The FDIC Takes Over a Bank

I made a juvenile joke the other day about the Northeast taking over Commerce and Freedom in Georgia. But the reality that banks are being taken over by the FDIC all over the country is no laughing matter.

FDIC allowed 60 Minutes to follow it as it closed down one small bank–watch the YouTube to see how it works (in this case it was fDiC taking over our Heritage, ha ha).

Two things, though. First, notice Sheila Bair’s reaction to two questions: how many more (she didn’t answer, "tons") and why not Citi (she didn’t answer, "we’re not equipped to take over Citi yet"). If I were Sheila Bair, I’d already be having nightmares about FDIC’s upcoming feast on Citi.

As to the latter point, remember this video shows a five branch bank being taken over, and the FDIC stationed 8 FDIC employees at each branch when they did the simultaneous takeover. How many branches does Citi have? This says 1,400, plus 3,800 ATMs. So 8 employees for all 1,400 branches, and the FDIC needs at least 11,200 employees just for the takeover, even before you get to runs on the ATMs and the website and the infrastructure (and given the global reach of Citi, "simultaneous" gets more challenging). I guess that’s why they’re hiring in big ways.

Retroactive Immunity for the Banksters, Too?

On October 18, 2007, the Senate Intelligence Committee passed the first version of a bill that would grant corporations retroactive immunity for helping Bush spy on Americans.

The Senate intelligence committee yesterday produced a new bipartisan bill governing foreign intelligence surveillance conducted inside the United States, but objections by several Democratic lawmakers to some of its provisions raised questions about how quickly it might gain passage.

[snip]

It would further give some telecommunications companies immunity from about 40 pending lawsuits that charge them with violating Americans’ privacy and constitutional rights by aiding a Bush administration’s warrantless surveillance program instituted after September 2001. That provision is a key concession to the administration and companies, which lobbied heavily for the provision. 

On October 22, 2007, right in the middle of the larger debate about retroactive immunity, FBI Deputy Director John Pistole gave a pep talk at a money laundering conference, cheering the work bankers had done to help pursue terrorists. He described the pattern analysis FBI was doing on financial transactions.

We established a specialized section in our Counterterrorism Division called the Terrorism Financing Operations Section, or TFOS. 

The mission of our agents and analysts in TFOS is to trace transactions and track patterns.  This painstaking work helps us identify, disrupt, and prosecute terrorists, their associates, their leaders, and their assets. 

Read more

Sully Goes to Washington

picture-73.thumbnail.pngAfter Chesley "Sully" Sullenberger and his union crew brought US Airways 1549 to a safe landing and evacuation on the Hudson River last month, I pointed out that most of the key parties involved in the rescue–the pilots, the flight attendants, the ferry crews, the first responders, and the air traffic controllers–had all benefited from years of union activism demanding better safety training.

But Sully, who testifies before the Aviation Subcommittee of the House today, says that the cuts airlines have demanded of pilots in recent years have been chasing the best pilots out of the business, which may lead to a decline in safety in the industry.

It is an incredible testament to the collective character, professionalism and dedication of my colleagues in the industry that they are still able to function at such a high level. It is my personal experience that my decision to remain in the profession I love has come at a great financial cost to me and my family. My pay has been cut 40%, my pension, like most airline pensions, has been terminated and replaced by a PBGC guarantee worth only pennies on the dollar.

While airline pilots are by no means alone in our financial struggles – and I want to acknowledge how difficult it is for everyone right now – it is important to underscore that the terms of our employment have changed dramatically from when I began my career, leading to an untenable financial situation for pilots and their families. When my company offered pilots who had been laid off the chance to return to work, 60% refused. Members, I attempt to speak accurately and plainly, so please do not think I exaggerate when I say that I do not know a single professional airline pilot who wants his or her children to follow in their footsteps.

I am worried that the airline piloting profession will not be able to continue to attract the best and the brightest. The current experience and skills of our country’s professional airline pilots come from investments made years ago when we were able to attract the ambitious, talented people who now frequently seek lucrative professional careers. That past investment was an indispensible element in our commercial aviation infrastructure, vital to safe air travel and our country’s economy and security. If we do not sufficiently value the airline piloting profession and future pilots are less experienced and less skilled, Read more

Lebanese Recipe For Economic Health: Go With What You Know

Whether it is Henry Paulson, Tim Geithner or the yammering dipsticks on CNBC, it seems the there has been a headlong rush to seek analysis, wisdom and solutions from the very self proclaimed geniuses that put the US and the world in the problem to start with. Aren’t there any big bankers/finance ministers that really got it right? Turns out there are, and he comes from a most unexpected place. From the Los Angeles Times comes the story of Riad Toufic Salame:

Instead, the silver-haired banker became a hero by playing it very, very safe. In 2005, he defied pressure from the Lebanese business community and bucked international trends to issue what now looks like a prophetic decree: a blanket order barring any bank in his country from investing in mortgage-backed securities, which contributed to the most dramatic collapse of financial institutions since the Great Depression.

So as major banks in America and Europe were shuttered or partly nationalized and thousands of people in the U.S. financial sector were laid off, Lebanon’s banks had one of their best years ever.

Billions in cash continue to pour in to the relative safety of Lebanese savings accounts, with comfy but not extravagant yields of 6%. A nation shunned for years as the quintessential failed state has become a pretty safe bet, or as safe a bet as investors are likely to find in this climate.

Well, that is kind of refreshing, how did Salame do it? By being a rational technocrat, eschewing excesses, turning a deaf ear to cries for irrational rates of return, maintaining tight regulation, imposing conservative balance-sheet requirements, refusing to launder dirty money and, most critically:

When the real estate boom crested this decade and investors began bundling debt into nebulous financial instruments fueled by easy credit, the pressure was on for Salame to let banks take advantage of the high yields.

But Salame steadfastly refused.

He says the mortgage-backed securities worried him from the start. He watched curiously as investment bankers engaged in what he calls "rituals" to please the credit ratings agencies and got back such safe assessments of their products. He didn’t get it. Why were these considered safe investments? They were just too complicated. They went against a major tradition in Lebanese and Middle Eastern banking: Know to whom you’re fronting cash and who’s going to pay you back.

"We could not really sense who would be responsible in the end Read more

Why American Industry (And Its Future) Matters

Ian has a great piece up at FDL on the financial sector’s problems, their genesis, and the Obama Administration’s conventional wisdom, status quo, manner of dealing with them:

I have become increasingly concerned that some in the Obama administration are treating this economic crisis as a "black swan" event. That is a very rare, random and unpredictable event. The key thing about black swans is that they are random and unpredictable and you can’t stop them from happening, you can only create your systems so that they can handle them if they occur.

But, of course, the economic and financial crisis unfolding right now was not random. It was predicted by multiple people, and it was predicted because of policy steps taken by government and widely known private actions.

All of which is to say the crisis was caused by a number of factors. It was not random. It was predictable and predicted. If we just muddle through this current meltdown—spend a lot of money bailing out the banks, throw some stimulus around—and don’t fix the fundamentally flawed incentives and structures of the system, it will likely happen again.

Ian was discussing the financial sector, but it strikes me that the same applies for America’s industrial and manufacturing sector. The United States was built on the backs of hard working people that planted and built things, sweated, toiled and prevailed. In the post-modern hustle and flow of the digital and financial whiz bang world, we seem to both forget and neglect the industry, manufacturing and workers that put us here. I want to focus, and open a discussion, on that.

I am not expert on the issues and economics that underpin this area, so I am going to rely on the collective wisdom here to engage and flesh out the discussion. I do, however, want to open that discussion on a familiar note, the American automotive industry. Roland Jones at MSNBC.com yesterday did an interesting piece as to why bankruptcy is not a viable option for General Motors:

“If these companies went into bankruptcy right now, in exactly the position they are in today, they would be liquidated because no one out there would supply them with the financing they need to get through bankruptcy,” Mark Zandi, chief economist with Moody’s Economy.com, told CNBC Wednesday.

That would mean a few million jobs lost, Zandi said, which would be “cataclysmic” for Read more

Veni, Vidi, Vici – Obama’s Foreclosure Reveal In Phoenix

246349.thumbnail.jpgAs you may know, President Obama came to Phoenix in order to roll out his $75 Billion Plan to Fight Home Foreclosures. This was exciting for me, because Obama spent last night at a resort, Montelucia, about 3/4 of a mile from my house. Lots of excitement; even more jammed up traffic yesterday afternoon and evening. Still, all in all, pretty exciting for an old desert dweller. Our dog, Kiki, is still barking at all the helicopters. Interlaced into this post will be a series of pictures taken by various Phoenicians and submitted to the Arizona Republic for open use on their website. I would have taken proprietary photos for Emptywheel, especially of the shots going down the road right by my house and entering Montelucia, but, alas, I was tied up with conference calls with multiple attorneys, all of whom are every bit as annoying as I am. Trust me on the latter.

246347.thumbnail.jpgFrom the New York Times:

President Obama pledged on Wednesday to help as many as 9 million American homeowners refinance their mortgages or avert foreclosure, an initiative he said would shore up distressed housing prices, stabilize neighborhoods and slow a downward spiral that he said was “unraveling homeownership, the middle class, and the American Dream itself.”

The plan, more ambitious than many housing analysts had expected, was unveiled by Mr. Obama in a high school gymnasium here, in a community that is among the nation’s hardest hit by the foreclosure crisis.246467.thumbnail.jpg

“This plan will not save every home, but it will give millions of families resigned to financial ruin a chance to rebuild,” the president told the crowd. “It will prevent the worst consequences of this crisis from wreaking even greater havoc on the economy. And by bringing down the foreclosure rate, it will help to shore up housing prices for everyone.”

In a nutshell from the LA Times, the plan would:

• Remove restrictions on Fannie Mae and Freddie Mac that prohibit the institutions, both taken over by the government last year, from refinancing mortgages they own or have guaranteed when more is owed on a home than it is worth. The White House says this could reduce monthly payments for up to 5 million homeowners.

246470.thumbnail.jpg• Create incentives for lenders to modify subprime loans at risk of default or foreclosure. For lenders that agree to reduce rates to levels borrowers can afford, the government will make up part of the difference between the old monthly payment and the new payment. Participating lenders also will be required to cut payments to no more than 31 percent of a borrower’s income. Up to 4 million homeowners could benefit.

Read more

Maybe We’ve Got Each Other By the Nuts…

I asked yesterday whether or not the "private investors" whom Geithner expects to pony up billions if not trillions to bail out our biggest banks were Sovereign Wealth Funds.

The WSJ and Robert Reich suggested they might be. But, Reich wondered, what incentive would other countries have to keep investing in our shitpile?

Some additional financing is thought to come from China, Japan, and the Middle East. (It seems likely that some hedge fund financing is now coming from rich Arabs.) But why exactly would Asia or the Middle East be willing to commit even more money to the United States when they’re already nervous about their US loans and investments, and when their own economies are under more and more stress?

Meanwhile, Atrios points to what might be one source of leverage we have to persuade Asia and the Middle East to ante up again.

WHEEEEEEEEEEEE

The Fed has decided it can do whatever it wants. Just in case you didn’t know.

WASHINGTON — The White House plan to rescue the nation’s financial system, announced on Tuesday by Timothy F. Geithner, the Treasury secretary, is far bigger than anyone predicted and envisions a far greater government role in markets and banks than at any time since the 1930s.

Administration officials committed to flood the financial system with as much as $2.5 trillion — $350 billion of that coming from the bailout fund and the rest from private investors and the Federal Reserve, making use of its ability to print money.

Yes, it can do that.

WHEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEEE

It seems the "public-private partnership" gimmick presents the world with an either/or proposition. Either "private investors" (of which foreign countries have some of the most ready cash) ante up, or the Fed will just print money and print money and print money until it comes up with the cash.

I’m beginning to see why foreign investors–and SWFs more specifically–might have an incentive to invest. 

Countries have SWFs, after all, as a way to do something with their giant surplus of dollars. The manufacturing exporters (Asia) and oil exporters (Middle East) created them as a means to invest their dollar reserves, hopefully getting a higher return on all those dollars just sitting and collecting dust. Now, as I suggested, a lot of those SWFs may be willing to invest further because it’s the only thing staving off nationalization of companies they own up to 5% of.

Read more

Senate Stimulus: Steal from the Poor to Give to the Affluent

ProPublica has done a comparison of the House and Senate stimulus packages. It shows, in striking fashion, how much the Grassley-Isakson-Coburn-Collins-Bad Nelson bill skews spending away from the poor–the most stimulative kind of spending, since these people need this money badly and would spend it right away–to the upper middle class:

Aid to Low-Income Families Total $124,186,000,000 $97,230,900,000 ▼$26,955,100,000
Health insurance aid   $2,272,000,000 ▲$2,272,000,000
Unemployment benefits $36,000,000,000 $39,490,000,000 ▲$3,490,000,000
COBRA healthcare for unemployed $30,300,000,000 $20,000,000,000 ▼$10,300,000,000
Hunger programs $21,176,000,000 $17,100,000,000 ▼$4,076,000,000
Housing $13,510,000,000 $8,600,000,000 ▼$4,910,000,000
Medicaid for unemployed $8,600,000,000   ▼$8,600,000,000
Job training and placement $5,120,000,000 $4,300,000,000 ▼$820,000,000
Disabled and elderly programs $4,200,000,000   ▼$4,200,000,000
Other $5,280,000,000 $5,468,900,000 ▲$188,900,000

 The Senate bill took out $27 billion in spending for the poor, ending with a total of $97 billion.

Tax Cuts Total $282,284,000,000 $358,162,000,000 ▲$75,878,000,000
Manufacturing   $1,603,000,000 ▲$1,603,000,000
Individuals $184,637,000,000 $302,198,000,000 $117,561,000,000
State and local governments $42,957,000,000 $14,272,000,000 ▼$28,685,000,000
Businesses $29,483,000,000 $17,546,000,000 ▼$11,937,000,000
Energy projects $19,961,000,000 $17,682,000,000 ▼$2,279,000,000
Other $5,246,000,000 $4,861,000,000 ▼$385,000,000

The Senate bill put in $117 billion in new tax cuts for individuals–more money than the entire $97 billion they give for those items ProPublica classifies as "Aid to Low-Income Families."

Those tax cuts consist primarily of two things: the AMT patch ($64 billion), which affects primarily upper middle class people in areas with high home prices, and the house flipping subsidy (up to $48 billion), the full credit of which is only available if inidviduals pay at least $7,.500 in taxes a year (there’s also $10-11 billion for auto sales incentives).

There are other reasons to oppose including these two tax cuts in the stimulus. The AMT patch, which isn’t really stimulative in the first place, would get passed and properly off-set in the budget appropriations process anyway. And the house flipping subsidy does little else than put money in realtor’s pockets. 

But the biggest reason is this: we’re taking food, housing, and medical care away from those who desperately need it, to put more money in the pockets of the upper middle class.

The Senate "Moderates’" reverse Robin Hood: Steal from the poor and give to the affluent!

Is Geithner Planning on a Public-Private Partnership with the Sovereign Wealth Funds?

The big gimmick to Tim Geithner’s new plan to avoid nationalizing the banks save the big banks is a public-private partnership.

Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

  • Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.
  • Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

There are a couple of sources of private money available on the scale that is necessary to help out: billionaires like Warren Buffett (net worth, $62 billion), pension funds (total assets as of last September, before the crash, $28.1 trillion), mutual funds (total assets before the crash, $26.2 trillion). While Buffett has shown some willingness to bail out these banks for the right price, I can’t see pension and mutual funds wanting to take on the risk.

And then there’s a source of funding that the big banks have already turned to in an effort to stave off this crash–a source which has a lot invested in forestalling nationalization: sovereign wealth funds (total assets before the crash, $2.7 to $3.2 trillion, and expected to grow to between $5 and $13 trillion).  SWFs, of course, are the investment arms of oil producers like Saudi Arabia, Kuwait, and the UAE, and exporters like China, Singapore, and South Korea.

I’m particularly interested in whether or not Geither is expecting sovereign wealth funds to be involved in this public-private partnership because of the role they had in "saving" a few big banks between November 2007 to January 2008. Read more

Comings and Goings and Dealings at the SEC

Last Wednesday, Linda Thomsen was one of a handful of contemptuous SEC officials who appeared before Congress–and pretty much refused to answer any questions. That same day, new SEC head Mary Schapiro sent a very contrite letter to Paul Kajorski, admitting, "Today’s hearing before your Subcommittee cannot have been satisfactory for you." Schapiro offered to meet at Kanjorski’s earliest convenience so, "we can determine a course forward." On Friday, Schapiro got rid of rules that GOP hack Chris Cox and his predecessor had put into place that made it hard to impose financial penalties on companies.

Securities and Exchange Commission chairman Mary Schapiro announced Friday she would make it easier for SEC staff to launch formal investigations of corporations, and she overturned her predecessor’s policy of requiring commission approval for levying financial penalties against public companies.

The latter move, in particular, represents a rebuke to her predecessor, Christopher Cox, and to former SEC commissioner Paul Atkins.

[snip]

Schapiro said the enforcement staff had told her the pilot program had "introduced significant delays into the process of bringing a corporate penalty case; discouraged staff from arguing for a penalty in a case that might deserve a penalty; and sometimes resulted in reductions in the size of penalties imposed." 

Schapiro also said it was too difficult for enforcement staff to launch a formal investigation, which currently also requires permission from the SEC.

In undoubtedly related news, Linda Thomsen will announce her resignation today.

The U.S. Securities and Exchange Commission’s top enforcement official, Linda Thomsen, is expected to resign on Monday, CNBC television said.

[snip]

The enforcement division has been heavily criticized for how it handled the Bernard Madoff case, in which the former financier is accused of defrauding investors of $50 billion.

And in other, probably related news, the SEC has decided that Madoff will be held civilly, as well as criminally, liable for his deeds.

The Securities and Exchange Commission says it has agreed with Bernard Madoff on a deal that could eventually force the disgraced money manager to pay a civil fine and return money raised from investors.

The agency said Monday the agreement states that Madoff cannot contest allegations of civil fraud and that possible penalties will be decided "at a later time."

I look forward to seeing whether this civil fraud deal reflects the earlier contemptuous approach of Linda Thomsen, or whether it reflects the new responsive era of Mary Schapiro.

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