FedUpUSA

Archive for January 27th, 2010

Will We See Bankster Baseball?

Posted by Karl Denninger

There are times that I wonder if the looting will keep on until the people express their anger with necktie parties – or worse.

The arrogance of Wall Street knows no boundaries.  The latest is on display in these two stories, first from Bloomberg:

Now the firms and their chiefs, confronting a wave of public anger against their bonuses awarded in the wake of the financial industry bailout, are trying to devise a strategy to fight both the proposed new limits on banks’ size and activities as well as the bank tax. While they are still plotting tactics, one thing has become clear: The banks don’t want to go to war with the commander-in-chief.

“We don’t want to fight the administration,” said Rob Nichols, whose trade group, the Financial Services Forum, represents the chief executive officers of the largest financial companies. “We just want to sit at the table and have a productive conversation about the kinds of reforms needed to address the real causes of the recent crisis.”

I’ll tell you exactly what sort of reforms are necessary:

• No more obfuscation, lies about credit quality, and intentionally peddling things you think are worthless.  And don’t start that crap about shorting things “as a hedge” when you constructed them – if you’re the company that put them together if you’re not damn sure they’re marketable, you don’t sell them.  Ever see the sign in a restaurant: “If you’re not proud of it, don’t serve it”?  WELL?

• Those who have committed this sin must atone.  This means admitting what you did, it means giving back as much money as is left, and it means if you broke the law on top of it pleading guilty and accepting your punishment. 

• Since “animal spirits” seem to be impossible to tame, it also means breaking up lending and depository functions into what amounts to a regulated public utility.  Gamble with your own money – but never with ours, and never, ever with a sovereign backstop.  Ever.  This means depository and lending institutions may not participate in any way, shape or form in the securities markets – including the purchase, sale, holding or trading of derivatives.  Period.

• No more “mark to myth” and no off-balance-sheet anything.  Every investor must be able to read a balance sheet and have a full and fair view of your firm’s assets and liabilities.  Period.

• Oh, and stop trying to influence Bernanke’s appointment – that’s reported in this story as well.  Attempting to influence the selection of your regulator should be treated as a felony – just like bribing someone – because it effectively is.

This isn’t confined to the US either:

Bankers stood shoulder-to-shoulder at the Swiss ski resort of Davos to try to prevent a scatter-gun approach to new financial regulation by different countries.

They united against Barack Obama’s threat to break up banks and Gordon Brown’s growing enthusiasm for a Tobin tax on all financial market transactions.

Again: Quit stealing.

Or just listen to your buddy from Davos:

The founder of the World Economic Forum has said there is a lack of public trust in political and world leaders.

Klaus Schwab told the BBC that business leaders must show that they serve society to heal this rift.

It’s hard to show that when you’re robbing everyone you see blind.

Money Market Funds: No Longer Safe

Posted by Karl Denninger

Here’s something you won’t see talked about much – unless you dig for it.

Zerohedge covered it – the fact that money markets are no longer guaranteed liquid.  But look at what The Wall Street Journal had to say:

Money-market funds could be forced to pay out less interest under new federal rules designed to make them sturdier.

With memories still raw from the 2008 meltdown of Reserve Primary Fund, the Securities and Exchange Commission released rules on Wednesday that require funds to hold more liquid and higher-quality assets and disclose the value of their assets per share more frequently.

This makes it sound as though the funds will be safer – and more liquid – right?  That is, there will be less risk of what happened when Reserve broke the buck and then threw up gates.

Bloomberg said:

Funds must be able to sell 10 percent of their assets in one day and 30 percent within a week under rules approved today by the Securities and Exchange Commission. The SEC’s 4-1 vote also imposed new restrictions on buying lower-rated securities and required more disclosure on declines in funds’ share prices.

“These rules will take important initial steps toward making money-market funds less vulnerable to runs,” SEC Chairman Mary Schapiro said at a meeting in Washington. “The new rules will have substantial benefits for investors.”

Less vulnerable to runs, eh?  That’s a rather nuanced statement that at first sounds like “less likely for you to get stuck without access to your money”, right?

Well, don’t be so sure.  Buried in there is this:

Suspension of Redemptions: The new rules permit a money market fund’s board of directors to suspend redemptions if the fund is about to break the buck and decides to liquidate the fund (currently the board must request an order from the SEC to suspend redemptions). In the event of a threatened run on the fund, this allows for an orderly liquidation of the portfolio. The fund is now required to notify the Commission prior to relying on this rule.

Formerly the fund had to seek permission to suspend redemptions.

Not any more.  Now the fund’s board is empowered to do so unilaterally and advise the SEC, as opposed to asking the SEC for permission to toss up the gates.

This is not a small difference folks.  Indeed, it is a major problem.  You could easily find your so-called “safe” money market fund gated and you unable to get to your money until the fund liquidates – without warning.

So yeah, the funds are now “less vulnerable to runs” as if there’s a problem they can immediately bar the door and keep you from leaving with your cash!

That’s not quite what you thought that paragraph said, is it?

Many people treat these funds as if they were equivalent to a checking account.  Some of the funds will even send you a book of checks!

Investors no longer can reasonably rely on daily liquidity for these funds as a consequence of this change.  While under normal conditions daily liquidity remains available it is precisely under abnormal conditions that an investor is likely to most need access to this money instantly, for example to meet a margin call or for other emergency funding requirements.

The inversion of the former rules in this regard means you can no longer treat these as cash equivalents with a higher yield.  Indeed, there is damn little reason for anyone to buy these at all now – you’re really not any better (or worse) off if you simply deposit the money in Treasury Direct and then buy a ladder of short-term bills – say, 4 or 13-week instruments. 

Yes, you’ll earn jack doing this.  But you’re going to earn jack anyway in a money market fund, you won’t pay a management fee with a Treasury Direct account, and at least thus far there is no material threat of the US Federal Government throwing up gates.

Inexorably the noose tightens around your neck.  Beware.

An Elegant Solution

Financial Jenga

The heads of the global banking cartel are currently gathered for their annual meeting in Davos, Switzerland. They have received enormous subsidies and bailouts at the expense of taxpayers in many nations all around the world. Those nations that possess representative governments are now beginning to respond to the outrage of their citizens at this gross injustice. In Britain, this has taken the form of a proposal to tax financial transactions. In the US, President Obama recently proposed regulations to limit the risk-taking activities of banks and to force the “too big to fail” institutions to shrink. The bankers’ response is a proposal to take regulatory power away from national governments according to a British Press outlet.

This of course would be precisely the WRONG action. National governments in representative systems are forced to respond to the concerns of their citizens. The bankers’ proposal would push the power even further away from the people and vest it in unaccountable supra-national bureaucracies. Our response should be precisely the opposite – devolve regulatory power over the banks back from the Federal government back to the state level. This should be particularly true for commercial banking. First, power should be as close to the citizens as reasonably practical so that the exercise of government power will be as responsive as possible to the average citizen. Second, power should be decentralized so as to reduce the incentive to abuse it and to minimize the damage when such abuse does occur.

One very positive effect would be to create a framework that automatically penalizes large organizations. Giant banks constantly lobbied to reduce the role of the states in banking regulation in the name of “efficiency” starting in the 1970s. One of the chief claims advanced during that period was that US banks would be unable to compete with foreign (especially Japanese) banks without consolidation. That turned out to be correct as the US banks produced a bubble very comparable to the one that has led to a 20 year depression in Japan.

The collapse of the states’ role led directly to the creation of corrupt TBTF mega-banks by reducing the cost of geographic consolidation, just as the weakening and then repeal of Glass-Steagall enabled the growth of financial conglomerates via acquisition across business lines. President Obama has called for limiting the ability of banks to take risk and also breaking up the TBTF banks. We agree and call upon the president to immediately re-implement Glass-Steagall in order to confirm the seriousness of his words via corresponding action. In addition, we call upon him to remove all federal roadblocks to state banking regulation.

The mega-banks object to state regulations because it would increase their cost of compliance. We agree that it would increase such costs and further state that such an outcome would be a GOOD thing. It would create an automatic systemic incentive not to expand. It would be far better for the banks to decide to break themselves up rather than to mandate such an outcome. The legal and regulatory environment can provide the proper incentives and then leave the implementation to the individual players when they find such actions to be in their self-interest. The explicit repudiation of the “too big to fail” doctrine should be sufficient as the only reason to create such behemoths was to become large enough to hold the US economy and financial system hostage. But it never hurts to create the right incentives – all that Washington DC needs to do is stop interfering with the states’ ability to regulate.

This seems to be an elegant solution.

AIG, Paulson and Geithner

Posted by Karl Denninger

These hearings are simply amazing.

First, Tim Geithner.  Timmy made a lot of noise about “total meltdown” risk (and indeed even referenced the possible loss of civil order!) but the question that was not asked is this: Who stoked that fear in Congress?  That would be Bernanke and Paulson, right?  They in fact told Congress “either hand over $700 billion for buying troubled assets or tanks will be in the streets.”

But then – on top of that – they didn’t do what they said they needed the money for and there were no tanks!

So we’re stuck with a handful of facts, none of which are in dispute:

1. Congress was told that either $700 billion be handed out immediately or civil order would be lost.  They were told this by Bernanke and Paulson and believed it.
2. Congress took the action Paulson and Bernanke demanded but then did not spend the money as they said they would, and yet the “or else” did not happen.
3. Yet neither Paulson or Geithner will take responsibility for the precise actions taken during what they, along with Bernanke, claimed was literally an “end of the world” event!

Paulson gets the cake though - he admitted (under oath!) that The Fed just blatantly printed the money to rescue AIG and the banks (!!!)

So let’s see - it wasn’t his decision, it wasn’t Timmy’s decision, and yet at the very same time the entire world was about to come to an end unless the Congress immediately handed over $700 billion of taxpayer money?

Oh, and let’s keep going.  Paulson got skewered with what I pointed out in August of last year – that is, that he knew full well he wasn’t going to buy any “toxic assets” prior to the final vote being taken in The House but notified nobody in Congress of this fact.

Then Mr. Baxter’s turn comes and he says that Geithner signed off on paying AIG counterparties at par.

Didn’t Timmy claim he had no part in the negotiations with AIG and the determination of what to pay?  I thought he did….. maybe I misheard, but I seem to remember that he has continually maintained that he had no part in the decision process and in fact recused himself……

Oh wait – here it is!

I had no role in making decisions regarding what to disclose about the specific financial terms of Maiden Lane II and Maiden Lane III, and payments to AIGs counterparties.

Uhhhhhhh Turbotax Timmy?  How do you explain that?

One of the highlights of my day. 

Meanwhile….

AIG’s mysterious Schedule A finally revealed

The heavily-redacted regulatory filing that spells out the details of the New York Federal Reserve’s controversial bailout of American International Group is a secret no more.

Reuters has obtained a copy of the five-page document the giant insurer and the New York Fed had asked the Securities and Exchange Commission to keep confidential. The effort by the New York Fed to keep the document under wraps has sparked a furor on Capitol Hill and was the subject of a hearing on Wednesday by House Committee on Oversight and Government Reform.

The unredacted version of the “Schedule A – List of Derivative Transactions” fills out some of the missing pieces in the AIG bailout, in which an entity set-up by the New York Fed effectively funneled tens of millions of dollars to 16 big U.S. and Europeans banks that had bought credit default swaps from the insurer.

The unredacted version of the Schedule A enables some to identify all of the 178 mortgage-related securities, or collateralized debt obligations, that AIG wrote insurance-like protection on.

It’s been known for months that Goldman Sachs and Societe Generale were the two banks who recieved the most money in the dea because they had insured the most CDOs with AIG. But the new information enables traders, investors and the general public to see just which deals the banks had purchased insurance on.

The new information also reveals that of the 178 tranches of CDOs that AIG insured, some 14% were on deals issued after 2005. That’s critical because in December 2007, former AIG Financial Products head Joseph Cassano had said AIG largely got out of the CDS business by the end of 2005.

The newly disclosed information also reveals that Goldman not only bought a lot of CDS from AIG to protect itself; the Wall Street firm also originated a good number of the CDOs that were in SocGen’s portfolio. Some of the Goldman deals in SocGen’s portfolio that AIG had insured includes CDOs with names like Adirondack 2005, Putnam Structured Product CDO 2002 and Davis Square Funding IV.

Janet Tavakoli, a derivatives consultant who has called the AIG bailout a gift to the Wall Street banks, said the issue isn’t just what deals AIG insured, but the underlying assets in those deals. She noted that a goodly number of the CDOs held by the banks also held pieces of other CDOs.

Goldman Sachs, Societe Generale, Deutsche Bank, Merrill Lynch and other banks sold their ailing collateralized debt obligations to the New York Fed-sponsored entity, Maiden Lane III. AIG then canceled out the CDS contracts it had sold as default insurance on those 178 CDOs.

“If all of this had come out in the public domain in late 2008, Goldman Sachs and Merrill would have been deeply embarassed and the Federal Reserve woudl have been questioned,” said Tavakoli.

In the process, the banks were made whole and AIG no longer had to pay out billions of dollars in cash collateral to the banks everytime the CDOs dropped in value.

SEE WHAT YOU ARE THE PROUD OWNER OF HERE:   Un-redacted AIG Schedule A  PDF Document

Yes, they paid 100 cents on the dollar for these ‘investments’  with YOUR money, which were not only rated CCC- or less, but had already deteriorated 20, 30, 40 and 50%.

Suspending Money Market Redemptions Is Now Legal; SEC Approves New Money Market Regulation In 4-1 Vote

Submitted by Tyler Durden

Zero Hedge discussed a month ago the disastrous prospects of what would happen if the new proposal contemplated by the SEC, which would allow the suspension of redemptions from Money Market Funds, were to pass. Well, in a nearly unanimous vote, Money Market Funds now have the ability to suspend redemptions, courtesy of the SEC’s just passed 4-1 vote. This explains the negative rate on bills: at this point, should there be another meltdown, money market investors will not, repeat not, be able to withdraw their money purely on the whim of Mary Schapiro. As the SEC noted: “We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares.” Too bad investors’ hardships considerations ended up being completely irrelevant.

As a reminder, here is the gist of the proposal as pertains to redemption suspension:

Proposed rule 22e–3(a) would permit a money market fund to suspend redemptions if: (i) The fund’s current price per share, calculated pursuant to rule 2a–7(c), is less than the fund’s stable net asset value per share; (ii) its board of directors, including a majority of directors who are not interested  persons, approves the liquidation of the fund; and (iii) the fund, prior to suspending redemptions, notifies the Commission of its decision to liquidate and suspend redemptions, by electronic mail directed to the attention of our Director of the Division of Investment Management or the Director’s designee. These proposed conditions are intended to ensure that any suspension of redemptions will be consistent with the underlying policies of section 22(e). We understand that suspending redemptions may impose hardships on investors who rely on their ability to redeem shares. Accordingly, our proposal is limited to permitting suspension of this statutory protection only in extraordinary circumstances. Thus, the proposed conditions, which are similar to those of the temporary rule, are designed to limit the availability of the rule to circumstances that present a significant risk of a run on the fund. Moreover, the exemption would require action of the fund board (including the independent directors), which would be acting in its capacity as a fiduciary. The proposed rule contains an additional provision that would permit us to take steps to protect investors. Specifically, the proposed rule would permit us to rescind or modify the relief provided by the rule (and thus require the fund to resume honoring redemptions) if, for example, a liquidating fund has not devised, or is not properly executing, a plan of liquidation that protects fund shareholders. Under this provision, the Commission may modify the relief ‘‘after appropriate notice and opportunity for hearing,’’ in accordance with section 40 of the Act.