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Federal Deposit Insurance Corp. Chairman Sheila Bair said banks involved in the U.S. Public-Private Investment Program won’t bid on their own assets to clean-up their balance sheets, which would effectively be an accounting dodge.

“There should be no confusion: Banks will not be able to bid on their own assets,” Bair said today at a Washington news conference.

The FDIC is helping the Treasury Department set up and run the PPIP, which will use $75 billion to $100 billion of Troubled Asset Relief Program funds to entice private investors to buy as much as $1 trillion in distressed mortgage-backed securities and other assets.

Banking groups and the Clearing House Association LLC, a group of 10 lenders including JPMorgan Chase & Co. and Bank of America Corp., are pressing the FDIC to let them use the program to buy their own troubled assets, the Wall Street Journal reported today.

Meanwhile, it seems that enthusiasm may be waning entirely for the proposed PPIP sales, which may be called-off altogether for lack of seller interest. Pressure for the banks to sell the assets has evaporated with changes in the mark-to-market accounting rules and the demonstrated ability of big banks lately to raise capital in the private markets.

It remains to be seen how much interest the fund managers who have applied to take part in the scheme actually bring to the program. While the government subsidies are attractive, fund managers may be leery of making too big a profit in a government program, or being involved at all.

“A significant and growing obstacle to private participation in government bailout plans is that many investors are wary of political backlash and the imposition of additional restrictive conditions post-investment,” wrote accounting firm PriceWaterhouseCoopers in an analysis published this week.

At a Congressional hearing last week, Columbia University economist Jeffrey Sachs urged the government to abandon PPIP. He contrasted the murky program with the much more desirable clarity of an FDIC seizure and resolution.

cringely Uncategorized bank bail-out, banks, FDIC, Obama Administration, PPIP, TARP

When Barack Obama was running for President one of his favorite sound bites was that any financial bailout should not just involve Wall Street, but Main Street, too – that the government’s responsibility was to help both bankers and homeowners. But now that the election is won and Obama is in office, the two streets are still being treated very differently, with Main Street getting a lot less help from Washington.

This is a HOUSING crisis, not a BANKING crisis, yet $700+ billion has gone to help bankers and only $75 billion to “help” homeowners. The banker’s money has mainly been spent and the homeowner money has hardly been touched. If this is a HOUSING crisis, why aren’t more resources being devoted to housing?

It comes down to an issue of morality, believe it or not, with homeowners expected to be moral and bankers not. Everybody blew it, but the homeowners are being disproportionately punished for their actions.

There is no morality issue in the bank bailout. Banks are having their capital boosted based not on whether they are well run or in some way “deserving,” but purely on the basis of whether they are viewed as being in three groups: 1) doomed; 2) capable of being saved through injecting government funds, or; 3) too big to be allowed to fail no matter how poorly run. This means the least-deserving banks tend to get the most help.

But the Obama Administration’s attempt to help mortgage holders is different. If you hope for government help in restructuring your mortgage you’d better not be behind in your payments. If you missed a mortgage payment months into this crisis, you are out of luck. If your mortgage isn’t guaranteed by Fannie Mae or Freddie Mac, you are out of luck. If your mortgage is jumbo you are out of luck. And if you owe more than 105 percent of the value of your home you are out of luck.

That’s a lot of homeowners out of luck. No wonder the Obama Administration thinks it needs only $75 billion to do the job, it is excluding so many people.

Let’s try applying the homeowner rules to the banks. If both played by the same rules, then banks with mortgage portfolios that have dropped by more than about 15 percent (are five percent or more underwater) would be ineligible for government assistance. Banks that MADE jumbo loans would be ineligible for assistance. Banks that made loans with private insurance or no insurance would be ineligible for assistance. Banks that had shown themselves unable to meet capital requirements (had effectively missed a payment) would be ineligible for assistance. In each case, these criteria define EVERY bank that has received assistance. They ALL have mortgage portfolios down in value by 15 percent or more, ALL made jumbo loans, ALL made uninsured loans, and ALL are under capitalized.

So if we apply to banks the same rules that are being applied to homeowners, then no banks deserve support and there should be no bank bailout. Well that can’t be, can it? So screw the rules, screw the idea of there being a moral issue with bankers, just start handing out cash without even requiring that they use any of it to make or restructure loans.

So that’s what the Treasury and the Fed have done – bailed out the bankers without regard to their past OR FUTURE behavior. And $700+ billion later do we really truly feel better as a result?

Hell no we don’t, because we still can’t pay our mortgages!

This bailout is broken, it is unfair, and it is incredibly inefficient as a result. The bank bailout is based entirely on providing INCENTIVES to the banks – bribing them to THINK ABOUT doing the right thing. The government won’t MAKE the banks do anything. They just ENCOURAGE the banks by giving money.

Where are the incentives in the much smaller housing bailout? There are incentives. THEY ARE ALL BEING GIVEN TO THE BANKS. It is very difficult to find in the new Federal mortgage modification rules much of anything that truly helps homeowners. Banks aren’t REQUIRED to do anything; they can reject any mortgage holder for any financial reason. The banks are PAID to restructure the mortgages and the way those mortgages are being restructured (primarily through increasing term and adding balloon payments) not only costs the banks nothing, it tends to make them MORE money over the life of the loan.

So that $75 billion allocated to modifying mortgages and keeping people in their homes, how much of that $75 billion will actually go to homeowners? About 25 percent, or $18 billion almost entirely in first-time buyer tax credits. This means the bank bailout isn’t $700+ billion, it is $758+ billion or FORTY-TWO TIMES the size of the housing bailout.

And why only first-time buyers? What makes them more deserving of help? The theory is that these are new homeowners so they’ll be buying-up excess inventory and helping to firm prices. They aren’t people selling one house to buy another. In another view they are virginal and uncorrupted by the housing bubble. It wasn’t their fault, so they are being rewarded. More morality, inequitably applied.

Main Street isn’t doing very well under this policy. Main Street is being cheated.

This is a bad plan, unfair and poorly executed. It places a moral burden on individuals and not on banks, yet there is no good explanation for why it has to be so.

What is it about banks that make them deserving of 42 times as much support as your Mom?

Nothing.

Like the Bush Administration before it, the Obama Administration has a bias for helping Wall Street. They couch this as a claimed inability to come up with any better ideas. Yet better ideas – ideas NOT couched in moral argument (or more appropriately couched in EQUAL moral justification) were presented right in this spot in the post titled The Not So Bad Bank. That’s a plan that helps banks and homeowners equally, doesn’t require incentives to work, acts faster, and costs a tenth as much.

What’s wrong with doing the job better, faster, and cheaper?

cringely Blog bank bail-out, banks, financial crisis, foreclosure, mortgage modification, mortgages, Obama Administration

By Kristen Koh

It shocks me how little media pundits know about what is really going on when it comes to the mortgage crisis. The PPIP program (Private Public Investment Partnership–buying toxic assets) WILL loosen consumer lending and is NOT stupid.

The banks have TWICE the cash (capital) they had last year, even though they are accused of being insolvent today whereas they were flying high last year this time. The moolah is sitting in their accounts at the Fed earning 0.25 percent.  They are paying 5 percent on TARP money, and earning only 0.25 percent on it.  So are Jamie Dimon and Ken Lewis dumb?  NO.  They are TERRIFIED that bank regulators gone wild will seize their banks for not having enough collateral to back the declining value of their investment portfolios which include these toxic (or maybe not so toxic) assets.

Right now there is no market for these securities. They are absolutely frozen except for a few fire sales from liquidating funds and manipulation tactics from bad hedge funds. On top of this, onerous application of mark to market rules that came into effect in mid 2007 at the market peak are greatly exaggerating balance sheet crises for the banks.

What does this mean?  Let’s say that you bought an investment property for $1 million and it generates $50,000 in annual net rental income. You have a mortgage on the property for $700,000.  A comparable property sells under duress for $200,000 in an illiquid market and regulators tell you that your property is now worth $200,000 even though if you ran a Discounted Cash Flow analysis on the rental income stream, you’d get $1 million as an asset value.

You argue that even if rents fell 30 percent, which is a possibility under a Depression scenario, your property is worth at least $700,000.  But the regulator says, no, it’s worth $200,000 due to mark to market rules and you are now in violation of rules due to your mortgage ($700k) being higher than your asset value ($200k) so they seize your building since you are unable to come up with the $500,000 difference.

They sell your building for nothing and you are bankrupt.  Does this sound right?  Of course not!  This is why mark to market rules are stupid when the market is hyper-cyclical (artificially inflates values during bull markets and artificially deflates values during bear markets).

That is what is going on with the banks right now.  The market says their asset backed bond portfolios are worth 20 cents on the dollar and the banks are saying they are worth at least 70 cents (albeit on the books at probably 90+ cents), maybe more when held to maturity.  The 50 cent spread was the reason why then Treasury Secretary Hank Paulson (my former boss at Goldman) couldn’t make the first TARP effort work.  You can’t force the banks to dump their assets below what they are worth and investors are too scared to pay what they are worth.

That is until now since the PPIP program enables incredible leverage with Fed money so that it will be hard NOT to make money on these investments.  You put in $1, the government puts in $7 ($1 equity, $6 debt), and you are allowed to keep 50% of the profits.

So, you say, that the example above would never happen because the comparable building would never sell for $200,000.  Well that’s where hedge fund shenanigans come into play.

Let’s say I wanted to make some money manipulating the markets.  I would short shares in the big banks.  I would then find some illiquid asset-backed bonds that I know many of the banks owned.  I would find some desperate seller who just got a margin call and buy a tiny piece of his holding ($1000 worth) and print a price on the tape that showed that I bought the bond at 20 cents on the dollar.  Then I would tell everybody how the banks are holding their bond portfolios at 70 cents on the dollar (after 30 percent writedowns) and they are really just worth 20 cents.  I would point to the tape that showed my purchase (a price point I forced on very small volume).  I would go on CNBC and talk about how the banks have negative equity and will be seized by the regulators a la Lehman, Bear, Wachovia, Wamu, etc, and talk about how Ken Lewis is a liar just as was the case with Dick Fuld before Lehman went down in flames. Everyone will panic, and I’ll be able to cover my bank shorts 50 percent lower.  This is why Bank of America is trading at $7 instead of $15: hedge funds gone wild.

Regulations are WAY behind the many ways the market can be manipulated.  Don’t get me started about naked short selling, the elimination of the uptick rule, and the proliferation of the triple short bear ETFs that skirt existing margin rules.  The only people talking about how these confidence/market shattering conditions don’t matter are short sellers upset that they may have to stop taking candy from babies.

This is why it is important that the government is tweaking the application of mark to market rules. Congressman Paul Kanjorski (D-PA and chairman of the House Financial Service Committee) basically told Finanial Accounting Stadards Board (FASB) chairman Robert Herz that if the FASB doesn’t figure it out, Congress will legislate mark to market changes making the FASB irrelevant.

This is also why it is important to create incentives for vultures to buy the “toxic” bank assets (PPIP) at closer to 70 cents on the dollar so the banks will actually sell them.  Until those sales happen the banks will hoard capital to avoid what they fear – being seized by regulators.    Until then they will not lend in volume even though they have huge cash reserves being poorly deployed.

With the exception of Goldman Sachs and Morgan Stanley, the banks are holding their “toxic assets” at probably 90 cents on the dollar saying that they plan to hold these assets to maturity.  FASB rules allow assets in hold-to-maturity investment accounts to be valued differently than those in trading portfolios which have to be marked to market daily.   This makes sense,  yes, but banks have to mark down their portfolios at sale which is keeping them from selling at today’s irrationally depressed prices.  .

Now here is the important part.  The write-down from 90 cents to 70 cents can probably be absorbed by the operating profits of the banks given time.  It’s a good business to borrow at 0 percent and lend at 10 percent A write-down to 50 cents or less probably makes the banks truly insolvent which is keeping them from trying to sell these assets.  This uncertainty is what motivates banks to hoard cash.  There is $831 billion in cash on the balance sheets of these banks (held with the Fed earning 0.25 percent). So all the TARP money is right back where it came from, just under the ownership of the banks rather than the Fed.

That money is sitting there doing nothing while businesses are starving from the lack of credit.

Remember it’s not the quantity of money but the velocity of money that will get us going.

So what is the risk to the PPIP program?  The banks may refuse to dump assets at the prices these hedge funds are willing to pay.  This would give us a standoff where the velocity of money stays at very low levels.  That’s what happened in Japan where the market fell for ten years and real estate prices have been going down for 20.

We don’t want to be Japan.

Kristen Koh is chief financial officer of Home-Account. She personally owns bank ETFs and call options on those ETFs.

cringely Blog bank bail-out, Blog, financial crisis, Geithner, Kristen Koh, mortgage crisis

Banks facing possible nationalization under U.S. Treasury Secretary Timothy Geithner’s bail-out plan will first have to fail a “stress test” but what is that?  Not much, according to banking industry sources.

Rather than checking the ability of banks to withstand losses, the tests outlined last week by the U.S. Treasury seem designed more to convince investors that the firms don’t need to be nationalized, analysts said.

The Treasury said it has until the end of April to identify how much extra capital is needed to protect banks with more than $100 billion in assets from losses on loans, securities and off- balance sheet commitments.

Regulators will test how well the banks can hold up in a “baseline scenario” with a 2 percent slide in the economy this year and unemployment at 8.4 percent, in addition to a “more adverse” situation. The test also assumes housing-price declines of 14 percent this year and 4 percent in 2010 as a baseline case. The more adverse possibility would see drops of 22 percent and 7 percent, respectively.

Following the test, lenders will have six months to raise private capital or accept government funds in the form of convertible preferred securities, which would acquire voting rights if converted to stock. The Treasury has used about half the $700 billion allocated by Congress for rescuing the banking industry, and most of that was spent under former President George W. Bush.

cringely News bank bail-out, bank stress test, banking crisis, Geithner, News, Obama

I’ve been thinking a lot about the $700 billion that Congress has earmarked for bailing banks out of the mortgage crisis, or what we used to refer to as the mortgage crisis.  Remember the Treasury was going to buy-up bad mortgages for more than they were really worth then decided, instead, to inject capital directly into the banks.  This latter capability, which was literally forced on the Treasury by Congress, is not in itself a bad deal because as the banks recover so will the value of the bank shares now owned by you and me.  Or at least that’s what Paul Krugman tells us.

And maybe it’s true, but there sure doesn’t seem to be much lending going on, is there?  And wasn’t that the whole point of this bail-out?  So far the only upside I can see for you and me is that we ought to be able to go into any big bank in America and demand to use the bathroom as shareholders, but even that concept is as-yet untested.

So the first $350 billion of the total $700 billion has been used for something completely different from the original pitch and the result of this change of course is doubtful.  Things may be better for the banks but they aren’t better for any of the rest of us.  Bankers are magnanimously foregoing bonuses while regular folks are more and more foregoing salaries.

But enough of this pissing and moaning, what I wonder is whether we should have seen this coming?  And the answer – at least in my case – is “yes.”  Whether you or the guy down the street or Hank Paulson should have seen it coming or not, I should have, and I am sorry for not having brought it to your attention.

The reason I should have known this was going to happen is because of an experience I had about 30 years ago working on a research study for the U.S. Department of Agriculture.

We were looking at how information technology could help agriculture.  Farmers in Kentucky were given access to Department of Agriculture computers to look at all available data in near real time.  They could check weather forecasts, crop yields, prices, look at economic projections – whatever was available to the Secretary of Agriculture was available to those farmers, each equipped with a little Texas Instruments paper terminal connected to the government through a telephone and an acoustic coupler.

This was pre-Internet, remember.

We were able to look at how much each farmer used the system and what they looked for.  We could then relate that to their crop decisions, planting plans, and ultimately trace the flow of information right into their bank accounts at the end of the season.  Or that was the plan.

Here is what we learned.  Some farmers used the system a lot, some very little.  But no matter how much they used the system, none of the farmers seemed to make any farming decisions based on that data.  They just did what they had done the year before.  Yet at the end of the year nearly all the farmers made more money than they had the year before – more money than we expected them to given that they hadn’t seemed to make any operational changes based on the new information.

Was this a placebo effect?  Was just having the data enough to make the famers more successful? That was very unlikely.  So a team flew to Kentucky to do interviews and find out what was up.  Alas, I didn’t go on that trip, but I can share with you what they learned.

The farmers didn’t change their operations because they generally felt they were already optimized.  There wasn’t that much to change without making bold moves like, say, deciding to no longer be a farmer.  But the new information did give them insights in areas where most of them hadn’t been active before.  Most of the farmers were using the Department of Agriculture data to guide them in hedging their crops by trading futures.  They had data better than and earlier than the traders in the pits at the Chicago Merc and used that advantage to make more money for their farms and families.

Why didn’t we think of that?

Jump with me now back to the $700 billion bank bail-out.  The banks were given $350 billion as capital injections aimed at getting them to give more loans.  The money was exactly analogous to the information we gave to the farmers in Kentucky.  But just like those farmers, it was soon obvious to the bankers – some of whom had the money literally FORCED on them – that more lending wasn’t in the best short-term interest of the bank – short-term interest being these days the only kind of interest that apparently matters.

So the money flowed to where it would do the most good in the view of the bankers receiving it, which was generally for bolstering reserves against the Winter they all saw approaching or for financing acquisitions of weaker banks.

We shouldn’t have been surprised it worked out this way.  But had we thought this through for more than a minute, maybe we would have done something else with the money – something more in the interest of the people actually paying the bills.

What a novel idea!

cringely Blog agriculture, bank bail-out, Blog, commodity trading, crisis, farmers, information technology, Kentucky, mortgage, research