Posts filed under “Bailout Nation”

Ugly Process: Rationalizing Insolvent Banks Existence

Of the many issues that arise via the banking bailouts we have seen, perhaps the most pernicious is how corrosive the process becomes. It corrupts even the most well intended parties.

The latest example is the stress tests, which run the risk of being window dressing. As noted last week, the Stress Tests themselves weren’t very stressful. And, now that some of the results are coming in, the cure for inadequate capital is not more capital, but an accounting trick — converting preferred stock to common. As Paul Kasriel of Northern Trust describeed it, this amounts to nothing more than Accounting Alchemy — the finacial equivalent of lead into gold.

Thus, we see the major test for the sector was inadequate to cleanly identify potential weakness. And even by that soft standard, the cure is inadequate.

US banks are suffering a solvency problem, and what they need is more capital, not an accounting sleight of hand. Yet that is precisely what they are getting — the same clever financial engineering that led to the crisis in the first place. All Treasury needs is more leverage and a few derivatives and the transformation into the financial Borg will be complete.

From Bloomberg:

“At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.

While some of the lenders may need extra cash injections from the government, most of the capital is likely to come from converting preferred shares to common equity, the people said. The Federal Reserve is now hearing appeals from banks, including Citigroup Inc. and Bank of America Corp., that regulators have determined need more of a cushion against losses, they added.

By pushing conversions, rather than federal assistance, the government would allow banks to shore themselves up without the political taint that has soured both Wall Street and Congress on the bailouts. The risk is that, along with diluting existing shareholders, the government action won’t seem strong enough.”

All this goes to show is that receivership was the correct approach to this in the first place. Instead, we get “Gentleman B” stress tests and nonsense accounting gimmicks. The Treasury and Federal Reserve can no longer be considered honest brokers of the process. They too have been corrupted by the ugly process of rationalizing insolvent banks ongoing existence . . .

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Turning the Corner?
corner
via Dan Wasserman

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Previously:
Stress Test: Not Very Stressful (April 24th, 2009)

http://www.ritholtz.com/blog/2009/04/stress-test-white-paper/

Sources:
Fed Is Said to Seek Capital for at Least Six Banks
Robert Schmidt and Rebecca Christie
Bloomberg, April 29 2009

http://www.bloomberg.com/apps/news?pid=20601087&sid=aiz06xRmmeOQ&

Preferred Equity into Common Equity – Accounting Alchemy?
Paul Kasriel
Northern Trust, April 27, 2009

http://web-xp2a-pws.ntrs.com:80/content//media/attachment/data/econ_research/0904/document/ec042709.pdf

See Also
Time for Bank Creditors to Share the Pain?
DAVID LEONHARDT
NYT, April 28, 2009

http://www.nytimes.com/2009/04/29/business/economy/29leonhardt.html

Category: Bailout Nation, Bailouts, Credit

After the Storm…Where Are We Now?

> My fishing buddy David Kotok is hosting a conference in Philly this week where I wll be presenting: The Financial System, Banks & Economy: After the Storm…Where Are We Now? The 27th Annual Monetary and Trade Conference: Thursday, April 30, 2009 The Global Interdependence Center and Drexel University’s LeBow College of Business Present: >…Read More

Category: Bailout Nation, Bailouts, Credit, Derivatives

Simon Johnson and Ferdinand Pecora on Bill Moyers

Bill Moyers speaks with economist Simon Johnson and Ferdinand Pecora biographer and legal scholar Michael Perino. Johnson is a former chief economist of the International Monetary Fund (IMF) and a professor at MIT Sloan School of Management, and Perino is a professor of law at St. John’s University and has been an advisor to the Securities and Exchange Commission.

click for video

moyers-johnson

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Bill Moyers

http://www.pbs.org/moyers/journal/04242009/watch.html

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Category: Bailout Nation, Economy, Video

Bailout Nation: Estimated Delivery May 8th

Wow, this is kinda cool: Amazon (but not Barnes & Noble or Borders) is showing an estimated delivery date for Bailout Nation on May 8th, 2009: >

Category: Bailout Nation, Bailouts

The Power of “The Daily Show”

Yesterday, I had a lunch meeting about Bailout Nation with the folks at Borders HQ in Detroit was quite interesting. I was over-caffeinated, and essentially babbled away for 2 hours. I did manage to remember to ask a few questions, and learned quite a bit. It was an education for me in a real “Art…Read More

Category: Bailout Nation, Bailouts, Financial Press, Television

Bailout Nation Update

The Bailout Nation manuscript has officially been accepted by Wiley. I am told we are on target for a mid-May publication date, with the book in the stores sometime before Memorial Day. (Makes for the perfect beach read!) You will be able to pre-order the book at Barnes & Noble or Amazon or Borders. A…Read More

Category: Bailout Nation, Books, Markets

Bailout Nation Cover

Well, here is the final version of the cover, by graphic artist/cartoonist John Sherffius. John also did the ‘toons that adorn each of the 5 Section pages. Its available for pre-order at Amazon with a May 4 publication date. > > His work is awesome . . .

Category: Bailout Nation, Bailouts, Books, Corporate Management, Credit, Derivatives, Federal Reserve, Markets

Bailout Nation Editor Quits McGraw Hill

I now have permission from the relevant parties to release this information: The week after McGraw Hill refused to publish the book as written, the editor I was working with there, Jeanne Glasser, resigned. Jeanne Glasser was the person who first approached me about doing this book. She was terrific to work with, and I…Read More

Category: Bailout Nation, Bailouts, Books

Wiley to Publish Bailout Nation

The deal is now official, so I can make the announcement: Wiley is the new publisher of Bailout Nation. They wee one of more than a dozen publishers that approached me about the book. The  denial from the PR weenies at McGraw Hill was classic. Here is my favorite part: The book didn’t meet our…Read More

Category: Bailout Nation, Books, Credit, Markets

Endnotes/Sources

These are the endnotes in the submitted Manuscript. As you can see, verifying them should be relatively simple given the included web page URL.

These do not reflect the additional 90 pages of sources — McGH requested I remove to make the book smaller.

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N O T E S

Chapter 1
1. Daniel Gross, Pop! Why Bubbles Are Great for the Economy
(New York: HarperCollins, 2007).

Chapter 2
1. Casimir Frank Gierut,
Taxpayers’ Message to Congress: Repeal the Federal Reserve Banks: Pandora’s Box of Criminal Acts (Bunker Hill, Ill.: National Committee to Repeal the Federal Reserve Act, 1983), p. 31.

(The Federal Reserve Act was passed in 1913 on a Sunday two days before Christmas, when most of Congress was on vacation. Wilson’s comments were made years later, regarding the bill he signed into law.)

2. Steve Matthews,
“The Improviser,”
Bloomberg Markets, June 2008;
http://www.bloomberg.com/news/marketsmag/mm_0608_ story2.html

3. The Economic Club of New York, 395th Meeting,
New York City, April 8, 2008;
http://econclubny.org/files/Transcript_Volcker_ April_2008.pdf

4. “Jefferson’s Opinion on the Constitutionality of a National Bank,”
1791,
The Avalon Project at Yale Law School;

http://avalon.law.yale.edu/18th_century/bank-tj.asp

5. Virtual Tour of Historic Philadelphia,
“Second Bank of the United States/Portrait Gallery: Biddle vs. Jackson”;

http://www.ushistory.org/tour/tour_2bank.htm

6. Roger T. Johnson, “Historical Beginnings of the Federal Reserve,” Federal
Reserve Bank of Boston, December 1999;

http://www.bos.frb.org/about/pubs/begin.pdf

7. Stephen Mihm,
A Nation of Counterfeiters: Capitalists, Con Men, andthe Making of the United States
(Cambridge, Mass.: Harvard University Press, 2007).

8. Ibid., p. 6.

9. Johnson, “Historical Beginnings.”

10. Robert F. Bruner and Sean D. Carr,
The Panic of 1907: Lessons Learned from the Market’s Perfect Storm
(Hoboken, N.J.: Wiley, 2007), p. 7.

Chapter 3

1. Robert J. Shiller,
“A Government Hand in the Economy Is as Old as the Republic,”
Washington Post, September 28, 2008, p. B01;

http://www.washingtonpost.com/wp-dyn/content/article/2008/09/26/AR2008092602838.html

2. Daniel Gross,
Pop! Why Bubbles Are Great for the Economy
(New York: HarperCollins, 2007), p. 29.

3. Jonathan Alter,
The Defining Moment: FDR’s Hundred Days and the Triumph of Hope
(New York: Simon & Schuster, 2006), p. 341.

4. C. L. Harriss, History and Policies of the Home Owner’s Loan Corporation
(Detroit: National Bureau of Economic Research, 1951);

http://www.nber.org/books/harr51-1.

5. “Profitable HOLC,”
Time, April 22, 1946;

http://www.time.com/time/magazine/article/0,9171,792832,00.html

6. Alex J. Pollock,
“A 1930s Loan Rescue Lesson,”
Washington Post, March
14, 2008, p. A17;

http://www.washingtonpost.com/wp-dyn/content/article/2008/03/13/AR2008031303174.html

7. Harriss, History and Policies.

8. Ibid.

9. Alan S. Blinder,
“From the New Deal, a Way Out of a Mess,”
New York Times, February 24, 2008;

http://www.nytimes.com/2008/02/24/business/24view.html

10. Harriss, History and Policies.

11. James Butkiewicz,
“Reconstruction Finance Corporation,”
EH.Net Encyclopedia, ed. Robert Whaples, July 20, 2002;

http://eh.net/encyclopedia/article/butkiewicz.finance.corp.reconstruction.

12. Barrie A. Wigmore,
“The Crash and Its Aftermath: A History of Securities Markets in the United States, 1929–1933,” Contributions in Economics and Economic History, no. 58 (1985), p. 540.

Chapter 4

1. The company placed the blame for these losses and its subsequent difficulties on military contracts arranged under the Total Package Procurement (TPP) procedure instituted by former Defense Secretary Robert McNamara, a system “designed to end overrun claims by setting a strict ceiling on the final cost of any project.”

2. The TPP was a fixed contract purchasing program instituted by the Defense Department where defense contractors would bid for military programs based on their expected development and production costs, and the government would pay only up to the contract ceiling. The losses involved in any contract would thus be shouldered by the contractor, with the government liable only for the ceiling price.

3. Nick Barisheff,
“August 15, 1971: Inflation Unleashed,” Financial Sense University, May 11, 2006;

http://www.financialsense.com/fsu/editorials/bms/2006/0511.html

4. “The Biggest Bankruptcy Ever,”
Time, July 6, 1970;

http://www.time.com/time/magazine/article/0,9171,878372,00.html

5. ”The Penn Central Reorganization Revisited—Again,”
News and Insights, DLA Piper, January 14, 2008;

http://www.dlapiper.com/penn_central_reorganization/.

6. “Chrysler’s Crisis Bailout,” Time, August 20, 1979;

http://www.time.com/time/magazine/article/0,9171,947356,00.html

7. “Chrysler Corporation Loan Guarantee Act of 1979: Remarks on Signing H.R. 5860 into Law,”
January 7, 1980;
http:// www.presidency.ucsb.edu/ws/index.php?pid=32978

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Category: Bailout Nation, Bailouts, Books