Category Archives: Banking

Frank Sends Letter on TARP Repayments to Committee Members

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Barney Frank’s letter to members of the House Financial Services Committee

To: Members, Financial Services Committee

From: Barney Frank, Chairman

Today the Treasury announced that 10 of the largest financial institutions participating in the Capital Purchase Program (CPP) will be allowed to repay the $68 billion investment made by American taxpayers.

That does not alter ‘taxpayer’ risk. They lose once private capital is gone in either case.

That is good news on three fronts. First, it means the program is working and has begun to help restore stability to our vital financial system.

The ‘improvement’ had nothing to do with TARP. It may have been helped by the FDIC not closing down these institutions when capital was deemed deficient, but the FDIC could have kept those institutions open under those same terms and conditions as imposed by TARP.

Second, it means that the government will have additional resources to address continuing needs without having to ask taxpayers for more money or increasing borrowing.

Functionally the FDIC can impose the same terms and conditions. The difference is that the FDIC is ‘funded’ by a tax on banks, rather than TARP being an obligation of ‘general revenues.’ However, the FDIC is guaranteed by the government and the FDIC tax on banks that is passed through to the general public might be more regressive than the average IRS tax.

Also, regarding ‘borrowing’ the TARP funds advanced to banks add the reserves that are used to buy the additional government securities.

And, third, it means that that the taxpayer protections and compensation restrictions that Congress insisted be included in the original legislation are having the intended effect – taxpayers are participating in the upside as these institutions recover and raise additional private capital in order to exit the government program.

Again, functionally the FDIC could have imposed the identical terms and conditions.

In sum, today’s announcement means that over one third – approximately $70 billion – of the $199 invested through the CPP has been, or will soon, be repaid. In addition CPP recipients have already paid an additional $4.5 in preferred stock dividends during the past seven months. That means that almost $75 billion has already been earned or repaid. Further those who repay have the right to repurchase the warrants held by Treasury at current market value – further increasing the return to taxpayers.

Yes, it has functioned as a tax on banks and the private sector in general, thereby reducing aggregate demand during a punishing recession that has resulted from government’s failure to sustain aggregate demand.

Congratulations- job well done!!!


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WestLB Was Close To Being Shut Down Over Weekend

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What seems to be happening is bank ‘funding needs’ are become funding needs of Germany itself.

While this adds to Germany’s funding pressures, this process can go on indefinitely unless/until germany cannot somehow fund itself.

Not long ago the finance ministers announced they had a contingency plan for that possibility but wouldn’t say what that plan was leaving open the possibility they were bluffing. The CDS markets could be the best leading indicators of real trouble. With the US ‘recovery’ hitting a ‘soft patch’ of very low and very flat gdp and unemployment rising with productivity gains, an export dependent Eurozone looks like it will continue to struggle.

It just dawned on me that the Bush recovery got help from the fraudulent sub prime lending while it lasted, as the Clinton expansion got an assist from the pie in the sky valuations of the dot com boom, as the Reagan boom was assisted by the fraudulent S and L lending while that lasted. Without that kind of supplemental dose of aggregate demand, the automatic stabilizers alone while braking the decline probably do not produce all that robust of a recovery.

And if we follow the lead of Japan and tighten fiscal with every green shoot we wind up with the same results.

DJ WestLB Was Close To Being Shut Down Over Weekend

June 8 (Dow Jones) — German state-controlled bank WestLB AG was
close to being shut down over the weekend, people familiar with the
situation told Dow Jones Newswires Monday.
Bundesbank President Axel Weber and President of Germany’s BaFin
financial regulator Jochen Sanio threatened to close down the state bank
at crisis talks held over the weekend, the people familiar with the
talks said. It was only after this threat that savings banks agreed to
raise the guarantee framework for the debt-laden bank, the people said.

Late Sunday, WestLB owners said they raised their guarantee
framework for the bank by another EUR4 billion. The people familiar with
the situation said the savings bank agreed to extend the guarantee
umbrella after it was ensured that a solution wouldn’t hamper the spin
off of toxic assets into a so-called “bad”
German bank.

Regional banking associations WLSGV and RSGV together hold more than
50% of the shares, while the state of North Rhine-Westphalia has a 17.5%
stake and NRW.BANK holds 31.1%. NRW.BANK’s owners are the state of North
Rhine-Westphalia with 64.7% and WLSGV and RSGV with 17.6% each.


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FDIC undervalued failed banks as suspected

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As suspected at the time, some (not all) of the failed banks were undervalued by the FDIC to facilitate a quick transfer to other institutions to the detriment of the former shareholders.

Worse, the FDIC said some of the banks failed due to liquidity and not capital impairment.
This means they failed because FDIC deposit insurance and Fed lending failed to do their job of supporting the liability side of banking as per the business model of this long standing ‘public/private partnership’ called banking.

JPMorgan $29 Billion WaMu Windfall Turned Bad Loans Into Income

by Ari Levy and Elizabeth Hester

May 26 (Bloomberg) — JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income.

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks’ balance sheets and the cash flow they’re expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four- year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

“It will benefit these guys dramatically,” Willens said. “There’s a great chance they’ll be able to record very substantial gains going forward.”

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

Purchase Accounting

The purchase-accounting rule, known as Statement of Position 03-3, provides banks with an incentive to mark down loans they acquire as aggressively as possible, said Gerard Cassidy, an analyst at RBC Capital Markets in Portland, Maine.

“One of the beauties of purchase accounting is after you mark down your assets, you accrete them back in,” Cassidy said. “Those transactions should be favorable over the long run.”

JPMorgan bought WaMu’s deposits and loans after regulators seized the Seattle-based thrift in the biggest bank failure in U.S. history. JPMorgan took a $29.4 billion writedown on WaMu’s holdings, mostly for option adjustable-rate mortgages and home- equity loans.

“We marked the portfolio based on a number of factors, including housing-price judgment at the time,” said JPMorgan spokesman Thomas Kelly. “The accretion is driven by prevailing interest rates.”

Wachovia ARMS

JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.

Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.

The Wachovia loans added $561 million to the bank’s first- quarter interest income, leaving Wells Fargo with a remaining accretable yield of almost $10 billion.

Government efforts to reduce mortgage rates and stabilize the housing market may make it easier for borrowers to repay loans and for banks to realize the accretable yield on their books. With mortgage rates below 5 percent, originations surged 71 percent in the first quarter from the fourth, a pace that may accelerate during 2009, said Guy Cecala, publisher of Inside Mortgage Finance in Bethesda, Maryland.

Recapturing Writedowns

Wells Fargo, the biggest U.S. mortgage originator, doubled home loans in the first quarter from the previous three months, in part through refinancing Wachovia loans.

“To the extent that the customers’ experience is better or we can modify the loans, and the loans become more current, that could help recapture some of the writedown,” Wells Fargo Chief Financial Officer Howard Atkins said in an April 22 interview.

Banks still face the risk that defaults may exceed expectations and lead to further writedowns on their purchased loans. Foreclosure filings in the U.S. rose to a record for the second straight month in April, climbing 32 percent from a year earlier to more than 342,000, data compiled by Irvine, California-based RealtyTrac Inc. show.

Accretable Yield

The companies bought by Wells Fargo, JPMorgan, PNC and Bank of America were among the biggest lenders in states with the highest foreclosure rates, including California, Florida and Ohio. Housing prices tumbled the most on record in the first quarter, leaving an increasing number of borrowers owing more in mortgage payments than their homes are worth, according to Zillow.com, an online property data company.

“We’ve still got a lot of downside to work through this year and probably through at least part of next,” said William Schwartz, a credit analyst at DBRS Inc. in New York. “If I were them, I wouldn’t be claiming any victory yet.”

The difference in accretable yield from bank to bank is due to the amount of impaired loans, the credit quality of the acquired assets and the state of the economy when the deals were completed. Rising and falling interest rates also affect accretable yield for portfolios with adjustable-rate loans.

PNC closed its $3.9 billion acquisition of National City on Dec. 31, after the Cleveland-based bank racked up more than $4 billion in losses tied to subprime loans. PNC, based in Pittsburgh, marked down $19.3 billion of impaired loans by 38 percent, or $7.4 billion, and said it expected to recoup half of the writedown. After gaining $213 million in interest income in the first quarter and making some adjustments, the company has an accretable-yield balance of $2.9 billion.

‘Being Prudent’

“We’re just being prudent,” PNC Chief Financial Officer Richard Johnson said in a May 19 interview.

Johnson said he expects the entire accretable yield to result in earnings. The company has taken into “consideration everything that can go wrong with the economy,” he said.

Bank of America, the biggest U.S. bank by assets, has potential purchase-accounting income of $14.1 billion, including $627 million of gains from Merrill Lynch & Co. and the rest from Countrywide. Bank of America bought subprime lender Countrywide in July, two months before the financial crisis forced Lehman Brothers into bankruptcy and WaMu into receivership.

As market losses deepened, Bank of America had to reduce the returns it expected the impaired loans to produce from an original estimate of $19.6 billion.

Countrywide Marks

“The Countrywide marks in hindsight weren’t nearly as aggressive,” said Jason Goldberg, an analyst at Barclays Capital in New York, who has “equal weight” investment ratings on Bank of America and PNC and “overweight” recommendations for Wells Fargo and JPMorgan.

Bank of America spokesman Jerry Dubrowski declined to comment.

The discounted assets purchased by JPMorgan and Wells Fargo make the stocks more attractive because they will spur an acceleration in profit growth, said Chris Armbruster, an analyst at Al Frank Asset Management Inc. in Laguna Beach, California.

“There’s definitely going to be some marks that were taken that were too extreme,” said Armbruster, whose firm oversees about $375 million. “It gives them a huge cushion or buffer to smooth out earnings.”


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Vice Chair Kohn on fiscal expansion

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Yes, he’s got that part very right!!!

>   On Mon, May 25, 2009 at 11:06 PM, Roger wrote:
>   
>   Federal Reserve Vice Chairman Donald Kohn:
>   
>   Interactions between Monetary and Fiscal Policy in the Current Situation
>   
>   [I]n the current weak economic environment, a fiscal expansion may be much more
>   effective in providing a sustained boost to economic activity.
>   Doesn’t say anything about when. Looks like it’s already too late to forestall a pileup.
>   


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German debts set to blow ‘like a grenade’-Pritchard

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Completely agreed about the possibility of a bank blow up.

And it’s also possible the government plan blows up the government.

The eurozone is the region vulnerable to ratings downgrades- both banks and national governments.

Not the UK and US governments where spending is not revenue constrained.

The ECB can ‘save’ the eurozone but only by extending credit beyond that ‘permitted’ by the treaty which in some ways they have already done.

This warning comes from a financial regulator:

German debts set to blow ‘like a grenade’

by Ambrose Evans-Pritchard

May 25 (Telegraph) — German debts set to blow ‘like a grenade’
Germany’s financial regulator BaFin has warned that the toxic debts of the country’s banks will blow up “like a grenade” unless they take advantage of the government’s bad bank plans to prepare for the next phase of the crisis.

German Chancellor Angela Merkel’s bad bank plan has been heavily criticised Photo: EPA
Jochen Sanio, BaFin’s president, said the danger is a series of “brutal” downgrades of mortgage securities by the rating agencies, which would eat into the depleted capital reserves of the banks and cause broader stress across the credit system. “We must make the banks immune against the changes in ratings,” he said.

The markets will “kill” banks that try to go it alone without state protection, warning that banks have €200bn (£176bn) of bad debts on their books. “We are pretty sure that within a month or two our banks will feel the full force of the sharpest recession ever on their credit portfolios,” he said, speaking after the release of BaFin’s annual report last week.

The International Monetary Fund (IMF) has called for a stress test for Europe’s banks along the lines to the US Treasury’s health screen, saying the region “urgently needs to weatherproof its institutions”.

The IMF said European institutions have written down less than 20pc of projected losses of $900bn (£566bn) by 2010. Euro area banks will have to raise a further $375bn in fresh capital, compared with $275bn for US banks. The Tier one capital ratio is 7.3pc in Europe, and 10.4pc in the US.

The German bad bank plan has been heavily criticised as an attempt to brush the problems under the carpet until after the elections in September. It allows banks to spread losses over 20 years in an off-balance sheet vehicle – much like the “SIVs” that masked their extreme leverage in the first place – and risks repeating the Japanese error of letting “zombie” banks limp on rather than purging the system.

The recession has hit Europe much harder than expected. German GDP has contracted by 6.9pc over the last year, and the eurozone as a whole has shrunk 4.6pc, although there are signs that the economy may be through the worst.

Germany’s IFO business confidence index rose to 84.2 in May, the highest since December, and German exports have started to rise again after a catastrophic fall of 16pc. But Carsten Brzeski from ING said it is too early to celebrate.


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Personal interest income in free fall

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Looks to me like this is going to be a strong headwind for a while, that is offsetting some of the fiscal expansion. It should be a ‘good thing’ as it means tax cuts and/or increased government spending is in order, but that’s not in the cards.

The non government sectors are large net savers to the tune of the cumulative government budget deficit spending.

Savers are continuously getting recouponed lower as fixed rate CD’s, tsy secs, etc. mature. This reduces aggregate demand.

Borrowers are helped some but not as much as borrowing rates remaining high due to the price of risk.

Net interest margins for banks and other lenders remain high and are drains on aggregate demand as banks are not spending their operating profits on goods and services, but instead adding to reserves.

Personal Income Graph


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German Bad Bank Plan

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(email exchange)

The ‘short cut’ would be to allow banks to mark to model aggressively and then write off the losses over 20 years so the losses don’t alter capital ratios.

And while it does drive down their ‘economic net worth’ and reveals ‘actual shareholder equity’ immediately, as long as they can fund themselves with insured deposits and central bank funding operations, they are not affected.

They may even be allowed to pay dividends based on reported (though arguably overstated) earnings.

And they can still raise new capital if the new investors can get in at levels that give sufficient returns on investment.

Also, as is the case in the various US plans, the price the assets are sold at is critical.

The government does not want to overpay and subsidize bank shareholders, and there is no advantage for a bank to sell too low.

This plan also adds to the ‘financial stress’ of the German national government and weakens its creditworthiness as their economy continues to deteriorate and deficit funding needs grow.

While more support from the ECB has been discussed, it is not a certainty.

>   
>   On Wed, May 13, 2009 at 7:07 AM, wrote:
>   
>   Original Message 5/13 7:02:27
>   The German government today approved a “bad bank” plan to take
>   toxic assets off the balance sheet of banks. The plan will likely be
>   passed by parliament within six weeks.
>   
>   The key idea of the plan is to give banks up to 20 years to cover their
>   losses from toxic structured assets without putting much taxpayer >   money at risk.
>   
>   
>   Judging by the initial draft, the key elements of the plan are:
>   
>   Banks can deposit toxic structured assets at 90% of the book
>   value in an in-house special purpose vehicle (“bad bank”).
>   
>   In return, the banks receive bonds that are guaranteed by the
>   government’s bank support agency (SoFFin) against a fee. The
>   banks thus swap bad assets against good assets.
>   
>   Independent auditors will determine the “true” value of the toxic
>   structured assets.
>   
>   The banks than have up to 20 years to build up reserves in equal
>   annual instalments to cover the difference between the face value
>   (minus the 10% haircut) and the “true” value. In the end, the banks
>   will also have to make up for any difference between the “supposed
>   ”true” value of the toxic assets and the amount that their “bad
>   banks” realise upon winding down the bad assets.
>   
>   
>   The problems of the Landesbanken, which go well beyond toxic structured
>   assets, will be dealt with by a separate procedure to be unveiled within a
>   few weeks.
>   
>   We haven’t seen all details of the law yet, and it may well be changed
>   in parliament.
>   
>   For banks, participation in the scheme is voluntary. The basic idea, namely
>   to ease bank balance sheets constraints up-front and to give them up to 20
>   years time to build up reserves against losses from toxic structured assets,
>   looks sound. As usual, the devil could be in the detail. So far, German banks
>   have accepted government support only late and reluctantly because they
>   consider the conditions attached as too harsh. If few banks participate, the
>   ”bad bank” plan may not much impact on lending behaviour of banks.


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Fed Disclosure of Member Bank Borrowings

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(email exchange)

>   
>   On Tue, May 12, 2009 at 10:35 AM, wrote:
>   
>   We are talking trillions of dollars from our pocket…
>   

The Fed is lending to its member banks. That is the same as the banks taking in deposits insured by the FDIC. Banks specific loans are only seen by regulators as a matter of public purpose.

Do you want every loan by every bank revealed? If so, lobby congress, as the majority in congress doesn’t want that.

Your beef is with congress, not the Fed.

Also, loans to member banks are not ‘dollars from our pocket’ unless they aren’t repayable, and the regulators monitor banks for capital compliance and they’ve done an ok job so far in that regard. Relatively few FDIC losses given the magnitude of the slowdown.

>   
>   Where is accountability for keeping the dead alive?
>   

Funding banks is not keeping the dead alive. All banks are always publicly funded via FDIC insured deposits. So happens the Fed is offering funds cheaper and for longer term than the FDIC, so it’s getting the business.


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Buffett looking to the US for takeovers

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Looks to me at current prices every public company is a takeover target, including Berkshire itself.

Buffett Resumes US takeover Hunt as Prices, Competition Ease

by Betty Liu and Erik Holm

Mar 12 (Bloomberg) — BillionaireWarren Buffett, who took a four-country tour of Europe less than a year ago in search of takeover targets, now says buying opportunities are presenting themselves in the U.S.


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Meredith Whitney falls into the better lucky than good group

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Citigroup Will Have to Sell More Assets: Whitney

Mar 10 (CNBC) — Whitney also said that the government is trying to sweeten deals for the private sector in order to get more cash infusions into U.S. banks. “The government cannot do it alone,” said Whitney. “They need the private sector to come back.”


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