Couple of new pieces.
Market Oracle sees coming end of BoA, Citi!
Warning: Mega-banks Could Fail Despite Federal Bailouts
Companies / Credit Crisis 2009
Jan 27, 2009 - 06:16 AM
Martin Weiss writes: The time has come to issue one of my sternest warnings to date: Bank of America and Citigroup could fail despite the most radical government rescues of all time.
Right now, after recent close calls with instant death, these two megabanks are on life support, receiving massive transfusions of government capital. But they're still hemorrhaging, and no one in Washington has found a cure.
Already, they have received capital injections of $90 billion ($45 billion each).
Already, this bailout is larger than the total combined capital of PNC Bank, Suntrust Bank and State Street Bank — all among America's ten largest.
Yet, ironically, that $90 billion is still a drop in the ocean compared to their massive exposure to risky assets.
The shocking facts revealed in the banks' own balance sheets and in the OCC's Quarterly Report demonstrate the enormity of problem:Massive Risks at America's Megabanks
(bill. of dollars)
B of A Citi B of A + Citi JPM
Total assets 1,831 2,050 3,881 2,251
All derivatives 38,186 39,979 78,165 91,339
Credit default swaps 3,291 2,467 5,758 9,250
Exposure to defaults by trading partners 177.6% 259.5% 400.2%
Fact #1. Too big to save. Bank of America Corp. and Citigroup, Inc. have combined assets of $3.9 trillion, or 43 times the size of the Treasury bailout funds they've received to date.
Fact #2. Bigger losses ahead. Even before any further declines in the economy, an unusually large portion of their assets are already in grave jeopardy — commercial real estate loans going sour, credit cards loans tanking, auto loans sinking, and residential mortgages turning to dust. Now, as the economy continues to tumble, avoiding much larger losses will be almost impossible.
Fact #3. Big derivatives players. Bank of America and Citigroup are the nation's second and third largest high-rollers in the derivatives market, with a combined total of $78 trillion in these bets outstanding. That's over ten times the derivatives that Lehman Brothers had on its books when it failed last year.
Fact #4. They've bet far too much on each other's failure. Bank of America and Citigroup are also the second and third largest participants in the most dangerous derivatives of all — credit default swaps. These are the big bets that financial institutions make on the failure of other major companies.
But participants in this market are like shipwrecked sailors in a sinking lifeboat betting fortunes on who will live and who will survive: If a company bets too heavily on failures and too many companies actually fail, who's going to make good on those bets?
And unfortunately, betting on each other's demise in huge amounts is exactly what the nation's megabanks have done. At their latest reckoning, Bank of America and Citigroup held credit default swaps with notional values of $2.5 trillion and $3.3 trillion, respectively. (See OCC report , pdf page 23.)
Total between the two: An astounding $5.8 trillion!
This number is not directly comparable to capital. But just to give you a sense of the magnitude of the problem, Bank of America and Citigroup's combined credit default swaps are more than sixty times larger than the $90 billion they've received so far in capital infusions from the Treasury Department.
Fact #5. JPMorgan Chase is not far behind. Right now, Washington and Wall Street are still counting on at least JPMorgan Chase to pick up the pieces after major failures and shotgun mergers.
But according to the OCC, among the three megabanks, JPMorgan Chase is actually the most heavily leveraged, with over 400% of its capital already exposed to the risk of default by trading partners. Bank of America's and Citigroup's exposure (177.6% and 259.5%, respectively) is also wild, but JPMorgan Chase's exposure is obviously far greater.
Fact #6. JPMorgan Chase's derivatives could double the size of the banking crisis overnight. On the day that JPMorgan Chase needs to join the ailing Bank of America and Citigroup in Uncle Sam's intensive care unit, the derivatives mess doubles immediately.
Reason: The bank has $9.2 trillion in credit default swaps, almost twice as much as Bank of America and Citigroup combined.
Fact #7. Stocks crashing. Shares in failed banks are worth zero, and that's where Bank of America's are headed. Citigroup's are already close, making it almost impossible for the company to raise capital from investors.
In light of these facts, how can the government save America's megabanks?
Wall Street is hoping that the Obama administration will create a separate , government-run “bad bank” to take bad assets off their hands. And some pundits are even proposing that the U.S. government nationalize the big banks in trouble. But …
Neither approach addresses the obvious reason our nation's banks are in the ICU to begin with: Excess debts and risk-taking. In fact, these “solutions” would merely pile on more of the same . Meanwhile …
Both approaches spread and transform the contagion from a Wall Street debt crisis into a Washington debt crisis, as the federal deficit explodes to as much as $2 trillion in fiscal 2009.
My Forecast: Washington Will Ultimately Lose This Epic Battle!
No matter what the government does, it cannot patch back together the busted market for mortgages, derivatives and especially credit default swaps.
It cannot stop a pandemic of loan losses among large AND small banks as the economy sinks and traditional bank lending goes bad.
It cannot stop the contagion of falling confidence, fear and panic. It cannot outlaw gravity or stop investors from selling. Nor can it turn back the clock and reverse years of financial sins.
So don't count on Uncle Sam to save your bank, your business, or the economy.
Keep up to 90% of your money in cash.
Avoid bank deposits as much as possible, using mostly short-term Treasury bills or equivalent.
Above all, focus on building up your own resources and finding alternative sources of income or profits. For specific instructions on precisely how, click here for our free one-hour video, “7 Startling Forecasts for 2009.” But you don't have much time; it goes offline tomorrow.
Good luck and God bless!
This investment news is brought to you by Money and Markets . Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com .
Latest bailout to BoA because of its bad decision to buy Merrill Lynch last September. Unbelievable!
January 23 / 25, 2009
Bank of America's Big Deal
When Due Diligence is a One-Way Street
By CHRISTOPHER BRAUCHLI
This is a column about due diligence. Presidents of large banks, such as Bank of America’s (BOA) Kenneth D. Lewis may read this column but it is not applicable to BOA since the Present Financial Crisis (PFC) demonstrates that due diligence has no place in BOA’s dealings except when dealing with customers.
Due diligence is the process whereby people who contemplate entering into a business transaction take steps to insure that the transaction is as they believe it to be. For the seller of a product due diligence may be as simple as insuring that the purchaser has the funds with which to complete the transaction. For the purchaser it consists of making sure that the object of the transaction is as it is represented. Thus, someone buying a car employs due diligence to make sure that the car is in the promised condition.
Any one who has borrowed money from Mr. Lewis’s institution knows that even if all the borrower wants to borrow is $.25, Mr. Lewis will not lend that amount until, through due diligence, his employees determine that the borrower has $.50 in assets and an income stream sufficient to assure Mr. Lewis that the bank will get back its $.25 plus a reasonable amount of interest. (Mr. Lewis made an exception to this rule in the case of billions of dollars of mortgages that the bank issued that have now departed the bank’s books for warmer climes) One of the surprises to emerge from the PFC is that as familiar as Mr. Lewis is with the concept of due diligence when dealing with customers, he forgot to use it when entering into a VERY big transaction for the bank.
On September 15, 2008 BOA announced that it was acquiring Merrill Lynch and Co., (ML) the country’s biggest brokerage firm. The due diligence took 48 hours, much less than many people will spend deciding whether to buy a car or even a dishwasher. When asked about this exceptionally short 48 hour due diligence study, Joe Price, the CEO of Bank of America explained:
“We have had a tremendous amount of historical knowledge, both as a competitor with Merrill Lynch, but also have reviewed and analyzed the company over the years. . . . In addition. . . we deployed the team that we would ordinarily deploy in these types of situation, which had well over 45 people from our team on site as well as others off site, outside counsel and the like. So collectively with that group. . . . and the progress that Merrill Lynch had made in reducing the risk exposures . . . . made it possible for us.”
Mr. Lewis added that the bank was not asking for any help from the government in completing the transaction.
The foregoing notwithstanding, in mid-December Mr. Lewis let regulators know the deal was in trouble. It turned out that one of the things the due diligence doers happened to overlook was that ML would have to take a fourth-quarter write-down of $15 to $20 billion. Mr. Lewis explained to analysts that he was surprised to learn that losses of ML were much larger than expected. That was a little like discovering that the car you planned to buy needed a complete set of new tires and you’d not noticed that before you agreed to buy it.
ML’s losses were so large, said Mr. Lewis, that he considered walking away from the deal but decided that would not be “patriotic.” It was more patriotic, he apparently thought, to let the taxpayers help save the deal. (Government regulators did not want the deal to collapse fearing panic in the markets.) Unlike the car buyer who could not get out of the deal because of overlooking bad tires, no one thought BOA should suffer for its lack of due diligence as shown by not noticing that ML needed a new set of tires. Instead, the federal government told Mr. Lewis it would be willing to help him out in completing the transaction.
Under the new deal, BOA has to pay for front tires costing $10 billion, and the feds will pay for the rear tires plus the spare, costing $10 billion plus 90 percent of any additional repairs that are needed. Thanks to that agreement, the deal closed in early January. That is not quite the end of the story. Although the deal has closed, there is still on going discussion about the role the taxpayer will play even though by now the car has left the lot and is hundreds of miles away.
Mr. Lewis has indicated that he and the feds are still negotiating the terms of the feds’ involvement in the transaction. Mr. Lewis would be the first to tell you that when you borrow money from him, there is no room for negotiation after you’ve driven the car off the lot. Mr. Lewis should be grateful that the Feds are not as strict with him as he is with his borrowers.
Christopher Brauchli is a lawyer living in Boulder, Colorado. He can be reached at: firstname.lastname@example.org
Hudson on the emerging Obama phase of the dollars-for-junk bailout. None of this is going to stop the big units from crashing and banking will be nationalized, but first they have to steal whatever can be sucked out of the taxpayers. (How much of this will be recovered afterward? Can they offshore and hide all these trillions?
January 30 / February 1, 2009
It Won't Save the Economy; It May Make the Crisis Worse
Obama's New Bank Giveaway
By MICHAEL HUDSON
First, here’s the silhouette of the giveaway, as outlined Thursday in the New York Times:
“Treasury Secretary Timothy F. Geithner said Wednesday the administration is working on a comprehensive plan to “repair the financial system.” … bank stocks surged on hopes the government was moving toward creating a “bad bank” to purge toxic assets from balance sheets that are rapidly deteriorating as the economy worsens… administration officials believe that trillions of dollars more may be needed to buy the majority of bad assets from banks. …
“The concept of a bad bank has gained momentum in the financial industry as the economy deteriorates, slashing the value of risky assets on banks’ books and increasing the need for banks to hold capital against those losses. Shares in Citigroup and Bank of America, which both recently received a second taxpayer lifeline, surged 19 percent and 14 percent respectively as the stock market rose on optimism that the administration would relieve banks of money-losing assets.”
“Geithner Says Plan for Banks Is in the Works”, By Stephen Labaton and Edmund L. Andrews, The New York Times, January 29, 2009.
After (1) threatening for eight years that the prospect of a trillion-dollar deficit spread over a generation or so is sufficient reason to stiff Social Security recipients and abolish debts to the nation’s retirees, and (2) after the Bush administration provided $8 trillion over the past three months in cash-for-trash swaps of good Treasury bonds for Wall Street junk derivatives, the Obama Administration is now speaking of (3) some $2 to $4 trillion more to be given in just the next week or so.
Not a single Republican Congressman went along, just as Rep. Boehmer refused to support the Bush bailout on that fatal Friday when Mr. McCain and Mr. Obama debated each other over marginal issues not touching on the giveaway, which both candidates passionately supported. The Party of Wealth sees the political handwriting on the wall, for which the Party of Labor seems happy to take all responsibility. This probably is the only place where I’d like to see “bipartisanship.” Watch the campaign contributions flow for an index of how well this will pay off for the Democrats!
How many families would like a “give-back” on every bad investment they’ve ever made? It’s like a parent coming to a child who has just broken a toy, saying “That’s all right. We’ll just go out and buy you a new one.” This from the apostles of “responsibility” for poverty, for mortgage debtors owing more than they can afford to pay, for people who get sick and can’t afford medical care, and for states and cities now left high and dry by the fiscal wipe-out that the Bush-Obama “cleanup” has foisted onto the economy. No do-over for anyone but the hundred or so billionaires who have just been endowed with enough free money to become America’s ruling elite for the rest of the 21st century.
After spending a lifetime denouncing socialism as inherently unfair, Wall Street is now doing a hideous parody – as if “socialism for the rich” were not an oxymoron in the first place. Certainly the banks are not being “nationalized.” Giving away the largest sum of spendable securities in history without direct managerial power that goes with ownership is not “nationalization.” Ask Lenin.
Now that the details of the new, larger but definitely not improved bank giveaway of between $2 and $4 trillion more have been leaked out in time for Wall Street’s Davos attendees to celebrate, we may ask whether, financially speaking, the Obama Administration should best be thought of as Bush-3 – or indeed, whether it is still on a pro-creditor trend that may better be traced as Clinton-5, or perhaps even Reagan-8. Since 1980 the financial sector has made a sustained money grab at the expense of labor and “taxpayers.” More accurately, it has been a debt grab, on the opposite side of the balance sheet from assets.
Backed by Larry Summers, Boris Yeltsin’s Harvard Boys transferred trillions of dollars of Russian mineral wealth and public enterprises into the hands of kleptocrats. That was an asset transfer, pure and simple. In 1997, to be sure, the IMF gave Russia a loan that immediately disappeared into the kleptocrats’ bank accounts, to be paid out of subsequent oil-export proceeds. But assets were the name of the game. Today’s U.S. giveaway has a new twist. The analogy is the “watered stocks” and bonds of yesteryear that railroad magnates and Wall Street emperors of finance gave themselves and their political mouthpieces, simply adding the interest coupons and dividends onto the prices charged the public as if they were real “costs.” Today’s version – “watered Treasury bonds” – are being created on the public sector’s balance sheet. “Taxpayers” must pay bear the interest charges – leaving less for the infrastructure investment that Mr. Obama suggests we may need.
The Bush-Obama bailout bore “small print” stipulations that have already given Wall Street a decade’s tax-free status by letting it count its financial losses against its tax liability. So not only has there been a great fiscal giveaway, there has been a tax shift off finance onto labor and industry. States and localities already have begun to announce plans to sell off roads and airports, land and other public assets to the financial sector in order to finance their looming budget deficits (which localities are not allowed to run under present legislation). No federal funding has been granted to finance the cities as their tax receipts plunge. There has been a token amount to relieve some low-income families saddled with junk mortgages. But this does not involve actually giving them a spendable money “bonus.” Their role is simply to be trotted out like widows and orphans used to be, as justification to bail out banks for their bad gambles on currency, interest rates and bond derivative gambles. Insolvent debtors are merely passive vehicles to get a book-credit of mortgage relief that the government will turn over in their name to their bankers to make these institutions whole.
Whole, and then some! Chris Matthews just reported his statistic of the day (January 29): $18.4 billion in Wall Street bonuses, paid for out of the government giveaway.
This is called “saving the economy.” That is as much an oxymoron as “socializing the losses.” Socializing the losses would mean wiping the mortgages and other bank loans of debtors off the books. These giveaways are to keep the debts on the books, but for the government to buy them and make the creditors whole – while a quarter of real estate has fallen into Negative Equity as its debts are not being bailed out but kept on the books. The economy’s “toxic waste” remains. But a matching volume of new waste is being created and given to a few hundred families. No wonder the stock market soared by 200 points on Wednesday, led by bank stocks!
In the seemingly frenetic ten days since Obama took office, it is beginning to look as if his good political decisions regarding Guantanamo, Iraq, employee rights to sue for employer wrongdoing, are sugar coating for the giveaway to Wall Street, a quid pro quo to avert opposition from his Democratic Party constituency. At least this seems to be their effect. To accuse Obama of a giveaway would seem at first glance to contradict the basic thrust of his actions – or would be if one did not take into account his appointments of Larry Summers at the White House and the conspicuous leadership role in the bailout played by Barney Frank in the House and Chuck Schumer in the Senate.
There is a simple way to think about what has happened – and why it won’t help the economy, but will hurt it. Suppose the new $4 trillion “bad bank” works. The government shell will give away Treasury bonds for bad bank loans and derivatives gambles, without the government “marking to market.” (So much for the pretense that giving Wall Street credit is “free market” policy. But the alternative to free markets does not turn out to be “socialism” at all, even if “socialism for the rich.” There are worse words for it, which I won’t use here.)
The real question is what the Wall Street elite will do with the money. From Chuck Schumer and Barney Frank through Larry Summers, the Obama administration hopes that the banks will lend it out to Americans. Borrowers are to take on yet more debt – enough to start re-inflating house prices and making homes yet more unaffordable, requiring buyers to take on yet larger mortgages. Larger mortgages at rising prices are supposed to help the banks rebuild their balance sheets – to earn enough to compensate for their gambling losses.
But this neglects the fact that today’s looming depression is caused by debt deflation. Families, businesses and government having to spend more wage income, profits and tax revenues on debt service instead of buying goods and services. So why is the solution to this debt overhead held to be yet MORE debt? Is there not something crazy here?
The government’s solution, placed in its hands by the financial lobbyists, is to bail out the bankers and Wall Street while leaving the “real” economy even more highly indebted. All this talk about “more credit” being needed, all this begging of banks to lend more money and then extract yet more interest and amortization from the economy, is leading it even deeper into the debt hole. It is not helping families repay their debts. And indeed, homeowners whose mortgages already exceed the market price of their property are not going to be able to borrow more.
It would take only $1 trillion or so – or simply to let “the market” work its magic in the context of renewed debtor-oriented bankruptcy laws – to cure the debt problem. But that obviously is not what the government aims to solve at all. It simply wants to make creditors whole – creditors who are, after all, the largest political campaign contributors and lobbyists these days.
The most important thing to understand about the present economic crisis is that it was not necessary technologically, politically or fiscally. Government at the state, local and federal levels are strapped for funds – but only because the natural source of taxation, land rent and monopoly rent and the user fees from public enterprise have been financialized. That is, whereas property taxes used to finance about three-quarters of state and local budgets back in 1930, today they supply only about a sixth. The shrinkage has not been passed on to homeowners and renters or commercial users. Prices for homes and office buildings are set by the marketplace. The rise in market price has been pledged to bankers as mortgage interest. The financial sector thus has replaced government as recipient of the economic surplus – leaving the public sector starved of cash.
The financial sector also has replaced the government as economic planner. This role has followed from its monopoly in credit creation, which turns out to be the key to resource allocation.
Bank credit is created freely. Governments could do the same. Indeed, this is what the U.S. Treasury did during America’s Civil War, when it issued greenback credit.
If today’s looming economic depression is a manmade (that is, lobbyist-financed) phenomenon, then what policy is needed as a remedy?
Michael Hudson is a former Wall Street economist. A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new ed., Pluto Press, 2002) He can be reached via his website, email@example.com
Me on DU
Yes, Virginia, the obvious will happen.
Edited on Wed Jan-28-09 06:16 PM by JackRiddler
When it does:
1) Declare credit-default swaps invalid. These can't be paid off by anyone, which is the whole problem. (Mandate refunds on half the price paid by the buyers.) Most types of derivatives need to be banned (equities are already derivative enough!).
2) Take over deposits up to FDIC limit.
3) Fuck them otherwise. They belong to history now. One can only hope the associated robber barons are also ruined, though this happy outcome is unlikely. Yeah, it will be hard times for all. Even harder if the bailout deception continues and people who still have jobs and pay taxes are forever worked as blood donors to doomed vampires (stakes already in their hearts).
4) Establish a national bank in the ruins of the Ponzi financial sector. Encourage localities to issue community currencies backed by work-hour standards.
5) Require the Communist Manifesto as school reading from the fifth grade forward.
Okay, #5 is a little joke.
Sixth grade, of course.
PS - NY Mets to play next year at Taxpayer Field.
Kucinich and Poe (R-Tx) calling on Treasury to cancel Citi's $400 naming deal with NY Mets for new Citi Field was in fact the front page story of NY Newsday today. Mets owner was also a Madoff victim, so I guess this is pretty much guaranteeing no Manny Ramirez in Queens next year.