The Economy, stupid

[NorthSideSox72]

via the cnn.com homepage Bank of America would like to know if you trust the US banking system...

 

Awesome. I love contextually driven ads gone wrong.

 

 

 

[Balta1701]

Calculated Risk has a table listing all of the leaked stress test figures so far. As a percentage of assets, the big banks need between 0% and 1.4% in additional capital. But there is one outlier: GMAC, with $189 billion in assets, needs $11.5 billion in capital.

 

This implies that GMAC is not just low on capital, it has negative capital. If you were to give GMAC $11.5 billion in new cash, it would have $200 billion in assets. The minimum tangible common equity requirement being used for the stress tests is probably in the 3-4% range. If it’s 4%, then the post-recapitalization GMAC would have $8 billion in tangible common equity – which means that right now it has negative $3.5 billion in tangible common equity. (The situation is slightly worse if you assume that it will be recapitalized through a preferred-to-common conversion, or if the threshold is 3%.)

 

The thing that confuses me is that, on paper, you can’t recapitalize a company with a negative net worth. No investor would pay $11.5 billion to own 100% of the common shares in a company that is worth $8 billion. (You can recapitalize a company that is under-capitalized: if it has $5 billion in capital and needs another $5 billion, then the new investors get 50% of the company.) This is why it is important (from the government perspective) for the stress tests to show that some banks are low on capital, but not that they have negative capital.

 

Maybe there’s some clever accounting mechanism or financial wizardry I’m missing.

Link

[Balta1701]

I heard this on MSNBC today and then got to thinking... Hello Mr SecTreas., you know, the guy out of the New York Fed bank... Why hasn't he been mentioned in any of this, because this is who GS was dealing with.

The guy at the NY Fed has resigned, it seems.

[southsider2k5]

Link

 

I have actually explained this before. Because a bank is technically insolvent before they are bankrupt, the amount of asset valuations and capital don't always line up. Technically a bank with an 89% asset to loan ratio is worthless, no matter now much they own in assets.

[Balta1701]

I have actually explained this before. Because a bank is technically insolvent before they are bankrupt, the amount of asset valuations and capital don't always line up. Technically a bank with an 89% asset to loan ratio is worthless, no matter now much they own in assets.

So if I'm reading this right, you're agreeing that GMAC is insolvent.

[southsider2k5]

So if I'm reading this right, you're agreeing that GMAC is insolvent.

 

It is certianly possible. I haven't seen their books. I don't know where they get asset valuation from.

[lostfan]

At what point did temporary government takeover to clear off bad assets, recapitalize, etc. and return a bank to the private sector become "nationalization" (a dirty word)?

[Balta1701]

At what point did temporary government takeover to clear off bad assets, recapitalize, etc. and return a bank to the private sector become "nationalization" (a dirty word)?

When the Socialists seized power in that awful coup last november.

[lostfan]

When the Socialists seized power in that awful coup last november.

Right on cue, this is exactly where I was going with this. Now instead of that option, which may have actually been the best one, we have this current sloppy abomination of endless bailouts because that first option was taken off the table before it was ever really put on (nevermind that this is actually what the FDIC does and there is nothing "socialist" about it). Law of unintended consequences - see what happens when sloppy labels are thrown around?

[Balta1701]

Right on cue, this is exactly where I was going with this. Now instead of that option, which may have actually been the best one, we have this current sloppy abomination of endless bailouts because that first option was taken off the table before it was ever really put on (nevermind that this is actually what the FDIC does and there is nothing "socialist" about it). Law of unintended consequences - see what happens when sloppy labels are thrown around?

Even as an advocate of an FDIC like rapid takeover and reshuffling of BofA, Citi, and the other biggest few, I'll be the first to admit it's not as easy as you make it sound when you go from the smaller banks the FDIC is eating every friday night (My money says tonight will be 3 more) to the large, multi-national businesses that aren't just banks but are also owning other businesses, investment firms, etc. Unraveling these smaller banks takes the FDIC days. Unraveling Citigroup would be an abject nightmare.

 

I think its a better nightmare than having the banks string along for the next 5 years as one bubble (option ARM, Commercial real estate, credit cards) pops after another, and I think simply breaking their stranglehold on Congress alone would be worth the trouble, but don't insinuate it would be simple or even similar to what the FDIC is already doing.

[lostfan]

Even as an advocate of an FDIC like rapid takeover and reshuffling of BofA, Citi, and the other biggest few, I'll be the first to admit it's not as easy as you make it sound when you go from the smaller banks the FDIC is eating every friday night (My money says tonight will be 3 more) to the large, multi-national businesses that aren't just banks but are also owning other businesses, investment firms, etc. Unraveling these smaller banks takes the FDIC days. Unraveling Citigroup would be an abject nightmare.

 

I think its a better nightmare than having the banks string along for the next 5 years as one bubble (option ARM, Commercial real estate, credit cards) pops after another, and I think simply breaking their stranglehold on Congress alone would be worth the trouble, but don't insinuate it would be simple or even similar to what the FDIC is already doing.

Actually how to do that, and whether the government has the authority/ability to actually do that, is a whole other discussion. What I was getting at is the inconsistency and the constant dumbing-down of complicated ideas like this. If you don't like an idea just call it "socialized" or "nationalized" so that liberals instinctively run away from it because of the gratuitous "socialism" label. Whether the labels are actually accurate is irrelevant.

[Balta1701]

You know, I really think the treasury dept. right now is sort of hoping that some combination of the stimulus package and luck will save the banks and that they just need to get people to stop paying attention to them. There's really no other way to interpret this combination of information.

When the Fed last month informed banks of its preliminary stress-test findings, executives at corporations including Bank of America Corp., Citigroup Inc. and Wells Fargo & Co. were furious with what they viewed as the Fed's exaggerated capital holes. A senior executive at one bank fumed that the Fed's initial estimate was "mind-numbingly" large. Bank of America was "shocked" when it saw its initial figure, which was more than $50 billion, according to a person familiar with the negotiations.

 

At least half of the banks pushed back, according to people with direct knowledge of the process. Some argued the Fed was underestimating the banks' ability to cover anticipated losses with revenue growth and aggressive cost-cutting. Others urged regulators to give them more credit for pending transactions that would thicken their capital cushions.

 

At times, frustrations boiled over. Negotiations with Wells Fargo, where Chairman Richard Kovacevich had publicly derided the stress tests as "asinine," were particularly heated, according to people familiar with the matter. Government officials worried San Francisco-based Wells might file a lawsuit contesting the Fed's findings.

 

The Fed ultimately accepted some of the banks' pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.

US banks have been given government assurances they will be allowed to raise less than the $74.6bn in equity mandated by stress tests if earnings over the next six months outstrip regulators’ forecasts, bankers said.

 

The agreement, which was not mentioned when the government revealed the results on Thursday, means some banks may not have to raise as much equity through share issues and asset sales as the market is expecting. It could also increase the incentive for banks to book profits in the next two quarters.

[Balta1701]

Judicial Watch got some fairly remarkable documents out of the Treasury Department regarding the TARP program...some of the best feature the Chief of Staff to Secretary Paulson. Take a look for yourself. A couple fun ones are him asking "Who the big 9 are" regarding the 9 biggest financial companies in the U.S. that Paulson was calling to the Treasury Department regarding the bailout, on the morning the meeting happened, and another noting that the Dow futures were up 300 on some of the work they were doing (their priorities were clearly correct).

[Balta1701]

It's a comedy show so I'm sure that someone here will rip me for posting it, but this discussion between Bill Maher and Elizabeth Warren is darn intelligent. It basically is looking at how the banks have moved to a system where they're making a killing by confusing people and taking advantage of people.

[kapkomet]

Another bout of random poo.

 

 

 

[kapkomet]

I will say this. The CEO of Fiat is brilliant. He gets the most lucrative parts of GM and Chrysler at no cost (if you believe the rumours floating around that GM is going to sell off China and Latin America portfolios to Fiat as well) - and actually gets funded by OUR government to take these assets over. This man will come out of this smelling like a rose.

[Balta1701]

I will say this. The CEO of Fiat is brilliant. He gets the most lucrative parts of GM and Chrysler at no cost (if you believe the rumours floating around that GM is going to sell off China and Latin America portfolios to Fiat as well) - and actually gets funded by OUR government to take these assets over. This man will come out of this smelling like a rose.

And he makes something like 1/100th of what the guys at AIG, BofA, Merrill Lynch et al. made while running those companies in to the ground.

[kapkomet]

And he makes something like 1/100th of what the guys at AIG, BofA, Merrill Lynch et al. made while running those companies in to the ground.

Don't worry, he'll get his.

 

[Balta1701]

Don't worry, he'll get his.

He's already gotten it. A couple million a year is more than enough for most people. Unless you're a U.S. CEO.

[kapkomet]

He's already gotten it. A couple million a year is more than enough for most people. Unless you're a U.S. CEO.

Oh I know. Our country sucks, doesn't it?

 

[StrangeSox]

Oh I know. Our country sucks, doesn't it?

 

No, but corporatism sure does.

[NorthSideSox72]

No, but corporatism sure does.

I wouldn't even go that far. I think the problem isn't corporatism generally, its a two-part problem of the current way corporations prioritize the value of personnel, and a securitization system that doesn't properly check that.

 

[Rex Kickass]

I will say this. The CEO of Fiat is brilliant. He gets the most lucrative parts of GM and Chrysler at no cost (if you believe the rumours floating around that GM is going to sell off China and Latin America portfolios to Fiat as well) - and actually gets funded by OUR government to take these assets over. This man will come out of this smelling like a rose.

 

Given that FIAT has its own balance sheet issues that will rear its ugly head in about two years.... I wouldn't say smelling like a rose will necessarily sound that apt.

[NorthSideSox72]

Given that FIAT has its own balance sheet issues that will rear its ugly head in about two years.... I wouldn't say smelling like a rose will necessarily sound that apt.

Well, and remember too, Fiat is an Italian company. Labor relations in Italy are ridiculous - if GM or Chrysler think they have a hard time with labor here, its nothing compared to the level of control that labor has in Italy.

 

[kapkomet]

Given that FIAT has its own balance sheet issues that will rear its ugly head in about two years.... I wouldn't say smelling like a rose will necessarily sound that apt.

It doesn't have near the issues and with these moves will cover it's balance sheet. They are getting assets for nothing. Think leverage.