Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

[GRG55]

I put this in Rant and Rave because if I was a US Taxpayer I would be livid. What Paulson is doing is entrenching his friends. 5%???? No voting rights??? No say in how these banks reform themselves??? Nothing better than "moral suasion" tied to the re-lending of bailout funds????

jtabeb, got your pitchfork ready?:p



From Barry Ritholz's Big Picture Blog

New Bailout Price Tag: $2.25 Trillion Dollars
Monday, I said that the total cost of this bailout could scale up to $3 trillion -- I just didn't imagine it would happen by Wednesday.
We learned yesterday that the size of the bailout just tripled, from $750b to $3T. Here is the cost structure:

• $250 billion of capital into banks;
• Guarantee $1.5 trillion in new senior debt issued by banks;
• Insure $500 billion in deposits in noninterest-bearing accounts (primarily businesses accts).

In exchange for this largesse, the treasury, on behalf of taxpayers, receives:

• Preferred shares that pay a 5% (rising to 9% after five years);

•No voting rights for government;
• Warrants to purchase common shares = to 15% of initial investment

All told, its a massive program that makes my earlier forecast of 2-3Trillion obsolete. New forecast is now double: $4-6 trillion dollars . . .

[GRG55]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

I put this in Rant and Rave because if I was a US Taxpayer I would be livid. What Paulson is doing is entrenching his friends. 5%???? No voting rights??? No say in how these banks reform themselves??? Nothing better than "moral suasion" tied to the re-lending of bailout funds????

And further to the last point above here's Bloomberg on the topic:

Paulson Lacks Leverage to Compel Banks to Put New Cash to Work

Oct. 15 (Bloomberg) -- Treasury Secretary Henry Paulson persuaded nine major U.S. banks to accept $125 billion in government investment. Getting them to lend it out may prove a tougher sell.

The equity stakes the government is purchasing in Citigroup Inc., Morgan Stanley and seven other big institutions come with no guarantee that the investments will spur lending and unfreeze credit markets. Nor do they give the government board seats or any other leverage to demand that that the firms actually use the money to help the economy.

[Pause here to allow US Taxpayers to cough up their Egg McMuffin breakfast]

``The truth of the matter is, they can't put a gun to their head and say you have to lend this money,'' said Charles Horn, a former official at the Office of the Comptroller of the Currency, part of the Treasury Department, and now a partner at the Mayer Brown law firm in Washington.

Treasury officials acknowledge they can't force banks to get the taxpayer money into the hands of their customers. Instead, officials are betting that the government's investment will create conditions where banks have a greater incentive to earn profits from lending than to hoard money to shore up their balance sheets.

``It's in their economic interest,'' said David Nason, the Treasury's assistant secretary for financial institutions, in an interview with Bloomberg Television. ``When you give them a stronger capital position and you also provide a certain amount of government backstop to their funding sources, it's incumbent upon them to go out and continue to lend.'' ...

Talk about "pushing on a string". Don't expect the banks to lend.

Some commentary from a guest writer on Steen Jakobsen's [Saxo Bank] blog this morning:

...Paulson said today "The needs of our economy require that our financial institutions not take this new capital to hoard it, but to deploy it.'' He left the most important objective on the goodwill of the 9 nominated banks knowing full well what happened in Japan: the Japanese banks didn’t lend, they used the injected capital, the zero interest rate and the deposit money to push the 10y JGB yield down to 0.75%. The banks recovered eventually, but the rest of the country lost a decade. So we may see another zero sum game again. The government gives $750 billion and 1% Fed fund; the banks buy Tresuries (so bigger the issuance, more profits for the banks). It’s much better than selling the toxic assets to the government since that could give the banks a chance to recover some of the loss later)...

[Andreuccio]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

We learned yesterday that the size of the bailout just tripled, from $750b to $3T.

Not to pick nits, but wouldn't going from $750b to $3T be quadrupling the size of the bailout?

Not that it matters. A trillion here, a few hundred billion there, what's the difference. It's not like it will affect the lives of just about every person in the country, if not on the planet, as well as their descendants for years to come.

I see why you put this in Rant and Rave, GRG. It appears my biggest failing in life will have been not finding a way to make friends with Paulson.

[jtabeb]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

Not to pick nits, but wouldn't going from $750b to $3T be quadrupling the size of the bailout?

Not that it matters. A trillion here, a few hundred billion there, what's the difference. It's not like it will affect the lives of just about every person in the country, if not on the planet, as well as their descendants for years to come.

I see why you put this in Rant and Rave, GRG. It appears my biggest failing in life will have been not finding a way to make friends with Paulson.

No, I think it is your morality, you need to lose that sense of "right" and "wrong" and just stop it with the whole "fairness" thing. It's SOOO passe.

[Andreuccio]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

No, I think it is your morality, you need to lose that sense of "right" and "wrong" and just stop it with the whole "fairness" thing. It's SOOO passe.

Thanks, jtabeb. Although my morality is frequently questioned, it's not often I get accused of being too moral.

[GRG55]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

I put this in Rant and Rave because if I was a US Taxpayer I would be livid. What Paulson is doing is entrenching his friends. 5%???? No voting rights??? No say in how these banks reform themselves??? Nothing better than "moral suasion" tied to the re-lending of bailout funds????

jtabeb, got your pitchfork ready?:p



From Barry Ritholz's Big Picture Blog

New Bailout Price Tag: $2.25 Trillion Dollars
Monday, I said that the total cost of this bailout could scale up to $3 trillion -- I just didn't imagine it would happen by Wednesday.
We learned yesterday that the size of the bailout just tripled, from $750b to $3T. Here is the cost structure:

• $250 billion of capital into banks;
• Guarantee $1.5 trillion in new senior debt issued by banks;
• Insure $500 billion in deposits in noninterest-bearing accounts (primarily businesses accts).

In exchange for this largesse, the treasury, on behalf of taxpayers, receives:

• Preferred shares that pay a 5% (rising to 9% after five years);

•No voting rights for government;
• Warrants to purchase common shares = to 15% of initial investment

All told, its a massive program that makes my earlier forecast of 2-3Trillion obsolete. New forecast is now double: $4-6 trillion dollars . . .

From the Naked Capitalism blog yesterday...

One of the reasons I am a fan of Willem Buiter is that he is bracingly candid about his likes and dislikes. And we happen to share a major dislike, namely, the conduct and policies of Henry Paulson.

Buiter lambasts Paulson's gift capital provided to nine large US banks. What is striking is that Buiter is genuinely outraged, seeing this as a very bad deal for the taxpayer and providing all the wrong incentives to the miscreants recipients.

I cannot recall seeing a single US commentator remotely as critical of this deal as Buiter (for the record, we have gone off the deep end more than once as far as Paulson is concerned, but not on this particular action). Why so little outrage when we are going to wind up living with the consequences of these costly handouts to an undeserving industry? AIG was put on a very short leash. Why do Goldman and Morgan Stanley deserve better?

From Buiter:

The US tax payer is getting a terrible return on the $125bn worth of capital that was injected on his behalf by US Treasury Secretary Paulson into the nine largest US banks. This is surprising to me, because the complete or partial nationalisations of a number of US financial behemoths earlier in the year represented rather better value for money for the tax payer.

The nationalisation of Fannie, Freddie, AIG and pieces of the nine largest US banks (with more to come) was necessary to prevent a complete collapse of the house of cards we used to know as the American financial system.

Unfortunately, Treasury Secretary Hank Paulson’s injection of $125 billion into the nine banks (out of a total capital injection budget provisionally set at $250bn (but bound to rise to probably around twice that amount), carved out of the $700 bn made available (in tranches) by the 2008 Economic Stability Emergency Act, was almost a free gift to these banks. In this it was different from the case of AIG, where the Fed and the Treasury imposed rather tough terms on the shareholders and obtained pretty favourable terms for the US tax payer generally. It was also unlike the case of Fannie and Freddie, where the old shareholders are likely not to recover anything.

In the case of the Fortunate Nine, the injection of capital is through (non-voting) preference shares yielding a ridiculously low interest rate (5 percent as opposed to the 10 percent obtained by Warren Buffett for his capital injectcion into Goldman Sachs). Without voting shares, the government has no voice in the running of these banks. It also has no seats on their boards. By contrast, in the Netherlands, the injection of €10bn worth of subordinated debt into ING bank comes with a price tag that includes two government directors on the board and a government veto over all strategic decisions by the bank.

In addition, in the the case of the Fortunate Nine, there are no attractively valued warrants (options to convert, at some future time, the preference shares into ordinary shares at a set price or at a price determined by some known formula). Quite the opposite, the preference shares purchased by the US state, can be repurchased after three years, at the banks’ discretion, on terms that are highly attractive to the banks. The US tax payer is not only getting a lousy deal compared to private US investors like Buffett, (s)he is also doing much worse than the British tax payer in the UK version of Paulson’s capital injection (£37 bn so far out of provisional budget of £50bn). The UK preference shares have a 12 percent yield and come with government-appointed board members.

Even in the cases of AIG, Fannie and Freddie, unsecured senior creditors did not have to take an up-front haircut. Worse than that, even holders of junior debt and subordinated debt could come out of this exercise whole. There were no up-front haircuts, charges or mandatory debt-to-equity conversions.

That, I would argue, is scandalous, both from a fairness perspective and from the point of view of the moral hazard this creates, by boosting the incentives for future reckless lending to elephantesquely large financial enterprises. Unless not only the existing shareholders of the banks benefiting from these capital injections but also the holders of the banks’ unsecured debt (junior and senior) and all other creditors of the bank (with the possible exception of retail depositors up to some appropriate limit) are made to pay a painful penalty for investing in excessively risky if not outright dodgy ventures, we are laying the foundations of the next systemic crisis, even as we are struggling to escape from the current one.

[GRG55]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

And it just keeps coming...

Fed Provides $540 Billion Prop to Money Funds After a Week of Record Inflows



The Fed is throwing a massive lifeline to money market funds AFTER the crisis has passed and investors are entering the pool again on their own. Consider today's story from the Financial Times:

The US Federal Reserve on Tuesday said it would finance up to $540bn (€410bn) in purchases of short-term debt from money market mutual funds to shore up a key pillar of the US financial system.

Money market funds have faced severe redemption pressures since the financial crisis deepened last month, forcing them to raise cash by scaling back their short-term lending to banks and selling their holdings of commercial paper.

This retreat has contributed both to a freeze in the interbank market and a steep decline in activity in the commercial paper market, which has made it difficult for banks and companies to raise short-term funds....

“The short-term debt markets have been under considerable stress in recent weeks as money market mutual funds and other investors have had difficulty selling assets to satisfy redemption requests and meet portfolio rebalancing needs,” the Fed said.

Lawrence Fink, chief executive of BlackRock, the asset management group, said: “This is a very big event. This is the first thawing that I really see in terms of helping the commercial paper market unravel itself.”

Under the scheme the US central bank will lend money to five special purpose vehicles, to be managed by JPMorgan Chase, tasked with purchasing assets from money market funds. These assets are low-risk paper, including certificates of deposit, bank notes and commercial paper with three-month maturities or less.

Now consider yesterday's Financial Times article, "Record inflows into money market funds":

Investors are pumping a record amount of cash into money market funds as they rush to the safest instruments amid the market turmoil.

In spite of co-ordinated central bank action to inject liquidity into the markets and sweeping measures from governments to shore up the beleaguered banking sector, investors are still shunning riskier investments.

Money market funds, which are considered safe because they tend to buy US Treasuries, absorbed $44.4bn last week, the largest inflow since 2001, according to fund tracker EPFR Global.

Money market funds were hit last month when one fund, Reserve Primary Fund, “broke the buck”, or returned investors less money than they paid in. But this was a fund that invested in commercial paper rather than Treasuries.

Cameron Brandt, global markets analyst at EPFR, said: “Investors want something that is safe in a very volatile market, with equities swinging sharply from one day to the next.

“However, they also want flexibility and the ability to pull their money out quickly when they consider the time is right to switch into equities. This is something they can do with money market funds.”

However, in spite of the latest inflows, money market funds have not yet made up for their outflows during September – in one week last month investors pulled $200bn from the funds.

This is the one area of the money markets that is recovering nicely on its own, yet the Fed targets it for emergency action with a massive program, AFTER the Treasury has implemented a short-term insurance program.

Willem Buiter criticized the Fed at Jackson Hole for being unduly sensitive to the financial service industry's demands. Today's action yet again proves him right.

[GRG55]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

Here's a new form of government funded entitlement program...

Wall Street Won't Surrender on Bonuses, Veterans Say

By Christine Harper

Oct. 30 (Bloomberg) -- Wall Street's chief executives will hunker down and pay bonuses this year in the face of the worst financial crisis since the Great Depression, a taxpayer bailout and mounting political outcry, industry veterans say.

Odds that Wall Street will forgo the payouts are ``slim to none,'' said John Gutfreund, 79, president of New York-based Gutfreund & Co. and the former chief executive officer of Salomon Brothers Inc. ``They're going to have to be a little bit sensitive because politicians, whether they like it or not, are part of their lives now.''...

["...a little bit sensitive"...but not too sensitive I imagine ;)]

...For some bankers, a smaller payout would come as a surprise. More than one-third of Wall Street employees surveyed by a recruitment Web site between Oct. 13 and Oct. 21 said they expect a bigger bonus this year...

[Do you get the impression that bankers are human after all? Now exhibiting the exact same behaviour as a welfare recipient whose just had a benefits cut...:rolleyes:]

[GRG55]

Your Tax Dollars At Work...

[...if you are a US taxpayer that is]

I thought the banks were expected to lend the money being rained down on them? Instead it would appear the US taxpayer is now the sole source of the cheap money needed so BAC can act like a KKR clone.

Paulson is doing [enabling] as much damage as possible before he goes back to Goldman.

Bank of America to Pay $7 Billion to Double CCB Stake

Nov. 18 (Bloomberg) -- Bank of America Corp. will pay $7 billion to almost double its stake in China Construction Bank Corp., adding to the purchase of Merrill Lynch & Co. even as it cuts jobs and gets government bailout funds.

The biggest U.S. bank by market value will boost the three- year-old holding in China's No. 2 lender to 19.13 percent from 10.8 percent by buying shares from the government. China Construction fell 5.4 percent in Hong Kong at 12:15 p.m. on concern Bank of America may sell stock it bought in 2005 after a lockup period on that stake ended last month.

Chief Executive Officer Kenneth Lewis, three weeks after getting $15 billion from the U.S. government, raised his bet on China Construction after the stock lost 45 percent in the past six months. He is paying 32 percent less than yesterday's closing price. The move came as Citigroup Inc. announced plans to eliminate 52,000 jobs following four quarters of losses...

...Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31...

So far the stuff posted on this thread hasn't elicited nearly the reaction from US iTulipers one might have expected. Everyone as "puked out" as metalman? Numb from the onslaught on your pocketbook? Prefer to conserve your energy for something more constructive, like waiting for "change"? Just wondering if the pitchfork tips are being sharpened...

[marvenger]

Re: Your Tax Dollars At Work...

[...if you are a US taxpayer that is]

Nov. 18 (Bloomberg) -- Bank of America Corp. will pay $7 billion to almost double its stake in China Construction Bank Corp., adding to the purchase of Merrill Lynch & Co. even as it cuts jobs and gets government bailout funds.

The biggest U.S. bank by market value will boost the three- year-old holding in China's No. 2 lender to 19.13 percent from 10.8 percent by buying shares from the government. China Construction fell 5.4 percent in Hong Kong at 12:15 p.m. on concern Bank of America may sell stock it bought in 2005 after a lockup period on that stake ended last month.

Chief Executive Officer Kenneth Lewis, three weeks after getting $15 billion from the U.S. government, raised his bet on China Construction after the stock lost 45 percent in the past six months. He is paying 32 percent less than yesterday's closing price. The move came as Citigroup Inc. announced plans to eliminate 52,000 jobs following four quarters of losses...

...Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31...

Metalman seems to think the US will come out of this stronger than ever. He's obviously living vicariously through Hank and his mates. The above just blows my mind, I seriously do not understand that.

[c1ue]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

GRG,

I think most people are saying: "I, for one, welcome our new bankster overlords".

The rest of us are either paralyzed, ignorant, or preparing to renew our foreign visas...

[Chomsky]

Re: Your Tax Dollars At Work...

So far the stuff posted on this thread hasn't elicited nearly the reaction from US iTulipers one might have expected. Everyone as "puked out" as metalman? Numb from the onslaught on your pocketbook? Prefer to conserve your energy for something more constructive, like waiting for "change"? Just wondering if the pitchfork tips are being sharpened...

It's called outrage fatigue.

[GRG55]

Re: Your Tax Dollars At Work...

[...if you are a US taxpayer that is]

I thought the banks were expected to lend the money being rained down on them? Instead it would appear the US taxpayer is now the sole source of the cheap money needed so BAC can act like a KKR clone.

Paulson is doing [enabling] as much damage as possible before he goes back to Goldman.

Bank of America to Pay $7 Billion to Double CCB Stake

Nov. 18 (Bloomberg) -- Bank of America Corp. will pay $7 billion to almost double its stake in China Construction Bank Corp., adding to the purchase of Merrill Lynch & Co. even as it cuts jobs and gets government bailout funds.

The biggest U.S. bank by market value will boost the three- year-old holding in China's No. 2 lender to 19.13 percent from 10.8 percent by buying shares from the government. China Construction fell 5.4 percent in Hong Kong at 12:15 p.m. on concern Bank of America may sell stock it bought in 2005 after a lockup period on that stake ended last month.

Chief Executive Officer Kenneth Lewis, three weeks after getting $15 billion from the U.S. government, raised his bet on China Construction after the stock lost 45 percent in the past six months. He is paying 32 percent less than yesterday's closing price. The move came as Citigroup Inc. announced plans to eliminate 52,000 jobs following four quarters of losses...

...Thousands of Merrill Lynch and Bank of America employees will lose their jobs because of the merger, Merrill CEO John Thain said on Oct. 20. The purchase is expected to be completed on or about Dec. 31...

So far the stuff posted on this thread hasn't elicited nearly the reaction from US iTulipers one might have expected. Everyone as "puked out" as metalman? Numb from the onslaught on your pocketbook? Prefer to conserve your energy for something more constructive, like waiting for "change"? Just wondering if the pitchfork tips are being sharpened...

This won't surprise anyone. Antagonize, perhaps. Irritate, highly likely. Anger, maybe a few. But not surprise...

Paulson Trying to Rewrite His Own History

by: Bespoke Investment Group November 20, 2008
Treasury Secretary Henry Paulson spoke at the Reagan Library this afternoon, and judging by the speech, it appears as though Mr. Paulson is embarking on a PR campaign to rewrite the history of his handling of the credit crisis. One line that stood out was when he said, "By pro-actively addressing the problems we saw coming..."

Judging by excerpts of prior comments the Treasury Secretary made during 2007, if Mr. Paulson saw the problems coming, he wasn't telling anybody:

Marketwatch 3/13/07: Paulson also said the fallout in subprime mortgages is "going to be painful to some lenders, but it is largely contained."

Reuters 4/20/07: "I don't see (subprime mortgage market troubles) imposing a serious problem. I think it's going to be largely contained."

Bloomberg 5/22/07: Paulson, also speaking to CNBC, said the housing slump was ``largely contained'' and that market's correction was mostly ``behind us.''

Bloomberg 6/20/07: Subprime fallout ``will not affect the economy overall.''

Forbes 7/27/07: Appearing on CNBC with other members of the Bush administration's economic team, he again said mortgage industry problems would be 'largely contained.'

Boston.com 8/1/07: Paulson added that he did not see anything that caused him to reconsider his view that the economic damage from the housing correction was "largely contained."

Another classic line from today was, "As I assess our current situation, I believe we have taken the necessary steps to prevent a financial collapse." Mr. Paulson, what is it going to take for you to consider this a financial collapse?

Given that the extent of the credit crisis was underestimated by almost everyone, you can give Paulson somewhat of a pass for missing it. But to try and rewrite history through speeches even while the credit crisis is still playing out is inexcusable.

[c1ue]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

GRG,

It is clear that Paulson is going to be remembered as the Charles E. Mitchell of this bubble era.

A nasty combination of bank head, government official, AND encantation recital leader.

[GRG55]

Re: Paulson Starts Virtual Soup Kitchen; Starving Bankers Grateful...

GRG,

It is clear that Paulson is going to be remembered as the Charles E. Mitchell of this bubble era.

A nasty combination of bank head, government official, AND encantation recital leader.

And as the holiday season approaches, Washington's very own Santa just can't stop giving. And giving. And giving. Or is he actually just making charitable donations...:rolleyes:

Paulson May Ask for Remaining $350 Billion of TARP

Nov. 24 (Bloomberg) -- Treasury Secretary Henry Paulson, less than a week after indicating he would let the Obama administration decide how to use the second half of the $700 billion financial fund, is considering asking for the money...

...Six days ago, Paulson told Congress “it was only prudent to reserve our TARP capacity, maintaining not only our flexibility, but that of the next administration.” Since then, the collapse in Citigroup Inc. shares threatened a renewed bout of financial turmoil, and forced the Treasury to mount a rescue of the bank late yesterday...