Treasury may capitalize banks by end of October: source
By Karey Wutkowski
WASHINGTON (Reuters) - The U.S. Treasury Department plans to start directly injecting capital in U.S. banks as soon as the end of October in exchange for passive investment stakes, according to a financial policy source familiar with Treasury Secretary Henry Paulson's thinking.
Using authority granted to it by last week's $700 billion market rescue legislation, Treasury would get common or preferred shares in the banks it capitalizes, the source told Reuters on Thursday. The government does not intend to seek seats on companies' board of directors in the voluntary capitalization program.
White House spokeswoman Dana Perino said later on Thursday that Paulson is "actively considering" capital injections into troubled U.S. banks.
"Secretary Paulson is looking at all the different tools to figure out which ones should be used at what time and how robustly and how much money to put into each," she said.
A Treasury spokesperson declined to comment in detail but said: "Treasury has broad, flexible authorities under the financial rescue legislation to buy assets, provide guarantees and inject capital and intends to consider all of them."
If the U.S. Treasury does inject capital into banks, it would be following the playbook of the British government, which on Wednesday pledged up to $87 billion to shore up banks' capital in exchange for preference shares.
The source familiar with Paulson's thinking said Treasury was working "extremely fast" to put together a capital injection plan.
The effect of injecting capital would be to boost banks' capacity to lend, thus complementing the bailout bill's objective of removing soured mortgage-backed assets weighing on banks' balance sheets.
Some critics of the proposals for buying soured mortgage-related products have said the process would take so long that it would reduce its efficiency, whereas a capital injection through share purchases would immediately put more cash for lending into the banking system.
The question may be whether banks are willing to accept the government as a stakeholder in return for the new capital.
The source said the injections would likely be made public, possibly inducing some reluctance among bankers to use it for fear that they would be identified as vulnerable institutions.
In addition, it was unclear whether a bank that wanted to participate would have to agree to conditions like limits on executive pay and an end to "golden parachutes," or rich pay packets for departing executives.
While public fury remains high at what is perceived as excessive pay for financial firms, corporations are generally reluctant to cede control over compensation levels, perhaps especially so to the government.
Paulson made clear on Wednesday that he interprets the authority granted by the financial rescue package as sweeping and that he intends to make full use of it. He said most attention has focused on Treasury plans to buy distressed securities from banks but made clear that wasn't the extent of his new authorities.
"We will use all of the tools we've been given to maximum effectiveness, including strengthening the capitalization of financial institutions of every size," he said.
(Additional reporting by Andy Sullivan and Glenn Somerville; Editing by Leslie Adler)
Uncle Sam: The Owner Of Last Resort
10.09.08, 10:45 AM ET
By my reckoning, Uncle Sam has already sunk in excess of $2 trillion through loans or investments into the nation's financial institutions in hopes of stanching the credit crisis. The size of the Federal Reserve's own balance sheet has ballooned over the past few weeks from $800 billion to $1.8 trillion.
You can expect funds or guarantees from the central bank, U.S. Treasury and Federal Deposit Insurance Corp. to grow sooner rather than later to $3 trillion or even $4 trillion. Maybe even more. Fed Chairman Ben Bernanke will spend as much as needed in an attempt to prevent a total meltdown of the banking system and the onset of Great Depression II.
The major conundrum is that the crisis, seemingly a financial Loch Ness monster, but one that is in no way chimerical, keeps spreading and deepening, swallowing its victims as it threatens the solvency of one institution after another. It's a monster payback for the excesses of debt of the past many years.
We are in the middle of history's most expensive bailout of the private sector by the public sector. Just to recap: Since March, the Fed has taken on $29 billion of Bear Stearns' holdings, loaned $85 billion to
The Fed will effectively enter the $1.6 trillion commercial paper market and provide working capital to companies that are running out of operating money. Not all of corporate America is as strategically savvy as
Bernanke has also indicated that the central bank will lend money to corporations that face liquidity problems, and that it will even buy troubled loans from banks that need to have funds to lend to others.
The Treasury, for its part, is just as generous. It has promised $200 billion for the recapitalizations of the stranded
The Treasury also has authorization to invest in troubled banks by buying billions in preferred stock and taking warrants to purchase bank shares in the future, much as multibillionaire Warren Buffett has been doing with
The Treasury will also loan money to state governments like California, New York and Massachusetts, which have already announced they are close to running out of operating funds. What's more, Treasury Secretary Henry Paulson said this week that the Bush administration would buy subsidized loans from Fannie Mae and Freddie Mac to the tune of another $150 billion.
It may even become necessary for Uncle Sam to purchase vacant homes or to subsidize homeowners so they can stay in their homes. This is a government intervention in the U.S. economy far more grandiose that what took place during FDR's New Deal. But Bernanke's focus is on preventing a repeat of the Great Depression, and his Federal Reserve is aiming to swiftly stave off further crisis in ways that the phlegmatic Fed of the early 1930s was unable or unwilling to do. Between 1929 and 1932, the stock market lost 90% of its value. A third of the nation's banks closed. Some 25% of the workforce was on the street. It was dire straits.
No one can say how many trillions will be necessary for this task. As the economy weakens and profits fall, companies will be unable to service their bond debts and the clarion call for a bailout of corporate debt will require intervention again. A dramatic decrease in tax receipts will endanger cities and towns, which will require first-aid as well. Uncle Sam will be called upon to lend and invest, again and again.
So, why didn't the presidential candidates talk more about this the other night in Nashville? It was as if, for them, this terrible crisis wasn't their priority. They displayed what psychologists call cognitive dissonance; what ordinary people call denial. Only John McCain raised the promise of Uncle Sam buying mortgages directly from homeowners so they could stay in their homes. He should have pounded on this message again and again. He should have spelled out how it could be done, too.
(blah...denial?-java)
What did the front-runner do? Barack Obama switched the topic to energy independence, health care and education--important issues but back-burner stuff given the monster confronting the nation. Jobs, homes, income, savings are endangered. Some $2 trillion in pension fund and retirement investments have been lost already.
Where were the two candidates? On automatic pilot, giving us their pet one-liners about earmarks and taxes. Here they had a chance to rise to the occasion and speak to the people who were suffering with their depleted 401(k) accounts. But they just repeated their boring mantras. And one of them is about to become Uncle Sam. Let's hope they get real, really quickly.
(truth? uncle sam can only do so much. policy is only part of the solution, that is unless we begin a program of socializing essential industry and investing in strategic necessities.--java)
October 9, 2008
Why Are We Surprised?
From Enron to the Current Meltdown
By ROBERT BRYCE
The question that keeps coming to mind amidst the current financial meltdown is this: why is anyone surprised?
I take no pleasure in asking that question. Along with lots of other people, I’ve watched over the past few weeks as my modest stock holdings shrink into nearly meaningless positions.
But the question remains: given the myriad warnings that came via Enron – and the years-long neglect of any meaningful efforts to have serious policing of Wall Street – why are we surprised to find out that the financial engineers have robbed us blind? The warnings from the Enron meltdown could scarcely have been more clear. Indeed, two key lessons were obvious: financial regulators needed lots more funding, personnel and support; and derivatives markets that operate without proper regulatory oversight and reporting pave the way for financial engineers to privatize profits and socialize costs.
First, the lack of regulators. A key problem with today’s financial markets, as it was when Ken Lay and Jeff Skilling were piloting Enron into the dirt, is simple: we have too few cops patrolling Wall Street. That lack of oversight can most easily be understood by looking at the budget of America’s single most important financial regulator, the Securities and Exchange Commission.
In 2001, the SEC’s budget was $437.9 million. In March 2002, the General Accounting Office issued a report which said that the shortage of money and manpower at the SEC had forced the agency to “be selective in its enforcement activities and have lengthened the time required to complete certain enforcement investigations.” So what has happened since then? Precious little. Yes, the agency has a substantially larger budget today than it did during the Enron era. For 2008, its spending authority is $906 million. And for 2009, the agency’s budget is projected to increase slightly, to $913 million.
But here’s the number that defies explanation: this year, the number of enforcement personnel, the people who go after the financial engineers, is expected to decline. You read that right. Despite the trillion dollar meltdown now underway, the number of SEC enforcement personnel will decline from 1,209 in fiscal year 2008 to to 1,177 in 2009. In all, the SEC expects to have 3,771 employees for 2009.
How does that compare to other federal agencies? Well, for comparison, the Smithsonian Institution budget for 2009 includes funding for 4,324 employees. That’s not a slap at the Smithsonian. It houses a myriad of the nation’s most treasured objects. But the SEC actually guards the nation’s treasure. And yet, Congress treats it like a bastard stepchild. Congress currently doles out more than five times as much money for corn subsidies ($4.9 billion in 2006, the most recent year for which data is available) as it does for the SEC.
It’s not just about funding. It’s also about rigorous accountability for the regulators themselves. Over the past few weeks, it’s become obvious that the SEC was largely co-opted by the companies it was supposed to be regulating. On September 25, the agency’s Inspector General, David Kotz, issued a report which that it is “undisputable” that the SEC “failed to carry out its mission in its oversight of Bear Stearns” – the investment bank the collapsed earlier this year and was taken over by JP Morgan. The report said that the agency missed “numerous potential red flags” prior to the company’s collapse and failed to require the investment bank to rein in its risk taking. (The full text of the report is available at: http://www.sec.gov/about/oig/audit/2008/446-a.pdf.)
But what’s more telling, according to the report, is the lax approach the SEC had in its handling of what was known as the Consolidated Supervised Entity program, a system set up to oversee the biggest Wall Street firms. There were six holding companies in the program: Bear Stearns, Goldman Sachs, Morgan Stanley, Merrill Lynch, Lehman Brothers, Citigroup and JP Morgan. The report found that the SEC approved the inclusion of Bear Stearns in the program “prior to the completion of the inspection process.” Thus, the SEC agreed to regulate Bear Stearns before it even knew if the company was in compliance with the standards it was supposed to enforce.
Perhaps even more unsettling is a new report from Kotz, reported on this week by the New York Times and ABC News, which concludes that the top enforcement officials at the SEC quashed an investigation into possible insider trading at Pequot Capital Management, a big hedge fund. Kotz’s report sides with Gary J. Aguirre, a former SEC employee, who was fired in September 2005 after he tried to get testimony from John J. Mack, the current CEO of Morgan Stanley. Aguirre wanted to talk to Mack about the Pequot investigation. (In 2007, Mack’s compensation totaled $41.7 million even though Morgan Stanley’s earning fell by 57 percent.) Kotz’s report makes it clear that Aguirre was wrongly dismissed for being too vigilant in his investigation of Pequot and it says that the SEC gave “preferential treatment” to Mack during the investigation. It further recommends that the agency’s chief of enforcement, Linda Thomson, as well as two other top regulators at the agency, face “disciplinary and/or performance-based action” for their role in the tawdry affair.
This brings us to derivatives. Before it failed, Enron operated a huge – and almost completely unregulated -- derivatives exchange business. According to the Bank for International Settlements, the global derivatives market is now worth some $676.5 trillion. That’s $676,500,000,000,000. That’s a five-fold increase over the value of derivatives that were traded in 2003. Further, that $676.5 trillion is 51 times America’s current GDP.
In 2002, the world’s smartest investor (and my pick for president in 2008) Omaha billionaire Warren Buffett, issued his annual letter to the shareholders of Berkshire Hathaway. In it, he called derivatives “financial weapons of mass destruction, carrying dangers that, while now latent, are potentially lethal.”
The most toxic element of the current market meltdown are credit derivatives, a financial instrument that was almost non-existent prior to 2000. And the growth of the credit derivatives business is due largely to one of John McCain’s pals, former Texas senator, Phil Gramm. In 2000, Gramm, who was then the chairman of the Senate Banking Committee, sponsored the Commodity Futures Modernization Act, a bill that was passed unanimously by the Senate on December 13, 2001. President Bill Clinton signed it into law eight days later. After it passed, Gramm hailed the measure, saying it “protects financial institutions from over-regulation.” He went on, saying it also “guarantees that the United States will maintain its global dominance of financial markets.”
Global dominance may be a worthy goal, but Gramm’s bill also contained a provision which Congressional aides referred to as the "Enron exemption.” This bit of legislative legerdemain made into law a regulatory exemption on derivatives contracts that was first rushed into place by the Commodity Futures Trading Commission in 1993 when that agency was chaired by Gramm’s wife, Wendy Gramm.
More than any other piece of legislation, the Commodity Futures Modernization Act paved the way for the financial engineers on Wall Street to buy and sell the infamous derivatives known as “credit default swaps” with virtually no oversight. According to one Washington, D.C.-based expert on derivatives who asked that his name and affiliation not be used, the bill that Gramm sponsored “led directly to the current meltdown. In 2000, the total value of the credit derivatives business was less than $1 trillion. By this year, the credit derivatives business was worth more than $60 trillion.”
Of course, few people listened when Buffett warned of the dangers of derivatives back in 2000. Indeed some of America’s most important financial players dismissed him out of hand. In September 2002, Federal Reserve Chairman Alan Greenspan, Treasury Secretary Paul O’Neill, Securities and Exchange Commission chairman Harvey Pitt and James Newsome, chairman of the Commodity Futures Trading Commission, sent a letter to a pair of U.S. Senators in which they declared that financial derivatives were not a danger. Instead, they said that derivatives “have been a major contributor to our economy’s ability to respond to the stresses and challenges of the last two years.” Further, they declared that a then-pending Senate proposal to regulate derivatives could increase “the vulnerability of our economy to potential future stresses.”
Back in 2002, in Pipe Dreams, my book on the Enron disaster, I wrote that reforms were needed to deal with derivatives. I quoted one financial analyst who called derivatives “Wall Street’s dirty secret.” And I recommended that “Derivatives dealers should be required to post agreed-upon amounts of capital to collateralize their trading positions” and that “the derivatives marketplace must be made more uniform, with policing by regulators who can establish price limits, listing requirements and other trading parameters.”
I’m not repeating that to brag or claim any special foresight. Lots of others were arguing for the same types of reforms.
Enron gave Congress and the Bush administration all of the rationales that were needed to justify proper regulation of the financial markets. Enron clearly showed the need for more cops – well paid cops who have the backing of their bosses – to patrol the corporate boardrooms and study corporate accounting practices. Enron’s bankruptcy also demonstrated the dangers of uncontrolled derivatives businesses. But those lessons were merrily ignored by Gramm, Greenspan and their cronies on Wall Street.
So I have to ask again: why are we surprised?
Robert Bryce is the author of Pipe Dreams: Greed, Ego and Enron and Gusher of Lies: The Dangerous Delusions of "Energy Independence."
No comments:
Post a Comment