We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that

TO BE NOTED: From the NY Times:

"April 29, 2009
Feeling More Secure, Some Banks Want to Be Left Alone

By GRAHAM BOWLEY and ERIC DASH

As Washington pushes banks to mend their finances, the banks are pushing back.

Emboldened by newfound profits and eager to shake off federal control, a growing number of banks are resisting the Obama administration’s proposals for fixing the financial system. Lenders that skirted disaster only months ago with the help of taxpayer dollars are now balking at government prescriptions.

Despite pressure from federal regulators, industry executives are taking issue with major elements of the president’s bank plan. Administration officials characterize each part of their three-pronged approach as crucial to bolstering banks and restarting the economy. But bankers are increasingly eager to extricate themselves from the government’s grasp, and worry that Washington will impose new restrictions on their businesses if the government’s already considerable role in the industry grows.

“The pushback has been pretty hard,” said Frederick Cannon, the chief equity strategist of Keefe, Bruyette & Woods and a specialist in banking stocks. “If we don’t address these issues, that could have a negative effect on economic growth, which in turn makes the banks’ problems worse.”

As the Obama administration marks its first 100 days, the banks’ resistance is complicating the government’s effort to solve some of the thorniest problems of the financial crisis. Opposition is building on several fronts.

Citigroup, Bank of America and other big banks are disputing so-called stress tests being conducted by federal examiners to determine how these institutions would withstand a deep, prolonged recession. The banks contend they are in better shape than the early findings suggest, although it is likely several will need to raise capital.

A Treasury plan to purge banks of their troublesome assets — a seemingly intractable problem — has received a lukewarm response in banking circles. Several big banks have declared they have no intention of participating in the program. Another major effort, one to revive credit for everything from car loans to equipment leases, has also gotten off to a slow start.

Administration officials said Tuesday that their efforts were going according to plan. They said that more than 100 private money managers had signed up for the program to buy troubled assets. “We are not flipping a switch here,” said one official, calling for patience. “These are intricate programs.”

But the disputes over the stress tests, which have been administered to 19 big banks, and a lackluster reception to the third effort, the Term Asset-Backed Securities Loan Facility, or TALF, are also potential worries.

Large banks are being put through a battery of tests to see whether they will hold up under pressure in the worst-case economic assumptions over the next two years. Big banks like Citigroup, Bank of America, PNC Financial and Wells Fargo are disputing some of the early findings, which suggest some banks may need to raise capital, according to people briefed on the exams. Because of the protracted negotiations with the banks and regulator infighting over how much information to disclose, officials now plan to announce the results on May 5 or 6, the third time the date has been postponed.

“There is concern among the banks that the stress test has led to uncertainty, the opposite of what is intended, and they would be diluting their shareholders based on a scenario that the regulators say themselves are unlikely to happen,” said Edward L. Yingling, the head of the American Bankers Association.

According to people briefed on the situation, the disputes center on several assumptions that regulators made in administering the tests. These include the severity of losses on assets like mortgages, credit card loans and commercial real estate loans, as well as the banks’ potential to generate earnings.

In a further challenge, the banks are also pushing regulators to relax the timetable for them to obtain new capital.

Some investors are prepared to buy problem assets from banks. What is less certain is whether banks will be willing to sell. Big money managers like BlackRock and Bank of New York Mellon said they had applied to raise money for the troubled-asset funds. While administration officials say they never expected every bank to participate, large banks whose involvement was regarded as vital to the plan’s success have said they will not be involved. Executives worry that whatever assurances the White House gives them, an angry Congress might impose new rules on banks that participate, particularly on pay.

Officials from Citigroup, Morgan Stanley, PNC Financial and a number of other big lenders that have received multibillion-dollar government bailouts are reluctant to participate or have refused so far to commit until more details are offered. Jamie Dimon, JPMorgan Chase’s chief executive, has said he believes that the Public-Private Investment Program — which depends on loans from the Federal Deposit Insurance Corporation — could be “good for the system” but that his bank has no intention of being either a seller or buyer. “We’re certainly not going to borrow from the federal government, because we’ve learned our lesson about that,” he said earlier this month in a conference about earnings.

Many banks are reluctant to sell their nonperforming loans because they could suffer big losses, forcing them to raise more capital. Others want to avoid the stigma of latching on to another federal program.

“Never mind the price,” James E. Rohr, PNC’s chief, said in a recent interview. “I wouldn’t want to be the first person and be perceived as a weak bank.”

D. Bryan Jordan, the chief executive of First Horizon, a big lender based in Tennessee, said the likelihood that his bank would participate was somewhat low. “We think we can get a lot more value out of them by working them out ourselves,” he said earlier this month in a conference call about first-quarter results.

Art Murton, an official at the F.D.I.C. who is helping to devise the troubled-loan program, said there had been “encouraging” levels of interest. To test the investor waters, the F.D.I.C. is planning a pilot auction in June.

The TALF program has also struck some as underwhelming. It was to ignite the market for securities backed by consumer and small-business loans, which dried up last year.

Policy makers said they planned to lend up to $1 trillion under the program. But investors took only $4.7 billion in loans in the first installment in March, and a further $1.7 billion in April, according to the Federal Reserve Bank of New York. Administration officials said, however, that the plan was restarting lending and would grow in coming months.

Citigroup, meanwhile, has been in discussions with the Treasury over overhauling its compensation system for traders and other employees, a person close to the talks said, as the bank awaits the government’s new compensation rules. Among the ideas discussed have been issuing warrants, permitting employees to buy stock rights at steep discounts and exempting traders from the new rules.

Louise Story contributed reporting."

“false and deceptive advice” when they marketed the securities to small investors by claiming that they were as safe and liquid as cash

TO BE NOTED: From the NY Times:

"California Sues Wells Fargo Over Securities Sales

By JESSE McKINLEY

SAN FRANCISCO — Joining a roster of state lawmen pursuing civil actions against banks, California’s attorney general, Jerry Brown, sued three subsidiaries of Wells Fargo on Thursday, claiming the bank had lost some $1.5 billion for investors in the state who bought auction-rate securities.

The lawsuit, filed in San Francisco, claims that three Wells Fargo units gave “false and deceptive advice” when they marketed the securities to small investors by claiming that they were as safe and liquid as cash. Instead, investors lost money when the market for auction-rate securities collapsed in February 2008.

“More than 2,000 Californian investors who thought they could get their money back when they needed it now can’t,” Mr. Brown said at a news conference. “What we’re seeing today is another example of these complicated financial transactions, so-called financial products that have been part of this massive financial bubble that’s burst.”

In a statement, Charles W. Daggs, the chief executive of Wells Fargo Investments, disputed Mr. Brown’s claims, but expressed regret for “the effects this prolonged liquidity crisis has had on our clients.” He added that auction-rate securities clients had been given access to loans covering up to 90 percent of their investment.

The Securities and Exchange Commission and state regulators have been pursuing banks that sold auction-rate securities, whose rates fluctuated in auctions overseen by the banks, since the market froze last year. In August, for example, Merrill Lynch, Goldman Sachs and Deutsche Bank agreed to buy back some $12.5 billion in auction-rate securities in a deal with the New York attorney general, Andrew M. Cuomo, who also reached a $7.3 billion settlement with Citigroup."

many of BarCap’s (and for that matter Goldman’s rivals) have failed, merged and therefore withdrawn, or scaled back, from certain markets

TO BE NOTED: From Alphaville:

"Mystic Bob Diamond Posted by Neil Hume on Apr 16 09:15.

The ebullient BarCap boss has been looking into his crystal ball and guess what, the better than expected earnings reported by Goldman, Wells Fargo aren’t a “one-off” phenomenon.

They will be repeated, says Bob.

From Bloomberg.

“You have to look at which banks have improved their competitive position in this period, and in that regard I don’t think it’s a one-off,” Diamond, 57, said in an interview today on Bloomberg Television.

“If I step back and look at the Wells Fargo earnings and the Goldman Sachs earnings, there’s good news for the whole industry there,” Diamond said. “It has been quite a while since we’ve seen analysts talk about revenue as opposed to writedowns and balance-sheet risks.”

By that we presume Diamond means the favourable widening of bid/offer spreads in customer flow business and the fact that many of BarCap’s (and for that matter Goldman’s rivals) have failed, merged and therefore withdrawn, or scaled back, from certain markets, such as fixed income, commodities and currencies.

Of course, not everyone thinks the first quarter results we be repeated. Many in the blogsphere suspect Goldman’s first quarter results will prove to be “non-recurring” in nature because they were mainly due to the unwinding of AIG hedges.

And Wednesday’s results from UBS prove that all is still not well in the IB world.

That said, Barclays’ purchase of Lehman Brother’s North American business out of bankruptcy does look to have been well timed. It has given the bank strong positions in several markets, such as US government debt, which are pretty attractive right now.

Little wonder Diamond has this to say to Bloomberg about the Lehman deal.

“When we look back, we really have to pinch ourselves.”

So do we Bob.

Related links:
Goldman’s blowout Q1 figures - reaction - FT Alphaville
UBS not in Q1 happy bank club - FT Alphaville
On Wells Fargo and banks’ well-being - FT Alphaville

This entry was posted by Neil Hume on Thursday, April 16th, 2009 at 9:15 and is filed under Capital markets, People. Tagged with barcap, barclays, bob diamond."

But the banks are resisting because they would have to book big losses.

TO BE NOTED: From the NY Times:

"Showdown Seen Between Banks and Regulators

By STEPHEN LABATON and EDMUND L. ANDREWS

WASHINGTON — As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.

President Obama emerged from a meeting with his senior economic advisers on Friday to say “what you’re starting to see is glimmers of hope across the economy.” But there were also signs of growing tensions between the White House and the nation’s banks over the next phase of the financial rescue.

Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money.

Jamie Dimon, the chief executive of JPMorgan Chase, and two other executives of large banks raised the issue with Mr. Obama and the Treasury secretary, Timothy F. Geithner, at a meeting two weeks ago.

“This is a source of considerable consternation,” said Camden R. Fine, who attended the White House meeting as president of the Independent Community Bankers, a trade group of 5,000 mostly smaller institutions, many of which are complaining about the repayment requirements.

Meanwhile, the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.

Finally, there is increasing anxiety in the industry that the administration could use the stress tests of the 19 biggest banks, due to be completed in the next three weeks, to insist on management changes, just as it did with General Motors when officials forced the resignation of its chief executive after examining that company’s books.

Senior officials, recognizing that the next few weeks could prove pivotal for both the industry and the bailout effort, are moving ahead with major plans.

“You will be seeing additional actions by the administration,” Mr. Obama said after the meeting Friday, when the officials discussed the bank stress tests and the new $500 billion to $1 trillion plan that will use public subsidies to encourage private investors to buy mortgage assets.

Attending the session were Mr. Geithner; Sheila C. Bair, the head of the Federal Deposit Insurance Corporation; Lawrence H. Summers, the chairman of the National Economic Council; and other top regulators.

The tension between the industry and the administration is rising as the government’s bailout fund is dwindling, putting the administration in a bind. It is all but certain to need to seek more money from Congress, which wants to see results from existing programs first.

The fund is down to its final $134 billion, according to Treasury officials, and is expected to face new requests for money in the coming weeks to aid tottering banks, the auto industry and possibly insurance companies.

“Between now and Memorial Day we’re going to know a whole lot more about the degree of trouble the banks are in,” said Senator Charles E. Schumer, a New York Democrat who is vice chairman of the Joint Economic Committee. “At the same time, we will begin to have a good initial reading as to how well the administration’s programs are working.”

This month, the nation’s largest banks began announcing their latest quarterly earnings. Some, like Wells Fargo, have released results early to trumpet their profitable first quarter — and possibly to give them leverage in coming negotiations with their regulator.

The immediate concern for the administration is how to get the weaker banks to relieve their books of deteriorating mortgages and mortgage-backed securities.

Industry analysts estimate that United States banks alone have more than $1 trillion of such mortgages on their books but have recognized only a small share of the likely losses.

Economists at Goldman Sachs estimated recently that banks were valuing their mortgages at about 91 cents on the dollar, far more than investors are willing to pay for them.

Even though the Treasury Department plans to subsidize the purchases of toxic assets by giving buyers low-cost loans to cover most of their upfront cost, a growing number of analysts warn that many if not most banks will remain reluctant to sell.

“The gap is still very wide,” said Frank Pallotta, a former mortgage trader at Morgan Stanley, now a consultant to institutional investors. “If every bank was forced to sell at the market-clearing price, you’d have only five banks left in the market.”

The stress tests of the banks are aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected.

Government officials do not plan to disclose the results for individual banks but may reveal broad results for the entire industry at the end of the month.

If the test indicates that the losses would leave a bank with too little capital, the bank will have six months to either raise extra money from private investors or get money from the government. Executives at some banks are worried that regulators will start demanding changes in management and strategy, possibly forcing them to merge with stronger institutions.

Treasury officials said they understood that banks had valid reasons for placing higher values on their mortgages than investors, and said they were hoping to avoid major conflicts.

Facing a host of government restrictions — from how much they pay executives to how many foreign citizens they employ — some small banks have returned the bailout money, and some larger ones, including Goldman Sachs, Wells Fargo and Northern Trust, have said they want to do so as quickly as possible.

On Friday, Sun Bancorp of Vineland, N.J., became the sixth bank to exit the program, returning $89.3 million just three months after it received its loan.

Regulators are reluctant to approve the early repayments until banks can show that they have the capital to withstand further erosion in the economy and will not curtail their lending.

Both large and small banks have pressed the Obama administration to make it less costly for them to exit the bailout program by waiving the right to exercise stock warrants the banks had to grant the government in exchange for the loans. At a meeting last month, the chiefs of three of the largest banks separately asked Mr. Obama to direct the Treasury not to exercise the warrants, Mr. Fine said.

Douglas Leech, the founder and chief executive of Centra Bank, a small West Virginia bank that participated in the capital assistance program but returned the money after the government imposed new conditions, said he complained strongly about the Treasury Department’s decision to demand repayment of the warrants. That effectively raised the interest rate he paid on a $15 million loan to an annual rate of about 60 percent, he said.

“What they did is wrong and fundamentally un-American,” he said. “Even though the government told us to take this money to increase our lending, the extra charge meant we had less money to lend. It was the equivalent of a penalty for early withdrawal.”

Stephanie Cutter, a spokeswoman at the Treasury Department, said it did not comment about the participation of specific banks in the plan or their efforts to exit the program."

$3 billion debt sale in a two-part sale backed by the Federal Deposit Insurance Corp

TO BE NOTED: From Reuters:

"Wells Fargo launches $3 bln debt sale

Wed Mar 25, 2009 3:58pm EDT

NEW YORK, March 25 (Reuters) - Wells Fargo (WFC.N: Quote, Profile, Research, Stock Buzz) on Wednesday launched a $3 billion debt sale in a two-part sale backed by the Federal Deposit Insurance Corp, IFR reported.

The bank will offer $1.5 billion of 3-year fixed-rate notes, priced at a yield spread of mid-swaps plus 22 basis points, said IFR, a Thomson Reuters service.

It will also offer $1.5 billion in 3-year floating rate notes, priced at 3-month London Interbank Offered Rate plus 22 basis points.

Goldman Sachs, JPMorgan, Morgan Stanley and Wachovia are joint lead managers on the deal.

(Reporting by Ciara Linnane; Editing by Diane Craft)"

Wells Fargo trumped that bid four days later with a higher offer for all of Wachovia, and which did not require FDIC support.

TO BE NOTED: From Reuters:

"Citigroup-Wells Fargo case moves to NY state court

Tue Mar 24, 2009 12:32pm EDT

NEW YORK (Reuters) - A federal judge has transferred Citigroup Inc's (C.N: Quote, Profile, Research, Stock Buzz) $60 billion lawsuit against Wells Fargo & Co (WFC.N: Quote, Profile, Research, Stock Buzz) over the acquisition of Wachovia Corp back to the New York state court where it began, citing a lack of jurisdiction.

In a March 20 ruling, U.S. District Judge Shira Scheindlin agreed with Citigroup that the lawsuit does not raise a federal claim.

She rejected Wells Fargo's argument that the case turns in part on Citigroup's right to relief under a provision governing acquisitions in last year's federal Emergency Economic Stabilization Act. That act authorized the $700 billion bank bailout known as the Troubled Asset Relief Program, or TARP.

Citigroup last September 29 agreed to buy much of Wachovia for $2.16 billion, with the Federal Deposit Insurance Corp sharing in losses on a pool of Wachovia loans.

Wells Fargo trumped that bid four days later with a higher offer for all of Wachovia, and which did not require FDIC support. Citigroup sued to block that merger, but later backed down.

Wells Fargo on December 31 completed the Wachovia acquisition, which was eventually valued at about $12.5 billion.

The case is Citigroup Inc v. Wachovia Corp, U.S. District Court for the Southern District of New York (Manhattan), No. 08-8668. The original case was Citigroup Inc v. Wachovia Corp, New York State Supreme Court (Manhattan), No. 602872/08.

(Reporting by Jonathan Stempel; Editing by Derek Caney)"

It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks

TO BE NOTED: From Bloomberg via Alea:

"Wells Fargo Assails TARP, Calls Stress Test ‘Asinine’ (Update2)

Share | Email | Print | A A A

By Ari Levy

March 16 (Bloomberg) -- Wells Fargo & Co. Chairman Richard Kovacevich criticized the U.S. for retroactively adding curbs to the Troubled Asset Relief Program, which he said forced the bank to cut its dividend, and called the administration’s plan for stress-testing banks “asinine.”

When the U.S. Treasury persuaded the nation’s nine biggest banks to accept capital investments in October, it signaled the whole industry was weak, Kovacevich, 65, said in a March 13 speech at Stanford University in California. Even though Wells Fargo didn’t want the money, it must comply with the same rules that the government placed on banks that did need it, he said.

“Is this America -- when you do what your government asks you to do and then retroactively you also have additional conditions?” Kovacevich said. “If we were not forced to take the TARP money, we would have been able to raise private capital at that time” and not needed to cut the dividend to preserve cash, he said.

Kovacevich joins a growing list of bankers who are chafing at restrictions imposed by the TARP program, which affect lending, foreclosures, pay and perks. Lenders including Bank of America Corp., U.S. Bancorp and Goldman Sachs Group Inc. have said they want to give back the money. More than 500 banks, insurers and credit-card companies applied for TARP capital, and the government has distributed almost $300 billion.

While Bank of America aims to return the funds, Chief Executive Officer Kenneth Lewis praised TARP last week for preventing a financial “meltdown.” JPMorgan Chase & Co. CEO Jamie Dimon said it helped stabilize the banking system.

Lower Payout

Wells Fargo slashed its dividend by 85 percent on March 6 to 5 cents a share, citing savings of $5 billion and the need to build a capital cushion in case the market deteriorates further. Last month the San Francisco-based bank made a quarterly payment of $371.5 million to the Treasury for interest on the $25 billion TARP investment.

The company reported its first loss since 2001 in the fourth quarter after accounting for the acquisition of Wachovia Corp., whose losses on home loans brought it within hours of bankruptcy last year. The deal helped make Wells Fargo third- largest by deposits among U.S. lenders.

In February, as the government made its third attempt to save Citigroup Inc., Wells Fargo suspended cash bonuses for executives including Kovacevich and CEO John Stumpf. Any bank receiving government funds has to limit annual pay for top executives to no more than $500,000. Wells Fargo has also canceled a sales conference in Las Vegas and removed Wachovia’s name from a professional golf tournament in its hometown of Charlotte, North Carolina, amid government pressure.

Retaining Capital

The dividend cut is “the right move for the company, as it will allow it to retain capital in this uncertain and challenging economic environment,” RBC Capital Markets analyst Joseph Morford in San Francisco wrote in a March 9 report.

The company sees the dividend as a “core part of its relationship with its shareholders and part of the long-term return they expect,” wrote Morford, who rates the shares outperform and owns some personally.

Kovacevich said the government is still making mistakes as it tries to save the industry. The “stress test,” designed to determine which of the 19 largest U.S. banks need more capital, provides opportunities for short-sellers to drive down bank stocks and can hurt confidence in the system even more, he said.

The Obama administration announced the test last month and said it will help determine which banks are healthy enough to withstand surging unemployment and tumbling home prices. Results are due by late April, according to the Treasury.

Stress Tests

“We do stress tests all the time on all of our portfolios,” Kovacevich said. “We share those stress tests with our regulators. It is absolutely asinine that somebody would announce we’re going to do stress tests for banks and we’ll give you the answer in 12 weeks.”

Isaac Baker, a Treasury spokesman, said the stress test will protect the banking system.

“This program will help ensure banks have the capital they need to continue lending through an economic downturn that is more severe than expected and help restore confidence that our financial system is sound,” Baker said in an e-mail.

Wells Fargo fell 24 cents, or 1.7 percent, to $13.70 at 4 p.m. in New York Stock Exchange composite trading, leaving the stock down 54 percent this year."

others say the conditions go beyond protecting taxpayers and border on social engineering

From the NY Times:

"Some Banks, Citing Strings, Want to Return Aid

By STEPHEN LABATON

WASHINGTON — The list of demands keeps getting longer.

Financial institutions that are getting government bailout funds have been told to put off evictions and modify mortgages for distressed homeowners. They must let shareholders vote on executive pay packages. They must slash dividends, cancel employee training and morale-building exercises, and withdraw job offers to foreign citizens.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyond protecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money. The list includes small banks like the TCF Financial Corporation of Wayzata, Minn., and Iberia Bank of Lafayette, La., as well as giants like Goldman Sachs and Wells Fargo.

They say they plan to return the money as quickly as possible or as soon as regulators set up a process to accept the refunds. On Tuesday, Signature Bank of New York announced that because of new executive pay restrictions in the economic stimulus package, it notified the Treasury that it intended to return the $120 million it had received from the government only three months ago.

Other institutions like Johnson Bank of Racine, Wis., initially expressed interest in seeking bailout funds but have now changed their minds. Bank executives told The Milwaukee Journal Sentinel that one reason they rejected the government money was to avoid any disruption in the bank’s role in the local community, including supporting the zoo or opera company if they chose to.

One of the biggest concerns of the banks is that the program lets Congress and the administration pile on new conditions at any time.

The demands to modify mortgages or forestall evictions are especially onerous, some bank executives and experts say, because they could prompt some institutions to take steps that could lead to greater losses.

“We are taking an approach that wants the banks to help the economy and whether it is ultimately good for a particular bank is secondary,” said L. William Seidman, the former senior regulator during the savings and loan bailout. “Weak banks are being asked to do things that will erode their position.”

A senior Treasury official involved in the bailout effort said the administration was carefully trying not to do anything that could harm the banks and was giving financial incentives to modify mortgages. The official said the restrictions were part of a larger effort to clean up bank balance sheets and assist the economy.

“We’re having to take some very unpleasant actions when the alternatives are so much worse,” said the official, who spoke on condition of not being identified.

But a growing chorus of industry experts are warning that asking weak banks to carry out the government’s economic and social policies could increase the drain on the public purse. These experts say that the financial assistance, while helpful in the short run, could force weak banks to engage in lending practices that will lose even more money, and that the government inevitably will become more heavily involved in dictating how banks do business.

“I honestly believe the people in power pushing this policy see it as a win-win — as something that is good for the banking industry and good for homeowners and others,” said Douglas J. Elliott, a former investment banker who is now an economics fellow at the Brookings Institution. “But there is a slippery slope and there are potentially significant negative consequences.”

Mr. Elliott says that by modifying loans, banks that are already fragile could wind up losing more money.

“What gets us in real trouble,” he said, “is when we try to fudge things and pretend that something is in the direct interest of both the government and the financial institutions when it in fact costs the banks money or increases their risk levels.”

Take Fannie Mae and Freddie Mac, the housing-finance companies that the government now controls. In recent months, they have been told to spend billions of dollars buying bundles of mortgages for which there are no other buyers, and to let homeowners refinance their loans — even if they have no equity.

Such commands are echoes of the 1990s, when Fannie and Freddie tried to balance dueling mandates that required them to make a profit for their shareholders and to serve a public mission of increasing homeownership.

In service of both shareholders and what they asserted was the public good, they borrowed extensively in order to buy and hold mortgages in their own investment portfolios. They purchased billions of dollars in risky subprime mortgages.

As a consequence of having a public mandate, they also had a credit line with the Treasury and their risky business strategies were viewed by the markets as being guaranteed by the government.

To satisfy both mandates, the companies also faced fewer restrictions and were allowed to take on more debt than other financial companies. But when buyers began defaulting and home prices plunged, the companies nearly collapsed and last fall were placed under government conservatorship. Mr. Elliott said that some banks participating in the bailout program are now in the same conflicting position that Fannie Mae and Freddie Mac were in.

He and other experts also worry that, by relying on weak banks to carry out the administration’s or Congress’s policies, officials are not biting the bullet and shutting down weak banks that may be insolvent.

At the height of the savings and loan crisis in the 1980s and 1990s, Congress and regulators adopted new rules known as “prompt corrective action” that required the government to quickly close weak financial institutions if they could not raise money to absorb mounting losses.

The rules were a response to a consensus that keeping weak institutions open longer, under an earlier practice known as forbearance, damaged healthy banks competing with the government-subsidized ones and ultimately destabilized the banking system. By shutting weakened institutions before their losses grew, prompt corrective action was also seen as less costly to taxpayers and the deposit insurance fund.

Administration officials say that some of the banks at issue today are simply too large to be seized by the government, making comparisons to the savings and loan crisis less meaningful.

Moreover, they say, the public outrage over the growing cost of the bailout makes it politically imperative that they exert greater control over the way the money is being spent.

But by keeping weak banks operating, the markets continue to sink and taxpayer costs are mounting, outside experts said. “The current policy is likely to result in weaker banks,” Mr. Seidman said. “And keeping insolvent banks in operation does not benefit the system.”

Some community bankers, whose institutions are stronger than the large money center banks, agree.

C. R. Cloutier, the president of MidSouth Bank of Lafayette, La., and a survivor of the savings and loan debacle, said that his institution received $20 million from the rescue fund because he and his board believed it was patriotic and would help them offer loans during a recession.

But faced with what he says is an unwarranted stigma of participating in the program, as well as the new restrictions on banks taking the money, he is now considering whether to return the money, as other institutions have sought to do.

“Two things you learn in the banking business,” Mr. Cloutier said. “The first is, concentration is bad. We now have 64 percent of deposits in eight institutions. The second rule is, your first loss is your best loss. Get it over with. Don’t pump water in a dead fish.”

Me:

"But by keeping weak banks operating, the markets continue to sink and taxpayer costs are mounting, outside experts said. “The current policy is likely to result in weaker banks,” Mr. Seidman said. “And keeping insolvent banks in operation does not benefit the system.”

Some community bankers, whose institutions are stronger than the large money center banks, agree. "

Perhaps Mr.Seidman, or even these small bankers, can explain how it could be the case that we had no plan to seize insolvent large banks, save merging them with other large banks, at whatever cost to the taxpayers. It seems FDIC 101 to have a plan for seizing ANY insolvent bank. Isn't that their job?

Don the libertarian Democrat

— Don, Tacoma, WA

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.

"Wells’ acquisition of Wachovia in late September fended off an earlier government-assisted bid from Citigroup"

From the FT, some deals are finalizing:

"Shareholders are on Tuesday expected to vote in favour of two bank deals forged at the height of the financial crisis, helping to mark the end of a transformative year for the US banking industry.

The fire sales of Wachovia and National City took place under regulatory pressure to stabilise the banks’ deposit bases after heavy mortgage-related losses led to concerns over capital. For the buyers – Wells Fargo( VIA TARP ) and PNC Financial respectively – the deals are strategic victories, emblematic of how stronger players have used the crisis to expand.

Wells’ acquisition of Wachovia in late September fended off an earlier government-assisted bid ( FROM THE FDIC )from Citigroup, winning regulatory support both by giving Wachovia’s shareholders a better price and getting the Federal Deposit Insurance Corporation off the hook for Wachovia’s losses( WHICH IS WHY THEY SOUGHT OUT CITIGROUP. HOWEVER, ONE WONDERS IF THE FDIC WILL HAVE CREDIBILITY IN DOING THIS GOING FORWARD, OR INVESTORS WILL DOUBT THEIR ABILITY TO SEAL THE DEAL ).

The deal will create a national retail banking powerhouse( TOO BIG TOO FAIL ), greatly expanding Well’s West Coast franchise east of the Mississippi river and creating a coast-to-coast network of 12,200 branches – larger than those of Bank of America and JPMorgan Chase.

PNC, based in Pittsburgh, will become the 8th-largest US depository institution( TOO BIG TO FAIL. BOTH HAVE JUST PURCHASED GOVERNMENT INSURANCE ).

The deals were the first to take advantage of a tax ruling that allows acquirers to use the built-in losses of target banks to reduce their own taxable income, a factor that helped clinch the Wells-Wachovia transaction in ­particular( TARP. PAULSON'S CHANGES ).

PNC’s acquisition of National City for $5.58bn in cash and stock was also facilitated by a $7.7bn capital commitment from the US Treasury under its capital purchase programme( DO TELL ). PNC, which had shied away from doing a deal without government assistance( AND YOU STILL BELIEVE THAT THESE PEOPLE DESPISE GOVERNMENT? ), said this allowed it to acquire National City using “attractively priced” government money to help cope with the potential effects on its balance sheet.

Wells Fargo received $25bn under the Treasury’s programme( GOVERNMENT AID. AGAIN ), but said it still intended to raise $20bn of new capital to help fund its acquisition. Wells raised a total of $12.6bn, at a heavy discount, in November.

Yet, while the deals are blockbusters for Wells and PNC, neither is without risks. In both cases, the greatest of these lies with managing the targets’ troubled mortgage portfolios.

Wells is set to take on Wachovia’s $312bn portfolio of residential and commercial mortgage debt, on which Wells expects to take a $40bn writedown when the deal closes and a total of $60bn worth of losses over the life of the portfolio. PNC expects National City’s portfolio to experience $20bn of losses.

Wells’ integration with Wachovia will also proceed in the shadow of continued legal costs from its skirmish with Citigroup. Citi has vowed to pursue its claim for up to $60bn in damages “vigorously”( DUE TO THE FDIC VS TARP DEVELOPMENT ).

● The US Federal Reserve Board on Monday approved commercial finance firm CIT Group’s bid to become a bank holding company( JOIN THE CLUB ), clearing the way for it to access up to $2.5bn in capital from a financial rescue programme, Reuters reports from Washington."

"I'm betting the theory of regulatory competition is going to go on holiday for a few years"

Justin Fox with a post about what I call Rationalization:

"The top West Coast regulator of the Office of Thrift Supervision has been removed from his jobwhile the Treasury Department's inspector general looks into some weirdness surrounding backdated capital infusions into since-failed thrift IndyMac( I POSTED ABOUT THIS STORY ). Add that to the demise of the biggest savings institution regulated by OTS, Washington Mutual, the loan troubles inherited from OTS-regulated Golden West Financial that forced Wachovia into a merger with Wells Fargo, and the various shenanigans associated with OTS-regulated Countrywide Financial, and things really aren't looking good for the agency. Oh, and don't forget AIG, which due to a quirk in our country's deeply quirky regulatory setup was also overseen at the holding company level by OTS( PLEASE. NO MORE ).

The OTS was created as a semi-autonomous division of the Treasury Department 1989, to take over the regulatory duties of the Federal Home Loan Bank Board, which was seen as identifying too closely with the savings and loan industry to do a good job of supervising it( YOU CAN'T BE SERIOUS ). I was the OTS beat writer for American Banker in the mid-1990s, and in those days the agency was trying hard to be professional and just as tough as the other banking regulators. But there was still lots of talk of looking out for the interests of the thrift industry, and ensuring the attractiveness of the federal savings bank charter that OTS oversaw( HOW CHUMMY ).

That's just the natural tendency of any specialized industry regulator, and I'm certainly not going to blame OTS for our current troubles ( I WILL GIVE THEM A TINY PORTION OF BLAME, IN THAT THEY ALLOWED REGULATORY SHOPPING ). The craziest of crazy mortgage lending was done by mortgage brokers selling to Wall Street. The OTS-regulated thrifts mostly just followed( THAT'S ENOUGH FOR BLAME ) in their lead. But OTS didn't stop them, I imagine, because people there were worried about thrifts losing market share( YES ). That, and they had been drinking the same home-prices-never-go-down Koolaid ( I DON'T BUY THIS KOOLAID ) as everyone else in real estate. The regulators were of the industry, not above it( NICE ).

This country's Balkanized financial regulatory structure (just for banks and savings institutions there's the OTS, the OCC, the FDIC, the Federal Reserve, and all the state banking commissioners) is mostly the product of history and bureaucratic turf wars. But for the past few decades there's also been a theory—regulatory competition, it's called—to back it up.

Having different state and federal entities compete for the privilege to regulate a particular company results in more market-friendly regulations, the thinking( THAT'S WHAT IT IS UNTIL THE REAL WORLD COMPLIES ) goes. That may be true, but more market-friendly regulations are also generally weaker regulations( TRUE ), and in the financial sector weak regulations can eventually end up destroying the very markets they're being friendly to. As we've seen lately( I AGREE. SOMETIMES, POORLY ENFORCED REGULATIONS ARE WORSE THAN BOTH ZERO REGULATIONS AND TOUGHER REGULATIONS ).

I'm betting the theory of regulatory competition is going to go on holiday for a few years, maybe decades. The OTS will be among the first victims of the new intellectual climate—Hank Paulson already proposed getting rid of it last spring. Any guesses as to who's next after that?"

I've already said that the whole system needs to be Rationalized. In other words, streamlined.

"That helped ignite the current panic, which was exacerbated by a drumbeat of bleak economic news."

From the WSJ story about the Citi deal:

"Citigroup has tried repeatedly to rid itself of its exposure to those assets -- and nearly hammered out a similar arrangement with the government nearly two months ago.

In late September, the company reached an agreement for a government-financed acquisition of Wachovia Corp. Under that planned deal, Citigroup and the government were going to divvy up the losses on $312 billion of assets, with Citigroup absorbing the first $30 billion in losses and the government shouldering the remainder.

Citigroup described that arrangement as intended to insulate it from Wachovia's risky mortgage assets. But Citigroup also would have been able to unload some of its own assets, according to people familiar with the matter.

That deal unraveled in less than a week, after Wells Fargo & Co. emerged with a higher bid that didn't require direct government backing. That deprived Citigroup not only of a way to dump its risky assets but also of a deep pool of deposits, which would have substantially strengthened its access to stable low-cost funding.

Shortly after the Wachovia deal fell apart, Citigroup pitched the idea to the government of it helping to protect the company against some of its losses. Citigroup executives argued that the government should help the company after Wachovia slipped away, according to a person familiar with the matter. But federal officials balked at the idea."

That's how the Wachovia deal impacted the current Citi problems.

"As recently as one month ago, Citigroup had hoped to be able to unload some of those assets to the U.S. government through its Troubled Asset Relief Program, according to people familiar with the bank's plans. But when Treasury Secretary Paulson earlier this month shelved plans to use TARP to purchase banks' bad assets, that option vanished."

This is interesting. TARP pulled the rug out from under Citi with the Wachovia deal, and TARP not buying toxic assets calcified the toxic assets market so Citi could get rid of some of its toxic assets. Maybe Paulson felt that he owed Citi.

"Last Monday, Mr. Pandit said in a meeting with employees that Citigroup was scrapping plans to try to sell about $80 billion in risky assets. Investors and analysts interpreted the move as a sign that Citigroup either was unable to sell the assets, or would have had to incur hefty losses in the process.

Two days later, Citigroup announced it was buying $17.4 billion in assets from its structured-investment vehicles -- complex entities whose holdings included risky mortgage-linked securities -- and faced a $1.1 billion loss due to their diminished values.

The back-to-back moves, coupled with existing fears about Citigroup's massive off-balance-sheet holdings, stoked investor fears that Citigroup could be swamped by toxic assets flooding back onto its books. That helped ignite the current panic, which was exacerbated by a drumbeat of bleak economic news."

I'm on record saying that this was a panic reaction, and not sensible, so I'm still not sure that this was necessary. I didn't doubt that the government would step in if it had to, but I'm not sure, absent panic, we'd have been in this position.

"Government officials could face requests from other banks for similar help shoring up their balance sheets. Banks, hedge funds, and private equity firms have urged Capitol Hill and government officials to restart the asset-purchase program in recent weeks.

"The problem is that other banks would want to get in line" for such government support, says Thomas B. Michaud, a vice chairman of investment bank Keefe, Bruyette & Woods Inc. "Is there enough money to do that?"

I think that we can guarantee this.

"A senior Republican senator is seeking an investigation into potential conflicts of interest "

Let's see if we can understand this story from the FT. First, here's my post about the problems with TARP:

"Saturday, October 4, 2008

Problems With The Bailout

From the NY Times article "For Treasury Dept., Now Comes Hard Part of Bailout", I see the following problems with the plan as envisaged:

1) Possible conflicts of interest with the administrators of the plan.

2) Overpaying for assets.

3) Doesn't do enough to ease credit markets or makes it worse.

4) When the assets are eventually sold, there is a huge and unanticipated loss.

5) Lobbying by hedge funds, etc.

Are there others? "

See Problem 1:

Also, read my post here about William Gross, who's my guy, and I still thought there could be problems.

Now, from the FT:

"A senior Republican senator is seeking an investigation into potential conflicts of interest among former Goldman Sachs executives serving at the US Treasury and whether any officials exceeded their authority by implementing a controversial tax change without the approval of Congress.

Chuck Grassley, the most senior Republican on the Senate finance committee, asked Eric Thorson, inspector-general of the Treasury, to investigate the "independence" of several Treasury officials who formerly worked at Goldman Sachs and serve as advisers to Treasury secretary Hank Paulson, the former chief executive of the Wall Street bank.

Mr Grassley said in a letter to Mr Thorson that there was reason to be concerned that “relationships” between the officials and board members at two merging banks, Wells Fargo and Wachovia, gave the “appearance of preferential treatment”.

Good work Sen. Grassley. You're right on the ball.

"Mr Grassley singled out Robert Steel, a former Goldman official who worked under Mr Paulson at the Treasury before he became chief executive of Wachovia.

Mr Grassley is specifically concerned with a change in the tax code the Treasury initiated in late September that saved some institutions tens of billions of dollars and paved the way for Wells Fargo's acquisition of Wachovia.

Citigroup was at the time also bidding for Wachovia, but was ultimately trumped by Wells Fargo, in part because it would not have received any benefit from the tax change because of its losses.

The September 30 “notice” by the tax authorities, which fall under Treasury's jurisdiction, altered a section of the tax code that had previously prevented tax-motivated acquisitions of loss-making corporations. In effect, the notice eradicated a limit on the amount of taxable income an acquiring bank could deduct after a takeover.

It has been estimated that the change could save Wells Fargo nearly $20bn (€15.9bn, £13.6bn)."

If you want to understand this, read my recent post here.

Back to the FT:

"Mr Grassley, who has a reputation for aggressively uncovering and pursuing tax evasion, has a previous working relationship with Mr Thorson, who served as chief investigator for the Senate finance committee and whom Mr Grassley once praised for having “integrity and courage”.

Last week, Mr Paulson defended the code change and said it had been done through an “administrative process” that was “quite legal”. The Treasury secretary said that the previous tax policy was “impractical and unworkable” in the current economic environment.

The Treasury said on Sunday it was reviewing the letter. Wachovia said “to the best of our knowledge” the company was not involved in the tax change. It added that Mr Steel did not have a severance agreement."

Okay. Good for Grassley. But please, nobody tell me this wasn't expected. The problem with TARP was that you had to hire people from some of the firms involved in the crisis, and the plan, the way it was constructed, as a hybrid plan, looked arbitrary, and reeked of cronyism. Calling Charles Krauthammer in my recent posts about his article on the Auto Bailout. TARP was pushing consolidation, meaning that it had to look like it was favoring some banks over others. That was one of the problems about letting insolvent banks fail, as Anna Schwartz wanted. It could look like some banks were being saved while others cut loose, and the solvency of the bank could meld into an issue of preferential treatment. Were they really solvent/insolvent?

This was a huge negative with the plan from the beginning, as was the problem of lobbying, which has also been serious.

"Paulson did it quietly and in the background": Then How Did I Know It?

I wonder how many times that I have to read this. From 124 Monkeys:

"I had completely missed this story by Amit Paley until Michael Scherer put up a blog post about it. Basically, the Treasury Department completely bypassed Congress and the Constitution* to revise Section 382 of the U.S. Tax Code. The why of it is pretty obvious on its face. Paulson believes that we’re on the verge of another Great Depression and he intends to not make the mistakes of letting banks fail and contracting the money supply that caused the first one.

*you know, that pesky document that spells out and specifically states that Congress and only Congress shall have the power to tax the people and pass laws about taxation

Paulson’s original plan was to buy up the bad securities and encourage the credit markets to start trading and lending again. Part of that scenario would definitely involve banks buying up other banks that had tons and tons of losses and bad assets on their books. In order to encourage such behavior, Paulson ordered a roll back of Section 382 to make buying companies with lots of losses - either on their books or waiting to be declared - more attractive.

Paulson did it quietly and in the background because he knew the top down nature of his plan, which essentially was “save Wall Street, let the solvent banks carry the overall economy through the crisis, screw the little guys” would go over very, very badly with Congress who would need votes from all those little guys to get re-elected in a month.

What I don’t understand is why this roll back wasn’t rolled back when the TARP plan changed to bank nationalization. Plus, its like totally unconstitutional and stuff."

Here's my post from, read it carefully:

Saturday, October 4, 2008

Not Really Free Market After All

Paulson's stimulus plan:

"Treasury Secretary Henry Paulson’s plan, which is now law, is fiscal stimulus that will be injected directly into the banking system to supplement almost nonexistent private-sector lending with government cash and determination. Mr. Paulson may be shooting the right weapon at the right time because it will help rescue the banks while restarting corporate and consumer lending.

But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.

With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo."

Your government's dollars at work.

And this post:

Saturday, October 4, 2008

Are Regulators Always Wise?

On the Wachovia sale:

"Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit."

You think?

And this post:

Monday, October 20, 2008

“One purpose of this plan is to drive consolidation.”

Score one for Surowiecki. From the NY Times:

"As the Treasury embarks on its unprecedented recapitalization, it is becoming clear that the government wants not only to stabilize the industry, but also to reshape it. Two senior officials said the selection criteria would include banks that need more capital to finance acquisitions.

“Treasury doesn’t want to prop up weak banks,” said an official who spoke on condition of anonymity, because of the sensitivity of the matter. “One purpose of this plan is to drive consolidation.”

I understand this as a temporary move, but don't find consolidation, or creating very large banks, a positive development in the long run.

As well, I don't think that a credit stimulus plan that doesn't stimulate lending to be very useful.


Okay. These three posts explain everything. Citigroup had a deal to buy Wachovia brokered by the government. When the TARP was passed, which included the provisions that I knew about at the time, and that people are claiming were hidden, Wells Fargo took advantage of the new law to put a better bid in to buy Wachovia. This put the government in the odd situation of brokering a deal with Citigroup, only then to pass tax subsidies that led to Wells Fargo making a better deal. A suit by Citigroup then ensued.

Also, the TARP plan was designed to acquire toxic assets from banks, not recapitalize them as happened. So, the original plan for recapitalization was to pass these tax subsidies so that banks could merge, making recapitalization easier, and, hopefully, making the banks more profitable, hence more able to pay us back and survive, since there was less competition.

Now, if you followed the Wachovia deal, or tried to understand how TARP could actually work and what it said, these provisions were obvious from the beginning. So, these stories are not news. The only news I can find is that some people claim that it's unconstitutional. But, I believe that is was in the bill that passed, so I'm missing something about this argument. It could be correct, but I need to understand it better.

But, if an amateur blogger like me knew this, how could all these experts not know it?

On Government Intervention And Complexity

Great article by Steven M. Davidoff in the NY Times on the Wachovia deal:

"The Law of Unintended Consequences Rules the Day

The slew of legislation, regulation and government intervention is going to engender a cascade of unintended consequences. We saw the first signs of this in the Wachovia deal. The Tuesday after it was announced, the Internal Revenue Service announced that banks would be permitted to deduct on an accelerated basis losses on loans or bad debt acquired in any bank acquisition. This rule will allow Wells Fargo to take substantial tax deductions -– Wells Fargo conservatively predicts a $74 billion loss on Wachovia’s $498 billion loan portfolio. That is a big tax deduction, and no doubt this made Wells Fargo’s decision to bid easier. Incidentally, this means the Wells Fargo bid may ultimately cost the government more money than the Citi transaction, because of the lower taxes that Wells Fargo would pay.

In addition, the parties are battling over the meaning of 126(c) of the TARP bill, for Troubled Assets Relief Program, that Congress passed last week. Each side contends that this provision nullifies the other’s agreement with Wachovia. But at this point, no one definitively knows what the provision means."

My problem with this statement is the problem I had with Bob Barr calling this a non-government solution. Excuse me, but tax policies are government interventions.

Here's another quote:

"Complexity Is Death in Today’s Market

Citi went with a letter of intent because it was arranging an asset purchase. Carving out these depository institutions from Wachovia and negotiating the arrangements could not be done overnight. Hence the use of a term sheet, and perhaps in this haste the reason for the failure to put in a break-up fee. But the need to negotiate these complex documents allowed Wells Fargo to slip in and make a higher bid on a 27-page merger agreement that needed little negotiation. Speed is everything in this market and complexity unduly delays things."

I agree with this, which is why I favored the Swedish Plan and not TARP.

Barr Misses Tax Rebate

Bob Barr says the following on Huffington:

"Even more dramatically, a bidding war has broken out between Citigroup, which had been tapped by the Federal Reserve to save troubled Wachovia bank, and Wells Fargo, which jumped in with an unexpected $15 billion purchase offer. The two are now battling in court over the right to buy a bank seen as financial road kill only last week."

However, he missed this:

"But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.

With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo."

Not exactly free market, but close enough for some.

Not Really Free Market After All

Paulson's stimulus plan:

"Treasury Secretary Henry Paulson’s plan, which is now law, is fiscal stimulus that will be injected directly into the banking system to supplement almost nonexistent private-sector lending with government cash and determination. Mr. Paulson may be shooting the right weapon at the right time because it will help rescue the banks while restarting corporate and consumer lending.

But Mr. Paulson’s fiscal-stimulus work didn’t end with the bailout bill.

With hardly anyone noticing, on Wednesday he pushed through very technical and obscure changes to tax regulations that provide a “tax subsidy” for acquirers of troubled banks. Just as automakers stimulate car sales through rebate checks, the Treasury is providing a form of tax rebate to acquirers of troubled banks. Everyone can thank Hank Paulson and his stealth tax-driven fiscal stimulus for the astonishing news that Wachovia was being acquired by Wells Fargo and not Citigroup. It was Mr. Paulson’s tax subsidy to Wells Fargo that provided the fiscal grease to make this deal happen. Pundits who point to the deal and proclaim that the “free markets work without government help” don’t understand the motivating effect of several billion dollars of tax benefits to Wells Fargo."

Your government's dollars at work.

Are Regulators Always Wise?

On the Wachovia sale:

"Lawyers not involved in the battle said that Wachovia could defend the Wells Fargo deal by arguing that it is better for its shareholders. Wachovia is likely to claim that its fiduciary obligations — its responsibility to protect the interests of its investors — required it to consider the Wells Fargo bid and, given its higher price, to accept that bid.

The litigation could put regulators in a difficult spot. The Wells Fargo deal may be better for taxpayers, but if it succeeds, in the future other financial institutions may not be willing to help the government, as Citigroup did, because of the risk that they might not reap the anticipated benefit."

You think?