Wednesday, October 15, 2008

CRASH TALK OCTOBER 15

Phil Mattera, Dirt Diggers Digest News accounts of the Treasury Department's meeting with major bank executives have suggested that Henry Paulson had to pressure the financiers to go along with his plan to have the federal government purchase substantial holdings in their institutions. But for someone who was supposedly throwing his weight around, Paulson did not exactly drive a hard bargain.

On some key points, Paulson's deal with the banks looks much worse than the terms Warren Buffett was able to extract from General Electric and Goldman Sachs when he provided them with comparable capital infusions. Paulson is requiring the banks to pay a dividend of only 5 percent to the feds. Buffett, by contrast, will receive a 10 percent dividend both on his $3 billion investment in GE and his $5 billion investment in Goldman.

In addition, the Treasury's preferred shares are callable after three years with no premium. Buffett's shares in GE are callable after three years with a 10 percent premium. At Goldman the shares are callable at any time with the same premium applied.

It is true that Buffett is not imposing the same limits on executive compensation, but given that Paulson is representing the power of the federal government at a time when there is intense public anger at the big banks, he could have forced them to make a lot more concessions, beginning with an insistence on voting rights for the shares.

Paulson seems to want to have it both ways. He is carrying out an extraordinary intervention into the private sector, but aside from placating public sentiment about overpaid executives, he is not demanding that these institutions change their core practices in a way that might benefit their victims (subprime mortgage holders et al.) and reduce the chances of future financial crisis.

The banks are not innocent parties in this crisis. They need not be treated with such deference.

Nomi Prins, The Nation - Paulson and his wheeler-dealer pals have proven more interested in preserving their own wealth than in stabilizing the American economy

The question addressed by Paulson Monday is what to do with that $700 billion? To answer this, he sat down with his friends, the leaders of the largest financial institutions in America that got us into this mess. Namely, Ken Lewis, CEO of Bank of America; Jamie Dimon, CEO of J.P. Morgan Chase; Lloyd Blankfein, Paulson's successor at Goldman Sachs; John Mack, CEO of Morgan Stanley; and Vikram Pandit, CEO of Citigroup.

These men have shown themselves to be far more interested in preserving themselves than in stabilizing the general economy for American citizens. And it's a safe bet (probably the safest out there) that their philosophy remains intact. . .

So far, he has decided to spend $250 billion of that $700 billion to buy equity stakes in banks whose future losses are still unknown. The rest could conceivably be used to buy up toxic assets.

These, and other related decisions are to be made, in large part, by Paulson's former protege at Goldman Sachs (and now interim assistant treasury secretary) Neel Kashkari. Kashkari described the equity purchase program as "voluntary and designed with attractive terms to encourage participation from healthy institutions."

Joan Veon - People who adhere to a "buy and hold" strategy don't realize that in a time of market declines the ones that sold took your gain as they realized the gain. Those who hold their investments watch as it declines and their gains vanish. Selling high is one of the easiest transfers of wealth. To illustrate this principle, think of the market as a glass of root beer. At the top you have the fizz and underneath the fizz is the liquid. Buy and hold is the liquid as it supports the fizz. The people who trade in order to lock up gains and minimize losses comprise the fizz. In order for the fizz to fizz, it is dependent on the liquid in order to do take their gains. . .

As we have noted, both presidential campaigns have been taking advise from those directly involved in the current fiscal crash, including Phil Gramm in the case of John Mccain and Robert Rubin in the case of Obama. Here's more on Rubin's role:

Washington Post The meeting of the President's Working Group on Financial Markets on an April day in 1998 brought together Federal Reserve Chairman Alan Greenspan, Treasury Secretary Robert E. Rubin and Securities and Exchange Commission Chairman Arthur Levitt Jr. -- all Wall Street legends, all opponents to varying degrees of tighter regulation of the financial system that had earned them wealth and power.

Their adversary, although also a member of the Working Group, did not belong to their club. Brooksley E. Born, the 57-year-old head of the Commodity Futures Trading Commission, had earned a reputation as a steely, formidable litigator at a high-powered Washington law firm. She had grown used to being the only woman in a room full of men. She didn't like to be pushed around. Now, in the Treasury Department's stately, wood-paneled conference room, she was being pushed hard.

Greenspan, Rubin and Levitt had reacted with alarm at Born's persistent interest in a fast-growing corner of the financial markets known as derivatives, so called because they derive their value from something else, such as bonds or currency rates. Setting the jargon aside, derivatives are both a cushion and a gamble -- deals that investment companies and banks arrange to manage the risk of their holdings, while trying to turn a profit at the same time.

Unlike the commodity futures regulated by Born's agency, many newer derivatives weren't traded on an exchange, constituting what some traders call the "dark markets." There were now millions of such private contracts, involving many of Wall Street's top firms. But there was no clearinghouse holding collateral to settle a deal gone bad, no transparent records of who was trading what.

Born wanted to shine a light into the dark. She had offered no specific oversight plan, but after months of making noise about the dangers that this enormous market posed to the financial system, she now wanted to open a formal discussion about whether to regulate them -- and if so, how.

Greenspan, Rubin and Levitt were determined to derail her effort. Privately, Rubin had expressed concern about derivatives' unruly growth. But he agreed with Greenspan and Levitt that these newer contracts, often called "swaps," weren't exactly futures. Born's agency did not have legal authority to regulate swaps, the three men believed, and her call for a discussion had real-world consequences: It would cast doubt over the legality of trillions of dollars in existing contracts and create uncertainty over how to operate in the market.

At the April meeting, the trio's message was clear: Back off, Born.

"You're not going to do anything, right?" Rubin asked her after they had laid out their concerns, according to one participant.

Born made no commitment. Some in the room, including Rubin and Greenspan, came away with a sense that she had agreed to cool it, at least until lawyers could confer on the legal issues. But according to her staff, she was neither deterred nor chastened. . .

Rubin, in an interview, said of Born's effort, "I do think it was a deterrent to moving forward. I thought it was counterproductive. If you want to move forward . . . you engage with parties in a constructive way. My recollection was, though I truly do not remember the specifics of the meeting, this was done in a more strident way.". . .

Born didn't back off on derivatives, either. On May 7, 1998, two weeks after her April showdown at Treasury, the commission issued a "concept release" soliciting public comment on derivatives and their risk.

The response was swift and blistering. Within hours, Greenspan, Rubin and Levitt cited their "grave concerns" in an unusual joint statement. Deputy Treasury Secretary Lawrence Summers decried it before Congress as "casting a shadow of regulatory uncertainty over an otherwise thriving market.". . .

MSNBC - Cash America International Inc., which operates more than 500 pawnshops in 21 states under the Cash America Pawn and SuperPawn brands, reported that second-quarter profits rose by 52 percent over the same quarter last year. It projected that profits would rise by another 13 percent to 20 percent over that when it reports third-quarter results later this month. . . "Higher loan demand continued our trend of increased revenue from pawn loans, and we experienced better-than-expected retail sales activity during the quarter," said Daniel Feehan, the company's president and chief executive.
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Robert Wenzel, Economic Policy Journal - Please sit down before you read this. If you have high blood pressure or heart trouble don't even try to read this, find a decent sports page instead, this is not for you. Approximately half of the first $250 billion tranche of money approved by Congress for the mortgage crisis will end up in the hands of the healthy big banks. . .

Citigroup and JPMorgan Chase were told they would each get $25 billion; Bank of America and Wells Fargo, $20 billion each (plus an additional $5 billion for their recent acquisitions); Goldman Sachs and Morgan Stanley, $10 billion each, with Bank of New York Mellon and State Street each receiving $2 to 3 billion. Wells Fargo will get $5 billion for its acquisition of Wachovia, and Bank of America the same for amount for its purchase of Merrill Lynch. So much for bailing out the mortgage market.

Here's the kicker: The shares will not be dilutive to current shareholders, a concern to banking chief executives, because perpetual preferred stock holders are paid a dividend, not a portion of earnings. In other words, all current shareholders are protected, unlike Lehman, Bear Stearns, Fannie Mae and Freddie Mac shareholders.

No matter how they frame this,the truth is this is a roughly $125 Billion going away gift from the Bush Administration to Wall Streets elite.

California Nurse - "Clearly, the proposal to partially nationalize some banks comes as our financial system continues to plunge off the cliff. But there's no less a critical emergency in our healthcare system," said Rose Ann DeMoro, executive director of the 85,000-member National Nurses Organizing Committee/California Nurses Association.

Consider that on the same day our government moved to take over collapsing banks, the U.S. Census Bureau released data that 16 percent of Americans under 65 are uninsured, and in some areas, like south Florida, the number is as high as 30 percent.

Another report out today in the Wall Street Journal, noted that employers are expected to increase co-pays, deductibles and other out-of-pocket costs to workers by more than 10 percent next year. This comes at a time when one in five Americans already self-rations care for which they are "insured" by skipping medications, doctors visits, vaccinations, and other needed care.

"If we can bail out the financial speculators and the banking CEOs, why can't we do the same for the tens of millions of Americans facing bankruptcy and healthcare calamity due to the meltdown of our healthcare system?" DeMoro asked. "If it's good enough for Wall Street, why leave out the rest of America?"

Through the simple, cost-effective approach of improving and expanding Medicare to cover everyone, the U.S. could effectively nationalize the financing of healthcare delivery, a single-payer system, while leaving intact the mostly private system of hospitals and doctors.

This summer, a report from the Commonwealth Fund found the U.S. ranks last among 19 comparable industrial nations in preventable deaths -- 101,000 fewer Americans would die annually if the U.S. matched the benchmarks of those other countries. The main difference is all those other nations have a nationalized or single-payer healthcare system, such as our U.S. Medicare system.

"If it's good enough for every other industrialized country, if it's good enough for the speculators and CEOs who have mortgaged our financial security, it ought to be good enough for the rest of America," DeMoro said.

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