When Geithner speaks – stock market reaction

Did anyone notice the big drop (more than 3.5%) in the stock market as of Monday’s close? As the financial stocks seem to have been the hardest hit, the better question, however, is “why”?  Well, it seems that this weekend, the latest administration news “leak” landed with a thud, causing an even louder thud on Wall Street.

Here’s the “plan”.  Treasury is worried that some of the TARP banks will not pass Treasury’s “stress test”, and it knows that it can’t go back to Congress for more TARP money. So, it is proposing to swap the preferred shares of stock it now has in those banks for common shares. How will that help the banks, you ask? Well, it won’t.

They propose a preferred-for-common swap, which can conjure up an extra $100 billion in bank tangible common equity, a core measure of bank capital. Not that this really adds any new capital; it merely shifts the deck chairs on bank balance sheets. Why Treasury thinks anyone would find this reassuring is a mystery. The opposite is the more likely result…

But, to a Martian landing here today, without benefit of any history, it would look like the bank has an enormous amount of “common equity”…a key statistic in evaluating bank capital, and, presumably a piece of the “stress test”.

Why the concern? As explained quite clearly in the above quoted April 21 editorial from the Wall Street Journal, it looks like the first step (or perhaps, the second) in nationalizing banks. With each share of common stock comes a vote. The government, by means of those votes, would be able to select the bank’s Board of Directors, who, in turn, set the bank’s policies. As an example, loans to “Group A” (whether sound or not) will be granted, and loans to Group B (no matter how sound) will not be granted. Some banks, most notably, J.P Morgan Chase, have indicated that they will not participate in Geithner’s “toxic assets” buy out plan. With control of the common share vote, they will. Most banks are opposed (for good reason) to the bill allowing the Bankruptcy courts to reduce the principal amount of home loans for those in bankruptcy. With control of the common share vote, the opposition will disappear.

And, guess who gets to control the votes that come along with the government’s ownership of banks’ common stock? If you guessed Barney Frank, chairman of the House Financial Services Committee, and Chris Dodd, chairman of the Senate Banking Committee, go to the head of the class. No wonder Wall Street is concerned.

And, now you also know why, even though some financial institutions are ready, willing and able to repay the TARP “loans” the Obama administration has said “no”.

Perhaps of greater concern to Wall Street is what happens when the government tires of playing with banks, and decides to dump millions of shares of bank common stock on the market? The “thuds” just keep getting louder.

Capitalists … Meet Your Master

Just in case you were wondering if the CEO of General Motors is the only one facing the guillotine (figuratively of course). Read more

Due process and equal protection?

Unlike my brother, I am not one to rant.  Occasionally, however, someone in Congress says something that is so stupidly outrageous (or outrageously stupid), that my normal mild mannered demeanor is forced to rant.  So, please forgive me, I’m not used to this.

Congressman Grayson, sadly from my home state – though luckily not from my district – recently proposed legislation that would allow Treasury Secretary Geithner to set the salaries of all who work for any company receiving TARP money.  Forgetting  for the moment that this “law” would create a marvelous bureaucracy of folks who, among their many tasks, would be able to decide what the teller at your local bank should earn, I think it appropriate to dig a bit deeper.

When asked how such a law could be constitutional, the congressman, on national television, pointed to the due process and equal protection clause of the 14th Amendment.  Of course, he didn’t mention the 14th Amendment, he only said “due process and equal protection”.  Either he is dumber than a rock, or he firmly believes Americans are dumber than a rock.

The 14th Amendment provides, in pertinent part, (as we lawyers would say) that no State shall deprive any person of life, liberty or property without due process of law, nor deny to any person within its jurisdiction the equal protection of the laws.  And, yes, that Amendment also provides that Congress shall have the power to enforce, by appropriate legislation, the provisions of this article.  Amendment 14 was passed to insure that the 13th Amendment, abolishing slavery, actually had some “teeth”.

On to my rant.  How anyone with more than a fourth grade education could hope to say that the above words from the 14th Amendment  mean that Congress can pass a law allowing the Secretary of the Treasury to decide the salaries of anyone who works for a company accepting TARP money is more than bewildering.  No, it’s demeaning.

Brave young men and women died to fulfill Lincoln’s dream that  the phrase “all men are created equal” actually meant that.  Thus the 13th and 14th Amendments.

Apparently our “good “congressman cares little of that  if  he can fool the public with the feels good phrase “due process and equal protection” .

Shame on him.

Certainly, the due process and equal protection clause of the 14th Amendment has been applied to situations other than making sure that all Americans, regardless of their color, have the same rights.  But no case that I know of has held that that Amendment allows the Executive branch of our government to decide who should earn what.

And first they came for…

I am more than happy to discuss the “due process and equal protection” clause of the 14th Amendment with the “good”congressman at his convenience.  Think he’ll take me up on that?

Hedge fund managers eschew participation in the Geithner PPIP

Ray Dalio, founder of Bridgewater Associates, runs one of the largest hedge funds in the world. Yet he is not interested in participating in Treasury Secretary Tim Geitner’s plan – the Public-Private Investment Program (PPIP) – to extract troubled assets from the balance sheets of banks that made bad investments. You can view the full article here.

thumbnail-ray-dalioWhy not? Well it seems there are lots of little devils in the details. First is the fact that the Fed will only be providing non-recourse loans (those are the kind that you don’t have to pay back if you lose it all) to five – tightly regulated – hedge fund managers. Anyone else who wishes to participate in the auction would have to put up 100 percent of the money.

No one in their right mind would dream of doing such a thing, so this auction will be between five fund managers. The five will have strings attached to their deal and will be directed to buy a great deal of these assets sight unseen. From the Business Insider

The way the buying is envisioned, two different types of buyers will be created — one with a very limited number (e.g., five) of managers who have access to leverage/put via PPIP, and the rest who don’t. So, unless you’re one of the five, you won’t get the benefits, and being one of the five has strings attached that make it difficult to act as a fiduciary.

…those who are selected as PPIP Managers (i.e. these five funds) will be in conflicted positions because the Treasury has expectations of how these managers should behave (like they should buy large amounts) because the whole program’s success hinges on how these five behave, yet, at the time of applying to be one of the five, they presumably don’t know the pricing and terms, or even exactly what will be sold. We couldn’t, and we wonder how other managers can, make commitments to be one of the five without knowing these things.

Now ask yourself why they might have structured it like that. Well it is because the treasury can then direct them to overpay for the toxic assets. The banks are made whole, the fund manager collects his fees regardless of what happens, and the American tax payer foots the bill. If the assets perform then the hedge funds make some serious money. If not, the taxpayer and the hedge fund investors are on the hook. Even with those incentives, hedge fund managers including Dalio do not want to participate.

If you are a hedge fund manager, you are in a no win situation. If the assets perform you are vulnerable to the government/press/big ugly crowd that will vilify them for fleecing the banks. If they do not perform customers (hedge fund investors) are going to vilify them for not performing.

Either these investments will make a lot of money for their investors or the government will lose a lot of money — in either case, there will be reasons for politicians to complain and to focus on the five winners to see how they “abused” the system.

My guess is banks will start hedge funds that will be capitalized by the banks themselves, then buy their own troubled assets having only to put up about 3 percent of the money. This gets the toxic assets off the balance sheet and diverts the risk to the taxpayer. It is a small price for them to pay.

Geithner plan is a give away, moral hazard thrives!

Sal Khan of Khan Capital Management is pretty sharp, a frequent guest on CNN, and I think he is pretty spot on in describing the Geithner plan. Read more

No Time To Waste

Secretary Geithner needs sweeping powers to do all kinds of things like take over financial institutions that the government thinks might possibly need taking over. So he needs to move fast … faster than fast. No time to look this deal over … quick.   First this on Wednesday

Allowing the Treasury Department to take over a broader range of companies, such as large insurers, investment firms and hedge funds, would mark a significant shift from the existing model of financial regulation, which relies on independent agencies that are shielded from the political process. The Treasury secretary, a member of the president’s Cabinet, would exercise the new powers in consultation with the White House, the Federal Reserve and other regulators.

That’s long enough. Now this on Thursday:

 The new rules will likely require financial institutions to hold more capital as a buffer against losses and will bolster risk-management standards. All told, the proposals would mean significant expansions of power for the Treasury, Federal Reserve and other regulators.

It isn’t clear which companies would be brought under this umbrella. Administration officials believe they could include banks’ parent companies, insurance conglomerates and certain hedge funds, among others. They said it would depend on a company’s size, leverage, reliance on short-term funding and role in the financial system.

Confused … don’t worry, but don’t dawdle either. Oh … and guess what won’t be regulated. The Democrats favorite cash cow and George Soros money maker … hedge funds.

One area where the U.S. is departing from its European allies is the Obama administration’s approach to hedge funds, private-equity firms and venture-capital funds. Mr. Geithner, in his remarks, said all firms over a certain size should register with the Securities and Exchange Commission and disclose certain information so government officials can determine whether their size or complexity puts the broader economy at risk. But he said the administration doesn’t seek to regulate hedge funds like banks.

So let me get this straight. The one unregulated part of the market, hedge funds, continue unregulated while we pile even more regulation on the regulated. Wait … times up … gotta move fast. More to do.

This is from Thursday’s hearings.


A crisis is terrible thing to waste. Not like we haven’t heard this all before. I blame Bush.

Geither To Announce Details … Wall Street Waits

AP is reporting that Timothy Geithner will be releasing the details of his plan to deal with toxic assets that are on the books and the New York Times is reporting some  leaked details of the proposed plan.

Treasury will ask banks, like Citigroup or JPMorgan Chase, to identify pools of residential and commercial real estate loans that they will be willing to sell through an auction. Private investors will bid against each other, setting a market price. No bank will be required to participate.

The idea’s not knew (frustratingly it’s one that Mark Cuban came up with last fall) but it seems like a good one because the market will value the assets and determines a “real” value for them. And, frankly, it’s about the best idea out there. However, even with FDIC loans, you can bet these investors will literally bid pennies on the dollar and the banks are going to have to take a major haircut on any assets that they sell in this auction. It is going to be really interesting to see how that idea shakes out.

Read the whole AP story too. Make special note of this paragraph too:

Some industry officials said that participation by the private sector may be harmed because potential investors will now be worried that the government will change the terms of the deal or impose new restrictions because of the current political backlash against Wall Street.

Hedge funds and other big investors are likely to be more leery of accepting the government’s enticements to purchase these assets, fearing tighter government restraints in such areas as executive compensation.

This is indeed more hope and change. Ye reap what ye sow and another 2 Trillion of our money! It had better work.

The Satyr and the Peasent, a modern retelling – Video

There is one of Aesop’s fables, entitled “The Satyr and the Peasent,”

“A Man had lost his way in a wood one bitter winter’s night. As he was roaming about, a Satyr came up to him, and finding that he had lost his way, promised to give him a lodging for the night, and guide him out of the forest in the morning. As he went along to the Satyr’s cell, the Man raised both his hands to his mouth and kept on blowing at them. “What do you do that for?” said the Satyr.

“My hands are numb with the cold,” said the Man, “and my breath warms them.”

After this they arrived at the Satyr’s home, and soon the Satyr put a smoking dish of soup before him. But when the Man raised his spoon to his mouth he began blowing upon it. “And what do you do that for?” said the Satyr. “The soup is too hot, and my breath will cool it.”

“Out you go,” said the Satyr. “I will have nought to do with a man who can blow hot and cold with the same breath.”

Sometimes, it is the oldest lessons most quickly forgotten…  So, they get updated for the modern day:

During the fall campaign, Obama mercilessly mocked his Republican opponent, Sen. John McCain, for declaring, “The fundamentals of our economy are strong.” Obama’s team painted the veteran senator as out of touch and failing to grasp the challenges facing the country.

On Sunday, economic adviser Christina Romer was asked during an appearance on NBC’s “Meet the Press” if the fundamentals of the economy were sound. “Of course they are sound,” she replied.

“The fundamentals are sound in the sense that the American workers are sound, we have a good capital stock, we have good technology,” she said. “We know that — that temporarily we’re in a mess, right? We’ve seen huge job loss, we’ve seen very large falls in GDP. So certainly in the short run we’re in a — in a bad situation.”

Just a week ago, White House Office of Management and Budget director Peter Orszag declared that “fundamentally, the economy is weak.”

Of course, this modern telling still lacks an ending…

Jim adds: Here’s the Romer video. Watch her twist.


And here is the Obama campaign ad it ran in September criticizing McCain for saying the economy is fundamentally sound. You better be sitting down.


Now … here is President Obama on Friday.


Outrage? Don’t bother. No hope n change, just politics as usual. Get used to it.

Emotion and business decisions – the AIG bonus program

Now really, what did you expect? Like it or not, the managers and executives at AIG have specific value in the market place. You may think that they are all worth nothing, but many companies see the AIG kerfuffle as an opportunity.

The obligations that AIG had to managers were contractual payments everyone knew about when the government took an 80 percent stake in AIG in return for an $85 billion cash infusion in September.

All of a sudden, people are outraged about the bonuses for AIG employees. Since the people are now fully invested – not by their own choosing – into AIG, the obvious problem rears it’s ugly head.


That’s right, emotion. Making business decisions based on emotion is a big mistake, and corporations who have taken federal bailout funds are now making business decisions based on how the event will be played out in the media.

Citigroup canceled the delivery of a new jet when politicians – and citizens – freaked out. Even I wrote that it was a bad marketing decision, not necessarily a bad business decision. Did you know that Citigroup was trying to sell two older jets worth $27 million each? The new jet was going to cost an estimated $50 million for a “profit” of $4 million for the corporate aviation division.

What’s the right business decision? I’m not sure, but I know that if I owned a project that could cut costs at the aviation division by $4 million, and the response was we can’t do that, the public would get mad, I’d be looking to find a job somewhere else.

And that is what AIG CEO Edward Liddy is arguing. AIG needs to be able to pay employees something close to the market wage for similar positions at other companies or the employees are going to leave. Employees also do not want to be under a microscope by the Marketing Department when they make solid business decisions. Would you want to stay at a company like that?

Referred to as brain-drain. Liddy writes about the issue this weekend in a letter to Geitner after AIG was bullied into implementing measures to do everything possible and legally cut scheduled bonus payments.

…I would not be doing my job if I did not directly advise you of my grave concern about the long-term consequences of the actions we are taking today. On the one hand, all of us at AIG recognize the environment in which we operate and the remonstrations of our President for a more restrained system of compensation for executives. On the other hand, we cannot attract and retain the best and brightest talent to lead and staff the AIG businesses – which are now being operated principally on behalf of the American taxpayers – if employees believe that their compensation is subject to continued and arbitrary adjustment by the U.S. Treasury.

This is the simple reason why the government can not be involved like this. My fellow bloggers like Michelle Malkin are rightly ticked at the current situation.

Both parties in Washington created this Frankenstein. Make no mistake. President Bush, with help from now-Treasury Secretary Tim Geithner and his mentor Hank Paulson, pre-socialized the economy and stabbed fiscal conservatism in the heart with the original AIG bailout.

I’ve written about this non-solution before, and more Americans need to understand what is happening. This does seem to be the crisis the Obama administration wants to use to their advantage. Don’t let it go to waste!

Others have more today, including Malkin and LGF. Hot Air chimes in with video of Obama being outraged!

Exit question: What could have been done, or still could be done, to get government out of the way so these companies could succeed on their own? (How about massive corporate tax cuts and making the federal government smaller?)

The return on our investment (bonus section)


Click on the image to see how our first $85 billion did. That investment seems to be worth about $19 billion today, down more than 75 percent.

The government continues to pour our money into a bad investment. It’s kind of like a gambler who is $1,000 in the whole making another bet for $500 hoping they can take the winnings and pay off that first grand. The problem is, the gamblers keep loosing.

Realize this: the government is gambling here, pure and simple. Since the original investment of $85 billion, things have gotten even more confusing since the government has poured more capital into AIG.

AIG got another $30 billion on March 2. When do we stop?

Featured image on the home page courtesy Mike Licht at Notions Capital.

Update: Morrissey at Hot Air has more today (Tuesday).

The nasty little secret at the center of all the outrage is that the Obama administration could have stopped the bonuses by simply stopping the bailout.  They could have forced AIG into bankruptcy, which would have voided the company’s contractual compensation obligations.  Instead, the Obama administration chose to inject liquidity into AIG, following the lead of the Bush administration, which had done the same thing.  That kept AIG’s doors open, and therefore kept its contractual obligations to its employees intact.

How are we going to pay for this budget?

I have been wondering where we are going to get the money to pay for all of this stimulus. The congressman from California has the exact same question!

Apparently they have not gotten to that little detail yet. He either doesn’t want to say or he doesn’t know. This is very disturbing.

I love how to blames Bush at least twice. “inherited financial crisis”