Administration Hypocrisy Watch (Financial Version)

"The Hill" titles a must-read piece as follows:

After Obama rips lobbyists, K St. insiders get private briefings.

Here are excerpts:

A day after bashing lobbyists, President Barack Obama’s administration has invited K Street insiders to join private briefings on a range of topics addressed in Wednesday’s State of the Union.

The Treasury Department on Thursday morning invited selected individuals to “a series of conference calls with senior Obama administration officials to discuss key aspects of the State of the Union address." . . . .

A handful of lobbyists told The Hill on Thursday morning that they received the invitations and were planning to call in.

Some lobbyists say they are extremely frustrated with the White House for criticizing them and then seeking their feedback. Others note that Democrats on Capitol Hill constantly urge them to make political donations.

One lobbyist said, “Bash lobbyists, then reach out to us. Bash lobbyists [while] I have received four Democratic invitations for fundraisers.”

In his State of the Union on Wednesday, Obama once again targeted K Street: “We face a deficit of trust — deep and corrosive doubts about how Washington works that have been growing for years. To close that credibility gap, we have to take action on both ends of Pennsylvania Avenue — to end the outsized influence of lobbyists; to do our work openly; to give our people the government they deserve.”

Hypocrisy we can believe in?

Moral to the president: People who run as a saint/Messiah are held to at least ordinary standards of consistency. "The Hill" mightn't bash you with such a pointed title and text had you not posed as other than a Chi-town pol, which is how you have been behaving.

Copyright (C) Long Lake LLC 2010

Moral Hazards Everywhere, and the Stench of Criminality

Based on a CNBC report, Mish at globaleconomicanalysis.blogspot.com reports that:

MISH:  Lies, coverups, distortions, and no transparency are the norm for the Treasury Department and the Fed, so it should come as no surprise that Bank Stress Test Results Delayed For Earnings.

CNBC:  The U.S. Treasury Department is planning to delay the release of any completed bank stress test results until after the first-quarter earnings season to avoid complicating stock market reaction, a source familiar with Treasury's discussions said Tuesday.

The Treasury is still talking about how results of the regulatory stress tests on the 19 largest U.S. banks will be released, and may disclose them as summary results that are not institution-specific, the source said.

The source, speaking anonymously because the Treasury has not made a final decision on what to disclose, said officials do not want any test results released before the earnings season wraps up for most U.S. banks on April 24.

The tests are designed to determine the depth of banks' capital holes if conditions deteriorate further. After the tests are completed, the banks will have six months to either raise private capital to compensate, or accept government funds.

But officials are worried about how the market will react to the stress test results if there is not a clear recovery path for a bank that is deemed to have a large capital need. The last thing Treasury wants to do is set off a panic, the source said.

It's earnings season and banks are going to pretend they are making money (or losing less than they are), and the Treasury does not want to interrupt those lies with stress test results.

MISH (again):  Furthermore, the one thing we know for sure is the longer the Treasury delays reporting and the less detailed information the Treasury provides, the worse the actual results, regardless of what is actually reported.

This is amazing:  earnings season takes precedence!  Mish's view is supported by the Johnson/Kwak post today in The Baseline Scenario:

The stress tests have two main problems. First, they are no longer credible, because the worst-case scenarios announced for the stress tests are no worse than many economic forecasters expect in their baseline scenarios. Second, the administration has as much as said that the major banks will all pass the stress tests, making it appear that the results are foreordained. It is possible that the stress tests will be used to force banks to sell assets as part of the PPIP, which would be a good but unexpected consequence.

Just in case you think that this sort of behavior is limited to Treasury or last year's two episodes of short-squeezing by sudden SEC crackdowns on naked short sellers, please read carefully from a Bloomberg.com report of what our Justice Department has done to a (previously) sitting Republican Senator:

U.S. Judge Dismisses Case of Former Senator Stevens (Update3) 

April 7 (Bloomberg) -- A U.S. judge set aside the political corruption verdict that probably cost ex-Alaska Senator Ted Stevens re-election and ordered an investigation into whether prosecutors’ “shocking” conduct was criminal.

U.S. District Judge Emmet Sullivan said he had a duty to determine the “potential for obstruction of justice” by six federal prosecutors.

“In nearly 25 years on the bench, I’ve never seen anything approaching the mishandling, the misconduct, I’ve seen in this case,” Sullivan said in Washington at the outset of what he called “a dramatic day.”

Sullivan appointed a special prosecutor, Washington lawyer Henry Schuelke, to conduct the probe of the government lawyers. He ordered the Justice Department to share files with Schuelke to help him determine whether the prosecutors are guilty of criminal contempt.

The instances of misconduct are too serious and too numerous to be left to a Justice Department investigation that has “no outside accountability,” the judge said.

Public Integrity Section

Those to be investigated are William Welch II, chief of the Justice Department’s public integrity section, Brenda Morris, the principal deputy director, and four other members of the trial team. The section prosecutes public officials and government employees for corruption.

Washington defense lawyer Michael Madigan called the judge’s appointment of a special prosecutor “an extraordinary action” he has never seen in his 30-year career. . .

During the trial, Stevens’s lawyers repeatedly accused prosecutors of failing to turn over evidence they were required to share with defense lawyers because it might help their client. Defense lawyers said prosecutors belatedly turned over copies of a Federal Bureau of Investigation interview in which Allen had told investigators he “believed Stevens would have paid an invoice if he had received one. . .

(Attorney General) Holder has declined to say whether the prosecutors committed any wrongdoing, saying he wants to await the results of an internal investigation.

The judge said he was frustrated with the apparent lack of progress in that investigation, saying, “to date, the silence has been deafening.”

Have you ever?  One reads the above with profound disappointment, because it appears to demonstrate that the misuse of Treasury and the planned misuse of the FDIC (discussed earlier today) has extended widely, even to Justice. 

In the same vein, consider:

AIG’s Bank Payments Probed By TARP Inspector General (Update2)

“We would like to know if the AIG counterparty payments, as made, were in the best interests of the taxpayers,” lawmakers led by Cummings said in a March 25 letter to Barofsky.

Competing insurers including Ambac Financial Group Inc. and the predecessor of Syncora Holdings Ltd. reached agreements with banks such as Citigroup Inc. and Merrill Lynch & Co. to cancel similar contracts at discounts to their expected losses.

GAO Report

The Government Accountability Office said last month that the Treasury should demand that AIG seek concessions from banks as a condition of the latest U.S. aid.

“If such concessions are not considered to be in the government’s interest, the reasons should be clearly articulated and explained,” the congressional auditors said.

One understands why Chris Whalen of Institutional Risk Analytics recently wrote that the Federal Government is like a criminal Mafia-type enterprise.  

EBR stands by its assertion that what we are seeing, and that may be unraveling, may well be the financial equivalent of Watergate, for which any number of people went to jail, a President was forced out, and which was associated with the worst bear market since the Depression.

In the Great Depression, the large New York banks were of unchallenged soundness, and the runs were on small community banks.  The situation is reversed now.  Your money will be safest in small, well-run local banks without toxic waste on their balance sheets and that have lent prudently while retaining strong capital positions.  You can assume that FDIC is a bankrupt institution that will be bailed out by the relatively insolvent but too-big-to-fail Federal Government.  Thus it is better to have your money either directly in a Federal obligation, a large Federal or Treasury money fund such as Vanguard's, a Ginnie Mae mortgage-backed security, or a truly safe bank than a risky bank such as BofA. 

So far as the stock market goes, please consider the long-term chart of the DJIA.  As the Republicans were taking over both houses of Congress in January 1995 for the first time in more or less forever, the stock market began to go vertical, and embarked on a record 5 consecutive 20% gains, ending in the manic and also improperly-concocted doubling of the NASDAQ in 1999.  This takeoff from what was a rising channel of stock prices throughout the 1982-1994 period began at Dow 4000.  No one should be surprised if we see that Dow level again as this disaster runs its course.

Copyright (C) Long Lake LLC 2009

More on Treasury's Plan for Toxic Assets

Given its importance, perhaps there are some people who would like a summary of comments across the Web on the Obama-Geithner plan to deal with bad assets on the books of large complex financial companies.

Now that I have read numerous comments, I remain appalled.  Please see, e.g., Krugman's analysis in the first section below.  The taxpayer is taking almost all the risk for only half the upside.  Better the taxpayer take all the risk for all the upside.  Even better, the bond holders need to pay.  That's simply how it is in business.  

Two of the leading sites for commentary are Nouriel Roubini's RGE Monitor (subscription required) and the real estate-oriented blog, Calculated Risk (www.calculatedriskblog.com).

Here are excerpts from each website presenting opinions.  In addition,   First, from RGE Monitor:

• Reactions:

• FT Alphaville: At the heart of this complex plan is liquidity, which Geithner has identified as both the problem and the answer. Increase liquidity and assets price will rise towards fair value, banks’ capital ratios will improve and they will start lending again. What if value of assets is low because of reduced cash flow expectations--> see also 'Fire-Sale' Vs. 'Hold-to-Maturity' Prices: Is The FASB Yielding To Pressure From The Industry? 
  
• Alea: The plan is good in theory as private investors have no incentive to overpay because they are in a first-loss position. However, there is likely to be a gap between the mtm value of the toxic assets and what a rational investor would pay, reducing or eliminating the incentive for banks to participate. Only the truly cash-starved banks will jump.
• Blog comments: private investors will take long positions in the selling banks’ stocks (or other long positions in derivatives) and will then have an incentive to grossly overpay for the securities in this program. They’ll gladly take some losses in this program to boost their other positions outside the program.  
  
• Krugman: Huge taxpayer subsidies to the private sector are involved: Suppose that there’s an asset with an uncertain value: there’s an equal chance that it will be worth either 150 or 50. So the expected value is 100. But suppose that I can buy this asset with a non-recourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset? The answer is, slightly over 130 [in a competitive auction.] Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me.
• cont.: Another way to say this is that by financing a large part of the purchase with a non-recourse loan , the government is in effect giving investors a put option to sweeten the deal.
• John Mauldin (via TechTicker): I'm in the hedge fund business myself but as a taxpayer I don't believe Treasury should subsidize hedge funds.

Next, from CR's post, first showing commentary from Wells Fargo (surprise, they like having money thrown at them) and then CR's personal comments:

“My gut reaction is that this is an excellent plan. This plan will go a long way toward getting banks in better position to lend more aggressively and break the deleveraging feedback loop that is now in place."
Scott Anderson, senior economist, Wells Fargo

I think this is a myth that banks will lend "more aggressively" once the toxic assets are off their balance sheets. To whom? Perhaps Anderson is making the moral hazard argument here - maybe he is saying since the banks (and their investors) are being bailed out with above market prices for toxic assets that they will once again engage in risky lending. I hope that isn't his argument. 

The key problem with the Geithner plan is that it incentivizes investors to pay more than market value for toxic assets by providing a non-recourse loan and with below market interest rates. (See Krugman on the price impact of a non-recourse loan). The investors do not receive this incentive, the banks do. And the taxpayers pay it, so this is a transfer of wealth from taxpayers to the shareholders of the banks.

Finally, I take the liberty of posting all of a somewhat lengthy commentary from the blog Information Arbitrage (www.informationarbitrage.com), because this blogger, Roger Ehrenberg, also presents his own plan and how it is superior, in his view, to Treasury's plan:

March 23, 2009

The PPIP: It's NOT the Liquidity, Stupid. It's the Marks.

You can say something about the current Administration: they are really trying. The recently released Public-Private Investment Program ("Program") details show both a lot of thought and some really good ideas. Unfortunately, the essence of the Program and its messaging are still missing the boat on a few important fronts. The main issue: the Government perceives the problem to be one of investor liquidity and the ability to finance broken asset portfolios. The problem is that they are wrong. It is all about banks not wanting to own up to inflated balance sheet values. But here are some other problems with the Program and its positioning:

• Still enamored with short-term stock market movements. Larry Summers stated that the Administration is "gratified" by the stock market's reaction to the Program. Why, oh, why, do Senior Government officials, especially those with ostensibly high IQs, say such stupid things? Guys, the focus should be on doing the right thing for the long-term, not on what will goose the market for a day or two. And while Summers et al claim to be all about the long term, then why do they keep on talking about stock market reactions to policy decisions? If there is one thing we know for sure, it's that the market is very, very jittery and volatile, and is apt to make sharp moves in response to almost any news. While the Dow could rally 500 points today, it could just as easily fall 500 points if liquidity fears rear their ugly head, another bank runs into trouble, populist rantings by Congress spook the markets, Pandit is given a long-term employment contract, etc. Bottom line: the Administration needs to stop talking about and caring about short-term stock prices. Stock prices are not unlike the Treasury yield curve: easy to manipulate on the short-end, difficult if not impossible to impact for a sustained period on the long end.     

• Forgetting the appetite of the supply side. The Program, with all the benefits provided to approved buyers - equity matching funds, cheap leverage, etc. - lists only a single line when addressing a key weakness: Participant Banks don't actually have to participate. Participant Banks can submit portfolios for auction, Approved buyers can line up, valuation firms can estimate the worth of portfolios submitted for auction, buyers can submit their bids and Participant Banks can say: no. I fail to see how the Program is a material departure from the current landscape, except for the fact that the Government is providing cheap financing. The buyers are still running equity risk regardless of the 1-1 Government match (as they should), and will only submit bids that reflect their assessment of risk and return. This may result in prices that are still far out-of-line with current bank carrying values, causing banks to reject the highest bids in a move to avoid further asset write-downs. So even a protracted auction process could result in a whole lot of nothing. What does Larry Summers think a failed auction will do to stock prices? I shudder to think.

• Perpetuating entrenched and failed managements. The Program is a vehicle for helping broken firms liquify broken asset portfolios. What it doesn't do is help broken firms get rid of broken managements that got us into these problems in the first place. In the rush to protect major lenders from going out of business (and protecting stockholders and debtholders in the process), the US taxpayer is given scant protection from the cadre of poor leadership teams that led firms into troubled waters. Why is AIG the sole whipping boy for the Government when plenty of other firms were complicit in damaging the financial system? While legacy AIG management deserves much of the scorn they've received, most broken bank executives have gotten off with nary a scratch. This I do not understand.

• Not reflecting the true magnitude of the Government's involvement in the numbers. If I read the materials properly, it seems as if the only money being counted against TARP are the equity matching funds being provided. What about the leverage being guaranteed by the FDIC? Depending upon the values realized for the purchased portfolios, those guarantees might come into play, increasing costs well beyond the equity commitments. This is more an issue of truth-in-advertising. While yes, having the private sector side-by-side is a good thing, the Government via the FDIC is providing the debt guarantee. If this isn't incremental exposure to the US taxpayer, then I don't know what it is. This needs to be clearly factored in as an explicit cost of the Program. 

My program, as discussed many, many times on this blog, is different than PPIP in one major respect: it does not rely upon the banking sector's willingness to participate; it forces the issue. Maybe banks will finally be willing to separate themselves from loan and securities portfolios at prices less than their marks. But I don't think so. The Government's plan is predicated upon the assumption that a lack of investor liquidity is the issue. But they are wrong. The issue has almost nothing to do with investor appetite and everything to do with banks avoidance of facing into the market values of their portfolios. And when push comes to shove, they will beg off and avoid selling into auctions that will validate the inadequacy of their capital positions and invalidate the quality of their marks. The only way they will do do is by force. This means Good Bank/Bad Bank, Crisis Style. 

Why is the Government wasting so much time and taxpayer money dancing around the issue? If my read of the situation is wrong and the Program is a smashing success, I'll be the first one to say so on this blog. But if my perception is right - the same perception I've had for, oh, nine months - then I'd like Treasury, the Fed, the FDIC and the President to move quickly to address the toxic asset issue once and for all. The PPIP contains many of the mechanics necessary to pull of Good Bank/Bad Bank: the main difference is compelling the supply side - the big, broken banks - to participate. Guarantee depositors funds without limit. But say goodbye, stockholders. Goodbye, unsecured debtholders. Goodbye, loser managements. Hello private investment in Good Banks. Hello, private investment in Bad Bank assets with profit sharing along with the US taxpayer at current market levels. Can't we just skip the PPIP and go straight to this? Because we know who will participate in my program: Everybody.

Copyright (C) Long Lake LLC 2009