After all – if the government could wipe you out why would you ever invest in low risk margin debt?

TO BE NOTED: From Bronte Capital:

"Do you or did you ever have friends in the FDIC?

"Here in my hand is a list of 205 communists in the blogosphere and the mainstream media."

Well – no actually – but I have a long list of people who – on the record – supported the confiscation of Washington Mutual.

Washington Mutual – by far the biggest bank confiscation in US history – happened during the AIG/Lehman week. It was confiscated despite being liquid and adequately capitalised at the time. Sheila Bair – the head of the Federal Deposit Insurance Corp (FDIC) did the deed – and in my opinion it was not her finest hour.

Washington Mutual was given to JP Morgan who did not need to honour all of WaMu’s debts. Debt holders – who would normally have expected to recover most or all of their investment were wiped out.

After this – and until very recently – no major US bank could raise any debt without a government guarantee. After all – if the government could wipe you out why would you ever invest in low risk margin debt?

The confiscation of Washington Mutual thus forced the entire system onto the government guarantee tit. The cost to taxpayers is thus potentially enormous.

Now at the time the confiscation looked justified to many because they assumed that Washington Mutual was insolvent no matter what their accounts said. JP Morgan – the acquirer – obliged this view by writing down the value of WaMu’s assets by about 20 billion. This write-down also justified the action by Sheila Bair. I said at the time that Sheila Bair was acting improperly despite this – and I said later that JPM was lying.

However if JPM was telling the truth – and Sheila Bair had a decent basis for believing them – then this was not arbitrary confiscation – though it was confiscation without appeal. It would be costly for the system – and it might have been justified.

Alas the facts have a neat way of outing the incompetence of Sheila Bair. JPMorgan is now confessing that almost all of the charges taken when Washington Mutual was confiscated will be reversed through their P&L. Washington Mutual was never insolvent and should never have been confiscated. [Hat tip – Felix Salmon.]

Sheila Bair – a Republican appointee no less – confiscated without compensation and without right of appeal valuable private property. I have argued repeatedly that she should resign – but now my basic thesis is proven her position is totally untenable.

A huge number of people supported her at the time. These are people who supported the confiscation of private property without appeal. Usually such people are called communists. The alternative explanation is that these people are just dopes.

Actually I know a lot of these people and they are not dopes. [Using McCarthyist logic therefore they must be communists.]

But they are not Communists either. Instead they were dopes on this occasion. Panics – be them financial or political do that. They turn thinking – even iconoclastic people like high profile bloggers – into dopes.

Now Washington Mutual was in fact very easy to add up. It was obviously solvent if you ran the numbers properly – but people find it quite difficult to run the numbers on banks. This applies to senior government officials too. And that explains why financial crises happen. People thought there was no risk in financial assets that were obviously risky during 2005 and 2006 and even into 2007. Thereafter they thought that financial assets that were most likely safe were (near) worthless. Government officials seemingly arbitrarily confiscating assets into the height of the crisis just added to that fear. A preferred stock is worthless if the government steals the underlying collateral (as I found out to my cost in the WaMu case).

After the confiscation of WaMu we needed not only to judge the solvency of banks (something which I think I am capable of doing) but also to judge the behaviour of individual officials in crisis (which I am not capable of doing).

The irrational fear in markets was not unlike the irrational fear that other manias (eg Joe McCarthy) engendered. That doesn’t make the fear less real or less destructive.

I thought at the time that Sheila Bair’s resignation would heal that wound– and would be the single best thing that the government could do to ease the financial crisis. Her resignation would break the nexus between fear in the market and the fear of seemingly arbitrary confiscation by government officials.

That nexus is broken now through repeated and consistent subsidy at huge potential cost to the taxpayers. The government – through repeated capital injections and guarantees – has managed to convince most people that American banks are safe.

It would have been cheaper for Sheila Bair just to resign.

However – the immediate and pressing need for Sheila Bair to resign as a matter of policy has past. The market is no longer outright afraid of arbitrary government confiscation of financial assets though they might have some fear about government intervening in Detroit’s bankruptcy.

But whilst the time for Sheila Bair’s resignation as a matter of national priority is past, the time for her resignation for proven incompetence has just begun.

John

Posted by John Hempton

It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut

From Reuters:

"Felix Salmon

is summer arriving?

« Previous Post

May 26th, 2009

Revisiting WaMu

Post a comment (2)

Posted by: Felix Salmon

Tags: banking, regulation

JP Morgan, having lopped $29.4 billion off the value of WaMu’s loans when it took over the troubled lender, now reckons it’s going to get the lion’s share of that money back:

When JPMorgan bought WaMu out of receivership last September for $1.9 billion, the New York-based bank used purchase accounting, which allows it to record impaired loans at fair value, marking down $118.2 billion of assets by 25 percent. Now, as borrowers pay their debts, the bank says it may gain $29.1 billion over the life of the loans in pretax income before taxes and expenses.

WaMu failed in the middle of the sleepless craziness following the Lehman collapse, and in hindsight might well have been at least as much of a factor in the scary gapping-out of Libor as Lehman was. It’s worth remembering that these are the only two US financial institutions where senior lenders took a haircut — and in both cases the senior lenders were pretty much wiped out. In other bank failures, even the junior lenders generally emerged unscathed.

It increasingly seems as though a panicked FDIC thrust WaMu into the arms of Jamie Dimon, who could — and did — ask for pretty much anything he liked, including the right not to have to pay back any of WaMu’s creditors. The result was that the bank wholesale-funding market went straight into crisis: one sui generis default (Lehman) might have been navigable, but when you have two in as many weeks, it’s pretty clear which way the wind is blowing.

We’ve had endless rehashings of the weekends leading to the Bear Stearns and Lehman Brothers failures, but I’ve seen much less on the subject of WaMu, which is equally if not more fascinating and just as systemically important. The news out of JP Morgan that it massively undervalued WaMu’s loan books certainly seems to indicate that the likes of John Hempton have a point when they say that Sheila Bair got this particular decision spectacularly wrong, and in doing so put the entire US retail banking system on a much more fragile footing than was necessary.

Bair also took a relatively consumer-friendly bank (WaMu) and forced it to adopt the practices of a relatively consumer-unfriendly bank (Chase) — with predictable results: Chase is now telling former WaMu customers that even if they have directed the bank not to let their accounts go overdrawn, the bank can still push the account into overdrawn territory anyway, and, of course, “will assess an Insufficient Funds Fee” for doing so.

It’s clear that the big winner here is JP Morgan, but the rest of us — taxpayers, WaMu account holders, WaMu creditors — increasingly look like very big losers."

Me:

I agree that the WaMu seizure and sale was a mistake, but I think that it follows from Lehman. Now being quite aware that mergers were the only option for large banks and financial entities, they didn’t want to wait and chance a Lehman like situation, where the B of A and Barclays deals didn’t work out. So, they proactively seized and merged, scaring the hell out of bondholders and creditors.

Oddly, Lehman had scared investors that the government wasn’t guaranteeing the unwind. Now, WaMu scared investors that, even if the government got involved, they were in for a hellish ride of possible losses.

Of course, if you believe as I do, that the government needed to guarantee everything right off, like Geithner, then both of these actions are terrible mistakes.However, in both cases, Lehman and WaMu, I can understand why the government acted as it did. Too bad that’s not going to stop them from looking like idiots in the history books, because a good plot needs dunces by which to measure the ultimate heroes intellect.

- Posted by Don the libertarian Democrat

If the government blinks again, the probability that it will ever be able to seriously regulate these banks drops to zero.

From Reuters:

"The Detroit face-off

Post a comment (4)

Posted by: Felix Salmon

Tags: banking, bonds and loans

Bankers are never particularly popular at the best of time. Pyschologically speaking, if I borrow $100 from the bank, that $100 is now mine. Yet if I lend $100 to the bank — if I put $100 on deposit at the bank — then psychologically that money is mine as well. Logically, the money can’t belong to both depositors and borrowers at once. And the result is that people hate banks for both charging them fees on their own deposits and also being unreasonable when it comes to loans.

Banks are used to dealing with such emotions when it comes to their small clients. But now they’re facing a tougher issue — how to deal with the biggest client of all, the government. One way, it seems, is to go crying to the press:

At a meeting with executives from four of the nation’s largest banks earlier this month, the chief of the government’s auto task force, Steven Rattner, delivered a message that shocked some in the room.

To save Chrysler, he told them, the four banks and several other financial firms would have to surrender their claims to most of the $7 billion the automaker owed them. And what would the banks get in return for this sacrifice? Nothing.

“People’s jaws just dropped,” said a person familiar with the discussions.

Lemme guess, that person familiar with the discussions was a banker, right?

The fact is that the bankers don’t have much of a leg to stand on here. The government is asking them to take about 15 cents on the dollar — which aligns almost exactly with the market price of Chrysler’s debt. The bankers, meanwhile, are holding out for more — as much as 50 cents on the dollar — based on pointless hypotheticals about how much money they might end up getting repaid in a liquidation.

The WaPo story continues:

The banks — J.P. Morgan Chase, Citigroup, Morgan Stanley and Goldman Sachs — have all since balked at the government’s proposal. This week, they are drafting a counteroffer.

But those four banks are themselves recipients of billions of dollars in government largesse. Collectively, they have received $90 billion from the rescue program for the country’s banks. Now, their critics say, the firms have an obligation to cooperate as the government seeks to save Chrysler.

“These are banks that have received substantial investments from the government,” said Rep. Gary Peters (D-Mich.), whose district includes Chrysler headquarters. “We hope they will understand that what was given to them was not for their benefit, but to get the economy moving again and maintain American jobs. People are angry that again it seems like the banks are standing in the way.”

While this might be the right poetic response to the banks, there are more mundane and less philosophical reasons why their plaints should be brushed off. Firstly, Chrysler is not going to be liquidated: that is not, and never was, an option — especially in the present economic environment, when the market for Detroit’s hypothetical cast-offs is, let’s say, highly illiquid.

And secondly, the only reason why the banks’ loans are worth anything at all is that the government has already poured billions of dollars of TARP money into Chrysler. If the banks continue to insist on talking about hypothetical liquidations, they should be asked how much money is likely to remain for them if the government is first in line for repayment.

Up until now, big and powerful creditors have done very well out of Detroit: just look at the way that the government blinked first when it asked GM’s bondholders to take a large haircut before any TARP money would arrive. They said no, and the TARP money arrived anyway. This time, it’s the government which will (please) stand firm. Washington holds all the cards, and the banks are ultimately going to have to do what they’re told. If the government blinks again, the probability that it will ever be able to seriously regulate these banks drops to zero."

Me:

So, at a meeting, we have a Chrysler rep and Geithner on one side of a table. They tell the Citi rep to accept the losses for the good of the country.

Then, Geithner walks around the table and sits with the Citi rep, who says that they need the money and can’t afford to take a hit for the team, and Geithner points out that Citi is part of the team. We’re giving money to Citi, on the one hand, and telling them to accept losses, on the other hand. Makes sense to me. What shareholder doesn’t want their company to lose money, after all?

- Posted by Don the libertarian Democrat

When CDS prices become too high, counterparties may back away because they don’t want to pay so much to protect themselves.

TO BE NOTED: From Bloomberg:

Being Morgan Stanley With Stock Up 50% Means JPMorgan Debt Wins

Share | Email | Print | A A A

By Christine Harper and Shannon D. Harrington

April 6 (Bloomberg) -- Being Morgan Stanley is a struggle between bond investors who expect the worst and shareholders who say the best is yet to come.

By its own admission, Morgan Stanley is the preeminent adviser to companies, governments and investors. The New York- based firm has outperformed the Standard & Poor’s 500 Index and the financial industry this year with a 50 percent advance on its shares. That’s no comfort to the people who trade Morgan Stanley debt, which costs almost twice as much to insure against default as that of JPMorgan Chase & Co., the bank from which Morgan Stanley was created in 1935.

“It wouldn’t surprise me in the least if bankers at JPMorgan point to the fact that Morgan Stanley’s credit-default swaps are trading outside their own to help win business,” said William Cohan, a former investment banker and author of “House of Cards,” a book about the collapse of New York-based securities firm Bear Stearns Cos.

The Wall Street that shaped the financial world for two decades ended last September after the bankruptcy of Lehman Brothers Holdings Inc. That’s when Goldman Sachs Group Inc. and Morgan Stanley persuaded the Federal Reserve to let them become deposit-taking institutions, concluding there is no future in remaining investment banks as long as investors considered the leverage-based model for making money broken.

Morgan Stanley’s five-year swaps, the equivalent of insurance against its bonds defaulting, are trading at 3.7 percentage points a year, compared with 1.9 percentage points for JPMorgan bonds, according to prices provided by CMA DataVision of New York. The spread means it costs $180,000 more each year to protect $10 million of Morgan Stanley debt than to insure the debt of JPMorgan.

Credit Spreads

The dichotomy gives New York-based JPMorgan, the second- biggest U.S. bank by assets, an advantage in over-the-counter derivatives and prime brokerage, where clients depend on a bank’s creditworthiness. Derivatives are financial instruments derived from stocks, bonds, loans, currencies and commodities, or linked to specific events like changes in interest rates or the weather.

“When a financial institution’s credit spreads get too wide, it makes it more difficult to engage in otherwise routine transactions,” said Robert Claassen, chairman of the derivatives and structured-products group at New York-based law firm Paul, Hastings, Janofsky & Walker LLP.

John J. Mack, chief executive officer at Morgan Stanley, declined to comment for this story, as did Jamie Dimon, JPMorgan’s CEO.

Deposit Base

The conversion of Morgan Stanley last year into the fifth- largest U.S. bank by assets ended its 73-year life as a securities firm. The move has yet to persuade investors that the company is as creditworthy as JPMorgan, which was forced to divest its investment bank after the Glass-Steagall Act of 1933.

Half of JPMorgan’s liabilities are deposits, compared with 7 percent at Morgan Stanley. JPMorgan had $1.01 trillion in deposits among its $2 trillion in liabilities at the end of 2008, according to the bank’s annual report filed with the U.S. Securities and Exchange Commission. Morgan Stanley’s $608 billion of liabilities included $42.8 billion of deposits at the end of November, according to reports submitted to regulators.

“One of the key drivers in perception of credit quality is the deposit base,” said Emmanuel Weyd, a former JPMorgan credit analyst who is now a fund manager at Louis Dreyfus & Cie. SA in Paris. “Even if Morgan Stanley and Goldman Sachs just got a bank license last year, to build up the deposit base is going to take a lot of time.”

October Surge

Goldman Sachs, which was the largest U.S. securities firm before becoming the sixth-biggest bank by assets, has a lower credit-default swap price than Morgan Stanley’s, even though only 3 percent of the New York-based firm’s liabilities are deposits. Its swaps are trading at 2.7 percentage points.

CDS prices are nowhere near the level they reached following the Sept. 15 bankruptcy of Lehman Brothers, when panic about another investment bank collapsing caused a surge in the cost of protection on Morgan Stanley and Goldman Sachs.

At its worst, in mid-October, investors were paying as much as 24 percent upfront and 5 percent a year to protect against a Morgan Stanley default for five years, according to prices from broker Phoenix Partners Group in New York. That means it cost $2.4 million upfront and $500,000 a year to insure $10 million of bonds for five years.

Morgan Stanley Loss

While the decline in swaps prices since October is good for Morgan Stanley’s business, it also means the firm will have to book a loss on its credit spreads in the first quarter, according to analysts. Accounting rules require the firm to mark up the value of structured notes tied to Morgan Stanley’s bond prices, which will increase the firm’s liability. Roger Freeman, an analyst at Barclays Capital in New York, estimates that will cost the firm $950 million in the quarter.

Morgan Stanley will report a loss of 5 cents a share in the first quarter, according to the average estimate of seven analysts surveyed by Bloomberg. The predictions range from a loss of $1.30 a share to a profit of 41 cents a share.

The firm’s share price has climbed 50 percent to $24.06 on April 3, while JPMorgan’s stock has dropped 7 percent to $29.28 since the end of December. In the past 12 months, Morgan Stanley is down 49 percent, compared with JPMorgan’s 36 percent decline.

Bank executives watch their CDS prices as closely as they monitor stock prices. Not only do CDS prices signal the company’s cost of borrowing, they also show how expensive it is for trading partners to hedge themselves against the risk they take doing business with a bank. When CDS prices become too high, counterparties may back away because they don’t want to pay so much to protect themselves.

‘Scared Off’

“These things are absolutely crucial,” said Michael Johannes, an associate professor of finance at Columbia Business School in New York who does research on derivatives. “Insofar as the clients of those firms get scared off, it could make a difference. If I were a big client, I’d probably look at it.”

Morgan Stanley’s prime brokerage business, which provides loans and other services to hedge funds, lost 65 percent of its assets in the three months that ended in November, mainly because funds withdrew money following the Lehman bankruptcy.

While Morgan Stanley executives said some customers have since returned, the firm is shrinking the business. Brad Hintz, an analyst at Sanford C. Bernstein & Co. in New York, said in a March 13 report that he expects JPMorgan to overtake Morgan Stanley as the biggest prime brokerage, as clients seek safety and brokers who can lend at the lowest rates.

‘Flight to Quality’

A JPMorgan executive acknowledged that the firm told investors at an analysts meeting on Feb. 26 that it benefited from a “flight to quality” during the last few months of 2008. One slide shown at the session noted that “markets client revenue” had jumped 40 percent from a year earlier.

JPMorgan is the top-ranked manager of U.S. bond sales so far this year, as it was in 2008, and has arranged $12.8 billion of rights offers in Europe, twice as much as Goldman Sachs, the closest competitor, according to data compiled by Bloomberg. Morgan Stanley ranks fourth in U.S. bond sales this year and eighth in European rights offerings.

“JPMorgan has captured the hearts and minds of a lot of investors, maybe excessively,” said Ricardo Kleinbaum, a credit analyst at BNP Paribas SA in New York. “But it became self- fulfilling. They’ve gained market share in new deal activity.”

Among the 11 largest credit-default swaps dealers, only Citigroup Inc. and Bank of America Corp.’s Merrill Lynch unit have greater CDS spreads than Morgan Stanley’s, according to CMA, a London-based data provider.

Citigroup, Merrill

Citigroup swaps have widened 4.5 percentage points this year to 6.4 percentage points as the U.S. government rescued the New York-based bank for the third time, raising concerns among holders of the most junior debt and debt-like securities that they may have to take losses.

“It’s not a perfect hedge, but let’s just say that if you’re worried Citi isn’t going to pay your trust preferred, then you go out and buy CDS,” Kleinbaum said.

Swaps on New York-based Merrill Lynch, which Bank of America acquired in January after reaching an agreement in September as Lehman was failing, trade at 5.3 percentage points, wider than its parent’s, because the bank has said it isn’t formally guaranteeing Merrill Lynch’s debt. Bank of America’s swaps trade at 3.5 percentage points, largely because of concerns about “the risk of nationalization,” said Weyd at Louis Dreyfus in Paris.

“People aren’t concerned about the risk of nationalization for JPMorgan,” he said.

Government Guarantees

Bank creditworthiness isn’t in the spotlight as much as it was in September and October, before the U.S. government provided capital to the nine biggest banks and started supplying federal guarantees on their new debt issues for three years. A new clearinghouse to handle over-the-counter trading for credit- default swaps has mitigated concerns about so-called counterparty risk, because it provides a reserve to cover any losses if a participant fails to honor its contracts.

“The paranoia of the fall that underpinned the flurry over counterparty diversification has definitely tapered off,” said Jack McDonald, CEO of Conifer Securities LLC, a San Francisco- based hedge fund administrator that last year started a prime brokerage through JPMorgan. “People feel much more confident in the longevity of a lot of these financial institutions and the backstop that the government is willing to provide.”

The MSCI World Index jumped 7.2 percent in March, the biggest monthly gain in six years. The rally improved market psychology and reduced concerns about the health of trading partners, though that could reverse if stocks tumble again, said an executive at one European bank who declined to be identified.

‘Bailout Fatigue’

“We’re running into bailout fatigue, also a reduction in the perceived resources for federal government bailouts,” said Sean Egan, president of Egan-Jones Ratings Co. in Haverford, Pennsylvania. “Bankruptcy is not an alternative, but a government takeover certainly is, and a squeezing down of the bondholders is a real possibility.”

One solution for Morgan Stanley’s Mack may be to capitalize on the recent gains in his stock price by selling shares and using the proceeds to buy back bonds. That would lower his firm’s CDS prices, said Cohan, the former banker and author.

“The best way to defeat the risk implied in credit-default swaps would be to raise equity and pay down debt,” Cohan said."

so bids well above current market prices for these assets by the PPIFs or through the TALF seem unlikely

TO BE NOTED: From Morgan Stanley via Zero Hedge:

"United States
Review and Preview
March 31, 2009

By Ted Wieseman | New York

With all the big announcements about the Treasury’s legacy asset and loan purchase plans and strong rallies seen in most risk markets in response, as well as some better-than-expected economic data, Treasury and other interest rate markets had a surprisingly quiet week that was mostly focused on supply and left Treasury yields mixed. In addition to largely ignoring the surge in stocks and rallies to varying extents in other key markets in response to the Treasury plan – with a very strong rally by the commercial mortgage CMBX market versus a comparatively soft response by the subprime ABX market particularly interesting – Treasuries also paid almost no attention to a round of overall better-than-expected data, probably partly because investors were looking ahead to what’s expected to be a rough run of more important early figures for March in the coming week’s employment, ISM and motor vehicle sales results. The data were also a good bit better on a headline basis in a number of cases than in some of the important underlying details. New and existing home sales both posted rebounds off their lows in February but showed little progress in working down the severely bloated inventory situation heading into the key spring selling season. Both overall and core durable goods orders posted good gains in February but only after extremely large downwardly revised declines in January. Even with a slight recovery in February, capital goods shipments were so weak in the revised January numbers that the outlook for 1Q investment continued to worsen. Fourth quarter GDP growth was revised down less than expected to -6.3% from -6.2% but partly because of a smaller downward adjustment to inventories that pointed to a partly offsetting larger inventory drag in 1Q. Even with a stronger path for 1Q consumption implied by the personal income report, we cut our 1Q GDP estimate to -5.1% from -4.9%. Instead of trading on the Treasury plans, other markets’ reactions to the plans or the economic news, supply was the overriding market focus in what activity there was during the week’s sluggish trading, and this cuts two ways. The Fed’s surprise announcement that it would be including long bonds in its initial round of Treasury purchases after previously saying buying would be focused in the 2-year to 10-year range helped the long end outperform on the week. And the very rapid start to the buying program provided additional support. As heavy as the Fed’s US$15 billion in purchases was, it was only a fraction of the record US$98 billion of new coupon supply in 2s, 5s and 7s during the week. After a solid start to the three auctions with Tuesday’s 2-year, the week’s Treasury market lows were hit after a poor 5-year sale Wednesday that added to supply jitters from the failed UK gilt auction. Once the much better 7-year auction wrapped up the supply on Thursday, however, and the market was able to look ahead to a busy schedule of Fed buying combined with a week-and-a-half break in new issuance, the market was able to rebound to close the week Thursday and Friday.

For the week, benchmark Treasury yield moves ranged from modest gains driven by the Fed’s surprise announcement to decent losses in the intermediate part of the curve led by the 7-year, which reversed much of its strong outperformance in initial response to the FOMC’s Treasury buying announcement. The old 2-year yield was flat at 0.86%, 3-year up 4bp to 1.26%, old 5-year up 12bp to 1.76%, old 7-year up 15bp to 2.31%, 10-year up 13bp to 2.76% and 30-year down 6bp to 3.62% (for the new issues, there was about a 4bp yield pick-up for the 2-year and 5-year and 6bp for the 7-year). Even with risk markets surging, demand for cash reached new extremes, though this may have mostly just reflected quarter-end book-squaring. Very short-dated bills closed negative Thursday before reversing course slightly on Friday to leave the 4-week bill’s yield down 7bp to 0.01%. For the week, commodity prices weren’t much changed, with only small further upside in oil prices in particular, but TIPS performed extremely well even after a partial pullback to extend what’s now been a three-week run of major outperformance. The 5-year TIPS yield fell 13bp to 0.82%, 10-year 4bp to 1.34% and 20-year 14bp to 1.92%. Current coupon 4% mortgages ended the week about unchanged (and with little day-to-day volatility) to outperform the sell-off in the intermediate part of the Treasury curve (though performance was notably worse on an option-adjusted spread basis as interest rate volatility declined). This left yields on 4% MBS a bit above 3.9%, down from near 4.15% two weeks ago and the year’s highs above 4.3% at the end of February. Mortgage rates being offered to consumers have tracked the rally in the MBS market, falling to record lows in the latest week.

Fed Treasury buying got off to a fast start, with two US$7.5 billion purchases, the first in the 7-year to 10-year range and the second 2-year to 3-year. Interestingly, by far the biggest purchase in the former was of the on-the-run 7-year issue and almost all of the buying in the latter was in the current 3-year. The Fed always stayed away from buying benchmark issues in the past as it expanded its Treasury portfolio gradually over the years (until reversing course after mid-2007 when it began selling down a large portion of its Treasury holdings as it was initially sterilizing its other liquidity facilities). But the goal now is clearly to lower broader borrowing costs as effectively as possible, not to gradually expand the Fed’s balance sheet in a non-market disruptive way in the manner of previous historical coupon passes, and these first two operations certainly suggest that the Fed quite reasonably thinks that largely focusing on supporting yields on the benchmark issues is the best way to do this. There will be three more rounds of Fed buying in the coming week – August 2026 to February 2039 maturities Monday; May 2012 to August 2013 Wednesday; and September 2013 to February 2016 Thursday. This additional buying will come during an off week for new Treasury coupon supply before 10-year TIPS, 3-year and 10-year auctions the week of April 6. On top of the fast start to the Treasury buying, the Fed’s net purchases of MBS of US$33 billion in the most recent week were also a new high, though the past week’s agency purchase (agency purchases are expected to take place generally once a week going forward under updated guidelines released by the New York Fed) of US$2.7 billion was around the average size seen up to this point. A continued pick-up in the pace of mortgage purchases may be needed in the weeks ahead as refinancings are likely to ramp up very sharply and put substantial supply pressures on the mortgage market.

The announcement of the Treasury’s legacy asset and loan purchase plans helped risk markets generally extend or resume significant rebounds that in most cases started off lows hit March 9. The S&P 500 gained another 6% on the week for a 21% rebound from the March 9 low. Financials continued to lead the bounce, with the BKX banks stock index up 12% on the week, but their leadership position faded late in the week after a stronger initial outperformance in response to the Treasury’s announcement. In corporate credit, the new series 12 investment grade CDX index tightened 15bp to 184bp in its first full week of trading, while the prior series 11 closed the week near 225bp after hitting a recent wide of 262bp on March 9. The high yield index was 132bp tighter on the week at 1,619bp through Thursday, down from 1,894bp on March 9, but the index was trading off about 3/4 of a point Friday. The leveraged loan LCDX index, which could benefit from the legacy loan portion of the bad bank plan, had a very good week but remained pretty far in the red for the year. Through midday Friday, the index was 379bp tighter on the week at 1,893bp, near its best level since the first half of February but still quite a bit wider than the 1,303bp close at the end of 4Q. The relatively strongest response to the Treasury plan was in the highest-rated parts of the commercial real estate market. The AAA CMBX index tightened nearly 200bp on the week to 559bp, wiping out almost all of the prior year-to-date losses. While the Treasury’s plan was clearly taken as good news for owners of high-quality commercial mortgage-backed securities (though AAA cash CMBS still trades quite a bit wider than the AAA CMBX index at this point, and lower-rated CMBX indices did not perform nearly as well), our desk notes that current spreads are still astronomically higher than where they traded a couple years ago before the financial crisis began – currently about 900bp for AAA CMBS versus only about 25bp pre-crisis. As a result, commercial real estate funding is punishingly expensive even after the recent market rebound, continuing to put intense pressure on commercial property valuations. Meanwhile, a comparatively much weaker performance by the subprime ABX market sharply contrasted with the CMBX strength. The AAA ABX index only gained 2 points from the record lows hit last week and at 26.17 is still down 33% so far this year. Lower-rated ABX indices saw almost no upside from recent record lows, with the AA index only up 0.02 point to 4.04 (incredibly, this index once traded as high as 97.00). Although the muted performance of the subprime market to some extent probably reflected uncertainties about how effective the Treasury’s plan would be, there appeared to be at base a simpler explanation. In contrast to the apparent assumption of the Treasury and many investors, our desk does not believe that current levels in the ABX market, even as far as they have crashed, have been trading at substantially depressed fire-sale prices relative to horrendous underlying fundamentals, so bids well above current market prices for these assets by the PPIFs or through the TALF seem unlikely. ( NB DON )

The past week saw a somewhat more positive tone to the economic data after what’s been mostly a steady run of gloomy results for some time, though underlying details of the figures in many cases weren’t as good as the headline results. For example, home sales rebounded, but there was little improvement in the horrendous inventory situation as we move into the key spring selling season. New home sales rose 4.7% in February to a 337,000 unit annual rate, rebounding from the all-time low hit in January to the second worst reading ever. Even with the number of homes available for sale down for a 22nd consecutive month to a seven-year low, the months’ supply of unsold new homes only moderated to 12.2 months from the record high 12.9 months hit in January. Around 5-6 months of supply would be consistent with a balanced market, so inventories are still completely out of hand heading into the crucial spring selling season. Meanwhile, existing home sales gained 5.1% in February to 4.72 million after hitting a 12-year low, but inventories were unchanged, remaining badly elevated at 9.7 months. Similarly, durable goods orders at first glance looked much better than expected, but underlying details, in particular the extent of the revisions to prior months, ended up being much more negative. Overall durable goods orders jumped 3.4% in February, but this followed a downwardly revised 7.3% plunge in January and still left orders down at a near record 35% annual rate over the past six months. Non-defense capital goods ex-aircraft bookings, the key core gauge, jumped 6.6% in January, but this similarly followed a downwardly revised 11.3% collapse in January, a record decline, and left the recent trend extraordinarily weak. Non-defense capital goods shipments ticked up 0.6% in February but only after a record downwardly revised 8.9% drop in January, pointing to severe weakness in business investment in the first quarter. We cut our forecast for 1Q equipment and software investment to -29% from -24.5% and overall investment to -27% from -24%. A 27% drop in current quarter investment following the 22% fall in 4Q would mark the worst six-month decline since the Great Depression. The inventory drag in 1Q also appears likely to be worse, as durable goods inventories fell a larger-than-expected 0.9% in February on top of a downwardly revised 1.1% drop in January. Note that the drop in sales has been so severe, however, that even with this sharp recent pullback, the I/S ratio in this sector remains very close to a 17-year high. On top of the weakness in durable goods inventories early in 2009, the smaller-than-expected downward revision to 4Q growth to -6.3% from -6.2% (and the way too high -3.8% advance estimate) was partly a result of a smaller-than-expected downward revision to inventories, pointing to a likely greater drag from inventories in 1Q. We now see inventory destocking knocking 2.1pp off 1Q growth instead of 1.5pp.

Against the expected bigger negatives from investment and inventories, the consumption picture at least looks a bit better. Real consumer spending fell 0.2% in February, as expected, but January was revised up to +0.7% from +0.4%. As a result, we now see 1Q consumption rising 1.3% instead of +0.9%. While the swing into positive territory would be a positive development, the upside we’re forecasting would mark a meager rebound after a near-record 4.1% annualized collapse in 2H08. Combining the expected downside in investment and inventories against the upside in consumption and also incorporating our February trade forecast and other underlying details of the 4Q GDP revision, we marginally reduced our 1Q GDP forecast to -5.1% from -4.9%. With 4Q GDP only being revised down to -6.3% instead of the -6.8% we were expecting, the net decline in the economy over the 4Q/1Q period still looks to be extremely severe, but slightly less so than we were forecasting coming into the week.

After some recently rare improvement in some of the economic data seen over the past week, we expect the key early round of March data to have a much more negative tone. We look for the worst employment report yet in this downturn, some renewed weakness in the ISM (though less so than we anticipated coming into the week after better results from the second round of regional reports), and another disastrous month for motor vehicle sales. Key data releases due out in the coming week include consumer confidence Tuesday, ISM, construction spending and motor vehicle sales Wednesday, factory orders Thursday, and employment Friday:

* We look for the Conference Board’s consumer confidence index to rise to 26.0 in March. Both the Michigan and ABC gauges suggest that sentiment was little changed during early March, so we look for the Conference Board measure to hold near the record low of 25.0 posted in February.

* We expect the ISM to decline a point to 35.0 in March. The regional surveys released to this point have been mixed. On an ISM-weighted basis, Empire and Philly posted declines, while Richmond and KC registered gains. So, we look for another relatively steady result on the ISM. The key orders gauge is expected to show an uptick, but employment and inventories should move lower. Finally, the price index is likely to register a pullback this month.

* We forecast a 0.5% decline in February construction spending. The housing starts data suggest that construction activity may have received some temporary support from unseasonably mild weather conditions across parts of the country. So, we look for a much smaller decline in spending than seen in recent months. Renewed weakness in homebuilding and a more rapid pace of decline in non-residential activity should be evident in the coming months. Finally, we don’t expect to see any noticeable support for public infrastructure spending tied to the recently enacted fiscal stimulus legislation until the second half of the year.

* Motor vehicle sales hit a 28-year low of 9.1 million units in February. Anecdotal reports suggest that the sales environment remained miserable in March, and we look for a little changed 9.0 million unit sales rate.

* As foreshadowed by the durable goods data, we look for a sharp 1.9% rise in February factory orders combined with a significant downward revision to January. Meanwhile, shipments are likely to show little change. Inventories are expected to slip 0.7%, with the I/S ratio ticking down a tenth to 1.45 after a major prior run-up.

* We look for a 700,000 drop in March non-farm payrolls. The readings on both initial and continuing unemployment claims are still pointing to a steady deterioration in labor market conditions. However, we actually expect to see an even steeper drop in jobs this month relative to the 650,000 or so declines that were posted in each of the first two months of the year. In particular, we look for some restraint tied to weather-related influences. Although conditions appear to have been near normal during the March survey period, this follows on the heels of much milder than usual weather in February. So, we suspect that favorable weather may have helped to prop up employment in February and this effect could be unwound in March. But any swing to the downside is likely to be tempered by the impact of concurrent seasonal adjustment (a statistical technique that has been used for the past five years or so). Interestingly, all of the large net downward adjustment to the December and January payroll figures in last month’s report was attributable to revised seasonals. The unadjusted figures were actually pushed up a bit. Thus, concurrent seasonal adjustment helped to push up the February reading and offset this by lowering the results for the prior two months. The smoothing process that results from concurrent seasonal adjustment is one reason why the declines in payroll employment seen to this point have not been even larger. Finally, the unemployment rate should continue to move substantially higher to 8.5% from 8.1% (note: we still look for a 9.9% peak by year-end)."

gifted major bank counter-parties with trades which were egregiously profitable to the banks

TO BE NOTED: From Zero Hedge:

"Exclusive: AIG Was Responsible For The Banks' January & February Profitability

Posted by Tyler Durden at 6:35 PM

Zero Hedge is rarely speechless, but after receiving this email from a correlation desk trader, we simply had to hold a moment of silence for the phenomenal scam that continues unabated in the financial markets, and now has the full oversight and blessing of the U.S. government, which in turns keeps on duping U.S. taxpayers into believing everything is good.

I present the insider perspective of trader Lou (who wishes to remain anonymous) in its entirety:

"AIG-FP accumulated thousands of trades over the years, all essentially consisted of selling default protection. This was done via a number of structures with really only one criteria - rated at least AA- (if it fit these criteria all OK - as far as I could tell credit assessment was completely outsourced to the rating agencies).

Main products they took on were always levered credit risk, credit-linked notes (collateral and CDS both had to be at least AA-, no joint probability stuff) and AAA or super senior portfolio swaps. Portfolio swaps were either corporate synthetic CDO or asset backed, effectively sub-prime wraps (as per news stories regarding GS and DB).

Credit linked notes are done through single-name CDS desks and a cash desk (for the note collateral) and the portfolio swaps are done through the correlation desk. These trades were done is almost every jurisdiction - wherever AIG had an office they had IB salespeople covering them.

Correlation desks just back their risk out via the single names desks - the correlation desk manages the delta/gamma according to their correlation model. So correlation desks carry model risk but very little market risk.

I was mostly involved in the corporate synthetic CDO side.

During Jan/Feb AIG would call up and just ask for complete unwind prices from the credit desk in the relevant jurisdiction. These were not single deal unwinds as are typically more price transparent - these were whole portfolio unwinds. The size of these unwinds were enormous, the quotes I have heard were "we have never done as big or as profitable trades - ever".

As these trades are unwound, the correlation desk needs to unwind the single name risk through the single name desks - effectively the AIG-FP unwinds caused massive single name protection buying. This caused single name credit to massively underperform equities - run a chart from say last September to current of say S&P 500 and Itraxx - credit has underperformed massively. This is largely due to AIG-FP unwinds.

I can only guess/extrapolate what sort of PnL this put into the major global banks (both correlation and single names desks) during this period. Allowing for significant reserve release and trade PnL, I think for the big correlation players this could have easily been US$1-2bn per bank in this period."

For those to whom this is merely a lot of mumbo-jumbo, let me explain in layman's terms:
AIG, knowing it would need to ask for much more capital from the Treasury imminently, decided to throw in the towel, and gifted major bank counter-parties with trades which were egregiously profitable to the banks, and even more egregiously money losing to the U.S. taxpayers, who had to dump more and more cash into AIG, without having the U.S. Treasury Secretary Tim Geithner disclose the real extent of this, for lack of a better word, fraudulent scam.

In simple terms think of it as an auto dealer, which knows that U.S. taxpayers will provide for an infinite amount of money to fund its ongoing sales of horrendous vehicles (think Pontiac Azteks): the company decides to sell all the cars currently in contract, to lessors at far below the amortized market value, thereby generating huge profits for these lessors, as these turn around and sell the cars at a major profit, funded exclusively by U.S. taxpayers (readers should feel free to provide more gripping allegories).

What this all means is that the statements by major banks, i.e. JPM, Citi, and BofA, regarding abnormal profitability in January and February were true, however these profits were a) one-time in nature due to wholesale unwinds of AIG portfolios, b) entirely at the expense of AIG, and thus taxpayers, c) executed with Tim Geithner's (and thus the administration's) full knowledge and intent, d) were basically a transfer of money from taxpayers to banks (in yet another form) using AIG as an intermediary.

For banks to proclaim their profitability in January and February is about as close to criminal hypocrisy as is possible. And again, the taxpayers fund this "one time profit", which causes a market rally, thus allowing the banks to promptly turn around and start selling more expensive equity (soon coming to a prospectus near you), also funded by taxpayers' money flows into the market. If the administration is truly aware of all these events (and if Zero Hedge knows about it, it is safe to say Tim Geithner also got the memo), then the potential fallout would be staggering once this information makes the light of day.

And the conspiracy thickens.

Thanks to an intrepid reader who pointed this out, a month ago ISDA published an amended close out protocol. This protocol would allow non-market close outs, i.e. CDS trade crosses that were not alligned with market bid/offers.

The purpose of the Protocol is to permit parties to agree upfront that in the event of a counterparty default, they will use Close-Out Amount valuation methodology to value trades. Close-Out Amount valuation, which was introduced in the 2002 ISDA Master Agreement, differs from the Market Quotation approach in that it allows participants more flexibility in valuation where market quotations may be difficult to obtain.

Of course ISDA made it seems that it was doing a favor to industry participants, very likely dictating under the gun:

Industry participants observed the significant benefits of the Close-Out Amount approach following the default of Lehman Brothers. In launching the Close-Out Amount Protocol, ISDA is facilitating amendment of existing 1992 ISDA Master Agreements by replacing Market Quotation and, if elected, Loss with the Close-Out Amount approach.

"This is yet another example of ISDA helping the industry to coalesce around more efficient and effective practices, while maintaining flexibility," said Robert Pickel, Executive Director and Chief Executive Officer, ISDA. "The Protocol permits parties to value trades in the way that is most appropriate, which greatly enhances smooth functioning of the market in testing circumstances."

And, lo and behold, on the list of adhering parties, AIG takes front and center stage (together with several other parties that probably deserve the microscope treatment).

So - in simple terms, ISDA, which is the only effective supervisor of the Over The Counter CDS market, is giving its blessing for trades to occur (cross) below where there is a realistic market bid, or higher than the offer. In traditional equity markets this is a highly illegal practice. ISDA is allowing retrospective arbitrary trades to have occurred at whatever price any two parties agree on, so long as the very vague necessary and sufficient condition of "market quotations may be difficult to obtain" is met. As anyone who follows CDS trading knows, this can be extrapolated to virtually any specific single-name, index or structured product easily. In essence ISDA gave its blessing for below the radar fund transfers of questionable legality. The curious timing of this decision and the alleged abuse of CDS transaction marks by and among AIG and the big banks, is striking to say the least.

This wholesale manipulation of markets, investors and taxpayers has gone on long enough."

the thrift was seized and it was sold at a "fire-sale price" or "blue-light special" without a good reason

TO BE NOTED: From THE DEAL.COM:

"WaMu zombies arguments on the rise

Share E-Mail Return To Full Story

Published March 25, 2009 at 8:26 AM

As Dealscape posted Monday, the holding company for Washington Mutual Inc. is suing the Federal Deposit Insurance Corp. for over $13 billion for the loss of its banking operations and a total of $40 billion in damages for allegedly denying claims against the firm's former banking unit.

The holding company claims federal regulators should have instead conducted a "straight liquidation" instead of seizing the bank and selling it to J.P. Morgan Chase & Co. (NYSE:JPM) for $1.9 billion. The belief is that it could have produced more money for creditors and the holding company, which filed for Chapter 11 bankruptcy after the thrift was seized and it was sold at a "fire-sale price" or "blue-light special" without a good reason. The question is: Was it? There seems to be some controversy over this.

Right before the holding company filed for bankruptcy, Washington Mutual was searching for a buyer or a stakeholder that might buy the company at a later date. The concern for buyers at the time was the $19 billion in mortgage losses the bank would accrue over the next 2-1/2 years, according to The Deal's Vipal Monga (see story in Pipeline), who wrote the story Sept. 23, 2008:

"A WaMu representative declined to comment, but a source close to the situation said that there has been no indication by the FDIC of its intentions. 'If they're running a parallel track, they're doing it without telling the bank,' the source said, noting that WaMu's managers do not feel they are operating under a government-imposed deadline to complete a deal. This source added that an auction for the company has been ongoing for five days, and bids have been coming in from multiple parties. The government, the source added, has been watching closely.

"According to one banking source not involved in the sale process, any buyer would face immediate mark-to-market pressures from WaMu's mortgage portfolio. Noting that purchase accounting rules would force a buyer to immediately mark the portfolio to market prices, the banker said that the hole in WaMu's balance sheet upon purchase could be as high as $52 billion. On the other hand, if the bank was not sold, but recapitalized, the hole would be anywhere from $12 billion to $19 billion.

"It is unclear if the FDIC would retain the toxic securities in any bid to sell the bank itself."

The Federal Office of Thrift Supervision seized Washington Mutual Bank on Sept. 25 when no buyer emerged and turned it over to the FDIC, which sold the company's assets and most of its liabilities to J.P. Morgan.

As one blogger for The Seattle Times states:

"We'll never know what might have been, say, if WaMu would have been politically connected enough to get Washington to bail out its 'toxic assets' while saving the retail banking operation that would have remained a Seattle economic pillar. WaMu's troubles will likely turn out to be small compared to the balance sheet of Bank of America, among others. Instead, WaMu was pretty much given away to the very connected JPMorgan Chase, which became even more 'too big to fail.' "

The point is taken, but WaMu did fail, and here is why, via the International Herald Tribune:

"At WaMu, getting the job done meant lending money to nearly anyone who asked for it - the force behind the bank's meteoric rise and its precipitous collapse this year in the biggest bank failure in American history. By the first half of this year, the value of its bad loans had reached $11.5 billion, having nearly tripled from $4.2 billion a year earlier.

Between 2001 and 2007, Killinger received compensation of $88 million, according to the Corporate Library, a research firm. During Killinger's tenure, WaMu pressed sales agents to pump out loans while disregarding borrowers' incomes and assets, according to former employees. The bank set up what insiders described as a system of dubious legality that enabled real estate agents to collect fees of more than $10,000 for bringing in borrowers, sometimes making the agents more beholden to WaMu than they were to their clients."

Meanwhile, federal agents and prosecutors are interviewing former Washington Mutual officials and going through documents to see whether fraud played a role in the largest bank failure in U.S. history. After all, it's hard to imagine one of the U.S.'s largest bank just went up in smoke over night, according to The Seattle Times.

"The lawsuit runs to nearly 500 pages and quotes more than 90 unnamed "confidential witnesses' -- including some identified as mid- and upper-level WaMu managers -- who allege Washington Mutual lacked risk management, demanded that appraisers inflate home values to justify larger loans, and used "dangerously lax" underwriting standards."

So should the holding company for WaMu be suing for more cash or should they have had their executives practicing better risk management skills? As The Big Picture states: "At what point do you just liquidate every last one of these sons of bitches -- and throw their management in jail?"

Despite a possibly flawed business model that offered up loose credit, a group with over 400 members called the The Washington Mutual Equity Group still blames the FDIC. Here are some of the issues being considered that Washington Mutual will likely cover if the lawsuit gets a jury, according to The WaMu Story:

• Naked short-selling of Washington Mutual continued to damage it severely, and although it is illegal, the SEC did nothing to stop it. WaMu was not put on the list of banks that were not to be shorted. WaMu CEO Killinger specifically asked for WaMu to be added to the list but was refused.
• Were all banks given the same information at the same time? By some reports J.P. Morgan knew of the auction three weeks prior. Did other banks have that same advantage?
• J.P. Morgan was notified on Sept. 19 that it would get the bank. That was days before the auction officially began. Of note, J.P. Morgan raised approximately $11 billion for the purchase, yet they managed to buy the bank for a mere $1.9 billion.
• The fair value of the net assets acquired exceeded the purchase price, which resulted in negative goodwill. In accordance with SFAS 141, nonfinancial assets that are not held for sale were written down against that negative goodwill.
• The FDIC auction "offer" essentially says that the bidders can have the bank for nothing as long as they pay the administrative costs of the transaction (which are left blank). It also says they can have any assets, whether they are on the banks books or not (this info is on page one).

There are several other "conspiracy laden" bullet points that are on The WaMu Story Web site. In addition to the $8.2 billion in debt that Washington Mutual had when it was seized, the IRS claims the company owes another $12.5 billion in back taxes that is being disputed.

Were Washington Mutual's retail branches sold at a "fire sale"? We'll let the court decide. - Maria Woehr

Also see:
FDIC attacked by zombie WaMu"

I still think that senior unsecured debt of most major banks is probably safe

From Felix Salmon:

"Bank Funding Datapoint of the Day

Bloomberg reports:

Contracts on the Markit iTraxx Financial index of credit-default swaps linked to the senior debt of 25 banks and insurers were more expensive today than the Markit iTraxx Europe corporate index. That hasn't happened since Lehman Brothers Holdings Inc. went bankrupt in September and, before that, JPMorgan's takeover of Bear Stearns, according to BNP Paribas. It reflects "systemic stress" in the financial system.

So much for rallying confidence in the banking system. This is senior debt we're talking about here, not subordinated debt (which often doubles as regulatory equity). Another word for senior debt is "wholesale funding": if a bank doesn't have a large deposit base, then it makes its money on the spread between its senior debt and the rate at which companies and other clients borrow from it. If that spread is now negative, then it's hard to see how the banking system as a whole can be nearly as profitable as the likes of John Hempton seem to think. (Yes, I know I'm conflating CDS spreads with actual funding costs. I suspect that the actual funding spreads are if anything wider than the CDS spreads.)

Indeed, far from seeing profits, the markets seem to be forecasting outright defaults, certainly on the subordinated debt, and possibly on the senior unsecured as well:

"The current prices imply that the companies' equity is worthless, the government's investment is worthless and subordinated debt holders will lose some of their investment," said David Darst, an analyst at FTN Equity Capital Markets in Nashville, Tennessee.

What's more, if bank-debt spreads stay at their present level for any length of time, they're likely to become increasingly self-fulfilling. Right now, these prices represent significant unrealized losses for people who bought at par. But increasingly they're going to start representing significant potential gains for people who are buying at today's levels and hoping to be paid off at par -- paid off, that is, essentially by taxpayers. Since those people can be broadly characterized as hedge-fund managers, one can foresee a lot of Congressional pushback if a large number of hedgies start pulling in tens of millions of dollars just by playing the moral hazard trade. Or, to put it another way, it's a lot easier to impose a haircut when a haircut is priced in than when it isn't.

I still think that senior unsecured debt of most major banks is probably safe, although the WaMu precedent does give me pause. But anything which can be considered equity is increasingly looking like fair game."

Me:

"But anything which can be considered equity is increasingly looking like fair game."

Fair game? More like game over. I'm ready to throw in the towel. William Gross has won this round. Some of these bondholders are going down with the system. They're taking us with them if they can. Some of them are countries, after all. Let's just guarantee these bondholders and regroup, if we've got the brass. They were toying with us. They hold all the cards right now anyway. It's time to start humming "Brazil".

By DonthelibertarianDemocrat Posted: Mar 11 2009 6:59pm ET

"We are not taking the post down, but this disclaimer stands: viewer beware."

A controversial but revealing post on Alphaville:

"Bank picture du jour( DOESN'T KEDROSKY HAVE THIS PATENTED? ) Posted by Neil Hume on Jan 21 12:36.

A caveat - We have received a slew of complaints in the comments and more than one email about this picture. One reader notes, for instance, that the graphic “just happens to make JPM look like the best bank by far. Represented correctly by area, things are not quite so clear cut between JPM and santander/HSBC.”

Points well taken. We are not taking the post down, but this disclaimer stands: viewer beware.Hat Tip JP Morgan (Click to enlarge).

This entry was posted by Neil Hume on Wednesday, January 21st, 2009 at 12:36 and is filed under Capital markets. Tagged with JP morgan."

Any graph can be misread or misleading.

Following Lehman’s filing on Sept. 15, “there was a spiral of confidence disappearing

More on the Lehman Debacle. From Bloomberg:

"By Jennifer Ryan

Jan. 19 (Bloomberg) -- Lehman Brothers Holdings Inc.’s rescue failed when U.S. officials couldn’t find a bank to provide the same trading guarantees that Bear Stearns Cos. received, the New York Federal Reserve’s general counsel said.

“Plan A was to prepare a Bear Stearns-style rescue, plan B was the alternative case,” Thomas Baxter, who attended the discussions to save the bank, told a conference in London today. “The problem with plan A was the problem with guarantees” and “if you don’t have that guarantee and a strong hand, market confidence in a weaker member is going to continue to erode.”

Lehman’s failure in September led to the biggest bankruptcy filing in history and prompted an escalation in the financial crisis which threatened to undermine banks around the world. An agreement by U.K.-based Barclays Plc to buy Lehman was blocked at the last minute by British regulators.( WOW )

“The facts are often that people conclude that we let Lehman fail, and that factual predicate is not accurate, that the government let Lehman fail,” Baxter said. “The problem we encountered on Sunday, Sept. 14, is Barclays wasn’t in a position to give a similar guarantee of the trading obligations of Lehman” as JPMorgan Chase & Co. gave to Bear.

Bank of America Corp and Barclays were the only two potential suitors for Lehman when officials met before the bankruptcy filing on Sept. 15., said Baxter, speaking at a conference organized by the Financial Markets Group of the London School of Economics.

‘Cast of Characters’

“When we started into Lehman weekend on Friday, Sept. 12, we gathered at the New York Fed,” he said. “The cast of characters were the secretary of the Treasury, Hank Paulson, my president, Tim Geithner, the chairman of the SEC,” Christopher Cox, and the heads of as many as 14 financial institutions.

“It soon became clear that Bank of America was not so much interested in Lehman, but something else. That was Merrill.” Baxter said. “So we lost Bank of America. That left Barclays.”

The group of bankers and officials was trying to repeat the Bear rescue on Lehman, except that this time officials told lenders that “unlike with Bear, you all are going to finance the assets that are taken to facilitate the acquisition. That was plan A,” Baxter said.

“The problem with plan A was not an absence of financing” because the bankers in the room did agree on a deal, Baxter said. “They had the money and they were willing to put it out.”

‘More Technical’

The hitch was “much more technical,” Baxter said.

“The problem for plan A relates to, what do you do in the period between the announcement of a merger and the actual closing of the merger?” Baxter said. He said plan A failed because Barclays couldn’t guarantee the trading obligations.

Barclays agreed to acquire Lehman after a syndicate of banks consented to backstop a new entity that would take over $55 billion to $60 billion of Lehman’s troubled assets, according to people familiar with the negotiations. The deal fell apart when the U.K.’s Financial Services Authority refused to sign off on the Barclays purchase that day and U.S. officials refused to take further steps to save the deal.( GOOD WORK )

The New York Fed meeting then turned to discuss plan B, Baxter said.

“The best option was to put the parent of Lehman into bankruptcy, to continue an operation as broker-dealer at least in the U.S., and to continue a broker-dealer operation through Federal Reserve liquidity,” Baxter said. “That happened.”

‘Big Time’ Loans

In the week after the bankruptcy filing, the Fed loaned “big time” to keep the broker-dealer in business, with funds totaling as much as $50 billion, he said. Barclays then returned to the table and bought the division.

“If you go back and study the way we did Bear Stearns, you’ll see the importance of the guarantees( I AGREE ),” Baxter said.

Following Lehman’s filing on Sept. 15, “there was a spiral of confidence disappearing( A CALLING RUN, DEBT-DEFLATION SPIRAL ),” Tony Lomas, a partner at PricewaterhouseCoopers who is administering Lehman’s U.K. bankruptcy, told the same conference today. He previously worked on the aftermath of Enron Corp.’s financial collapse.

“We had a call Saturday night, we were appointed Sunday lunchtime,” Lomas said. “We had half a day to prepare. In the Enron insolvency, we had a two-week window to talk with management on what they would do if support from the parent stopped.”

To contact the reporter on this story: Jennifer Ryan in London at Jryan13@bloomberg.net"

This was a terrible mistake.

one out of ten homeowners in the United States is either late in making a mortgage payment or in such serious arrears as to risk foreclosure

From Housingwire:

"Chase Steps Up Mod Efforts, Again

Posted By KELLY CURRAN
January 16, 2009 1:17 pm

JP Morgan Chase & Co. ([1] JPM: 22.82 -6.24%) announced Friday it has extended its mortgage modification program to include the approximately $1.1 trillion in investor-owned loans it services, “significantly expanding the reach and effectiveness” of its previously enacted efforts, [2] according to the press release.

“Building on our modification efforts for Chase-owned loans, we have reviewed closely the terms of our investor agreements and have worked with investors, trustees, government officials and other interested parties to fashion an approach to foreclosure prevention efforts that will work for investors and homeowners,” said Charles W. Scharf, CEO for Retail Financial Services at Chase.

Chase said it will continue to seek investor approval in the small number of situations where investor agreements contain specific terms that may limit modification actions Chase can take.

It was on Oct. 31 that Chase first launched an aggressive loan modification plan, while also enacting a foreclosure moratorium, in an effort to buy time and qualify existing troubled borrowers for the program. The mod plan at the time, however, only applied to owner-occupied properties with mortgages owned by Chase, WaMu or EMC — or those instances where JPM could obtain investor approval.

Under the now-revitalized loan mod program, Chase “believes it can legally modify the vast majority of mortgages owned by investors…” according to a statement, and intends to make modifications where appropriate. The company said it now has in place the people, programs and tools to help even more borrowers stay in their homes.

As for Chases progress in modifying loans thus far, since its October announcement, Chase reported it has implemented a “more attractive” package of modifications for delinquent borrowers, implemented an independent review process to ensure each eligible borrower was contacted and offered modification prior to foreclosure, and added 300 new loan counselors around the nation.

The program has delayed the initiation of foreclosure on over $22 billion of Chase-owned mortgages of over 80,000 homeowners, giving Chase time to review those mortgages for possible modifications under the program — although, for some borrowers, it has essentially delayed the inevitable, as everyone isn’t eligible for modification.

Chase has also worked with Fannie Mae ([3] FNM: 0.67 +1.52%) and Freddie Mac ([4] FRE: 0.70 +1.45%) to implement their new Streamlined Modification Program for borrowers at least 90 days delinquent – yet, another example of the group effort — whether right or wrong, helpful or hurtful — to keep people in their homes amid a foreclosure frenzy like no other.

“When homes are foreclosed, everybody suffers, so working aggressively to modify all loans -whether owned by Chase or owned by others - on terms that should work for the borrower, makes good sense for everyone,” Scharf said. “Our experience at Chase has shown that when mortgages are properly modified, using income verification and other appropriate criteria, they perform very well over time.”

Write to Kelly Curran at [5] kelly.curran@housingwire.com

Disclosure: The authors held no relevant investment positions when this story was published. Indirect holdings may exist via mutual fund investments. HW reporters and writers follow a strict disclosure policy, the first in the mortgage trade."

Now Barbara Kiviat:

"Could it be that the free market still works? Part II

Posted by Barbara Kiviat | Comments (3) | Permalink | Trackbacks (0) | Email This

In October, JP Morgan Chase said that it would start more aggressively changing the terms of home loans in order to try to prevent foreclosures. At the time, I wondered if this might be taken as a sign that the free market still works—that federal programs forcing servicers to rewrite mortgages in order to keep them affordable might not be as necessary as we think.

The problem, though, with that October announcement was that it only applied to loans Chase holds on its own books—a mere 20% of what it services. All those loans tied up in investor-owned securitizations weren't eligible.

Until now. Today Chase announced that it is extending its program to the $1.1 trillion worth of home loans it servicers on behalf of investors. So let me restate my hopeful position that there still might be free-market solutions to the housing crisis, and that the government won't have to step in as much as I sometimes think it will.

To gauge how justified that hopefulness is, I called up Chase and asked why it didn't do this in the first place, back in October. The answer: it took a few months to read through every single servicing agreement to determine what the company was allowed to do by way of modification, and to build technology to evaluate whether an individual loan would be more valuable to an investor at a reduced value or in foreclosure. (Foreclosure is such an expensive process that in most cases it's worth saving the loan, even with reduced payments( TRUE ).)

So I'm still hopeful. There's still one more step, though. The vast majority of the servicing agreements Chase went through allow it to go in and make modifications, as long as they produce more value for investors—but there are some agreements that specifically restrict modifications. This is where that new law we were talking about yesterday would come in handy.

The other piece of information I still don't have is what, exactly, Chase is doing when it modifies loans. I am assured that most modifications reduce monthly payments (historically, this hasn't necessarily been the case), and that the tools used include a mix of lowering interest rate, extended the length of the loan, and temporarily reducing principal balance. I keep asking Chase how that breakdown takes shape, but so far they won't tell me. As I've argued before, this is very important information to have in order to start to understand how to craft modifications with the most long-term success.

Barbara!"

Now Robert Reich:

"Why Citi Turned Around on Mortgage "Cramdowns"

The latest data show one out of ten homeowners in the United States is either late in making a mortgage payment or in such serious arrears as to risk foreclosure. Last week, congressional Dems breathed a sigh of relief when Citigroup dropped its opposition to a proposed change in the bankruptcy laws allowing distressed homeowners to do what owners of commercial property and second homes can already do when they can't pay up -- use bankruptcy proceedings as a means of working out better deals. (It's called a "cramdown." The practical effect wouldn't be hundreds of thousands of bankruptcy judges striking new deals, as conservative lawmakers predict; the mere option of going into bankruptcy would give homeowners more bargaining leverage with mortgage lenders in striking better deals.)

As long as Citigroup opposed this measure, it didn't stand a chance. Citi's clout in Washington is legendary. But on January 8, Citigroup's CEO, Vikram Pandit released a statement saying that Citi "believes it will serve as an additional tool to the extensive home retention programs currently in place to help at-risk borrowers." The announcement was greeted with kudos by House and Senate Dems. The bankruptcy provision is now moving, and is likely to be attached to the stimulus bill.

What happened? Until last Thursday, Citi had been a leader of the Bankruptcy Coalition of the Financial Services Roundtable, an industry group that had staunchly opposed the bill -- along with Bank of America, JP Morgan Chase( SEE ABOVE ), and Wells Fargo.

Could it be that Citi's Pandit knew last week that he'd soon need even more help from Congress than the $45 billion bailout the bank already received? Shares of Citigroup had seemed to regain their footing after the bailout. But then, this Monday, all hell broke loose. Citi shares plunged 17 percent, as investors got word of a deal Citi was cooking to sell its valuable Smith Barney brokerage unit to Morgan Stanley. The drop in Citi shares brought the stock back to the lowest level since the government gave Citi its first dollop of bailout funds last November. Citi is losing capital at an astounding rate -- nearly $100 million a day in the fourth quarter alone. Today the firm posted a loss of $8.29 billion for the fourth quarter, completing its worst year in history.

Citi has already got the sweetest bailout deal of any big bank, but the probability seems high that it will want more bailout money. This is the easiest explanation for Pandit's turnaround on the cramdown legislation -- something the Democratic Congress and distressed homeowners very much want.

In other words, the Wall Street bailout has had exactly the same effect for Congress that the proposed bankruptcy provision would have for homeowners -- it has increased its bargaining power over those who ordinarily pull the strings. The massive tax-payer financed bailout of Wall Street, largely a product of Wall Street's power in Washington, seems to be weakening the Street's ability to veto financial legislation it doesn't like. I'm not sure whether this is something we should be celebrating as a small victory for democracy, or condemning as an extortionate price for reducing Wall Street's grip."

I think that Reich is closer to the truth. However, I believe that is has to do with the fact that the government has yet to agree to buy these mortgages at a good price. Whatever will happen now, these mortgages will not be bought at a good price by the government. Consequently, the owners of these mortgages are resigned to the fact that they will have to get the best deal that they can on their own. Cramdowns are really no more than an acceptance of loss on principal by these mortgage owners, something that is still preferable in most cases to foreclosure.

As well, loan modifications are also preferable to foreclosures in most cases. They offer the chance of stabilizing home prices in the short run, and moving to foreclosure, if necessary, in the future, when home prices have stabilized or slightly increased from the market bottom. Given the chance, however, I have no doubt that these mortgage holders would have preferred government intervention that would have gone some way towards making them whole. That's our system. Call it free market if you'd like.