ensure that MBIA pays valid claims on insurance it issued on defaulting bonds

TO BE NOTED: From Reuters:

"Banks sue MBIA over $5 billion restructuring

Wed May 13, 2009 9:53pm EDT

NEW YORK (Reuters) - A group of major banks including Citigroup Inc, JPMorgan Chase & Co and Barclays Plc has sued MBIA Inc, charging that the bond insurer illegally restructured its operations by moving $5 billion of assets and leaving a key unit effectively insolvent.

The group of around 20 financial institutions and affiliates are seeking to ensure that MBIA pays valid claims on insurance it issued on defaulting bonds, but did not put a value on such claims.

MBIA, along with rival bond insurer Ambac Financial Group Inc, suffered huge losses in the recent financial turmoil as they were hit by claims on insurance policies they issued on repackaged debt, which turned out to be more risky than they assumed.

A spokesman for MBIA, which reported a profit of $697 million last quarter, declined comment on the lawsuit, which was filed on Wednesday in New York State Supreme Court.

The company's shares fell 9 percent in after-hours trading to $5.16, after falling more than 7 percent in regular trading on the New York Stock Exchange.

In the suit, the banks charge that MBIA acted illegally when it created a new municipal-bond insurance business earlier this year, making it free of its contractual obligations to policyholders.

As a result of moving $5 billion in assets, the banks said in their court documents, that MBIA Insurance -- the operating unit which pays claims -- is now "effectively insolvent" with no means of paying claims.

The banks claim that MBIA could instead have used its own cash to strengthen the balance sheet of MBIA Insurance, but it chose to spend more than $900 million repurchasing its own stock and debt and lending money to its asset management business. As a result, the suit claims MBIA executives will benefit while policyholders are left facing losses.

Other major banks party to the suit include units of: ABN Amro, BNP Paribas; HSBC, Bank of America Corp, Morgan Stanley, Royal Bank of Canada, Societe Generale, UBS AG and Wachovia Bank.

(Reporting by Bill Rigby; editing by Carol Bishopric)"

strategy announced in January that would separate Citigroup’s main banking business from its other assets

TO BE NOTED: From the NY Times:

"Citi Will Sell Japan Units, Bolstering Its Capital

By HIROKO TABUCHI

TOKYO — Citigroup said on Friday that it would sell its Japanese brokerage and investment banking units for $5.56 billion, securing much-needed capital before results expected next week from a government “stress test” of its financial health.

Citigroup, the recipient of about $45 billion in bailout money, will sell its Japanese securities arm and parts of its investment banking business to Sumitomo Mitsui Financial Group.

The overall transaction, including shareholdings and retained debt payments, is valued at 774.5 billion yen ($7.8 billion), Citigroup and Sumitomo Mitsui said. Citigroup said it would realize a loss of $200 million on the transaction, which would generate $2.5 billion in tangible common equity, a measure of financial health.

Citigroup’s sale of important businesses in Japan would reverse an ambitious, yet short-lived, push into the country. Just two years ago, the bank, based in New York, had spent about 1.6 trillion yen to acquire the Nikko Cordial franchise.

But Citigroup has been scrambling to raise capital after a year of crippling losses that has led to three bailouts, the last of which gave the government a 36 percent stake in the bank.

Vikram S. Pandit, Citigroup’s chief executive, called the sale “another step in the execution” of a strategy announced in January that would separate Citigroup’s main banking business from its other assets.

Citigroup’s sale in Japan includes Nikko Cordial Securities, a large brokerage firm, and parts of Nikko Citigroup, the investment banking unit of Citigroup in Japan.

The transaction does not include Nikko Asset Management, which is expected to be sold separately. The sale also leaves out Citigroup’s consumer banking and credit card assets in Japan, which Citigroup says it will keep.

The deal comes as United States regulators prepare to disclose results of the stress tests, which are assessing the banks’ ability to withstand a further deterioration in the economy.

With its purchase, Sumitomo Mitsui hopes to close the gap with the top brokerage house in Japan, Nomura Holdings. Nomura bought some of the operations of the failed investment bank, Lehman Brothers, last year.

Sumitomo Mitsui invested $745 million in the British bank Barclays last year and has had capital ties with Goldman Sachs since 1986. The Japanese bank said Friday that it would also work with Citigroup in the securities brokerage, sales and trading businesses.

Japanese banks have been looking to expand globally and increase fee revenue amid sluggish corporate activity at home. But losses on recent investments, as well as mounting bad loans and write-downs in the value of shareholdings, have battered their balance sheets.

On Friday, the biggest bank in Japan, Mitsubishi UFJ, said it expected to swing to a 260 billion yen loss for the year ending next March, compared with a previous forecast of a 50 billion yen profit. Mitsubishi UFJ, which invested $9 billion in Morgan Stanley last year, said its equities losses were likely to come to 520 billion yen.

Sumitomo Mitsui booked a loss of 390 billion yen in the year ended March 31. The bank said it was assessing the effects of the Citigroup deal on its finances."

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."

are hardly likely to be falling over themselves to spend the $5bn to $9bn that the FT reckons the business would fetch

TO BE NOTED: From Alphaville:

"Playing chicken with Citi’s Nikko Cordial Posted by Gwen Robinson on Mar 30 11:37.

Citigroup’s latest moves, to sell off its Nikko Cordial brokerage business in Japan, has triggered speculation about the likely buyer of Japan’s third-biggest broker - not least because Japan’s big banks, either absorbed with their own problems or existing deals, are hardly likely to be falling over themselves to spend the $5bn to $9bn that the FT reckons the business would fetch.

Not only that, some analysts question whether the sale of Japan’s third-biggest broker - at a time when competition is heating up in what is still one of the world’s biggest capital markets - might be a sale too far for beleagured Citi, which could end up losing out if it has to sell the business at a knockdown price rather than holding onto it.

Morgan Stanley and Mitsubishi UFJ Group, Japan’s largest bank, are just merging their Japan brokerage businesses in an effort to take on industry leaders Nomura and Daiwa Securities. An enlarged Nomura, meanwhile, is still integrating the Japan operations of Lehman Brothers. Meanwhile, Japan’s stock markets have been doing far better than the relentlessly grim economic data might suggest, and even though the outlook for corporate earnings is bleak, “there’s enough action to go round - for now,” in the words of one broker.

Yet, Citi’s rush is on. After informal talks with potential bidders, including Japan’s top three banks, MUFG, Sumitomo Mitsui Financial Group and Mizuho (all of which have informally expressed interest) Citi has begun soliciting formal offers for Nikko Cordial and wants to select a buyer as early as the end of April, the FT reports on Monday.

As far as potential Japanese buyers go, the bottom line, in the eyes of one observer, is that “while none of them really want the business, nor do they want any of the others to have it - it’s a classic game of chicken”. Only the big banks would really be in a position to buy the business. Of the top three, SMFG is the one that lacks a real securities arm, though it has an investment banking joint venture with Daiwa. One logical possibility could see the revival of earlier speculation, back in February, that SMFG and Daiwa Securities were eyeing a joint bid for Nikko Cordial.

By bidding together, the two firms - which already have a close relationship - would be able to lower their individual costs, and share the risk of the investment, Japan’s Sankei newspaper reported in February, noting that a successful joint bid for Nikko Cordial would put more assets under the management of the Sumitomo Mitsui-Daiwa alliance than those held by Nomura, Japan’s number one broker.

For Citi, the auction for Nikko Cordial, which the US group acquired for about $13bn in cash and shares in a process that spanned several years and much angst, is part of a desperate drive to sell non-core assets and slim down. But the divestment of Nikko Cordial – one of Citi’s biggest overseas acquisitions – “would mark a retrenchment in Japan, an economy the US bank had long regarded as crucial to its international plans”, the FT notes.

Worse than that, the sale of Nikko Cordial could be counter-productive for Citi’s remaining Japan business - namely, its investment banking arm, Nikko Citigroup, which has relied partly on its Nikko Cordial client base to boost its presence in the country.

In addition, as the FT notes, selling Nikko Cordial shortly after Citi’s German retail bank and US brokerage unit could also fuel criticism that the crisis is forcing Citi’s CEO Vikram Pandit to shed some of the group’s best businesses. As Pandit well knows by now, however, it’s impossible to make everyone happy.

Related links:
Citi seeks Nikko Cordial bids - FT
Morgan Stanley, MUFG to merge Japan brokerages - Reuters
Japan’s stock markets are doing very well thank you - FT Alphaville
SMFG, Daiwa, may bid jointly for Nikko Cordial - Reuters

This entry was posted by Gwen Robinson on Monday, March 30th, 2009 at 11:37 and is filed under M&A, Capital markets. Tagged with mizuho, morgan stanley, MUFG, nikko citigroup, nikko cordial, SMFG."

Morgan Stanley's Mack Says Bad-Debt Plan Needs Clarity

TO BE NOTED: From Bloomberg:

CEO Spotlight

Morgan Stanley's Mack Says Bad-Debt Plan Needs Clarity

Analysts have suggested that a fair price for Nikko Cordial would be between 300 billion yen and 400 billion yen ($3.07 billion and $4.09 billion)

TO BE NOTED: From the WSJ:

"MUFG Aims to Acquire Parts of Two U.S. Banks

• Article
• Comments

more in Asia »

By ALISON TUDOR and ATSUKO FUKASE

TOKYO -- Mitsubishi UFJ Financial Group Inc. is seeking to bulk up in financial services in Japan by securing parts of two U.S. banks, Morgan Stanley and Citigroup Inc., people familiar with the matter said.

The move comes at a time when the industry is shrinking and the balance sheet of MUFG, as Japan's largest bank by assets is known, looks stretched to analysts.

Associated Press

Businessmen walk by a Mitsubishi UFJ Financial Group logo in Tokyo. MUFG will likely merge its brokerage-firm unit with Morgan Stanley's Japan unit.

MUFG likely will announce a joint venture with Morgan Stanley in Japan as early as this week, with the Japanese bank taking a 60% stake in the entity, according to one of the people knowledgeable about the plans.

A Lifeline

In September, MUFG threw Morgan Stanley a lifeline by acquiring a 21% stake for $9 billion. At the time, however, financial analysts were unclear how MUFG benefited from what some viewed as a risky investment.

Aside from starting a joint venture with Morgan Stanley, MUFG also is vying for Citigroup's Japanese retail brokerage, according to the people familiar with the matter. Since Citigroup said in January that Nikko Cordial Securities Inc. was a noncore asset, Japan's three biggest banks -- MUFG, Sumitomo Mitsui Financial Group Inc. and Mizuho Financial Group Inc. -- have been expected to battle to acquire the country's third-biggest brokerage in terms of assets.

If MUFG brings both Morgan Stanley Japan Securities Co. and Nikko Cordial Securities under its wing, it could become the second-biggest brokerage in Japan, behind market leader Nomura Holdings Inc.

At present, the second-biggest is Daiwa Securities SMBC.

The moves could bring the predominantly commercial bank closer to the financial supermarket model that Citigroup is in the process of dismantling.

Discussions Continue

MUFG has said that it still is discussing with Morgan Stanley how to work together globally, including the possibility of cooperating in Japan. It declined to comment on its plans or on the possibility of bidding for Nikko Cordial.

Financial analysts expressed caution about MUFG's potential expansion. Looking for opportunities in this financial chaos is understandable as "there is a need to escape the confines of a mature, saturated market," said Ismael Pilli, an analyst at Macquarie Research. But he said he is concerned MUFG might overpay for these assets.

Analysts have suggested that a fair price for Nikko Cordial would be between 300 billion yen and 400 billion yen ($3.07 billion and $4.09 billion). Mr. Pilli suggested the price tag could rise as high as one trillion yen as competition intensifies.

Analysts said they don't expect the joint venture with Morgan Stanley to have a large impact on MUFG's earnings in the near term, as it will take time to integrate the businesses.

Write to Alison Tudor at alison.tudor@wsj.com and Atsuko Fukase at atsuko.fukase@dowjones.com"

"Firms That Got Bailout Money Keep Lobbying "

Just as I've been saying, from the NY Times:

"Firms That Got Bailout Money Keep Lobbying

By DAVID D. KIRKPATRICK and CHARLIE SAVAGE

WASHINGTON — The financial giant Bank of America says it is no longer lobbying the federal government about its unfolding bank bailout. After receiving $45 billion in bailout money, lobbying was just too unseemly.

“We are very sensitive to the fact that we have taxpayer money,” said Shirley Norton, a spokeswoman for the company.

Citigroup, recipient of another $45 billion, made the opposite call. While trying to keep a low profile, the company is still fielding an army of Washington lobbyists working on a host of issues, including the bailout. In the fourth quarter, it spent $1.77 million on lobbying fees, according to its lobbyists’ filings. ( YES )

The different approaches from the two banks that have received the most money underscores the growing quandary facing private companies, which increasingly deal with the federal government not only as rule-maker but also as shareholder, lender and trading partner.

Pressing federal policy makers risks the appearance of recycling public money to advance a private agenda, while staying on the sidelines could put a company at a comparative disadvantage.( A HYBRID DILEMMA )

Citigroup and Bank of America are hardly the only two financial firms to confront the issue. During the last three months of 2008, at least seven other firms receiving bailout funds — American Express, Capital One, Goldman Sachs, KeyCorp, Morgan Stanley, PNC and Bank of New York Mellon — all lobbied the government about the bailout, according to a review of their most recent disclosure reports. ( GEE )

The automakers that received billions under the same program lobbied as well( WOW. WHO KNEW? ): including General Motors; its financing arm, GMAC; and Cerberus Capital Management, the private equity firm that controls Chrysler. Other recipients of federal financing also lobbied Congress, the Treasury or both about other matters.( WHAT A SURPRISE )

The American International Group, taken over by the government during an injection of more than $40 billion last fall to prevent the company’s collapse, has discontinued all its federal lobbying; it is now in effect government-owned. But its former executives continue to lobby.( YEP )

Its former chief executive, Maurice R. Greenberg, ousted a few years ago amid allegations of securities fraud, is leading a group of shareholders lobbying for a chance to renegotiate the terms of the government takeover or buy back a bigger stake in the company.

According to a recent filing, A.I.G. shareholders paid $90,000 in the fourth quarter to a lobbying team at Ogilvy Government Relations that includes the Republican lobbying powerhouse Wayne L. Berman, a former assistant secretary of commerce under the first President George Bush and a major fund-raiser for the second.

The group also includes three Democrats who had been top aides to the House speaker, Nancy Pelosi; Senator Edward M. Kennedy; and the former House majority leader, Richard A. Gephardt. (Mickey Kantor, secretary of commerce under President Bill Clinton, has advised the group as a lawyer as well.)

Lawmakers, troubled by the prospect of taxpayer-subsidized influence-peddling, are threatening to crack down. Senator Dianne Feinstein, a California Democrat, and Senator Olympia J. Snowe, a Maine Republican, are pushing legislation that would explicitly bar companies from using bailout funds for lobbying or campaign contributions. ( YOU THINK? )

Although hard to enforce, the measure would put banks on notice that aggressive lobbying could set off a negative reaction from Congress.( NOT LIKELY )

“That taxpayer dollars intended to stabilize the economy could find their way into the bank accounts of lobbying firms” is “completely unacceptable,” Ms. Feinstein said in a speech supporting the measure.

On Friday, President Obama issued his own call for more oversight and transparency, citing “companies that have received taxpayer assistance then going out and renovating bathrooms or offices, or in other ways not managing those dollars appropriately.” This was an apparent allusion to reports of office renovations by the former chief executive at Merrill Lynch, a recent acquisition by Bank of America whose heavy losses led to an expanded bailout for the bank.

Bankers, though, defend their right to a voice in public policy debates about the industry’s future. “Nobody mentioned that you are giving up your Constitutional right to petition the government” when accepting federal money, said Edward L. Yingling, president of the American Bankers Association.( HE'S GOT A POINT )

He acknowledged, however, that Citigroup and Bank of America were in a more ambiguous position than the rest of the roughly 200 banks that accepted money from the Treasury and agreed to pay it interest as part of the bailout program. While most banks are required to demonstrate financial health to qualify for the deal, the two giants received $90 billion in emergency measures to prop them up and agreed to give the government a larger say in management.

The two banking behemoths had entered a “middle ground( THEY'RE ALL HYBRIDS. THIS IS BS ),” Mr. Yingling said, between the other private banks accepting federal investments and the three financial firms under full federal control: A.I.G. and the failed mortgage giants Fannie Mae and Freddie Mac. “I would expect that institutions in that middle ground would be well aware that they need to be careful about the tone and manner in which they lobby,” he said.

Citigroup and Bank of America say internal policies prohibit the use of any bailout money for lobbying. Neither, however, has stopped pressing its interests in Washington, albeit more quietly. ( YES )

Though Bank of America says it has stopped lobbying about the bailout legislation — the Troubled Asset Relief Program, or TARP — it continues to lobby on other matters. The bank spent about $1 million on federal lobbying in last year’s fourth quarter, including $820,000 for its own lobbyists, according to filings.

Ms. Norton, the spokeswoman, declined to comment on whether Bank of America was lobbying on other financial crisis proposals, such as creation of a government-controlled “bad bank”( I SAID THAT THIS WOULD HAPPEN ) to take over toxic securities.( WHY NOT? )

Nicholas Calio, Citigroup’s top lobbyist, handled Congressional relations for both the first and second President George Bush. Its team of outside lobbyists has also included a former Congressional liaison for President Clinton, a former chairman of the Federal Deposit Insurance Corporation, a former deputy assistant Treasury secretary and the veteran Democratic strategist Steve Elmendorf.

The two banks’ problem is an increasing one for the industry, said Scott Talbott, top lobbyist for the Financial Services Roundtable. “There is a TARP blowback problem,” he said. "

This was all predictable. I predicted it in the beginning of October. This is our system. This is what happens with a Hybrid Plan, and why Nationalization, while not perfect, is preferable to Hybrid Plans like TARP or a Bad Bank.

"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.

"As the crisis has worsened, the institutions have come to rely almost entirely on government help. "

Can you say "predictable"? This is why we should have adopted the Swedish Plan. We're basically buying the banks, and allowing them to continue showing us how incompetent they are. From the Washington Post:

"Bank Losses Complicate U.S. Rescue
Pressure Grows on Obama to Allocate More Money for Distressed Financial Firms

By David Cho, Binyamin Appelbaum and Lori Montgomery
Washington Post Staff Writers
Thursday, January 15, 2009; A01

A new wave of bank losses is overwhelming the federal government's emergency response, as financial firms struggle with the souring U.S. economy, the rapid deterioration of global markets and the unexpectedly high costs of shotgun mergers arranged by federal officials last year.

The problems are intensifying the pressure on the incoming Obama administration to allocate more of the $700 billion rescue program to financial firms even as Democratic leaders have urged more help for distressed homeowners, small businesses and municipalities. Senior Federal Reserve officials said this week that the bulk of the money should go to banks.( GOOD JOB )

Some Fed officials suggested that even more than $700 billion may be required, and financial analysts at Goldman Sachs and elsewhere say banks will have to raise hundreds of billions of dollars from public or private sources( IT WILL MAINLY BE PUBLIC ).

This year is expected to be worse for banks than last year, senior government officials and analysts say. The money from the first half of the rescue program helped banks replace most of the money they lost during the first nine months of 2008. But the firms are beginning to report fourth-quarter losses that are larger than analysts expected, and the economic environment continues to worsen quickly.( THE CALLING RUN COULD GET WORSE. GREAT. )

The markets got a taste yesterday of just how badly the year ended. European giant Deutsche Bank revealed an unexpected estimated loss of about $6.3 billion for the fourth quarter. HSBC, which has not yet raised capital during the financial crisis, may need $30 billion from investors, according to Morgan Stanley analysts.

Global stock markets reacted by plummeting, with financial shares falling the hardest. The Dow Jones industrial average dropped nearly 3 percent.

Meanwhile, Bank of America was on the verge of receiving billions more in federal aid to help it absorb( WE SHOULD HAVE DONE THIS ) troubled investment bank Merrill Lynch, whose losses had outpaced expectations, according to people familiar with the matter. That money would come on top of the $25 billion the government has already invested in Bank of America, including $10 billion specifically in connection with the Merrill Lynch deal.

Senior economic advisers to President-elect Barack Obama have said that restoring health to financial markets and the slumping economy requires the second half of the $700 billion rescue program as well as a massive stimulus package with a price tag approaching $850 billion.

On Tuesday, Federal Reserve chairman Ben S. Bernanke, suggested that more help for banks could be needed. "History demonstrates conclusively that a modern economy cannot grow if its financial system is not operating effectively," he said, adding that both the stimulus and the rescue package were essential to restoring health to financial firms.( HE'S CORRECT )

Yet it remained unclear yesterday whether Congress would approve the release of the last $350 billion in the program known as the Troubled Asset Relief Program, or TARP. Obama's transition team asked lawmakers to do so Monday, saying it was urgently needed. But Democrats are growing increasingly concerned about their ability to quickly deliver the money to Obama.

In the Senate, Republican support for release of the funds has evaporated in the face of public anger over the Bush administration's management of the program. With more than a handful of Democrats also opposed, Senate leaders scrambled yesterday to rally support.

The Senate is set to vote today on a resolution to block the release of the money.

Late yesterday, Lawrence H. Summers, Obama's top economic adviser, and Rahm Emanuel, Obama's incoming chief of staff, met with Senate Republicans to try to persuade them to come aboard. But even many Republicans who voted to create the bailout program in October now say they are unlikely to back the release of the money.

If Congress votes to block the cash, Obama has the power to veto the resolution, all but ensuring the money would be in place early in his administration. Some Republicans said they see no point in casting an unpopular vote simply to spare Obama the discomfort of issuing a veto against the Democratic Congress as one of his first acts as president.

"The Republican base hates this. So a lot of people are saying why anger the base in the name of good policy( TRY DOING WHAT'S BEST FOR THE COUNTRY CINCINNATUS ) when it's going to happen anyway?" said Sen. Robert F. Bennett (R-Utah), a senior member of the Senate Banking Committee, which was at the center of negotiations during the TARP's creation.

Republicans -- and many Democrats -- also say they are dissatisfied with Obama's pledges to dramatically reshape the rescue package to more directly assist distressed homeowners, small business and other consumers in search of credit, as well as to bolster oversight.

Republicans, in particular, want assurances that the money would be reserved to help ease the credit crisis in the financial system. They do not want the funds to go to other sectors, such as the faltering auto industry, which last month won a small share of the money from the Bush administration. That decision, said Sen. Bob Corker (R-Tenn.) turned the program into a "$350 billion slush fund."( IF THE MONEY IS JUST SPENT ON THE FINANCIAL SECTOR, IT WILL BE SEEN AS FAVORITISM AND CRONYISM, WHICH YOU SHOULD UNDERSTAND, SINCE YOU'RE AN EXPERT IN IT. )

After an hour-long meeting with Summers and Emanuel, many Republicans, even those who supported the TARP last fall, said they remained skeptical.

"They probably haven't said quite enough yet for most Republicans," said Minority Leader Mitch McConnell (R-Ky.).

Lawmakers were initially swayed to vote for the bailout program in October because of evidence that some banks were in extreme trouble. At that time, the government pushed healthier banks to acquire faltering rivals.

Now the buyers, which included Bank of America, J.P. Morgan Chase and other major banks, are struggling to make the mergers work. The prices they paid seemed like bargains at the time, but losses have been greater than the banks expected.( GEE. THEY'RE SUCH EXPERT FORECASTERS. )

J.P. Morgan Chase will be the first of several major U.S. institutions to report earnings in coming days. Last year, it acquired two troubled firms, Bear Stearns and Washington Mutual. Analysts expect J.P. Morgan to report a narrow profit after a very tough year-end quarter.

Citigroup, which has received $45 billion in government aid, is expected to report a loss of more than $3 billion on Friday. The company also plans to announce that it will sell several major units to raise capital.

Bank of America, which reports earnings next week, has had enough capital to support its own operations but not enough to absorb Merrill Lynch's losses, according to two people familiar with the situation. Losses at Merrill Lynch have outpaced expectations since the merger was announced in September.

The banks closed the deal Jan. 1 after the Treasury Department committed( GUARANTEED ) in principle to making an additional investment, the sources said.

Bank of America and the Treasury declined to comment.

In total, banks raised about $456 billion in 2008, of which 41 percent came from the U.S. government, according to investment bank Keefe, Bruyette & Woods. But most of the money from private sources was raised in the first half of the year. As the crisis has worsened, the institutions have come to rely almost entirely( YOU THINK? ) on government help.

Staff writer Paul Kane contributed to this report."

If we had simply nationalized these banks, we would have saved ourselves money and aggravation. A hybrid plan pits the banks against the government, even as the money is handed over to the banks, who will continue to lobby for favors. Here's another obvious mess that people can't seem to see. Does anybody who favors the free market really believe that these banks believe in it, or would even be competent to do business in it? Please.

"default risk is the highest for Morgan Stanley"

What's wrong with this picture? From Calculated Risk:

"Morgan Stanley May Pay $3 Billion for Smith Barney Interest

by CalculatedRisk on 1/10/2009 09:25:00 AM

From Bloomberg: Morgan Stanley May Pay Citigroup $3 Billion in Brokerage Merger

Morgan Stanley may pay Citigroup Inc. as much as $3 billion for control of a venture that would combine their brokerage units ... Morgan Stanley ... may get 51 percent of the new company and an option to acquire the rest over three to five years ... The transaction may be announced as soon as tomorrow, the person said.

Citigroup ... would get cash for its Smith Barney brokerage, while Morgan Stanley would get recurring fee revenue and more potential banking customers.

Just shuffling the TARP money ... "

From Bespoke:

"These prices represent the cost per year to insure $10,000 worth of debt for 5 years. As shown, default risk is the highest for Morgan Stanley( ARE THEY CONNECTED WITH THE ABOVE NAMED FIRM? ), followed by Goldman Sachs, American Express, UBS, and Citigroup. The premium against default for JP Morgan is the lowest among US financial firms, with Wachovia, Wells Fargo, and Bank of America not far behind. BNP Paribas and Credit Agricole have the lowest default risk of the 24 financial firms shown.

What will Morgan Stanley CDSs be priced now? Will that tell us anything about how investors view this deal?

Below we highlight current credit default swap prices for 24 financial firms across the globe.

From Bespoke:

"Financial Company Default Risk

While default risk has dropped dramatically( GOOD NEWS ) for the financial companies listed below, it's still interesting to see how the firms compare with each other on the CDS front. Below we highlight current credit default swap prices for 24 financial firms across the globe. These prices represent the cost per year to insure $10,000 worth of debt for 5 years. As shown, default risk is the highest for Morgan Stanley, followed by Goldman Sachs, American Express, UBS, and Citigroup. The premium against default for JP Morgan is the lowest among US financial firms, with Wachovia, Wells Fargo, and Bank of America not far behind. BNP Paribas and Credit Agricole have the lowest default risk of the 24 financial firms shown.

"top brass will get paid based on something having to do with exotic metrics like performance and profitability"

A pretty funny and apt post from Clusterstock:

"Citi (C) Execs Pay To Be Based On Something Called "Performance" (C)

Joe Weisenthal | Dec 31, 08 3:38 PM

Citigroup (C) is set to announce a very bizarre compensation scheme indeed, according to CNBC. Details are sketchy, but it sounds as though top brass will get paid based on something having to do with exotic metrics like performance and profitability. We'll have to wait to learn more, but get this, if the firm's fortunes continue to deteriorate, then execs may get reduced pay. Odd, right?( IT'S UNHEARD OF! )

The plan calls for Citi's most senior executives, including the CEO, to take the biggest hits in compensation when the firm's bottom line suffers. Senior executives will receive much of their future cash and stock bonuses in a deferred fashion that is "vested" in three years time when the executive can claim ownership to the money.

The plan will also feature a clawback provision where the firm can recoup money from top executives if the performance of the firm sours after a big payday, in addition the top five executives at the firm will receive no severance if and when they leave.

Citigroup officials say the plan was developed internally by Pandit himself, but they confirm that they have been discussing executive compensation reforms with officials in the federal government, which have been increasingly more involved in Citigroup's operations since the big bank asked for its most recent bailout.

Citi isn't the first firm, where something's gotten in the water. Morgan Stanley (MS) has also announced a bonus scheme that allows for clawbacks. Again, it all seems to be based on this idea that pay should somehow reflect how well one did at their job this year. Developing..."

I wonder how long this will last?

"At that time, SAFE was certainly shocked by the news that the U.S. government decided to take over WaMu "

An interesting aspect to WaMu from Reuters:

"By George Chen, Asia Private Equity Correspondent

HONG KONG (Reuters) - China's foreign exchange watchdog, the State Administration of Foreign Exchange, will cut back on overseas equity buys next year after suffering major losses on the collapse of U.S. lender Washington Mutual, according to sources.

Earlier this year, SAFE, which controls around $2 trillion of China's foreign reserves, agreed to invest up to $2.5 billion in fund of U.S. private equity giant TPG TPG.UL -- its first foray into a foreign private equity fund, people close to the situation told Reuters.

In April, TPG, one of the world's largest private equity firms, led a $7 billion investment in Washington Mutual to help the troubled lender boost its capital.

TPG put money into WaMu through several of its funds, including one SAFE invested in, said the sources who declined to be identified due to the sensitive nature of the deal.

Just five months later, WaMu, the largest U.S. savings and loan firm, was closed by the U.S. government, making it one of the largest U.S. bank failures in history.

Its banking assets were sold to Wall Street bank JPMorgan (JPM.N) for $1.9 billion, wiping out about $1.35 billion that TPG and its institutional investors, known as "Limited Partners" had invested.

"At that time, SAFE was certainly shocked by the news that the U.S. government decided to take over WaMu and there was almost nothing that SAFE could do to save its investment," said one of the sources.

"It's a good lesson for SAFE and you can imagine how unhappy it was, just like every other LP of TPG for the deal," he said.

TPG's losses from the WaMu deal are publicly known but the names and investment contributions of limited partners of private equity firms usually remain under wraps.

It is still unclear how much in total SAFE lost from its bet on TPG and WaMu.

One source said SAFE agreed with TPG's plan to rescue WaMu, contributing at least 10 percent of TPG's initial $2 billion investment in WaMu. Other sources confirmed TPG informed SAFE of its plan to invest in WaMu before it took the action and SAFE supported TPG's plan.

NO MORE QUICK DEAL

SAFE was not the first choice of TPG as a partner to rescue WaMu.

In China, the private equity firm is well known for its landmark investment in Shenzhen Development Bank 000001.SZ in 2004, making it the first foreign investor to own a controlling stake in a Chinese lender.

Sources said TPG initially approached China Investment Corp, lobbying the country's official sovereign wealth fund to become a major limited partner of its new private equity fund.

CIC, which was set up by the Communist government last year to earn higher returns on a $200 billion portfolio of its foreign exchange reserves, declined the offer mainly due to concerns about investment risks and poor prospects of U.S. markets, the sources said.

Instead, TPG's dealmakers contacted SAFE and the foreign exchange regulator agreed on condition that TPG would also jointly invest some of its own money in the WaMu deal, the sources said.

The big losses by SAFE in the WaMu deal through its investment in the TPG fund have drawn attention from top government leaders in Beijing, who have urged both CIC and SAFE to be more cautious on its overseas investments next year.

CIC has already attracted massive criticism at home over its deals in U.S. firms, which have been battered by the credit crisis, with its stakes in private equity house Blackstone Group (BX.N) and Morgan Stanley (MS.N) diving in value.

One of the sources said both CIC and SAFE would focus more on overseas investments in fixed income areas rather than equities deals in 2009."

I guess we'll see more bond buying.

"So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. "

Taleb again, in the FT with Pablo Triana:

"On March 13 1964, Catherine Genovese was murdered in the Queens borough of New York City. She was about to enter her apartment building at about 3am when she was stabbed and later raped by Winston Moseley. Moseley stole $50 from Genovese’s wallet and left her to die in the hallway.

Shocking as these details surely are, the lasting impact of the story may lie elsewhere. For plenty of people reportedly witnessed the attack, yet no one did much about it. Not one of the almost 40 neighbours who were said to have been aware of the incident left their apartments to go to Genovese’s rescue.

Not surprisingly, the Genovese case earned the interest of social psychologists, who developed the theory of the “bystander effect”. This claimed to show how the apathy of the masses can prevent the salvation of a victim. Psychologists concluded that, for a variety of reasons, the larger the number of observing bystanders, the lower the chances that the crime may be averted.

We have just witnessed a similar phenomenon in the financial markets. A crime has been committed. Yes, we insist, a crime. There is a victim (the helpless retirees, taxpayers funding losses, perhaps even capitalism and free society). There were plenty of bystanders. And there was a robbery (overcompensated bankers who got fat bonuses hiding risks; overpaid quantitative risk managers selling patently bogus methods)."

I'm with him completely. Remember Fraud, Negligence, Fiduciary Mismanagement, and Collusion? But who are the bystanders? Let's catch the actual culprits first.

"Let us start with the bystander. Almost everyone in risk management knew that quantitative methods – like those used to measure and forecast exposures, value complex derivatives and assign credit ratings – did not work and could provide undue comfort by hiding risks. Few people would agree that the illusion of knowledge is a good thing. Almost everyone would accept that the failure in 1998 of Long Term Capital Management discredited the quantitative methods of the Nobel economists involved with it (Robert Merton and Myron Scholes) and their school of thought called “modern finance”. LTCM was just one in hundreds of such episodes."

Okay. I agree.

"Yet a method heavily grounded on those same quantitative and theoretical principles, called Value at Risk, continued to be widely used. It was this that was to blame for the crisis. Listening to us, risk management practitioners would often agree on every point. But they elected to take part in the system and to play bystanders. They tried to explain away their decision to partake in the vast diffusion of responsibility: “Lehman Brothers and Morgan Stanley use the model” or “it is on the CFA exam” or, the most potent argument, “modern finance and portfolio theory got Nobels”. Indeed, the same Nobel economists who helped blow up the system at least once, Professors Scholes and Merton, could be seen lecturing us on risk management, to the ire of one of the authors of this article. Most poignantly, the police itself may have participated in the murder. The regulators were using the same arguments. They, too, were responsible."

If they took part, then they're culprits, not bystanders.

"So how can we displace a fraud? Not by preaching nor by rational argument (believe us, we tried). Not by evidence. Risk methods that failed dramatically in the real world continue to be taught to students in business schools, where professors never lose tenure for the misapplications of those methods. As we are writing these lines, close to 100,000 MBAs are still learning portfolio theory – it is uniformly on the programme for next semester. An airline company would ground the aircraft and investigate after the crash – universities would put more aircraft in the skies, crash after crash. The fraud can be displaced only by shaming people, by boycotting the orthodox financial economics establishment and the institutions that allowed this to happen."

Okay. Fine. But does anyone ever do time for these crimes, beyond a few token high profile cases?

"Bystanders are not harmless. They cause others to be bystanders. So when you see a quantitative “expert”, shout for help, call for his disgrace, make him accountable. Do not let him hide be-hind the diffusion of responsibility. Ask for the drastic overhaul of business schools (and stop giving funding). Ask for the Nobel prize in economics to be withdrawn from the authors of these theories, as the Nobel’s credibility can be extremely harmful. Boycott professional associations that give certificates in financial analysis that promoted these methods. Remove Value-at-Risk books from the shelves – quickly. Do not be afraid for your reputation. Please act now. Do not just walk by. Remember the scriptures: “Thou shalt not follow a multitude to do evil.”

If they're not going to listen to you, I doubt that they'll listen to me. I'll give it a try anyway.

"Short sellers are known by many names": Like, "Shorty"

I don't understand the problem with short selling. Felix Salmon visits the issue:

"Jim Surowiecki says, quite rightly, that short selling can cause viciously self-fulfilling downward spirals, especially in financial stocks. But reading the WSJ's long and alarmist tale of what happened to Morgan Stanley in September, I'm more convinced than ever that short-sellers, be they in the stock market or the CDS market, are not the cause of current problems.

I'm with Jim Chanos on the subject of the WSJ story: he writes that

The WSJ piece, despite its sensationalist headlines, actually confirms what we have been telling Washington for some time now. That is, that most of the "short activity" in the banks/brokerages, was to hedge embedded long exposure to these institutions, often by other banks/brokerages! These were NOT "bear raids", but prudent fiduciary-related decisions made by these entities to protect their capital/investors. An important story to the Financial Crisis narrative so far."

Read the rest. Here's my comment:

Posted: Nov 25 2008 12:09pm ET

Felix, I'm not sure how betting on the market going down can cause harm. After all, if an index can go up and down, surely it's sensible to take financial advantage of the index going down, which it's going to do sometimes, being an index,if you can.

This whole worry has the whiff of a jinx. It's as if people are saying, "Look, we want the index to go up. That's when everything gets better. If you bet on the index going down, you're basically cheering on calamity, and making money on it. How dare you!"

What am I missing? After all, do we ban people who are naturally ebullient from trading, since they might cause the index to go up too much?

By DonthelibertarianDemocrat

"Ms. Meeker terrified the audience with the prospects of the coming recession"

When I read about the first part of this presentation, I nearly cried. Then it improved, via the NY Times:

"Nobody can show more in less time than Mary Meeker, the technology and Internet analyst at Morgan Stanley.

In the first session of the Web 2.0 conference in San Francisco, Ms. Meeker terrified the audience with the prospects of the coming recession, then offered a vision of ultimate redemption. (You can see her slides here.)"

Here's my comment:

“Nobody can show more in less time than Mary Meeker, the technology and Internet analyst at Morgan Stanley.

In the first session of the Web 2.0 conference in San Francisco, Ms. Meeker terrified the audience with the prospects of the coming recession, then offered a vision of ultimate redemption.”

Here's my comment:

Well, when I read that story, I didn’t see it doing a lot to drum up business for Morgan Stanley. It made me take a xanax, and think of putting cash under my mattress. And I’m optimistic about the economy.

— Don the libertarian Democrat

A Few Points About The SEC And The New Bill

Today, the SEC adopted one of Anthony Randazzo's proposals from the free market proposals I recommended:

"Third, the SEC should suspend the "mark-to-market" accounting rules for long-term assets that are driving firms into bankruptcy. Essentially, these regulatory rules are forcing firms to value their assets at much lower prices than what they would be worth long-term. The intent of mark-to-market regulation was to keep firms from overvaluing themselves and deceiving investors. Instead the law has artificially devalued financial institutions as a whole, which hurts their investors. As Steve Forbes noted recently, "The mark-to-market mania of regulators and accountants is utterly destructive. It is like fighting a fire with gasoline."

This accounting clause has significantly contributed to the bankruptcies (or near bankruptcies) of Lehman Brothers, Merrill Lynch, AIG, Bear Stearns, Morgan Stanley, Citigroup, Washington Mutual, and many others. In order to keep firms from overvaluing themselves, Newt Gingrich has proposed a three-year rolling average mark-to-market policy.'

Here from the Washington Post:

"Under intense political pressure, regulators for securities and accounting standards this afternoon issued what they called a "clarification" to provisions that have come under fire from bank executives and some lawmakers for contributing to the credit crisis...

The standard, also known as "mark to market," has led portfolios to plunge in recent months as banks affixed fire sale prices to their assets, a move that sometimes required them to raise still more capital to meet regulatory requirements. The measure also led to clashes between corporate executives and independent auditors over how low the markdowns should be forced to dip. "

Also, I backed this proposal from Jim Harper of Cato which looks to be in the new bill:

"And from the “This May Make Some Sense” department, there’s H.R. 6986, which would raise the maximum Federal deposit insurance coverage to $200,000. This seems to update the amounts covered by federal deposit insurance not in response to the crisis, but in response to the possibility that it could be needed. Nice to see someone possibly getting ahead of the curve, rather than following along behind it. But I have to say “least bad” is not high praise . . ."

Here from the NY Times:

"But those Democratic opponents did say that they would be willing to back an increase to $250,000, from $100,000, in the amount of a bank deposit that would be insured by the federal government — an idea that on Tuesday gained fast currency as a consensus change in the initial plan.

Mr. Obama and Mr. McCain early Tuesday both embraced the deposit insurance proposal, sparking a bit of a political tiff over who deserved credit for initiating it. House Republicans claimed to have offered the insurance increase in weekend negotiations over the plan only to have it rejected."

I might also add that Randazzo advocated tax breaks, but probably not these being considered:

"The Senate tax bill would cost more than $100 billion and extend and expand many individual and business tax breaks, including tax credits for the production and use of renewable energy sources, like solar energy and wind power. The bill would also extend the business tax credit for research and development, expand the child tax credit, protect millions of families from the alternative minimum tax and provide tax relief to victims of recent floods, tornadoes and severe storms.

Members of the House and the Senate say the bill would create tens of thousands of jobs and reduce the nations’ dependence on foreign oil. But the two chambers have been at odds over whether and how to offset the cost of extending the many tax breaks covered by the legislation. The major obstacle has been Representative Steny H. Hoyer of Maryland, the majority leader, and other centrist Democrats."

Maybe Randazzo would be for the business tax breaks.

"Second, Congress could cut corporate taxes and small business taxes in general. Trimming taxes for "the rich" opens up new capital to be invested in a struggling economy. At a time when investor confidence in the stock market is low, a tax cut for businesses would encourage innovation and entrepreneurial activity. The effects would be similar to that of a stimulus package, only without the government's involvement or a redistribution of wealth."

More about this new bill as I find out more about it, and understand it.