to the tune of $550-billion was being drawn out in in a matter of an hour or two.

The Treasury opened up its window to help, and pumped in $105-billion into the system, and quickly realized it could not stem the tide. We were having an electronic run on the banks. They decided to close down the operation, to close down the money accounts. … If they had not done that, in their estimation, by 2 PM that afternoon $5.5-trillion would have been withdrawn and would have collapsed the U.S. economy and within 24 hours the world economy would have collapsed.

We talked at that time about what would have happened. It would have been the end of our economic and our political system as we know it.

Now, this happened immediately after the fall of Lehman Brothers, and on the same day that the Reserve Primary Fund had to freeze withdrawal because it had "broken the buck".*  Here is Wiki's recollection of the events:

On Tuesday, 16 September 2008, Reserve Primary Fund, the oldest money fund, broke the buck when its shares fell to 97 cents, after writing off debt issued by Lehman Brothers. On the same day, BNY Institutional Cash Reserves, which was not a money fund, but a securities lending fund run by BNY Mellon, also broke the buck – its NAV fell to 99.1.cents – also due to Lehman holdings.

The resulting investor anxiety almost caused a run on the bank for money funds, as investors redeemed their holdings and funds were forced to liquidate assets or impose limits on redemptions: through Wednesday, institutional funds saw net outflows of $173 billion to $2.17 trillion, a withdrawal of over 7%.

Retail funds saw net inflows of $4 billion, for a net capital outflow from all funds of $169 billion to $3.4 trillion (5%). 

On Thursday, 18 September 2008, Putnam Investments’ Prime Money Market Fund, a $15 billion institutional fund, announced that it was liquidating, due to redemption pressures.

Ok, so this roughly matches the numbers that the Congressman was talking about ($2.2 T + $3.4 T = $5.6 T).  And that is truly an enormous outflow of money.  However, on September 19, the Treasury actually stepped in as insurer (like the FDIC) for eligible money market and mutual funds, which is believed to have quickly restored stability to this particular sector.

In other words, the problem had been triaged by an alternate Treasury program before TARP was even presented.

I'm going to guess that the Congressman is exaggerating a bit, or confusing just what exactly end of the world scenario TARP was meant to rescue us from.

No, I'm NOT trying to minimize the very dramatic cascade of flaming poo that Lehman's bankruptcy seemed to trigger.  I'm sure to many people it really did feel like the end of the world economy as we know it.  I'm certainly aware that Lehman's bankruptcy showed us how very little we know about the delicate and very interconnected web that is the global shadow financial system.  (Everyone was worried about the CDSs, and it turned out that it was the boring old commercial papers that triggered near catastrophe.)

And clearly, the Lehman/money market series of events shook this Congressman to his core.  I genuinely believe that this Congressman believes that we were on the verge of the end of the world economy as we know it.  At least now, I can understand better why the government has been pursuing this seemingly endless stream of chaotic, careless and vomit-inducingly expensive rescue plans.

I wonder though, if the Treasury stabilized the money market situation with a guarantee, how did it come to be construed by the Congressman that TARP was meant to address the same problem?  Paulson playing a game of "let them believe what they need to to give me the keys to the kingdom"?  Under securities law, it is ILLEGAL for a public company to have material omissions in their public disclosures.  As in, you are not blameless if your failure to say something important leads people to think something that is untrue.  Shouldn't we hold our government officials to the same standard?

*This is a huge deal.  Money Market Funds are something that a lot of pension and other retirement funds put their money in.  It is considered a safe and relatively liquid asset, so when a person allocates a portion of their retirement into fixed income, some of that money will likely be put into a money market fund.  The reason is that these are investments that won't generate large returns, but should never lose money either.  Think of them as a savings account at a bank.  When a money market fund "breaks a buck", it means that if you put a dollar in, you're going to get less than a dollar out.  It is virtually unheard of, especially for a large and notable fund like the Reserve Primary Fund, and as soon as it happens, everyone starts withdrawing as fast as possible (hoping that they will only lose a cent or two on the dollar, i/o being last in line and losing much more of their value).

update (2/11 7:15) I beat Felix Salmon to this punchline.  Yay me!  Too bad like 4 gazillion ppl read him and like 3 ppl read me.  hehe.

Bug Racist and other Rants...

My husband is an arborphile (as am I, though to a lesser degree).  Part of the reason that we both love the US so much is because of the vast areas of wooded wilderness that are still scattered across this immense country.  J strives to have an encyclopedic knowledge about trees, and he's relatively good at identifying the various species of evergreens and deciduous trees.    

So one of his biggest pet peeves is the devastation that has been wrought by invasive insects on his beloved hardwoods (maple, poplar, birch), specifically, by the Asian long-horned beetle.  And in the great tradition of irrational patriotism, he has extended his hatred of the specific to a broader hatred of the general.  At this point, if it destroys his beloved forests, it must be an Asian invasive species (which, it goes without saying, must be eradicated).

So yesterday, I showed J this NYT article about a menace that has been destroying millions of acres of pines out in the West: the mountain pine beetle.  Without even glancing at the article, his immediate retort was "I bet it's from Asia."

At which point, your Chinese-born blogger went berserk and declared him a "Bug Racist."

Just for those who have no interest in reading the article, it turns out that the mountain pine beetle is indigenous, but has been seeing exponential growth due to, among other reasons, "softening" weather conditions in the West (i.e. less cold).  Thank you global warming.

****

This morning, as I was just about to enter my place of work, a worker who had been loading stuff into a ginormous truck parked near the back entrance of the building dropped an entire crate filled with what looked to be mugs.  My last glance at the scene as I entered the building was a sidewalk full of smashed ceramic, with the lone intact mug drifting into traffic.

I was thinking at the time that the worker was probably not going to be held liable for destroying the mugs.  When I used to work retail, if one of my girls (I was an assistant manager) accidentally ripped or stained or otherwise destroyed a piece of clothing, we had a checklist to go through: see if it is salvageable at the retail level, salvageable at the outlet level, or marked for destruction (total loss).  To some extent, this is risk distribution at the most micro level.  I imagine that in a less industrialized society, if you break the wares of your employer, you might see your pay docked until that cost is recouped by the employer.  Now, every company probably budgets a certain percentage of their costs to cover these incidents (which are then spread out via increased costs to their customers or decreased pay to their employees - but basically spread out to a broader group of people).

Generally speaking, I like the power of risk distribution.  Given how random some acts of destruction can be, it seems somehow unfair (I know it actually isn't: this is an emotional, rather than rational, response) that the burden would be so heavy on someone who just got the short end of the luck stick.  In large organizations with at least one shared goal (I think it is safe to say that w/in one organization, most of the employees/managers have the shared goal of the organization doing well), having certain of these risk costs born by the collective organization makes sense (partly because it is only pennies for the individual, and partly because there is probably some administrative efficiency to be gained to not have to police and keep track of these risks and their costs).

It is amazing, however, that when you extend the risk sharing beyond a single organization and out to disparate groups that have basically no shared goals, how destructive the sharing can be (relative to the benefits of sharing).  And of course, I'm talking about the asset backed securities (and their extended family of derivative securities).  These were the ultimate expressions of risk sharing.  As this entertaining (and highly recommended) article by Michael Lewis (or Liar's Poker fame) points out: "big Wall Street investment banks took huge piles of loans that in and of themselves might be rated BBB, threw them into a trust, carved the trust into tranches, and wound up with 60 percent of the new total being rated AAA."  Mathematically, it was possible to take a huge pile of dog shit, carve it up, and come out with 60% gold.  Amazing.

Of course, this was only possible because the company doing the carving was not keeping any of the risk in-house.  They were using their mathematic models to convince the ratings agencies to grant the gold standard to the top tranches of CDOs based on BBB rated MBSs, and then, as quickly as possible, moving those securities off their own books.

It's like this: if you knew that you had a worker (who you cannot fire) who has the weakest arms in the world and his job is to load breakable goods into trucks, would you internalize the cost of the goods he might destroy or would you go out and find an AIG to insure against him? 

The FDIC Loot and Scoot...

General Electric said Wednesday that the federal government had agreed to insure as much as $139 billion in debt for its lending subsidiary, GE Capital. This is the second time in a month that G.E. has turned to a federal program aimed at helping companies during the global credit crisis.

GE Capital is not a bank, but granting it access to a new program from the Federal Deposit Insurance Corporation may reassure investors and help the lender compete with banks that already have government-protected debt, a G.E. spokesman, Russell Wilkerson, told Bloomberg News.

“Inclusion in this program will allow us to source our debt competitively with other participating financial institutions,” Mr. Wilkerson said.

The F.D.I.C. program covers about $139 billion of G.E.’s debt, or 125 percent of total senior unsecured debt outstanding as of Sept. 30 and maturing by June 30.

J just brought this to my attention tonight.  How the hell did this escape my notice?  Why the hell wasn't this headline news.  In fact, where the hell is this in the New York (sucky) Times?

What does this mean?

(1) The FDIC is supposed to insure depositors.  DEPOSITORS.  Like you and me with our paltry, under the $250,000 limit, but desperately important if we lose our jobs, savings and checking accounts.  When a bank fails and there isn't enough assets to pay back all the deposited money, the FDIC steps in and makes up the difference (up to $250,000, thanks to TARP, per person)

(2) The Deposit Insurance Fund is the pot of money that the FDIC draws on.  The Deposit Insurance Fund had $45 billion at the end of June.  Since then, there have been 15 banks that have failed.  Third quarter results should be out shortly, I'm guessing that the FDIC reserve is probably down to $30 billion.  There are 117 banks on the FDIC watch list (a.k.a other banks that are at risk of failing).

(3) What happens if the FDIC runs out of money?  Well theoretically, they can raise premiums or place assessments on the banks they insure, or they can borrow money from the Fed.  Given the problem that banks are having, what are the chances that assessing them with higher premiums is going to work (and not drive them closer to bankruptcy themselves). Ok, great, so borrow money from the Fed.  Because they haven't already lent $3 trillion out to flailing financial companies.

(4) Do you see the problem?  $30 billion of reserves.  Guarantee of $139 billion.  117 banks at risk of failing.  The only way to get more money is by printing it.  You don't have to be a financial whiz kid to see that the numbers don't add up.

(5) IT IS NOT THE FDIC's JOB TO BE BAILING OUT A FINANCIAL/CREDIT COMPANY.  Federal Deposit Insurance Corporation.  Look at the frickin' name.  No where does it say, "and Bond Guarantee Corp."  I call BULLSHIT!

As far as I can tell, between the Fed, the Treasury and the FDIC, the current administration is hell bent on stealing every last penny they can from the government, and leave everyone who doesn't have an "in" destitute through Obama's first term.  Pretty smart if you want to win in 2012, you betcha.

There will be a race to gorge in these next two months.  Watch as the GE bonds default, the FDIC go bankrupt, and all of the bank accounts in America go insurance-less.  What we are seeing, in the infinite wise words of Yves, is the ultimate LOOT and SCOOT.

It's Funny Because It's Completed F#*&ed Up...

From Clusterstock (emphasis mine):

In a move that is sure to put to rest the notion that there are no second acts in American life, former Bear Stearns chief risk officer Michael Alix has landed a job in the office of the Federal Reserve charged with assessing the safety and soundness of domestic banking institutions.

We suppose that Alix at least has plenty of experience with unsound banking institutions. He was the chief risk officer of Bear Stearns from 2006 until 2008. So, basically, he was the guy on the mast charged with yelling "iceberg" just before the titantic introduced its bow to a floating hunk of ice.  Prior to that he ran credit risk management for Bear from 1996 to 2006, Jon Keehner at Bloomberg points out. That worked out just great.

"Alix will be a senior adviser to William Rutledge, executive vice president of the bank supervision group, according to a statement on the New York Fed's Web site. Staff in the group 'assess the safety and soundness of domestic banking institutions,'" Keehner reports.

Wow, our central bank is full of fraking idiots.

Random Link of the Day: Christopher Cox trying to explain why he's not a complete tool.

So You've Nationalized Fannie and Freddie...

what are you going to do next?

I'm so pissed and scared about the Fannie/Freddie thing I can't even think straight.  I agree w/ the next economist that Paulson did the bare minimum of what was necessary (of course, partly necessary b/c the foreign holders of Agency Debt were probably putting the screws to him and others in the Bush administration).  But srsly?  We (and by we, I mean everyone) are just buying time.  The question is whether we can come up w/ any solution that might actually reverse the trend a bit.  (Hey, here's a thought... what about American consumers and the American government not buying so much on debt and actually taking a bit of your annual revenue to actually pay down accumulated debt???)  I'm also pissed b/c Paulson let the common shareholders keep 20 cents on the dollar.  Rolly?  WTF that about?

Blech...

If you don't understand Paulson's statement re: Fannie/Freddie, here is a GREAT TRANSLATION.

It's funny because it's true.