Effect of BAC and C getting restructured by the FDIC

[Carvel46]

 

I believe Bank of America and Citi will end up being taken over by the FDIC and debt partially or in whole wiped out while depositors protected--- politically the tone to this is changing in Washington---not sure about the administration.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aQ1L29.emkg0&refer=home

 

What are possible effects of this? Up from preferred shares to "investment grade" funds and money markets funds. I'm trying to get my head around it. On the flip side, it would likely benefit the stronger banks.

 

How are you positioned for this?

 

[Uccmal]

If you ask me this is the single largest stumbling block to getting money moving again.  The administration wants to get private money into the system again.  Ask Prince Alwaleed about his investment in Citi.

 

The financial markets are going to continue to languish until there is clear direction as to exactly which way the government is going to proceed.  No one is going to invest in anything until they are entirely sure their principal is going to be protected. 

 

Perhaps the best way to avoid spending gov't money indefinitely, and encourage private investment is to fully guarantee that anyone who invests in any "designated" company for the next three years will get their investment back, in whole, should the need arise to nationalize a company. 

 

No easy solutions.  Your not getting your head around it because no one else is either...

[ExpectedValue]

Perhaps the best way to avoid spending gov't money indefinitely, and encourage private investment is to fully guarantee that anyone who invests in any "designated" company for the next three years will get their investment back, in whole, should the need arise to nationalize a company. 

 

To me, plans like this boil down to - shareholders get all the upside while taxpayers have all the downside. It creates poor incentives and encourages moral hazard.

 

 

[Uccmal]

To me, plans like this boil down to - shareholders get all the upside while taxpayers have all the downside. It creates poor incentives and encourages moral hazard.

 

Well then I guess your only choice is to nationalize the banks.  You are going to have to do all of them though since the next one in line is always going to get hit because everyone withdraws capital when they become concerned it will be nationalized.  We are seeing this with Wells Fargo right now. 

 

Or you can let them fail completely and be done with it. 

 

While everyones tossing trillions around without making the real hard decisions (who lives and who dies) private money is going to stay off the table. 

[ExpectedValue]

To me, plans like this boil down to - shareholders get all the upside while taxpayers have all the downside. It creates poor incentives and encourages moral hazard.

 

Well then I guess your only choice is to nationalize the banks.  You are going to have to do all of them though since the next one in line is always going to get hit because everyone withdraws capital when they become concerned it will be nationalized.  We are seeing this with Wells Fargo right now.   

 

Or you can let them fail completely and be done with it. 

 

While everyones tossing trillions around without making the real hard decisions (who lives and who dies) private money is going to stay off the table. 

 

The fact that private capital is staying off the table should be one of the reasons for the US to hurry up and engage in a nationalization plan or some kind of "bad bank" plan because from the looks of it, unless the bad assets are taken are of we'll continue to see private capital sitting on the sidelines.

 

 

 

[watsa_is_a_randian_hero]

this is bs.  The government forced them to buy merrill.  BofA didn't have a choice.  BofA would not have problems right now if it weren't for that acquisition.  If the government nationalized the company after screwing it like that, that would be a terrible precedent. 

[Carvel46]

Good point Watsa... although I wonder where the "stress test" will lead.

 

Martin Wolf had an interesting piece in FT, Japan’s lessons for a world of balance-sheet deflation

http://ww.ft.com/cms/s/0/774c0920-fd1d-11dd-a103-000077b07658.html

 

"Third, recognising losses and recapitalising the financial system are vital, even if, as Mr Koo argues, the unwillingness to borrow was even more important. The Japanese lived with zombie banks for nearly a decade. The explanation was a political stand-off: public hostility to bankers rendered it impossible to inject government money on a large scale, and the power of bankers made it impossible to nationalise insolvent institutions. For years, people pretended that the problem was downward overshooting of asset price. In the end, a financial implosion forced the Japanese government’s hand. The same was true in the US last autumn, but the opportunity for a full restructuring and recapitalisation of the system was lost."

 

 

[Guest ericopoly]

I wonder if FFH still has the CDS on BAC and C.

[Guest ericopoly]

The government forced them to buy merrill.  BofA didn't have a choice.

 

 

I did some digging around and can't find any information about them being forced to buy Merrill.  Where did you read that?  It doesn't make sense to me, I mean, there isn't a selective service for banks where if your draft number is up you have to step up and buy Merrill.

 

[watsa_is_a_randian_hero]

its was a wsj article about two weeks ago.  I'll post the link & quote

[watsa_is_a_randian_hero]

"In Merrill Deal, U.S. Played Hardball"

 

http://online.wsj.com/article/SB123379687205650255.html

 

[ExpectedValue]

"In Merrill Deal, U.S. Played Hardball"

 

http://online.wsj.com/article/SB123379687205650255.html

 

 

See the following line -

 

"A Federal Reserve official warned that if Mr. Lewis did so and needed more government money down the road, Bank of America could expect regulators to think hard about their confidence in management."

 

The fact that they had already received government money kind of undercuts the argument that a private company was coerced into action. Taking that government money was obviously going to cede some control. And if BoA was a completely bulletproof institution, they wouldn't have needed government money in the first place. So it's likely that they had pre-existing problems before the Merrill acquisition.

 

 

[benhacker]

On TARP and what the gov says vs what they really did... see some comments from USB CEO.

 

http://www.twincities.com/allheadlines/ci_11722986

 

Basically says that banks were forced to take TARP and the big 5 were 'encouraged' to buy up their troubled bretheren with the money.

 

Pretty amazing if the GOV now wipes out shareholders...

 

Ben

[netnet]

The government forced them to buy merrill.  BofA didn't have a choice.  BofA would not have problems right now if it weren't for that acquisition. 

 

 

Wrong on that count Watsa, the Gov wouldn't let them out of the deal to which they already agreed; that is a completely different story.  The gov did not force them into the deal to start.  You can argue that they should have been allowed out of the deal, but by that time the Gov had already helped BAC.  Presumably more generously given their acquisition of Merrill.

[Carvel46]

Worth a read....

http://brontecapital.blogspot.com/2009/02/we-are-not-close-to-being-swedish-yet.html

"This is how it is – with certain rules and a process not every American bank is going to die - and possibly some or most of the big six will survive.  Some will live – and they will prosper.  Nationalisation with process leads to 20 baggers.  Oh, and zeros - 100 percent losses.  But we are here in limbo.  The nationalisation meme has taken hold – and nationalisation of some banks will happen.  America is a current account deficit country – and almost all American banks need wholesale funding.  There is none of that since the Lehman/WaMu week – and there will not be substantial wholesale funding until the rules are clear.  All banks will fail in that environment. The faster we come out with a good process – one which has nationalisation as one (but not the only) possible outcome then banks will continue to fail.  And ad-hoc decisions will be made to bail them out or confiscate them.  And we will be no wiser.  And no closer to a solution."

 

[ericd1]

I'm having trouble understanding BAC's situation. I'm not an expert on banks, any insight would be appreciated...

 

At yearend BAC's Tier I capital ratio was 9.15% - 3% is the Fed's min and ~8% is the average for large US banks.

 

Equity was $177B before the $20B TARP capital injection...presume (dangerous word) that kept Tier 1 ratio ~9.0%+

 

Merrill Lynch's $15B+ 4Q losses weren't BAC's, but BAC reported a $1.5B 4Q loss, which includes Countrywide's losses.

 

Govt is backing $118B in toxic assets BAC acquired with Merrill, although BAC gets first $10B in losses.

 

If there's more than $108B in future Merrill losses, BAC's on the hook...what's that probability?

 

In the 3Q govt bank 152A derivatives report Merrill had less than $1T...BAC had $39T in derivatives with of the total $26T in swaps.

 

Are the swaps the problem (lack of transparency?), or future operating losses from Merrill/CW/BAC (housing, credit cards, comm'l loans), or both?

 

 

 

 

 

 

 

 

[watsa_is_a_randian_hero]

"In Merrill Deal, U.S. Played Hardball"

 

http://online.wsj.com/article/SB123379687205650255.html

 

 

Remember this thread?  Pretty Interesting now that this letter from Coumo is out.

 

http://online.wsj.com/article/SB124050588176348711.html#mod=testMod

[Hoodlum]

This is just begging for a class action suit.

 

http://news.yahoo.com/s/nm/20090423/bs_nm/us_bankofamerica_ceosb_6

 

The Wall Street Journal reported on Thursday that Lewis testified Bernanke and Paulson told him that failure of the Merrill acquisition to go through would "impose a big risk to the financial system" of the United States.

 

Lewis also testified that Paulson and Bernanke pressured him to keep quiet about losses at Merrill.

 

According to Lewis's testimony made public on Thursday, Paulson told him the management and board of the bank would be replaced if it pulled out of the deal.

 

"I can't recall if he said 'we would remove the board and management if you called' or if he said 'we would do it if you intended to'," according to the transcript.

 

Cuomo said that, in an interview, Paulson "largely corroborated" Lewis's account.

 

"Secretary Paulson's threat swayed Lewis," Cuomo said. The letter also stated that Paulson "has informed us that he made the threat at the request of chairman Bernanke."

 

Bank of America halted its attempt to scrap the merger on December 21, the attorney general said.

 

He said Lewis told his office he was directed by Paulson and Bernanke that the question of public disclosure was not up to him.

 

"I was instructed that 'we do not want a public disclosure'," Lewis testified.

 

He also testified there was no discussion with the board about disclosure to shareholders.

 

[watsa_is_a_randian_hero]

class action against the United States Treasury?  They deserve it.

[ubuy2wron]

Class action against US Govt. ..... You betcha, BAC and Mr Lewis have been lambasted in the press. now the facts are known I believe Mr Lewis should receive a public apology. I believe that if he had walked from the deal which I believe he had a legal right to the mkt would have melted down. The shareholders of BAC would have been perhaps even damaged more, certainly the failure of Merrill would have caused a run on GS and MS the counter party exposures with a Lehman like failure would have been catostrophic for every company with wall street exposure. He was basically told to shut up and play ball if he did not BAC would have been nationalized as would most of the other players on wall street. Mr Lewis played his cards the only way he was allowed under the circumstances. His only other option was to resign and allow his bank to be nationalized by the US govt. which is entirely in the power of the fed at any time.

[SharperDingaan]

 

Keep in mind that the best & most effective solution is to deliberatly put BAC & C into bankruptcy, then immediately spin out the 'good' assets under brand new, & smaller banks. The existing boards dissolve & their directors/management either get cashiered or given new directorships in the new entities. The capital market version of GMs trip through bankruptcy.

 

These are all big boys; there are no 'rights' - there is no 'discussion' - there are no 'choices'. They will do as their told, when they are told, or they can immediately go bankrupt - one choice. For many in the public eye, the optimal solution is a few of these directors tossing themselves off the roof top. There is zero tolerance for directors/senior officers when they have demonstrated this level of collective abuse & incompetence.

 

Nothing establishes discipline like heads on a stick.

Time to start on round 1

 

We're feeling a little bloodthirsty!

 

SD

 

[Packer16]

This outcome is the result of a change in economic philosophy from an assistance role in letting the market determine the outcome (Bush philosophy) to a manipulate the market to your ends approach (Obama philosophy).  The later approach may work if the outcome the gov't wants is the same as the market would provide but I do not think this is the case and there is the problem of political influence/favortism and the unintended results of trying to make the market do what you want it to do versus using its signals to guide the most efficient use of resources. 

 

This can be seen in cap-and-trade, the Private-Public Partnership, the auto bailout and green technology subsidies (ethanol and renewable power mandates).  Although these may be good goals, without an unmanipulated market to put a relative price/value on these goals and allocate resources by these prices economic efficiency will suffer.  The primary way we have been able to compete with countries that have a lower paid workforce is by providing products and services more efficiently.  By using the gov't to impose these goals with no or very little consideration to the lost efficiencies is way to reduce the US' competitive advantage.

 

Packer   

[ExpectedValue]

Last I checked Packer, the purchasing of stakes in Banks by the TARP happened all under Bush and Paulson's watch, not Obama's. So much for your theory of letting the market determine the outcome philosophy.

[Packer16]

I think the difference was the intent was not to manipulate the outcome (i.e. tell the banks what to do) but to provide capital to prevent a systematic failure that is the reason for the lack of conditions for the money.  The new approach uses the same methods but has different end (i.e. control the outcome - more lending) thus the conditions for the money.  The implicit assumption is the lending that went away was bankable lending.  Much if it was probably not and that is why manipulating the market (via TALF and PPI) to reach this end will probably not work and result in taxpayer money going to those who can game the system to their favor (which is what happens when the gov't tries to manipulate the market rather than just tax the result).     

 

Packer

[SharperDingaan]

 

Packer

 

You might want to randomly sample some of the UK & French/German financial press over the last two months or so.

 

The banking industry's continuing refusal to lend at the 'high street' level, has started to shutter all kinds of retail stores (a visible face of the recession), & there is a growing groundswell that 'the bankers' are to blame. Still largely random stories of intimidation, verbal abuse, etc. at this point - but its also starting to get uglier (police interventions against attempted car bombings, gangs trashing branch office windows, bank managers being deliberately followed on the streets, etc.). France, Germany, & now the UK; a not-so-quiet, & gowing anger.

 

The US may have exported the credit crisis, but Europe is exporting the social unrest, & the priviledged few admitting they screwed up, paying a fine, & then moving on - isn't going to cut it this time around. Its 'game changing' time, & the 'entitlement' culture has proven itself incapable.

 

No one is expecting the central banks to get it right the first time out; but there is an expectation that this 'too big to fail/too important' shite is going to end, & that major institutions will be made examples of. We will have some kind of 'new deal', that gives most people a fresh start.

 

The US is not an island.

 

SD