Posts Tagged ‘Geithner’

Banking, Chicago style

Wednesday, June 3rd, 2009

Having taken US Treasury TARP funds from Tim Geithner, and being subjected to his “Stress test”, several TARP recipients have surprised the U.S. Treasury by easily selling new stock and raised money in the past few weeks with the goal of paying back the TARP money, paying off their loan shark, and no longer being subject to the whims of President Obama and a Democratic Congress.  How naive.

Bloomberg reports that the [US Treasury has moved the finish line], saying that what they said just a week ago for the firm’s  capital requirements no longer applies, and the U.S. Treasury won’t allow the TARP money to be paid back.

Do banks have kneecaps?

Does anayone else hear the distance sound of the drums of war?

Repeating the same mistake

Wednesday, June 3rd, 2009

A number of sources are reporting that GM and Chrysler’s new car sales are “better than analyst projections” – in the case of GM – only down 30% from last year, instead of the expected 39%.  (See any “spin” there?)

So assuming that’s actually true, why the counterintuitive result of people returning to the showrooms of companies about to go into bankruptcy?  

Here is my guess:   One of the early companies that got the Tim Geithner “bailout treatment” was GMAC.   GMAC makes car loans (mostly for GM cars).   They borrow money using bonds and then use that money to fund car loans.   GMAC got clobbered by the Federal Reserve forcing down interest rates – they had borrowed a -lot- of money for terms of up to 10 years and more (longer than a car load lasts). 

When the Federal Reserve pushed down interest rates, GMAC ended up having to make loans for less than what they were having to pay for the money.   The value of GMAC’s bonds began to drop, and as people started to worry that GMAC would never recover, the credit rating and price of the GMAC bonds became close to worthless, which then seriously hampered GM’s’ ability to sell new cars, to the point that GM was referring potential buyers to banks and other lenders instead of GMAC.

So one of the first things Paulson and Geithner did was to flood GMAC with cheap money, and combine the activities of GMAC with Chrysler’s financing company.   In December 2008, The US Treasury injected $6 billion, and converted GMAC into a “bank” (GMAC having never paid into FDIC and not having any “deposits”).  GMAC acquired a small bank to make that magic happen – it was named GMAC Bank, and now Ally Bank.

Remember the woman before the election who announced when Obama was elected that she would not have to pay her mortgage and would get a free car?  People scoffed at how naive she must have been.  The joke’s on us.  Remember Oprah’s Free Chicken Dinner giveaway and how word spread  so quickly within the community that there wasn’t enough free chicken to hand out?

Given Obama and Geithner’s obvious desire to manage failure, it seems very probable to me that they sent the word to GMAC to “just forget the credit scores” – we’ve got your backs – the same way the government “backstopped” Freddie Mac and Fannie Mae for home mortgages.  So GM and Chrysler may be selling cars to people who can’t possibly qualify for the car loan in normal times, or at interest rates that don’t reflect the risk of repossession down the road. 

Toyota’s sales were down 47% – they don’t have the luxury of ignoring credit risk.   The more the government gets involved, the more they change the competitive environment.   While they may not take over Ford, the competitive advantage that being financed by the government may ultimately drive you out of business – until a few years from now when GMAC is holding a worthless portfolio of uncollectible loans, and then we have a hole another trillion deeper.

Just like a woman can’t be half-pregnant, you can’t half-nationalize an industry.

$582 Trillion

Thursday, May 28th, 2009

$582 Trillion.   That’s about $100,000 for every person on the planet.

That’s the amount of the leverage hanging over the heads of the world.   It is the face (notational) value of the sum of all of the unregulated derivatives.   Every radio company owner that I’ve looked at so far (those not privately owned) have used short term variable rate LIBOR credit facilities – with interest rate swaps derivatives to protect them from an increase in LIBOR.

One of the problems with things like Interest Rate swaps are today they are 1 on 1 contracts.  There are theories about how you figure out the value of an interest rate swap at a point n time, but there is no liquid market to prove what it is worth.   Typicaally you bought them as a condition of getting the credit facility, and you had to buy it from the same folks.  Interest rate swaps being 1 on 1 contracts have couterparty risk – if the bank (or insurance company) that sold you the interest rate swap goes under (AIG, for instance), you’re 100% screwed.

Tim Geithner is doing one thing right, but whether it works or will just speed the collapse is not known yet.   He wants a publicly traded liquid market in interest rate swaps and other derivative instruments.   (by proposing this as his project, he’s stepping all over the toes of the CFTC, and to a lesser degree the SEC).  It’s a pretty naked power grab.

If interest rate swaps become a standard commodity (I’ll trade you LIBOR vs 4% for 5 years), then it takes the guesswork out of how much leverage is out there and how much the contract is worth at any point in time.   A key part to a commoditized financial product is that you get rid of the counter party risk.  Instead of your contract depending on 1 company, all of the people involved in the marketplace pool their assets  to guarantee all trades.   You can’t play the game if you can’t prove you have the resources to back up your trades.  If one of the companies fail, all the other players agree to absorb their loss.

Either Geithner is a brilliant man who is going to save the world, or he is incredibly naive and leading us right off the cliff.   I think we’ll know shortly which he is.   I don’t see how you get past the fact that one party to the transaction introduces risk via their credit risk, but maybe I just don’t understand it yet.

The LIBOR time bomb

Saturday, May 16th, 2009

Tick…  Tick… Tick….

Tim Geithner has stated that the Federal Reserve’s low interest rates starting in 2003 (Geithner joined the NY Fed in 2003 – coincidence?) is the root cause of the current problem.

Having spent the last week devouring 10-K statement for all of the major radio companies (and it’s probably the case for most Amerian businesses), that definitely looks correct.

It goes something like this – back in the “good old days”, if you were a business and wanted to raise money to build a new factory, you had basically two options – sell more stock in your company, or borrow money by selling long term bonds.

Selling bonds meant a long term obligation to make cash profits from your new factory to pay back the loan.   Raising money by selling stock didn’t commit you as strongly to paying cash for the money on a regular basis, but if your earnings didn’t increase over time, the value of your stock would be diluted and the stock would perform worse than your competitors.

Enter the Federal Reserve flooding the credit markets with very low cost money.   This was George Bush’s doing in cooperation with Alan Greenspan.  Following 9/11, the Bush administration felt a need to use government money to prop up the economy.   (outside of New York City, 9/11 did not cause a big “hit” on the economy).

The consequence of this unneeded intervention in the economy was that given the choice of continuing to pay 13% on junk bonds or pay 2% to an investment bank (which was getting its money from the Fed), that’s a “no brainer”.   Companies could drastically reduce their interest expense by swapping out their long term fixed rate debt with floating rate cheap money.  Unforunately, people who don’t use their brain do stupid things.

The quick fix has a huge down side however (the same one hitting the residential mortgage market).  Even if you had to borrow expensive long term money, you could budget cash flow out 10 years (or whatever the term of the bond is) and make rational investment decisions.  Funding capital assets with short term variable rate money is very short term smart and long term stupid.

To try to mitigate that risk, companies (sometimes as a condition of the LIBOR credit facilities) purchased LIBOR/Fixed interest rate swaps.  The swaps protect the company from the probability that sometime in the next “x” years, that very cheap LIBOR money is going to get more expensive.

That’s exactly what happened in September 2008 – With the failure of Lehman Brothers, reality set in.  An Interest Rate swap carries the risk that the party that sold it to you could go out of business (as Lehman did) and leave you holding the bag.  Who insures the insurer?   There is no such thing in life as “no risk”.

Overnight, LIBOR shot up from like 1.2% to 4.5% in a single day.  Had that not been stopped in its tracks, everything based on LIBOR would suddenly become very expensive and anyone who had sold hedges (interest rate swaps) was going to quickly become insolvent causing other sellers of swaps and lenders with LIBOR based loans to fail.  

So the central banks of the world all turned on their fire hoses to flood the global economy with even more cheap money.  They’re trying to put out the fire by flooding it with gasoline.

This can’t last.  At some point, LIBOR is going to zoom back up to the real cost of money reflecting the actual risks of the borrowers.   When it does, companies that borrowed long term money from the short term market will fail.   Companies (or government agencies who didn’t know what they were doing)  that have sold interest rate swaps will fail.

Geithner and Rose – Part 2

Tuesday, May 12th, 2009

Secretary of the Treasury Timothy Geithner – formerly the head of the powerful New York branch of the Federal Reserve – had another hour long interview with PBS’s Charlie Rose last week.

The Wall Street Journal offers their opinion [here].

Charlie asks Tim Geithner why things went so wrong and what mistakes were made along the way.

Geithner’s response is a bit muddled.   He blames it partially on lax regulation of banks that were taking on too much risk (note: AIG is not a bank).   While not letting the U.S. off the hook, he does suggest that low interest rates caused the global economy to chase and leverage risk because so much money was available at such a cheap rate.   [Most people agree on that]

Since money could not be parked in US Treasuries and earn reasonable rates, that caused the global investment community  to rush to invest its excess dollars (being generated by the Fed) in riskier and riskier  investments like mortgage backed securities and hedge funds that “invested” money with Bernie Madoff.  The easy availability of cheap mortgage money led to a building boom of housing that wasn’t needed, an influx of construction workers from Mexico to build them and a run-up in housing prices.

He gets specific at blaming that part of the problem in the Federal Reserve’s actions from 2003-2005.   Tim Geithner joined the Federal Reserve in 2003.   Alan Greenspan was the head of the Central Bank, of course.  Probably the unspoken subtext of that statement is something like “We spent a lot of money on the War in Iraq but George Bush didn’t want people to feel the pain of paying for it – so the Federal Reserve “cheap money” policy paid for the Iraq war”.  [Did George Bush ever fight a spending measure of any type in his 8 years in office?]

What is interesting (and alarming) about this revelation is not that he is “owning up” to the Federal Reserve’s role in creating this mess – but that while describing easy availability of credit and low interest rates at the Federal reserve as the problem, he and current Federal Reserve Chairman Ben Bernanke are advocating exactly the same thing as the solution!

To “liquefy” the credit markets, Ben Bernanke in cooperation with Tim Geithner at Treasury have “monetized” about $1 trillion (so far) by creating “fiat” money – the Federal Reserve just creates money and loaning it to the US Government, which is now going to turn around and spend it.

The reason creating fiat money was necessary is that the US Treasury can’t find people willing to buy US Treasury instruments at the extremely low (close to zero) interest rates.    The only way to keep attracting dollars to the US Treasury (if there are any) would be to raise the interest rates we pay.  A lot.

If the Federal Reserve slammed the money creation door on the US Treasury, it would be VERY ugly – but that’s the only thing that will turn this problem around.    If the Federal Reserve didn’t fund wasteful government operations with new dollars, here are few of the logical consequences:

  • Interest rates – short term and long term – would shoot up
  • With the US paying higher interest rates, the US dollar would strengthen against other currencies
  • With the dollar going up in value, the price of oil would drop
  • People with money to invest in Treasury Securities or things like CDs based on Fed interest rates would earn more return on their life savings now languishing in money market accounts
  • LIBOR – the interest rate behind most of the world’s investments would go up drastically.   Companies and individuals with borrowing tied to LIBOR would be in serious trouble (as they should be)
  • Entities that sold LIBOR interest rate swaps would be in very serious peril (as they should be)
  • If the LIBOR interest rate swap market falls apart (it will), entities that agreed to loan money because they were protected by an interest rate swap hedge will be in serious trouble (as they should be)
  • The higher value of the dollar would cause U.S. exports to become more difficult to sell, but lower the cost of imported goods and commodities.

Businesses that built their growth on easy credit will fail – those who built on earning money by creating a useful product and hoping for a reasonable rate of return would survive.  Those businesses would be the ones to pick up the pieces of the rubble and start over.  Hopefully there are a few of them left.

Someone HAS to say “No” to the Obama administration’s plan to spend its way out of this problem with fiat money.   Is Timothy Geithner man enough to “bell the cat”?

When a heroine addict stops putting a needle in their arm, there IS a risk that they will die.  It is guaranteed that things will be extremely unpleasant for a while – but it is the only solution to an addiction.    Back at the very beginning of this unwinding, Glenn Beck made the statement (which he hasn’t repeated that I’ve heard) that this problem is only going to be solved by an alcoholic – someone like him.    He sees a clear pattern of people rushing in and “enabling” the addiction to continue, thinking they are being compassionate – but all they are doing is deepening the addiction and the pain at the bottom.  It’s time to confront the truth.

Coming down off the “Easy money” high is the only way out of this problem, but nobody in government is prepared (yet) to risk the consequences.  (bankruptcy, mortgage foreclosures, high unemployment, financial collapse of state governments, massive layoffs of government employees, etc…  It could lead to a second Civil War and social unrest on a scale this country has not seen for 140 years.  A lot of people could die.   This scenario may  happen no matter what the Federal Reserve does.   The longer this charade continues, the more likely that becomes the outcome.

The first Charlie Rose hour long interview with Timothy Geithner is [here]

This current hour long interview is [here], or if you only have the time or patience for the edited version, a 6 minute highlight is available [here].  The highlight reel does not have the comments the WSJ is writing about.

The biggest disconnect I heard was when Charlie asked about the small banks who want to return their TARP funds and not have the Federal Government regulating what they pay their mangement.  Geithner said that he expected the SEC would handle that issue.  Note to Tim Geithner:  SEC has no regulatory role over corporations that are not publicly traded on a stock market.  The Federal Government has no say in how much a privately owned bank pays its executives.

Bankruptcy Watch – Charter Cable

Friday, April 24th, 2009

Charter is already in the bankruptcy process – so this isn’t about a new bankruptcy.

According to the International Business Times here, Charter’s plans to get in and out of bankruptcy fast have run into a snag. Wells Fargo and JP Morgan have both objected to the “quick prepackaged bankruptcy” and will not agree to it.

Are you listening Tim Geithner? GM? Chrysler?

Seeing how the CEO of Bank of America is being treated now for “going along with the government”, look for a lot more resistance to being told by the U.S. Treasury “the way things are going to work”.

It’s possible that a US Bankruptcy judge may have more power than the U.S. President.  Perhaps people working at the Federal Reserve bank didn’t know that.

Bankruptcy Watch – Chrsyler

Thursday, April 23rd, 2009

According to the NY Times, the U.S. Treasury Department (translation: Tim Geithner) is preparing the paperwork for filing Chapter 11 next week when the April 30th deadline arrives and Chrysler hasn’t found a buyer.

Geither’s folks have been talking about surgical bankruptcies for both GM and Chrysler – splitting up the “good” and “bad” parts of the company, taking the good and giving them to the UAW and current workers – and leaving the bad parts with the creditors – but that’s not the way bankruptcy works. 

One creditor cannot dictate the terms of the bankruptcy settlement for the others, segregate assets for themselves and cut up the pie the way it wants  (putting the UAW’s claims in front of bondholders – for instance).   Neither can the “Debtor in Posession” do that (DIP is the entity runnning the company while it works through the bankruptcy). 

Those decisions are the role of the bankruptcy judge – and following the law and legal precedents of similar cases in the past.   The more creditors that agree on a single plan, the more likely the judge will accept that version of the plan. 

Section $1114 of the US bankruptcy code already has rules about how to deal with retiree health insurance when their former employer goes bankrupt.   In addition, special COBRA provisions have been added in the past few years allowing retirees to buy COBRA for the rest of their life, and a 65% tax credit to pay for most of it (if they are working for a company whose pension plan was taken over by the Pension Benefit Guaranty Corporation). 

[I am not a lawyer]

Update:  Daniel Howes writing for the Detroit News makes the same point.  He quotes Larry Denton, the former CEO of an auto parts supplier that has been through the process:

“If GM thinks they can package this in a 90-day period, that’s pretty naive. The judge can’t say, ‘I’m going to give this company a good deal here because of its size,'” Denton says. “He has to follow the law.”

Then again, the Rule of Law doesn’t seem to apply lately to the Obama administration’s actions.  Perhaps this is a dry run to see if Geithner can force through the GM bankruptcy in June on his terms.

Bankruptcy Watch – General Motors

Tuesday, April 7th, 2009

Reuters Story

“Intense Preparations” are underway preparing for a possible GM bankruptcy, along the lines of Geither’s plan – to split the company into a “good GM” and a “bad GM”.

Reading between the lines, it sounds like the decision has been made – in a company as complex as GM, it takes a while for lawyers to write up the paperwork and anticipate possible objections the court or other parties (including countries in Europe) may have.

If GM “goes”, the automotive parts business will likely follow – as well as serious damage to the bondholders (most of the value of the bonds has already been “written off”, but forces everyone to adjust their valuation)

But don’t worry – the Federal Reserve has lots of “money” it can create to keep funding cascading bailouts of the companies that fail.

Geithner’s Waterloo

Monday, March 30th, 2009

Sunday, the US Government told Rick Waggoner – the CEO of General Motors – that he no longer has a job.  The government automobile rescue commission has declared that the viability plan is not workable.

Tim Geithner has declared that the problem with the economy is that he hasn’t done enough, not that he has done too much.  At the same time, he is lashing out at banks for being unwilling to take on additional risk.

Markets in Asia responded by dropping over 4%.   Futures suggest the same will happen here.   If you didn’t already sell to take advantage of the recent upswing, you probably missed your chance.

Geithner is now trapped by the reality that the hedge funds are not going to fund his latest toxic solution plan since Congress did the 90% AIG tax thing to punish those working hard to unwind the company.  Add to that the threat of “taking over” the same companies by decree of the Federal Reserve Board of Governors (which has no jurisdiction over anything except its members), and Geithner is in a real dilemma.   If he makes nice with the hedge firms and seeks to protect them from populist retaliation for making big profits by rescuing the banking system – he could face the rath again of those who want his head on a platter.  If he doesn’t shield them, they won’t voluntarily help.

No wonder nobody wants to work for him.

Showdown

Tuesday, March 17th, 2009

Congress – in order to deflect attention from their stupidity – is talking very stridently about the executives of “their” company AIG.

These are  incredibly stupid actions.   While the folks getting the bonuses may have played a role in the losses, threatening them is extremely stupid.  These are the only people who have the skills to unwind this mess.  One click of a button (or failing to click a button after they quit) and they can make the entire global economy lose $75 trillion.

The problem was that the government stepped in to bailout a failed company, not that the employees want their earned income.   The reason that there are bonuses at all is that Congress imposed a “salary cap” on “executives” and forced companies to pay employees based on performance.   If you don’t pay the “executives” what they were promised, they -will- leave AIG.  Will Chuck Schumer now force them to continue to work for AIG without paying them?

Fascism has arrived and it is bi-partisan.