Saturday, October 31, 2009

Cal National Bank's $500MM Preferred Shares in Fannie & Freddie WORTHLESS but AIG's CDS TBTF counterparties made whole

When it comes to bank's management safety and soundness decisions this one seems to draw a line; was it more safe and sound to invest a bank's funds in preferred shares of large, (correct me please if I am wrong here) AAA - rated Government sponsored entities with a long standing "open market - priced" belief of an implicit (if not explicit) government guarantee or as the TBTF club did, hedge large, excuse me but I'm not off first base when I suggest grotesquely large, leveraged, primarily off balance sheet DERIVATIVE investments in RMBS, CDO's, CPDO's and CMBS with credit default swaps (CDS) issued and backed by an unregulated company? Yes an UNREGULATED company, perhaps even an off shore entity.
As an aside were they perhaps taking legal advantage of lower than IRS off shore corporate tax rates or more loosely regulated and enforced capital requirements?

AP and the LA Times reported the death of Cal National was brought about in part due to $500 million virtually WORTHLESS investment it held in preferred shares of Fannie Mae and Freddie Mac as reported also by the LA Times.
Read AP story here
Read LA Times story here,0,5224531.story

Uh lets do a side by side - Fannie and Freddie were both GSE's (government sponsored entities with the long standing implicit government back stop), it's preferred securities were at one time not long ago rated triple AAA by all major rating agencies, and paid timely dividends.

AIG was the largest insurance company in the world and according to Hank Greenberg's statements on the Charlie Rose show September 17, 2008 was a "national asset" - yes - true statement - and pleaded for more time (and implied as we learned long ago time is money).

AIG, the regulated insurance company, however was NOT one and the same entity issuing the credit default swaps - although the name was the same - the sameness I believe ended there.

I shouldn't and I don't normally but I can't resist - so I'll stick my neck out on this and hazard a guess that its traders may have intimated that CDS were "backed" by AIG and certain off shore entities including the likes of the Greenberg - controlled CV Starr entities) it was not AIG but AIG Financial Products Group; a separate, not the same, NOT AIG the world's largest insurance company, NOT AIG the "national asset" but this: a distinct cat of a different unregulated stripe, not including the securities lending unit of AIG FPG (of which we'll likely never fully know what was going on there as it's not tightly regulated when it comes to registered securities let alone unregistered securities), not sure what rating they possessed it all - but I'm guessing again but reasonably certain that it was not or ever AAA rated; if at all; it was not or ever a Government sponsored enterprise - it was and still is a PRIVATE ENTERPRISE; Off Shore enterprise, not sure what AM Best rating they possessed, if any how's that for supposed due diligence by the TBTF club? - however, probably not top notch; although we can see similar mono line insurers like MBIA, AMBAC, FGIC, and a host of others and this: the ABSENCE of emergency, extraordinary government support. Yes the ABSENCE of government support.

What was it about AIG's CDS that were more WORTHY of over $182B of US taxpayer / government bailout dollars than Fannie and Freddie's securities - could it be the Too Big to Fail TBTF Club members? Ya think?

Could it be the TBTF club allied / aligned themselves post the Bear Stearns rescue in March 2008, then after the cool, balmy, soothing breezes of summer-in-the-Hamptons vacations were over spied the chess board and which pieces needed moving and leveraged themselves against the weak independent Lehman Brothers. Could it be that Mr Fuld thought it would be as it always was - when others in the nascent TBTF club were no longer dealing them cards let alone from the same deck of cards?

At least it appears to this writer (and I did get hit in the head playing soccer a week or so ago) that private insurance contracts were IN FACT MORE worthy of government support than the preferred shares of the GSE's - calling a spade a shovel and so should more of those watching the US Taxpayers' and future generations' purse.

But we can see that the FDIC TLGP program is supporting over $248B in debt - some issued by NOT FDIC INSURED - correct NOT FDIC insured affiliates of 32 banks and thrifts. See the FDIC's TLGP September 2009 report here AND READ the FDIC's footnote very slowly and carefully - "The amount of FDIC-guaranteed debt that can be issued by each eligible entity, or its cap, is based on the amount of senior unsecured debt outstanding as of September 30, 2008
Unsecured debt and the date - September 30, conveniently AFTER the AIG CDS counterparties bailout; but then maybe it's just a coincidence huh?

As stated here before Membership and Affilation has its privileges! Why do we enable same with radio silence? Raise your voice - just once it won't hurt, it won't kill you, you might even feel al little better (I can guarantee this: you won't feel any worse), your voice may inspire one more. Then it may just turn into a loud roar of disgust, CLAWBACK and CHANGE WE CAN BELIEVE IN.

Monday, October 26, 2009

Taxpayer funds wasted on the Financial Crisis Inquiry Commission-TBTF Club members should pay

Certain Wall St (and banks, insurance companies and entities like GE Capital; collectively the Financial Services Industry - FSI) have ALREADY published ALL that needs to be reviewed to discover who and what (voluntary, sheer, unvarnished profit-seeking only) behaviors caused and led to the announcement of "crisis" in 2008; as if it were occasion for a Hallmark Card or a Kodak moment.

Annual Reports, Compensation policies and Bonus payments.
Shortly the video called Wall St on LSD will reveal why - any interested party could have and should have been on notice of a changed Wall St.
It's not simply about a breakdown of Glass Steagall - separating commercial from investment banks - it's that certain Wall St / FSI - added a third NEW and very profitable layer - THE ICING ON THE CAKE - PROPRIETARY TRADING.
The Cake's three layers:

  • Commercial bank - obtain a bank charter, accept customers' deposits, loan out, earn a spread, avoid large losses by diversifying among same.
  • Investment bank - underwrite and sell securities, earn fees from mergers and acquisitions, earn fees and commissions for services provided to public customers.
  • Proprietary bank - typically form off balance sheet, special purpose entities officially known as QSPE's or VIE's, leverage assets (from layers one and/or two above) into OTC securities or derivatives, issue short term asset backed commercial paper ABCP, (money market funds buy this stuff), earn a spread. Add more "assets", requiring MORE leverage, use proprietary valuations (so called mark to model), earn greater sums, pay out greater CASH bonus compensation.
There's NO need to erect a new edifice as political cover in this commission.

"Too big to fail" otherwise known as the legal oligopolization, permanent enshrinement of certain Wall St firms - is an invention of K St. lobbyists. TBTF is what is known as treating the weeds instead of the roots of the problem analysis and solutions. It's a shame and a missed opportunity since if the insolvent were ALLOWED to fail it would likely have revealed the roots of the crisis - leverage, swaps, derivatives oft hidden in the proprietary (for the house ONLY) trading book.
TBTF is a barrier to entry - a barrier which protects the TBTF club members; some more than others; some have outperformed (mythically and magically) for years; can't be smarter people; can't be transparent markets (as in some cases they constitute the market of information about that so-called "market"); can't be hard work - but likely to be information advantages and access thereto. Who, what and where are the sources and signals of information? Let's just say it's a network effect. Nodes of which may appear as in the Galleon matter - where executives alleged $250M was paid to Goldman Sachs and/or Morgan Stanley (where Galleon was purported to be among the top five hedge fund customers) for what's been termed valuable "market color." Was this ALL the information - winks, nods, silent answers, "information" shared? Who will ask probing questions and connect the dots?
Read story here

Other "Inventors" include Mr Paulson and Mr Bernanke as in the "Emergency" stabilization acts forced upon Congress last fall; tell me something - HP and BB had NO idea what was happening BEFORE the "crisis" occurred?

There is no need to waste US Taxpayers money on such a commission.
NO one put a gun to the head of ANY banker and forced them to lend money to a borrower.
  • NO one put a gun to the head of ANY Wall St firm to BUY ANY mortgages let alone Sub Prime mortgages then create Sub Prime Mortgage backed securities.
  • NO one put a gun to the head of ANY Wall St firm and told them they could not independently seek other opinions of credit worthiness / credit ratings / credit default.
Wall St invented, traded, valued and participated in the above - VOLUNTARILY - NO ONE PUT A GUN TO THEIR HEADS - THEY DID IT TO THEMSELVES. If you're looking for a smoking gun - look no further than CASH bonuses paid out to proprietary traders, managers, executives, officers and others.

AND SHOULD HAVE, COULD HAVE ASKED and modeled "WHAT COULD GO WRONG HERE" - BUT APPARENTLY DIDN'T. One would think that somewhere along the journey (at the rate of over $350B a year the FSI spends on "systems") that would have come up no?

It's very important to point out one thing: NOT all banks are on the FDIC watch list for a reason; they practiced, (by resisting the temptations, oft ridiculed) not just talked safety and soundness of unsustainable asset / collateral valuations during the hockey stick era.

Want more information about the long term ANNUAL returns from real estate? Try mid to high SINGLE DIGITS - during the hockey stick era 40%, 50%, 60% over 100% ANNUAL PRICE APPRECIATION IS EVIDENCE OF ONE THING:

Go look at pages 16 to 18 in this link from Ibbotson (Morningstar)
Or witness that investor-owned properties made up about 5% of the mortgages issued for years, then doubled then doubled again such that investor-owned properties became 20%.

So why do investors own anything? Primarily, in hoped for price appreciation coddled along with IRS Code section 1031 higher-priced properties required in exchange - Congress didn't know or foresee or those at the NY Fed did not know or foresee? It's a built in escalator for an asset bubble, same dog different color as in asset - based / mark to model compensation for prop traders.

The cause of this crisis is NOT (as Mr Wallison, AEI and member of the Financial Crisis Inquiry Commission) 25 million mortgages (and as Mr Bernanke would have the Morehouse College audience believe last April) - although erudite, glib and plain spoken; it's about the profit-driven bankers who made the loan approvals AND every single out stretched hand / investor in mortgage backed securities RMBS, CMBS and related derivatives CDO's, CPDO's and CDS down the line; ALL OF WHOM COULD HAVE SAID "no" - BUT THEY DIDN'T.

Barry Minkow, Fraud Discovery Institute, a speaker in 2004 at the California CPA Corporate Governance Conference held out the form - taxpayers use Form 4506 (Request for Copy or Transcript of Tax Form pdf request link here where mortgage applicants authorized the IRS to send the borrower's tax returns directly to the lender for what purpose? INCOME (can you spell) V-E-R-I-F-I-C-A-T-I-O-N?

Hmmm...what a novel idea, then something BASIC clearly changed at only certain financial institutions from the safety and soundness embodied in that practice BUT not by all.

And apparently, it was undeserving of recognition; a Hallmark card or Kodak moment; but it could have - FOR SEVERAL YEARS RUNNING IN THE FULL LIGHT OF DAY including personal certifications as required by Sarbanes Oxley - BOARDS, AUDIT COMMITTEES, EXECUTIVES, MANAGERS, INDEPENDENT AUDITORS, REGULATORS, INSTITUTIONAL SHAREHOLDERS AND THE FINANCIAL MEDIA; and in reverse the very proprietary traders whose compensation derived 100% from certain not safe, not sound, not prudent proprietary leveraged speculative investments.

I have a modest suggestion - make the TBTF Club members - NOT the US Taxpayers - pay the full costs of funding this new commission; and allocate such costs among the TBTF club members based upon any / all emergency aid or support as in the FDIC's TLGP and resultant compensation the TBTF member expects to pay out in 2009 compensation; after all the bailout was "Emergency" - so too now the US Taxpayer asks the FSI to make a modest gesture in return.

Wednesday, October 7, 2009

The Clawback; it's a bitch Coalition

GET US Taxpayer Bailout money back (and then some) from Wall St
UPDATE #1 - and any / all economic benefit thereon - namely a piece of record 2009 CASH bonus compensation.

If not for US Taxpayer bailout certain, not all, Wall St. firms and banks were bankrupt last year.
And should have been forced to file as did Lehman or a similar special BK as GM later did.

See quote from Thomas Bowman, Acting Director of OTS, in Reuters April 2009
In defense of the OTS, Bowman said WaMu and IndyMac were not the largest American banks to fail last year."We did not regulate the largest institutions to fail in 2008," Bowman said. "We regulated the two largest institutions that were allowed to fail." The biggest institutions that failed in 2008 -- at least theoretically -- were regulated by the Office of the Comptroller of the Currency, said Bowman, who identified them as Citigroup (C.N: Quote, Profile, Research, Stock Buzz) and Bank of America (BAC.N: Quote, Profile, Research, Stock Buzz). The OCC, also an agency within the Treasury Department, is responsible for overseeing national banks.
Citi and Bank of America "got a systemic risk finding which allowed (for) open bank assistance, which allowed Treasury, the Fed and others to provide them money to avoid that failure," Bowman said.

Certain payments going back 6 years can be clawed back
When in BK certain transfers can be rescinded – including dividends, and certain compensation.
This link discusses Madoff – but applies to any bankruptcy.

Clawbacks are remedies under Sarbanes Oxley Section 304.

Foward to your friends including your elected officials.
More than the righteous, religious and disappointing film from Michael Moore's Capitalism, it's a love story - take action NOW!

Want to know more:
What was known, knowable, unknown or unknowable among US agencies, officials, SEC, and NASD now called FINRA within that which was forseeable

Bernanke papers and speeches link

AIG stops insuring Wall St brokerage firms against bankruptcy in 2003 (not a typo)

SEC allows (certain firms on) Wall St to use new (proprietary) models to value house' trading book 2004 (not a typo) final rule Effective August 2004
in particular READ the comment from Paul Wilkinson

Wall St and financial services industry annual IT spend - wanna guess how much?
If you guess any less than $300 Billion (not a typo) a year (yes annually) - you're a little short

It's not about being right, lucky - it's about one thing. Recognizing the obvious.
And in particular, Bernanke's papers were cited in other Fed "asset hangover" research as early as 1992, wrote or delivered speeches years BEFORE the so - called financial crisis washed up on shore last Fall. And the NY Fed carved out a new Commercial Paper category for Asset backed commercial paper in April 2006