07 March 2009

Is the Bailout of AIG by the Fed a Bailout or a Payoff to the Major Banks?


In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG.


The Fed has far overstepped their bounds and are disbursing tax money in secret without the oversight of Congress.


Wall Street Journal
Top U.S., European Banks Got $50 Billion in AIG Aid
By SERENA NG and CARRICK MOLLENKAMP
MARCH 7, 2009

The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.

Other banks that received large payouts from AIG late last year include Merrill Lynch, now part of Bank of America Corp., and French bank Société Générale SA.

More than a dozen firms with smaller exposures to AIG also received payouts, including Morgan Stanley, Royal Bank of Scotland Group PLC and HSBC Holdings PLC, according to the confidential document.

The names of all of AIG's derivative counterparties and the money they have received from taxpayers still isn't known, but The Wall Street Journal has identified some of them and is publishing others here for the first time.

Lawmakers Want Names

The AIG bailout has become a political hot potato as the risk of losses to U.S. taxpayers rises. This past week, legislators demanded that the Federal Reserve disclose names of financial firms that have received money from AIG, which Fed officials have described as too systemically important in the financial system to be allowed to fail.

In a Senate Banking Committee hearing in Washington on Thursday, Fed Vice Chairman Donald Kohn declined to identify AIG's trading partners. He said doing so would make people wary of doing business with AIG. (ROFLMAO - Wary of doing business with AIG? - Jesse)

But Mr. Kohn told lawmakers he would take their requests to his colleagues. The Fed, through a new committee led by Mr. Kohn to discuss transparency concerns, is now weighing whether to disclose more details about the AIG transactions.

The Fed rescued AIG in September with an $85 billion credit line when investment losses and collateral demands from banks threatened to send the firm into bankruptcy court. A bankruptcy filing would have caused losses and problems for financial institutions and policyholders globally that were relying on AIG to insure them against losses.

Since September, the government has had to extend more aid to AIG as its woes have deepened; the rescue package now has swelled to more than $173 billion.

The government's rescue of AIG helped prevent its counterparties from incurring immediate losses on mortgage-backed securities and other assets they had insured through AIG. The bailout provided AIG with cash to pay the banks collateral on the money-losing trades; it also bought out underlying mortgage-linked securities, many of which are currently worth less than half their original value.

Banks and other financial companies were trading partners of AIG's financial-products unit, which operated more like a Wall Street trading firm than a conservative insurer. This AIG unit sold credit-default swaps, which acted like insurance on complex securities backed by mortgages. When the securities plunged in value last year, AIG was forced to post billions of dollars in collateral to counterparties to back up its promises to insure them against losses.

More Problems

Now, other problems are popping up for AIG. The insurer generated a sizable business helping European banks lower the amount of regulatory capital required to cushion against losses on pools of assets such as mortgages and corporate debt. It did this by writing swaps that effectively insured those assets.

Values of some of those assets are declining, too, forcing AIG to also post collateral against those positions. And if the portfolios incur losses, AIG will have to compensate the banks.

AIG had seen this business as a relatively safe bet for the company and its investors. The structures were designed to allow European banks to shuck aside high capital costs. A change in capital rules has meant that the AIG protection no longer meets regulatory requirements.

The concern has been that if AIG defaulted, banks that made use of the insurer's business to reduce their regulatory capital, most of which were headquartered in Europe, would have been forced to bring $300 billion of assets back onto their balance sheets, according to a Merrill report.



06 March 2009

FDIC Warns of Bank Deposit Insurance Fund Failure


The few banks are taking down the many because the Obama Administration does not have the will to tie off the bleeding and stitch it up.

Why? Because the money center banks are politically connected to them through a corrupt campaign funding system and lobbying effort.

One way or the other this will be resolved. It is only a matter of when, how much, who pays, and who profits.


AFP
FDIC warns US bank deposit insurance fund may tank
Thu Mar 5, 7:39 pm ET

WASHINGTON (AFP) — The Federal Deposit Insurance Corporation is warning banks that its deposit insurance fund could dry up this year amid rising bank failures although the deposits would remain fully backed by the government.

The head of the Federal Deposit Insurance Corporation, Sheila Bair, in a letter to bank chief executives dated March 2, defended the FDIC's plan to raise fees on banks and assess an emergency fee to shore up the fund and maintain investor confidence.

Bair acknowledged the new fees, announced Friday, would put additional pressure on banks at time of financial crisis and a deepening recession, but insisted they were critical to keep the insurance fund solvent and protected.

"Without these assessments, the deposit insurance fund could become insolvent this year," Bair wrote.

The FDIC chief said in the letter that the rapidly deteriorating economic conditions raised the prospects of "a large number" of bank failures through 2010.

"Without substantial amounts of additional assessment revenue in the near future, current projections indicate that the fund balance will approach zero or even become negative," she wrote.

The FDIC last Friday announced it would impose a temporary emergency fee on lenders and raise its regular assessments to shore up the rapidly depleting deposit insurance fund that insures individual customer deposits up to 250,000 dollars.

A week ago the FDIC reported a sharp depletion of the deposit insurance fund in the fourth quarter due to actual and anticipated bank failures, to 19 billion dollars from 34.6 billion in the third quarter.

The FDIC said it had set aside an additional 22 billion dollars for estimated losses on failures anticipated in 2009.

"Some have suggested that we should turn to taxpayers for funding. But banks -- not taxpayers -- are expected to fund the system, and I believe Congress would look skeptically on such a course of action," Bair wrote.

"All banks benefit from the FDIC's industry-funded status and should take pride in it. Keeping the guarantee industry funded will serve banks well once this current crisis passes. Turning to taxpayers for support, on the other hand, could paint all banks with the 'bailout' brush."


Merrill Lynch Discloses "Trading Irregularities" to Regulators in London


Plenty of smoke here, with the fire to come over the weekend and/or next week.

Why don't we hear about this sort of thing from the US media until after hours? Are they too busy asking softball questions?

The timing of this disclosure, after the BofA acquisitions and the billions in last minute bonuses paid, is priceless.


Economic Times (India)
Merrill review spots trading 'irregularity'

7 Mar 2009, 0047 hrs IST, Bloomberg

LONDON: Merrill Lynch & Co, the securities firm acquired by Bank of America Corp, said it uncovered an “irregularity” during a review of its trading operations.

The bank informed regulators immediately of the discrepancy in “certain trading positions”, Merrill Lynch said in a statement from London. The bank said it’s working with the authorities to investigate further. A spokeswoman for the bank declined to comment further.

Merrill Lynch may have lost hundreds of millions of dollars on currency trading and credit derivatives last year, the New York Times reported earlier on Thursday.

The losses did not “spill into plain view” until after Bank of America investors had approved the $33 billion takeover in December and Merrill Lynch disbursed $3.6 billion in bonuses to bankers, the newspaper said. Bank of America later sought additional government funding. “Senior managers of the business are focused on the issue and believe the risks surrounding possible losses are under control,” Merrill Lynch said in the statement.

Bank of America Chief Executive Officer Kenneth Lewis is trying to rein in Merrill’s traders after their losses brought the bank to the brink of collapse, the New York Times said.

“It was always going to be extremely difficult to integrate a retail bank like Bank of America with an investment bank like Merrill because the cultures are so different,” said Richard Staite, an analyst at Atlantic Equities LLP in London. He has an “underweight” rating on Bank of America’s shares.


The Banking Crisis: Obama's Iraq Part 2


It is hard to assess who among the current DC crew are more limp when it comes to addressing the banking crisis in a meaningful and effective manner: Geithner, Summers or Bernanke.

They are all the very picture of the bureaucrat, which is a nice way of saying "systemic hacks." Have Timmy and Ben have reached their level of incompetency? Larry Summers has far exceededed his some years ago at Harvard.

It is difficult ground when one speculates on motives, but these are all rather bright fellows, albeit creatures nurtured by the system that they serve. It is hard to accept that their inability to address our financial crisis is sheer incompetency. But for now they obtain the benefit of doubt and the CEO's defense made so popular by the Enron crowd.

We wonder how bad it will get before Obama understands that his team is not working, that they have no actionable vision among them for whatever combination of reasons, and that the corruption being perpetuated is starting to stick rather handily to the Democrats.

The banking crisis is starting to look like Obama's Iraq.


Bloomberg
Hoenig Says Treasury Failed to Take ‘Decisive’ Action on Banks
By Steve Matthews and Vivien Lou Chen

March 6 (Bloomberg) -- The U.S. Treasury has failed to take “decisive” action to address the bank crisis, pursuing an ad- hoc approach that leaves management in place and avoids necessary asset writedowns, a veteran Federal Reserve official said.

“If an institution’s management has failed the test of the marketplace, these managers should be replaced,” Fed Bank of Kansas City President Thomas Hoenig said in prepared remarks for a speech in Omaha, Nebraska. “They should not be given public funds and then micro-managed, as we are now doing” with “a set of political strings attached.”

Hoenig’s comments are the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began. By contrast, Fed Chairman Ben S. Bernanke has endorsed the approaches taken by Treasury Secretary Timothy Geithner and his predecessor.

Geithner is requiring a “stress test” for the largest 19 U.S. banks to determine if they need more capital. He has stressed that nationalization isn’t the goal.

Last week, the U.S. government moved to convert some of the preferred stock it owned in Citigroup Inc. to common shares, gaining a 36 percent stake in the company and boosting Citigroup’s buffer against future losses. While authorities pushed for changes to the makeup of Citigroup’s board, Chief Executive Officer Vikram Pandit remains at the helm.

Hoenig said while policy makers “understandably” want to avoid nationalizing banks, “We nevertheless are drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis.”

The Treasury’s $700 billion Troubled Asset Relief Program “began without a clear set of principles and has proceeded with what seems to be an ad-hoc and less-than-transparent approach,” Hoenig said today.

Banking regulators need to be willing to write down losses, bring in new managers and sell off businesses if institutions can’t survive on their own, “no matter what their size,” said Hoenig, the second-longest serving of the Fed district bank presidents, after Minneapolis’s Gary Stern.