FT reports
“US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidised windfalls”.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity – such as pension funds – are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.”
“Transparent and acceptable”… to the markets? or opaque and acceptable to the banking oligarchy/administration? Clusterstock calls it money laundering:
“And let’s be honest, that’s exactly what it is. Banks buying assets from each other to inflate their books has nothing to do with “price discovery” or any such nonsense. It’s all about using taxpayer money to create bids that are higher than what the market currently prices those assets at. And if it turns out those bids were too high and the cash flows never materialize then, oh well, it’s the taxpayer left holding the bag.”
With mark to market now “mark to fantasy” and banks allowed to collude to bid their assets up to prices that are even higher than fantasy, they are sure to show big “profits” soon.
BTW, Zero Hedge has a great post on the resignation of the leader of FHLB over the recent changes of MTM to MTF. If this guy is saying the bank’s numbers are full of baloney, we probably should too. Check it out.
More socialism through crisis. Stephen Labaton of the Herald Tribune (NYT) on the Obama administration proposed new regulations of American firms:
One proposal could impose greater requirements on the boards of companies to tie executive compensation more closely to corporate performance and to take other steps to assure that outsize bonuses are not paid before meeting financial goals.
The new rules will cover all financial institutions, including those not now covered by any pay rules because they are not receiving U.S. government bailout money. Officials say the rules could also be applied more broadly to publicly traded companies, which already report about some executive pay practices to the Securities and Exchange Commission. Last month, as part of the stimulus package, Congress barred top executives at large banks getting rescue money from receiving bonuses exceeding one-third of their annual pay.
Beyond the pay rules, officials said the regulatory plan is expected to call for a broad new role for the Federal Reserve to oversee large companies, including major hedge funds, whose problems could pose risks to the entire
A central aspect of the plan, which has already been announced by the administration, would give the government greater authority to take over and resolve problems at large, troubled companies that are not now regulated by Washington, like insurance companies and hedge funds.
But the administration’s efforts, especially on tighter regulation of hedge funds, are not expected to assuage some European countries. Moreover, the hedge fund industry has significant influence on Capitol Hill and has shown that it can defeat proposals it finds onerous.
It’s not just hedge funds that have influence over the President and Congress – its’ all the bondholders, as a class. They give much more campaign contributions than taxpayers, as a class. Apparently, the power to take over failed institutions will only be given if bondholders are kept whole.
The President should explain exactly why bank creditors are being bailed out under the systemic risk exception of the “least cost” way to take over a bank . Why are bondholders more important to him than Taxpayers? Zero Hedge (hat tip), writing a great piece about the FDIC chastising Bloomberg for “inaccurate reporting” regarding FDIC’s dwindling resources, highlights what a legal dictionary says about the systemic risk exception in taking over a bank:
§ 360.1 Least-cost resolution.
(a) General rule. Except as provided in section 13(c)(4)(G) of the FDI Act (12 U.S.C. 1823 (c)(4)(G)), the FDIC shall not take any action, directly or indirectly, under sections 13(c), 13(d), 13(f), 13(h) or 13(k) of the FDI Act (12 U.S.C. 1823 (c), (d), (f), (h) or (k)) with respect to any insured depository institution that would have the effect of increasing losses to any insurance fund by protecting:
(1) Depositors for more than the insured portion of their deposits (determined without regard to whether such institution is liquidated); or
(2) Creditors other than depositors.
(b) Purchase and assumption transactions. Subject to the requirement of section 13(c)(4)(A) of the FDI Act (12 U.S.C. 1823(c)(4)(A)), paragraph (a) of this section shall not be construed as prohibiting the FDIC from allowing any person who acquires any assets or assumes any liabilities of any insured depository institution, for which the FDIC has been appointed conservator or receiver, to acquire uninsured deposit liabilities of such institution as long as the applicable insurance fund does not incur any loss with respect to such uninsured deposit liabilities in an amount greater than the loss which would have been incurred with respect to such liabilities if the institution had been liquidated.
[58 FR 67664, Dec. 22, 1993, as amended at 63 FR 37761, July 14, 1998]
To get a grip on the too big to fail problem, Congress established a difficult-to-trigger systemic risk exception. A least-cost resolution can be foregone – and by implication a resolution method selected that results in uninsured depositors and other creditors being protected – only if the Board Of Directors of the FDIC, The Board of Governors of the Federal Reserve System, and the secretary of the Treasury, in consultation with the president, determine the least-costly approach “would have serious adverse effects on economic conditions or financial stability.”
“The Obama administration said Thursday it would provide up to $5 billion in a revolving credit facility to guarantee payments owed to thousands of companies, employing some 500,000 people, that supply critical parts to U.S. automakers.”
“…banks won’t loan to auto suppliers under any circumstances, even with a government guarantee…the banks said, ‘Once we figure out what the government is going to do with GM and Chrysler, then we may reconsider.’ But right now, they’re not inclined to loan any more money to the auto industry.”  Hmmmm, we wouldn’t be surprised if Citi (being now controlled by the government) somehow soon finds a way to lend to them…
Bill Bonner at The Daily Reckoning says,
“We have previous suggested that Madoff be tapped for Secretary of the Treasury. The United States is running the biggest Ponzi scheme of all time, paying off old loans by taking out new ones. Why not let a real pro run the program?”
Actually he may have a point, we can’t do any worse…
