Tuesday, March 3, 2009

They read me in Washington!

The latest leak from the WSJ about the details of the Geithner plan should sound very familiar to readers of the "long post".  Even the numbers are the same as the long post.  To quote:

These private investment managers would run the funds, deciding which assets to buy and what prices to pay. The government would contribute money from the $700 billion bailout, with additional financing likely coming from the Federal Reserve and by selling government-backed debt. Other investors, such as pension funds, could also participate. To encourage participation, the government would try to minimize risk for private investors, possibly by offering non-recourse loans.

The public-private partnership grew out of the "bad bank" concept, an idea popular among some economists that would have required the government alone to buy up the troubled assets.

Maybe they read me in Washington - even if it is only briefly.  

Calculated Risk thinks its a bad idea - but say 100 billion of private money lying in front of public losses is a real capital injection into the banking system.  Big money too.

That seems better to me than all the capital coming from the goverment.  If you are ideologically hooked to the nationalisation solution then private money is bad.

Calculated Risk's objection is that the money is non-recourse.  But all banking capital is non-recourse with the taxpayers - through the FDIC bearing the downside.  As long as a fair bit of capital is required (as it should be required for banks) this is not dissimilar to new private money starting banks.  

I doubt Calculated Risk would have an objection to that.  The issue is not non-recourse - it is the ratio of private to public money because if only a slither of private money is required there is little real risk transfer to the private sector.  If a lot of private money is required there is real risk transfer and this plan is the real-deal, but would reduce the chance that the private money could be found.

I gave ratios of 6.5 to one or 7 to 1 because those were about a third where banks were allowed to operate and these funds will hold what on average will be riskier assets.  Numbers - not the concept - should be the realm of debate.



Anonymous said...

you shld read this

Anonymous said...


I hope the folks reading you in Washington are also writing some new banking regulations that will separate staid deposit banking from brazen financial speculation.

Reading this morning that JP Morgan reaped $5B in profit in derivatives trading on contracts worth 7x US yearly GDP sounds great for JP Morgan, but not so great for the parties on the other sides of those trades, nor for the taxpayer, who is most likely back-stopping the losers.

I'm all for the private-public partnership as long as the private side takes a proportionate haircut with the public side if the trade goes wrong. I suspect Geithner has something different in mind though.

Anonymous said...

I would like to explore investment opportunities. I read your blog and I believe you actually think, which is nice and rare. But to my thinking, time spent fixing the world, which doesn't really want to be fixed, is time not spent on figuring out where to put money.

Let me start. Is there some reason why arbitraging BRK.A vs. BRK.B is not basically printing money?

John Hempton said...

Keith - yes. There is a big seller of Bs - which is the Gates trust.


Anonymous said...

There were a lot of comments I thought to leave - but the simplest I think is the best. Great insight, great foresight and humble to boot - kudos from here in Canada!

Anonymous said...

Banks in the US are having a crisis and taxpayers are not protected because of corrupt and irresponsible government regulators. They continue to use our tax money for their self-interest, without regard to the current market turmoil.

We know Sheila Bair have spoken out for troubled homeowners and

I initially admired her for her mortgage modification plan but then I
realized that plan involved "FDIC [offerring] private loan servicers a
new incentive to modify troubled loans."


FDIC already didnt have enough money to back troubled Wamu and
Wachovia deposit (you know, their primary responsibility) but they
wanted to share in loan losses? Who gave FDIC the right to use its
reserve funded from bank premiums for anything but deposit guarantee?
In addition, if that reserve was spent for these loans modifications,
FDIC would have to ask Congress for our tax money for its deposit
insurance. Not only that, her plan didnt seem to differentiate
between the irresponsible homeowners who couldnt afford to buy a house
in the first place and the responsible ones that have defaulted
because one family member lost his or her job in this economic

Further, if Sheila Bair really cared about us taxpayers, why did she
back Citigroup's "rescue" of Wachovia covering any loss beyond $42
billion of $300 billion pools of loans? Remember FDIC only had about
$45 billion at that time so where was she going to get that extra $200


Now that FDIC may get a credit increase up to $500 billion, Congress must stipulate this assistance to FDIC is used to only protect consumer deposit.


Dont give Sheila Bair a chance to become Hank Paulson II, and dont let
FDIC use that increase in credit draw to seize and then gift bank deposits
to firms like Goldman Sachs or Morgan Stanley, wiping out shareholders
while leaving toxic liabilities to the taxpayers.

Check out her public statements. Is it right that this person, as a public official, makes irresponsible remarks to get what she wants to preserve her agency?

March 4, 2009
"No Taxpayer Funds Bair rejected arguments that the agency should use
government aid to rebuild the fund. The FDIC has authority to tap a
$30 billion line of credit at the Treasury Department and legislation
pending in Congress would boost the amount to $100 billion.“Banks, not
taxpayers, are expected to fund the system,” Bair said. Asking for
taxpayer support “could paint all banks with the ‘bailout’ brush.” "


March 6. 2009
"The Federal Deposit Insurance Corp. may reduce an emergency fee on
banks to bolster reserves if Congress expands the agency’s borrowing
authority with the Treasury Department to $100 billion, Chairman
Sheila Bair said"


March 9, 2009
"Bair said the FDIC had enough money in its industry-funded reserves and was fully backed by the U.S. government. "The money will always be there," she said. "We can't run out of money.""


This was the most horrific action by Sheila Bair. Her statement on
Bloomberg regarding FDIC's possible insolvency this year could have
caused bank runs everywhere in the United States. Under the
hypocritcal concern for American taxpayers, she told Bloomberg that
she wanted to place the burden of keeping FDIC solvent by charging

Yet 2 days later, she was willing to reduce that fee because the House
passed the bill that allows her to borrow up
to $100 billion, from the original $30 billion, with zero oversight from other government entities! Where does Bair think that money will come from?

This past Monday morning she actually had the audacity to say that "more banks would fail this year but the agency had enough money to do its job, even as it seeks to boost its reserves"


So after Sheila Bair got her credit line increase and taxpayers are on hook for
about $100- $500 billion of their own deposits she came out and basically said there was really no problem. Not only that, FDIC was now
considering reducing her newly increased bank fees (already ridiculous because she was going to burden smaller but responsible banks with hefty chrages as a result of all the mistakes big banks made). Talk about some
serious backstabbing at the expense of American taxpayers and the huge risk of bank runs... all just for $70 billion!

FDIC must use that credit increase only for
deposits, and not for any sharing in losses from loan modification
and backing bonds to help banks raise money (did you know FDIC was backing Morgan Stanley bonds in Hong Kong?)


Here is the latest information on foreclosures despite government assistance:

"Despite housing help, foreclosures rose 6% last month"

Let other government agencies handle those problems. Furthermore, Sheila Bair must help
troubled banks in the best interest of all parties involved, and not
sacrifice bondholders, shareholders, and employees so FDIC can
survive selfishly and without regard to market conditions and
bankruptcy laws. Why should the government give FDIC more money so Sheila Bair can do whatever she wants and save whomever she wants with $100 billion and with the Fed, Treasury secretary and White House approval up to $500 billion?
"When we're putting that kind of money into the banks to keep them
solvent, why is the FDIC taking billions out?"



Anonymous said...

Hi John,

I enjoy reading your blog and have learned a lot. I just tried to post something but I had to edit a lot so you may get lots of the same messages about FDIC.

Sorry about that... with your approval the last message is the final version



Anonymous said...

"Fighting the FDIC

Owners of the White’s Building say the federal takeover of their Duluth-based bank brought the development to a standstil

“It’s just one of the saddest things I’ve been personally involved in.”

Currently, 12 of the 17 finished condos are occupied, with the remaining 34 waiting for the finishing touches. Until the situation is resolved, however, even the finished condos can’t be sold.

“Before the FDIC took over Haven Trust, we were fine,” says Sherwin Loudermilk, who, together with Mike Raeisghasem, owns the project. “Even though there were delays in getting the money [due to the bank’s worsening fiscal health], we were getting the money. We were communicating with them and whatever they’d do, they’d put it in writing.”

Loudermilk accuses FDIC representatives of everything from indifference to incompetence."



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