Late Change in Geithner's Bank Plan

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Late Change in Course Hobbled Rollout of Geithner's Bank Plan - washingtonpost.com: "Just days before Treasury Secretary Timothy F. Geithner was scheduled to lay out his much-anticipated plan to deal with the toxic assets imperiling the financial system, he and his team made a sudden about-face.

According to several sources involved in the deliberations, Geithner had come to the conclusion that the strategies he and his team had spent weeks working on were too expensive, too complex and too risky for taxpayers.

They needed an alternative and found it in a previously considered initiative to pair private investments and public loans to try to buy the risky assets and take them off the books of banks. There was one problem: They didn't have enough time to work out many details or consult with others before the plan was supposed to be unveiled.

The sharp course change was one of the key reasons why Geithner's plan -- his first major policy initiative as Treasury secretary -- landed with such a thud last Tuesday."

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PIMCO - IO Feb 2009 Gross Beep Beep

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PIMCO - IO Feb 2009 Gross Beep Beep: "The current financial and economic crisis is difficult to appreciate, not only for the drop in elevation, but because of the swiftness of the declines. It’s been a Wile E. Coyote 12 months – straight down like a dead weight. A year ago, global equity prices were nearly twice today’s levels and recession was only a whisper on the lips of the gloomiest of economists. Today, descriptions drawing parallels to the Great Depression make it obvious that a major shift in economic growth and its historic financial model, as well as policy prescriptions for its revival, are underway. Most of the world’s connected economies and its citizens are in shock, conscious but not fully aware of the seismic shifts that will unfold in future years.

PIMCO’s thesis for several years has held that the levered global economy long ago morphed from a banking-dominated regime to one that hid behind securitized lending and structures resembling a “shadow banking” system. SIVs, hedge funds, CDOs and increasingly levered mortgage and investment banks fueled asset appreciation in all investment markets, which in turn propelled real economic growth and employment to unsustainable levels. But, with U.S. housing prices as its trigger, the delevering process did a Wile E. Coyote and headed over the cliff in"

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PIMCO - IO Feb 2009 Gross Beep Beep

PIMCO - IO Feb 2009 Gross Beep Beep: "But stopping the decline of asset prices can be and has been attempted in numerous, seemingly uncoordinated ways. Recapitalization of the banks has been the major thrust, in the hopes that banks would extend credit which would reinvigorate asset pricing. Those who argue strongly for a recapitalization of the banking system, however, may be missing the distinction between the banking system as we once knew it, and the “shadow banking” system that superseded it. Jim Bianco, who heads up the research tank bearing his own name, brought the difference to mind in a recently produced piece entitled, “When Will The Banks Start Lending?” His conclusion was that banks already were – lending – but it was the “shadow system” (my words) that was holding up the parade. According to his analysis, shown in Chart 1, securitization has for several years exceeded bank loans as a percentage of private credit market debt. In contrast to recent headlines, however, banks have been picking up their lending, but it has been the “shadow banks” that have faltered. That makes sense. While banks may have tightened their lending standards, fresh capital from the TARP has made it possible to make new loans. The shadow banks, however – hedge funds, investment banks, and str"

PIMCO - IO Feb 2009 Gross Beep Beep

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PIMCO - IO Feb 2009 Gross Beep Beep: "PIMCO’s advice to policymakers is as follows: you can’t bail out everyone, yet economic recovery is not possible unless certain critical asset sectors are not only reliquefied, but rejuvenated in price. The prior Administration’s focus on the banks has been critical but unidimensional. The shadow banking system with its leverage and financial innovation, powered a near 25-year global economic expansion, but it is the delevering of those hidden quasi-banks that is now threatening its petrification. Policymakers should not focus entirely on one-off bailouts of large real estate developers, municipalities, or even credit card issuers like they have with Citi, BofA, and AIG. Rather, they should recognize that supporting critical asset prices such as municipal bonds, CMBS, and even investment grade corporate bonds is a necessary step towards eventual economic revival. Capitalism at its philosophical and practical center depends on credit, and while new loans can be and are being advanced via the banking system, it’s a much more difficult task to force shadow banks to lend. That lending depends on securitization which in turn depends on stable and eventually higher asset prices than currently exist. The original focus of the TARP was on asset prices, but the prior Administration quickly lost its way or perhaps its"

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Zero Hedge

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Zero Hedge: "So does the upcoming bailout have the makings of actually fixing the structural problems in the economy? Some thoughts on the various approaches, from BAC:

Aggregator Bank

This is an off balance sheet vehicle that pools multiple bank’s bad assets into one “Bad Bank” or “Aggregator Bank” that can both manage and dispose of the bad assets it buys from banks. To alleviate the pricing problem, the bad bank could focus on trading account securities and loans that have been most heavily marked down. By either taking these at the latest mark, or standardizing these marks across banks of the (relatively) more price transparent assets, the pricing issue – setting the correct price to protect taxpayers – could be avoided. The impact of this move would remove further downside uncertainty for the banks, freeing them up from those assets (while at the same time transferring all future upside to the government as well). However, that pool would be limited to those deemed sufficiently marked down to be able to avoid both price uncertainty and the potential that by setting too low of a price, further capital inadequacy issues would be exacerbated. These were the core problems of the first TARP program.

Ring fencing

This approach has two attractions. First, it avoids having to deal with the pricing issue. This is important for loans with no ready price an"

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Key report on financial reform

Image via WikipediaImage via WikipediaImage via WikipediaFrom The Economist - An important new report on regulating the financial industry released Thursday (Jan 15) should play a crucial role in shaping the financial reform agenda.


The Group of Thirty’s “Financial Reform: A Framework for Financial Stability” is important both because of the concreteness of its 18 recommendations and because of who was involved. The authors were led by Paul Volcker, Tim Geithner, Larry Summers, and Jean-Claude Trichet, (president of the European Central Bank).

Banks:

• banks deemed systemically important would face restrictions—in the form of “strict” capital requirements—on high-risk proprietary activities, that is bets made using their own money
• strongly encourage investment banking arms of banks to focus on client businesses, such as merger advice, rather than trading
• separating these needed because they seem “unmanageable in financial conglomerates"
• also require raising the level at which banks are well-capitalised
  

Non-bank financial institutions:

• pools of private capital that live on borrowed money should have to register with a regulator and produce regular reports, disclosing things such as leverage and performance.
  
• biggest of them would even be subject to capital and liquidity standards.
  
• bank-like regulation for money-market funds
  
• legislation in America to set up a mechanism for dealing with non-bank failures

Other key issues:

• Central banks should be more involved in supervising banks—but to safeguard integrity the role of chief firefighter should be played by others once trouble ignites. Central bankers “need to be more concerned about financial stability, but less involved in crises,”
• formal system of regulation for over-the-counter derivatives, such as the type of credit swaps that sank American International Group
• urges regulators to force banks to hold on to a significant portion of credit risk when they package loans into securities and sell them on, in order to curb reckless underwriting of mortgages and other debt.
  
• calls for a rethink of certain accounting principles that may exacerbate downturns through pro-cyclicality, including the practice of marking assets to the current market value;
  

The other important message is that a global crisis requires a global fix. Mr Volcker was typically modest, insisting it was more an agenda for discussion than a hard-and-fast blueprint. But, given his closeness to Mr Obama, it is hardly far-fetched to imagine much of it becoming official policy. All that talk of the biggest overhaul of financial regulation since the 1930s just took a step towards reality.
"

Fed Has Already Adopted Quantitative Easing

Image via WikipediaPer the latest Market Watch from Barclays Capital:

"In recent weeks, there has been a rather odd debate over whether the Fed will adopt Japanese-style quantitative easing: that is, flood the banking system with reserves to induce more lending. In our minds, the Fed has already gone well beyond anything the Japanese ever did. It has already dramatically expanded bank reserves, and unlike the Japanese, it has used these funds to intervene aggressively in many parts of the capital markets. This is quantitative easing on steroids.

If our baseline forecast is correct, it could mean a broad-based shift in the capital markets as a variety of risk aversion trades unwind. Once the markets believe policy-makers are succeeding in containing the capital markets and economic crisis, we would expect a rally in risky assets such as credit spreads and equities; a bear steepener in the treasury market, as the Fed holds down the short end and budget deficit concerns push up the long end; a weakening of the dollar as safe-haven inflows ease; and a rally in commodity markets as investors price in an eventual recovery in global demand."

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Bloomberg.com: Exclusive

Image via WikipediaBarclays Dickers on Loan Waivers as European Banks Fight More Writedowns: Royal Bank of Scotland Group Plc and Barclays Capital are staving off writedowns by propping up European companies with plummeting loan values."

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Is Laissez-faire dead?

Image by jetzenpolis via FlickrSome strong words. Read full article here: Are sovereign investment funds the new economic model?

"The Western financial system, as we know it, is dead. Not tarnished or cracked. Dead. With its demise go the Anglo laissez-faire financial mechanisms of the Reagan-Thatcher-Kohl era that have held sway for nearly three decades. The American subset, affectionately referred to as “the cowboy experiment,” run by self-centered eccentrics, is at the root of this collapse. After all, New York, not London, had been the creator of new financial products, strategies and entities. We were the innovators. Leverage was the tool. And greed was the measure of success."

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Bloomberg.com: Economy

Bloomberg.com: Economy: "Oct. 14 (Bloomberg) -- Treasury Secretary Henry Paulson urged banks getting $250 billion of taxpayer funds to channel the money to customers quickly to halt a credit freeze that's threatening to bankrupt companies and hammer the job market.

``Leaving businesses and consumers without access to financing is totally unacceptable,'' Paulson said in Washington. He rolled out the emergency program after a crisis of confidence in the financial system last week spurred the biggest stock sell- off since 1933. Paulson told companies getting the government funds to ``deploy'' the money in loans.

The Treasury chief was forced to change tack from an initial plan to buy distressed assets from banks after the financial panic caused banks to hoard cash and send money market rates to record levels. In its biggest effort yet to halt the 14-month credit rout, officials will also offer guarantees on new bank debts and start purchasing commercial paper in two weeks."

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Bloomberg.com: Economy

Bloomberg.com: Economy: "Fragile Banks" The Treasury also said it is working on another element of its plan that will specifically address banks that may be on the brink of failure. Those banks will face different guidelines than healthier firms who take part in the asset-buying and capital injection programs."

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Bloomberg.com: Economy

Bloomberg.com: Economy: "The Treasury's stock buying program will begin with nine banks, which it didn't name. People briefed on the matter said $125 billion will be disbursed in days: Citigroup Inc., Wells Fargo & Co., JPMorgan Chase & Co. and a combined Bank of America Corp./Merrill Lynch & Co. each will get $25 billion, while Morgan Stanley and Goldman Sachs Group Inc. will get $10 billion each. Bank of New York Mellon Corp. said it will receive about $3 billion and State Street Corp. said it's getting $2 billion."

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Bloomberg.com: Economy

Bloomberg.com: Economy: "About 100 or fewer of the 7,000 U.S. banks with less than $10 billion in assets may consider taking advantage of the program, said Camden Fine, president of the Independent Community Bankers of America, a Washington trade group representing about 5,000 banks.

``The headline in the local paper that everybody's going to read is, `Local Bank Seeks Government Assistance,''' Fine said in an interview. ``That doesn't look real good to the folks in the local towns.''"

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Still Holding Back - Barrons.com

Still Holding Back - Barrons.com: "Where do you see all of this going?

I want to emphasize how little I understand all of the intricate workings of the global financial system. I hope that someone else gets it, because I don't. And I have no idea, really, how this will work out. I certainly wish it hadn't happened. It is just so intricate that all I can conclude, by instinct and by reading the history books, is that it will be longer, harder and more complicated than we expect."

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Bloomberg.com: U.K. & Ireland

Bloomberg.com: U.K. & Ireland: "Oct. 13 (Bloomberg) -- U.K. Prime Minister Gordon Brown's government is set to buy majority stakes in Royal Bank of Scotland Group Plc and HBOS Plc to contain the worst financial crisis since the 1930s, two people familiar with the matter said."

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Contagion could fracture the eurozone

The Guardian: "Somehow you always sensed that it was tempting fate when the German finance minister, Peer Steinbrück, said last month that the credit crunch was an American matter. How long would it be before the contagion that knocked the stuffing out of Wall Street and the City would claim a eurozone bank or two?

Well, the hubristic words were barely out of Steinbrück's mouth before we had our answer. The Belgians and the Dutch bailed out Fortis bank; the Irish made a blanket guarantee on deposits amid fears that at least one, and probably two, of their big banks were about to go belly up.

Steinbrück's musings on whether the US was losing its status as the world's economic hegemon were interrupted by the need to seek approval from Brussels for the ill-fated €35bn (£27bn) rescue of Germany's Hypo Real Estate banking group. And by the weekend the leaders of Europe's big four - Germany, France, Italy and Britain - were calling for an emergency global summit next month. A lesson for finance ministers: try not to anger the gods."

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Bloomberg.com: Exclusive

Bloomberg.com: Exclusive: "Making a Point

When Bair found herself in control of IndyMac in July, she used the bank to make her point. She suspended foreclosures on $15 billion worth of mortgages and sought to work out deals for the 60,000 borrowers who were behind in payments.

``My hope is that the program for IndyMac Federal Bank will be a catalyst for others across the country to modify their loans more rapidly and systematically,'' she told lawmakers at a hearing last month."

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