Saturday, March 28, 2009

Sheila Bair is either a criminal or a grotesquely incompetent stark raving idiot

It is no secret that I do not like Sheila Bair.  My original reason for dislike was posted here.

But now she is open to deliberately allowing massive fraud against US Taxpayers.

There is a serious conflict of interest problem with the Geithner Plan.  These problems were first outlined by Steve Waldman in his “dark thoughts” post.  I noted that the application terms for the Geithner funds seem guaranteed to maximise conflict of interest.

In short – if you have a small interest in a fund (kindly levered to be large by the US taxpayer) and a big interest in a bank you have a massive incentive to overpay for the assets purchased from the bank sticking the losses to taxpayers and thus increasing the value of your bank holdings.

The defence of course is to have strict separation between the banks selling the assets and the Geithner Funds buying the assets.  Arms length separation is thus a basic and minimal requirement of the Geithner Plan.

However Sheila Bair is now open to letting banks selling assets participate in the Geithner funds.  This was reported in the WSJhat tip to Clusterstock.

I guess Sheila Bair can’t see a conflict of interest – only a “convergence of interest”.

However designing the plan to maximise theft is designing the plan to fail.  This is American politics – and rampant deliberate tampering with government procurement (ie criminality) is a possibility – but in Sheila Bair’s case I see only incompetence.

I am naturally attracted the Geithner plan.  I have stated that many times – but now I am plain sickened.  Sheila Bair should be removed from office if the Obama administration is to have any chance of succeeding.  This statement potentially maximising conflict of interest – and the possibility that criminal fraud is the driver – should be enough to impeach her.  Her defence – and in her case it is a solid defence – is incompetence.  And that determines the right outcome.  She should resign.  


Rich said...

To judge by this paper by Gorelick Bros., at -

it makes sense for a profit minded bank to want to participate. It's more than a little perverse that hedge funds get the ability to invest in mortgages without margin calls or mark-to-market by stripping the "bad" assets from the bank. A preferential funding and regulatory regime turns dross into gold.

Taken from the perspective of a regulator that wishes to build up bank profitability to prevent failures, her position is understandable. It's just a mess.

Anonymous said...

The politics of monetary policy

They can't give it to the tax payers, but they can make them pay for it.

Similar to investment advice, if Americans pay for it, they feel better about it.

septizoniom said...

it is quite astonishing to me the many and obvious conflicts in the plan, especially with PIMCO and Blackrock or any other entity that holds signiciant stakes in the banks. Your additional highlight furthers my dismay. Why the conflict point is not getting any attention beyond the smart blogs is also astonishing.

Anonymous said...

I do not understand what the FDIC actually does.Previously I thought that they guaranteed bank deposits and assessed banks to pay for this guarantee.Occasionally they had to take over insolvent banks.
In the past year the FDIC started issuing guarantees on medium term borrowings by some of our biggest financial institutions.The FDIC received a 1% fee ,while the financial institutions recived a government subsidy of up to 4%.Now is is proposed that the FDIC lend up to %80 on the value on some of the banks toxic debt.
I am very concerned about my bank deposits with all of the current guarantees.Losses on some of these new programs would result in a furher problem with confidence and a possible unstoppable run on our banks

Unknown said...

Calculated Risk has a tremendously good point that nobody else has mentioned since. And that is, when the public found out how badly (or how well if you are bank stockholders) the financials game the Geithner plan, the political outcry will make the AIG bonus-gate look like a cake walk.

At that point the well will become so poisoned that no further rescue of financials is possible. Just in time for the midterm election!

Have your pitchfork ready.

Extraordinary Call said...

The FDIC is already raising the rates paid by insured banks. With the Geitner plan, the institution is potentially on the hook for tremendous amounts of money.

My understanding is that eventually losses to the FDIC are funded by thee US banking system collectively - unless there is some provision in the Geitner plan that allows the Treasury to step in in this case.

At some point, you have to think community banks will revolt. The FDIC will potentially be taking on losses that would have been incurred by the debt and equity investors of the large money centre banks. Obviously if the FDIC is somehow protected by the treasury than the losses are on the taxpayer.

Milton Recht said...

Incentives to overpay exist even if you do not own the particular bank. If funds own equities of other banks, funds overpaying help each other collectively.

Success is measured by the successful removal of the bad assets and stabilizing the banks. Overpaying accomplishes the government's goal and public goodwill is generated towards the hedge funds and other investor groups that participate. Goodwill has monetary rewards, e,g government business, new clients, a say in new regulations, etc.

Furthermore, if the investors make too much money off the bad assets, there might be government attempts to claw back some of the "excess" gains. Therefore, buyers will look for ways to transfer benefits to other assets not government monitored.

Go easy on Bair. She is just a public voice for a policy that many others have put their hands into, and there are many other motivations and means for buyers to overpay.

Anonymous said...

This isn't Bair's policy, this is Geithner/Obama's policy. Clearly their policy is to transfer taxpayer money to the banks until the banks are solvent. If you're going to do that, why wouldn't you let the banks run the funds? Then you don't have the frictional loss of a "laundering" payment to PIMCO/BlackRock.

Since the FDIC is on the hook anyway, not to mention a host of Treasury and Fed guarantees, the Geithner/Obama plan is not all that unreasonable at this point. Taxpayers are going to pay one way or another.

The trouble is they refuse to admit to the public that Democrats are taxing the "little guy" to subsidize "Wall Street bankers," so they are doing everything through deception and lies. They're trying to disguise their program as a means to provide "liquidity" or "reduce uncertainty" the like. And, like manch says, they're wrecking their own credibility -- with potentially catastophic consequences.

recruiterrick said...

The Geithner plan is unreasonable at every level. The argument we "must" save these banks is false.

There are literally hundreds of good, middle tier banks that have no exposure to credit derivatives, and little to no consumer and commercial real estate. They can and will fill the void if the larger banks are left to fend for themselves.

There stands no credible argument, if you believe in the Market Exchange System, for the taxpayer to pay off bad bets by any business. To do what has been, and is, proposed, amounts not to socialism or communism, but to tyranny. Those that issued and profited from credit derivatives based on faulty models should never be allowed to foist their losses on another group. Especially when there exists no "clawback" for all those profits and pay structures enjoyed during the period these now "toxic" derivatives were issued.

The simple fact of the matter is there may yet be a few hundred trillion dollars of these credit derivatives being held in level 3 assets, and worse, off-shore accounts, that are out of the purview of any regulatory authority. All issued by large American firms.

Our national debt is nearing the breaking point, and the world is telling us ENOUGH. Have you missed the headlines? Chinese Economists are encouraging the government to buy gold instead of US Treasuries. That kills any idea the proposed $8 Trillion in Treasury sales over the next few years will succeed. Not only is China looking elsewhere to put its future profits, it is also leading the charge to create, at the very least, regional currencies to supplant reliance on the dollar. Once that happens, that currency will issue its own debt, and that region will NOT buy US Treasuries.

Folks, the only way out is to let businesses that made bad decisions fail, use all monies allocated to them to go to creating jobs, immediately, in the US to start building the technologies of the future.

If we fail to start that process in the next few months, by the end of the fall of 2009, we will wish that had been done from the beginning.

Every dime given to the banks to cover losses associated with credit derivatives will be a 100% loss. They were built and issued in an environment of falsehood (low interest rates beyond market influence, ie the FED) and lunacy (105% financing with 50% DTI).

The only way for any of them to even retain the value they have today is if housing prices go back to where they were in 2006, and we have the lunatic underwriting guidelines which allowed 80% of the market to buy a house.

Neither of those has any chance of happening. Recognize we either save 50% of our economy, or we will be forced to live with 25% of it. It has been a fool's errand to give any money to the banks.

It is our choice.

wrdsrus said...

John, I know you once held Washington Mutual Stock, so thought you might be interested in the information on A group of shareholders got together and tried to put together an objective piece on the sale and seizure (and it took all of our strength to try to be objective)

The deeds of Sheila Bair are exposed there via official FDIC documents on the sale of WaMu. There is a TON of good info on that site. Many shareholders (myself included) think Weil and Gotshal will win this one...the truth is so easy to see when you read it all in one place.

I have much information on all these issues that are not on that website, and you can reach me through if you would like to discuss this bank heist.

I think there may be good news on the horizon...

Thanks for your great blogs. I always look forward to reading them...


Anonymous said...

You might be interested in this....

Many folks following the WaMu story.

Anonymous said...

Who is regulating OTS/FDIC/SEC?

Please stop the Senate from passing this bill without any stipulation on the use of FDIC's increased borrowing power up to $500 billion from $100 billion, only needing approval from FDIC itself, the Fed, and the Secretary of Treasury (if Im reading this correctly)-

"During the period beginning on the date of enactment of this paragraph and ending on December 31, 2010, if, upon the written recommendation of the Board of Directors (upon a vote of not less than two-thirds of the members of the Board of Directors) and the Board of Governors of the Federal Reserve System (upon a vote of not less than two-thirds of the members of such Board), the Secretary of the Treasury (in consultation with the President)..."

This money needs to be used ONLY for deposit guarantee and bank failures, not for bonds to help banks raise capital, not for Geithner's "legacy" assets.

DO NOT LET FDIC become AIG; AIG was selling CDS contracts without adequate reserve and this is EXACTLY what is happening with FDIC, when it breached its role to protect deposits and started backing bonds and now potentially toxic assets.


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