22 September 2008

Goldman Sachs and Morgan Stanley May Be Primary Beneficiaries of the Bailout

The Bailout Program as it is currently proposed by the Treasury may not be much more than a windfall profits package for a few Wall Street investment banks such as Morgan Stanley and Goldman Sachs.

One of the most significant obstacles to the financial markets is the lack of transparency, confidence and trust. One of the ways to restore trust is to stop lying, show your cards, take the losses, and then move forward with an honest game.

The government would be doing the markets a favor if they forced the banks and especially the newly formed bank holding companies to show their positions, open their books, to stop allowing them to game the system and make profits through practicing deception and the manipulation of markets and information.

Paulson Debt Plan May Benefit Mostly Goldman, Morgan
By Jody Shenn

Sept. 22 (Bloomberg) -- Goldman Sachs Group Inc. and Morgan Stanley may be among the biggest beneficiaries of the $700 billion U.S. plan to buy assets from financial companies while many banks see limited aid, according to Bank of America Corp.

''Its benefits, in its current form, will be largely limited to investment banks and other banks that have aggressively written down the value of their holdings and have already recognized the attendant capital impairment,'' Jeffrey Rosenberg, Bank of America's head of credit strategy research, wrote in a report today, without identifying particular investment banks.

Many banks may not participate in the Troubled Asset Relief Program because they haven't had to write down many assets under accounting rules, meaning decisions to sell into the program would cause them to lose capital, Rosenberg wrote. Investment banks operate ''under a mark-to-market accounting model while commercial banks hold assets at cost until realizing a loss (or until they reasonably expect one),'' he wrote.

Rosenberg assumed the government will use a reverse auction in which banks submit the lowest prices they are willing to sell certain types of assets for and then the government buys the cheapest ones, with the goal of ''protecting the taxpayers,'' the report said.

Treasury Secretary Henry Paulson's push for the program, which is being now considered by lawmakers, is designed to remove ''illiquid assets'' clogging the financial system, reverse declining asset values and prevent the freezing of lending for U.S. financial firms, companies and consumers. The intervention into the financial markets would be the broadest since at least the Great Depression.

Japan's Failure

In the 1990s, a Japanese government effort to buy troubled assets from banks to free up lending failed because sellers weren't willing to accept the prices offered, said L. William Seidman, a former chairman of the Federal Deposit Insurance Corp. He said that wasn't a problem he had as chairman of the Resolution Trust Corp. in the U.S., which sold off failed lenders' assets after the savings-and-loan crisis of the 1980s.

''If you're talking about institutions that haven't failed, then you have the question of whether they want to sell at a low price, particularly if that price depletes their capital,'' Seidman said in a telephone interview today.

''In Japan, we did all kinds of things, trying to have a mediator who would set a price and other kinds of methods to get around that,'' he added. ''It never really got done, so it was not successful, but here we probably have a more urgent need for more institutions to do something.''

'Hasten the Pace'

While Goldman and Morgan Stanley, both based in New York, were yesterday granted permission to transform themselves into bank holding companies, the companies so far have operated mostly under investment-bank accounting rules, logging almost $21 billion of asset writedowns and credit losses. Paulson is a former chairman and chief executive officer of Goldman.

Charlotte, North Carolina-based Bank of America, which has reported $21 billion of losses, is seeking to buy New York-based Merrill Lynch & Co., which has had $52.2 billion in losses.

Even without sales by commercial banks and savings-and-loans under the program, the companies may be harmed as the disclosure of prices paid in the troubled-debt auctions force them to ''hasten the pace'' of their own losses, Rosenberg wrote in his report. Banks and insurers mark down certain securities and derivatives to market prices in their earnings reports, avoiding losses on others unless they deem the declines to not be temporary and provisioning against loans as they go bad.

Fair Value

Bank lobbying groups today asked Congress and the U.S. Securities and Exchange Commission to suspend a rule that forces companies to put a price on difficult-to-value assets such as subprime mortgages.

''We are suggesting that the SEC issue a temporary order to negate the negative impact'' of the so-called fair-value rule when the economy slumps, Scott Talbott, senior vice president of government affairs at the Washington-based Financial Services Roundtable, said in an e-mail.

Companies including American International Group Inc., the insurer that accepted $85 billion in a U.S. takeover, have said the rule by the Financial Accounting Standards Board requires them to record losses they don't expect to incur. The world's largest banks and brokers have reported more than $520 billion in asset writedowns and credit losses since last year.