Geithner v. Hubris

Mr. Geithner Flexes Muscles

The Treasury Secretary Tells Investment Banks Government Is in Charge

4/22/09 - WSJ: http://online.wsj.com/article/SB124037255563841639.html

When AFL-CIO General Counsel Damon Silvers called Mr. Geithner a "banker" on Capitol Hill, Mr. Geithner responded that he has always been in public service, saying firmly, "Never ... never an investment banker." Former Sen. John Sununu later said, "I'd never confuse you for an investment banker." Mr. Geithner's tart reply: "I don't think you meant that as a compliment, but I'll take it as a compliment."

As I've chronicled in my blog, it's unfortunately painfully obvious Geithner was never in the private sector and certainly never an "investment banker". Nor a "capital markets" expert, either. Henry Paulson was an I-banker, not that you could tell from his dismal performance in 2007-08. "Can't anyone here play this game?" I'm not sure flexing his muscle is going to work given what's happened when he flexes his brain.

Nor is there anything automatically 'unethical' or immoral about that profession, just as there isn't with used car salesmen. (I've known some very ethical new-car salesmen; I assume they also traded in used.) Even Warren Buffett has one he likes (investment banker; don't know about his car salesmen).

Full disclosure: I was once a "banker" but of the "corporate banking" variety at a commercial bank. Later I became a derivatives trader or "capital markets" type. Today, I'm a financial regulator. And, yes, I can play this game -- I just can't get on the field!

JRB

4/22/09

No such thing as "bank capital" -- it's either an asset or a liability

U.S. Weighs Revealing Each Bank’s Capital Needs After Tests

2009-04-22 - Bloomberg News

"'Where there is a need for additional capital' Geithner told a congressional oversight panel in Washington yesterday ..."

Doesn't he understand there's no such thing as "capital"? There are assets & liabilities, "capital" is but an accounting conceit. The question is whether they need cash: cash to pay-off depositors right now, for "liquidity" of a solvent bank during a proverbial run-on-the-bank. Or for cash later, meaning they're insolvent and there's not going to be enough cash(flow) from assets to pay liabilities even in the probable fullness of time. ("probable fullness" being the purpose of a stress-test) In which case you don't "inject capital" you liquidate them, donating the healthy 'organs' to the deserving living.

JRB

4/22/09

Pension follies (farce as tragedy)

GM Pensions May Be ‘Garbage’ With $16 Billion at Risk
2009-04-08 17:07:50.395 GMT By Holly Rosenkrantz

Commentary: So we've gone full circle from Studebaker's 1963 bankruptcy (the genesis of ERISA) to ERISA in 1974 to GM & Chrysler's all-but-ineviatable bankruptcies in 2009: the sweet short stupid life of phony actuarial standards, liability-blind investing, and political compromise. The laws of finance are as immutable as those of physics: they cannot be 'gamed' forever (barely 35 years) and will not be compromised.

As I showed several years ago, if the PBGC had put on the perfect hedge (short 100% of common) at the perfect time (all-time high stk price) they still could not have hedged their United Air losses, which excludes pensioners' uninsured losses. So they probably could not have hedged GM either. You must regulate ALM if you want DB plans to survive.

There is no PBGC or other backstop for public plans, whose actuarial & accounting "standards" are far worse.

My research shows the DB model and 60/40 asset allocation actually could have worked, if ALM were properly managed. In fact, we should be able to retire at over 100% of final average salary, over 200% for some cohorts; but that's not going to happen. We'll be lucky to collect even 60% of FAS.

What can I say about all that now, except "too late".

JRB

4/8/09

AIG-FP's 10-Q: Collateral was the Contagion

AIG's 10-Q for 3Q-2008 has some interesting information. (The 10-K was less helpful as so much disappeared into the maw of Leviathan. And, yes, I'm behind on my reading!) Looking at FAS-157's so-called "fair value" or "market valuation" (a.k.a. MTM) of super-senior CDS/CDO, as a percent of notional I see that the MTM for YTD 9-mos (i.e., excl. 2007 MTM losses) of "regulatory capital" relief transactions on corporate loans and prime RMBS the losses were 0% on $248.3bln notional. But on one deal of $1.6 bln notional, deemed no-longer-regulatory-relief, it was 25%. For AIG-FP's "arbitrage" multi-sector CDOs the MTM loss was a whopping $19.9 bln or 66% of $71.6 notional -- again at super-senior attachments. But for corporate CDO & CLO only 3% of notional, and 3% again on mezz' tranche reg' relief CDS -- mezz'! Total MTM for the 9-mos was $21.7 billion on $377.3 bln notional, or 6%. I can't find any loss or claims-paid data, except for 2a-7 and other ratings or valuation puts.

Later in the 'Q they do a two-scenario roll rate analysis. Roll rates 30-to-loss were 80% for 2006 & '07 vintages, 70% for '05, and 60% '04 & earlier; severities ranged from 50% to 60%. (i.e., ballpark-ish to others' estimates) Their NPV of losses were $7.8 & $12.0 billion in their scenarios A & B, respectively. This compares to a "FV" or MTM loss of $30.2 bln (cumulative, not YTD) and a collateralization burden of $32.8bln. Scenario B simply increased the roll rates & severities by 20% (but not exceeding 100%, of course).

So: AIG was trying to collateralize at 109% of "FV", at 421% of expected loss in scenario A, and at 273% of stressed loss in scenario B! Now imagine Citi, Merrill, UBS, and others also out there trying to collateralize to 109%. Maybe they started 109% of expected loss but with each twist of the spiral it went up & up, to 200% and beyond. ('Loss-actual' was rising at the same time, too, injecting some nitrous-oxide into the turbocharger.) In other words ... Collateral was the contagion!!!

And remember, Leviathan, d/b/a Maiden Lane II LLC, doesn't play the"FV" / MTM game. The Fed is a PV shop, but they don't disclose how they PV or their assumptions. If they recognize they can't run their bank on a MTM basis why can't they recognize the banks can't be regulated on a MTM basis? Like Ben Graham's aphorsim, solvency regulation of financial institutions is a "weighing" machine not a "voting" machine. MTM is a discipline, not a religion. (Like I said before, FASB has made it into a fatwa.)

JRB

4/1/09

The Beltway's Governor Le Petomane rides again

Debt Swap Rules Risk Being ‘Rushed and Reactionary,’ A&O Says

2009-03-31 By Abigail Moses March 31 (Bloomberg)

"We've got to protect our phony-baloney jobs, gentlemen! We must do something about this, immediately, immediately, immediately!"

"Harrumph! Harrumph! Harrumph!"

"I didn't get a "Harrumph!" out of that guy!"

"Harrumph!"

"You watch your ass!"

Looks like Allen & Overy doesn't want to give a "Harrumph!" Instead, they're saying "Just give me 24 hours to come up with a brilliant idea to save our town. Just 24 hours. That's all I ask."

Count me among the dissenters to the federales' 'Shoot, Ready, Aim (we're the govt, we don't need to aim), Shoot again, Shoot the innocent so the guilty won't look bad, Shoot 'em all one more time' approach to crisis mgmt. Blazing Saddles, indeed.

JRB

3/31/09

"PPImP My SPV"

Treasury Statement on Public-Private Investment Program (Text)

I read the full text on Bloomberg. "... private sector investors standing to lose their entire investment in a downside scenario and the taxpayer sharing in profitable returns." -- But since the taxpayer is providing half the equity in each program, plus "non-recourse loans" in the "legacy securities" program, we obviously share the downside, too, much more downside.

In the so-called "legacy loan program" the FDIC's guaranty is collateralized by the (toxic) assets, but is are these also non-recourse? We, the taxpayer, already share in between 35% and 90% of the profits, depending on whether you use the corporate tax rate (35%) or the Barney Frank Special 90%, legislated 'in arrears' (so to speak).

Beyond that, it's hard to see an integrated or cohesive plan. The central problem is homeowners who can't afford their mortgages. We have several confused and/or confusing programs for that. Taxpayer "capital" has already been indiscriminantly sunk into banks. And now we have these intermediate "loan" & "securities" programs, along with all those other half-baked and less than half-executed programs (TALF, TARP, CP, MMkt,etc.).

If you fix the front-end problem, then do you need all these intermediate (intermediary) programs too? Probably not, as it's just one set of cashflows going thru the system, haphazardly propped up at various stages by this proliferation of federal programs, with much taxpayer "equity" injected at various points along the way. Hard to make sense of it.

Since there's so much convexity in the underlying mortgages & RMBS, won't these investors or funds need some swaps to manage rate risk? But what ISDA lawyer wants to dive into this morass of FDIC guaranteed loans, "non-recourse" Treasury loans with Treasury as 50% equity partner, all of which is probably subject to second-guessing and/or confiscatory taxes if successful? What is the governing law by which these 'brave new' PPIFs are organized: are they corporations, '40 Act companies, SPVs, LLCs, or is it just more ad-hoc Treasury decrees? In other words, who has regulatory jurisdiction and responsibility for bankruptcy or liquidation?

JRB

3/23/09

Regulation by hemlock

Grassley Suggests AIG Execs `Resign or Commit Suicide'

Bloomberg News, 3/17/09

The AIG fiasco just keeps getting more absurd. Unless you work for AIG because ACORN, the folks who have made an industry of voter registration fraud, have organized a guided "victim selection" tour for anyone less patient that Grassley. (The Stamford Advocate reported on Monday that 3 of 4 passengers were members of the media, a fact not reported elsewhere).

I'm sticking with my earlier forecast of GM, Chrysler, and/or AIG bankruptcies by May, although I suspect Congress would rather, and will, flush more billions & trillions down the drain first. After all, what's more important, our tax-dollars or their 15-second sound-bites?

Even Obama is now complaining about AIG's bonuses. Well, guess what, a federal bankruptcy judge has the authority to nullify employment and other contracts but the POTUS does not. It's called "law". Bankruptcy courts were established by Article I Section 8 of the U.S. Constitution, a document which also prohibits 'bills of attainder' such as Congress voted for a few days ago (the bonus tax).

Instead, we are getting incitements for mob violence. Well, after all, that is what "community organizers" do for a living: 'legislate' by threat & intimidation. (Which sounds like what state attorney generals do, extort & legislate by threat & intimidation.)

"Can't anyone here play this game!"

Soft on terrorism, tough on AIG. It's going to be a long century!

JRB

3/23/09