naked capitalism

SilverDollar says:

Wow, this cash infusion now sounds like it’s just a wing and a prayer!

Anonymous says:

How about: who do you really think is working for who?

Dick Durata says:

I’m shocked!

doc holiday says:

The premise of perpetual preferred stock is fairly open ended and each bank will list in its charter what rights are allowed; you go to any bank SEC docs and see how they define shareholder rights regarding preferred shares, i.e, Treasury does not run the mechanics of corpoarate rights.

Thus, I’m not sure what right Treasury has to dictate terms to corporations, and as you will call, Treasury doesn’t have authority to be in the business of commerce. See Treasury Powers. Think in terms of Treasury telling Buffett how to run Berkshire, it’s the other way around, i.e, Buffett just tells Treasury what it wants.

Also see: further stupidity and retarded crap:

Both the role and effects of CDS in the current market turmoil have been greatly exaggerated,” Robert Pickel, chief executive officer of the International Swaps and Derivatives Association, said in testimony before the Senate Committee for Agriculture, Nutrition and Forestry yesterday. “To say that CDS were the cause, or even a large contributor, to that turmoil is inaccurate.”

Credit-default swap trading expanded 100-fold since 2001 as insurance companies, hedge funds and investors used the derivatives to protect against bond losses and speculate on companies’ ability to repay debt. Lawmakers and regulators have called for more oversight of the $54.6 trillion market after the bankruptcy of Lehman Brothers Holdings Inc., which was among the top 10 backers of the contracts.

Blaming credit-default swaps for the credit crunch “reflects confusion of the various financial products that have been developed in recent years,” Pickel told lawmakers. The securities have a beneficial role to play in helping financial markets allocate risk, he said.

Max says:

I’ve been saying this since they first announced the bailout plan. There’s no way to force the banks to lend, therefore the plan is useless.

Another few billion wasted.

doc holiday says:

A few examples:

The issuance of Enron preferred stock, while providing desired flexibility in connection with possible acquisitions and other corporate purposes, could adversely affect the voting power of holders of Enron common stock and the likelihood that such holders will receive dividend payments and payments upon liquidation and could have the effect of delaying, deferring or preventing a change in control of Enron.

>> Noncumulative perpetual preferred stock is similar to common stock in its ability to absorblosses. If the Board of Directors does not declare a dividend on noncumulative perpetual preferred stock in any dividend period, the holders ofthe instrument are never entitled to receive that dividend payment. JPMorgan Chase’s outstanding noncumulative preferred stock is a typecommonly referenced as a “FRAP”: a fixed-rate/adjustable preferred stock. However, because the interest rate on FRAPs may increase (up to apredetermined ceiling), the Federal Reserve Board treats the Firm’s noncumulative FRAPs in a manner similar to cumulative perpetualpreferred and trust preferred securities.

jonpo says:

Bonuses and dividends all round then … huurrahh

doc holiday says:

I’m still looking, so hang tight.

The United States Congress reluctantly passed the “Chrysler Corporation Loan Guarantee Act of 1979″ (Public Law 96-185) on December 20, 1979 (signed into law by President Jimmy Carter on January 7, 1980)

Methods of Loan Guarantee Valuation and Accounting Ashoka Mody and Dilip PatroNovember 1996
http://siteresources.worldbank.org/INTGUARANTEES/Resources/Methods_of_Loan_Guarantee_Valuationand_Accounting.pdf

A study of loan guarantees used to bail out Chrysler Corporation shows that the U.S.Government’s commitment to alleviate the company’s financial distress made a very significant difference to financing costs (Chen, Chen, and Sears 1986). The method adopted measured returns to the company’s equity and debt following specific government announcements and actions towards implementing the guarantee program. Both the announcements and specificactions resulted in gains to equity and bond holders. An interesting finding is that the gains to equity owners were greater than gains realized by debt holders who were directly guaranteed. The authors suggest that, as residual claim owners, equity holders benefit significantly even when the guarantee is targeted only to debt repayments. Their finding justifies an innovative pricing approach used for the guarantee. In the past, when the government had bailed out corporations in financial distress (such as Lockheed in 1971), the tax payers had, in effect, taken the downside risk but had not gained from the upside when the companies recovered.

Pricing for Methods of Loan Guarantee Valuation and Accounting the Chrysler loan guarantee corrected this asymmetry and included not only a 1 percent fee on outstanding debt but also warrants on the company’s equity.

Andrew says:

Hi Yves,

I'm emailing you in regards to an email I sent to you last month about a partnership, have you had a chance to think about it?

If you would more information about the proposal, please let me know.

I look forward to hearing from you.

Kind Regards,
Andrew Knight.
Website Manager
Banking & Finance Division
Asia-Pacific Region

Boomerang.com.au (Australia) Pty Ltd
E: andrew.knight@boomerang.com.au

Anonymous says:

FYI: In the Chrysler case, Chrysler was saved, along with all the related jobs and
economic activity. Under the CLGA, Chrysler employees received approximately 15% of the company’s stock, the loan was repaid in full to the government ahead of schedule, and the U.S. government made over $300 million when it sold its stock warrants.

Bonus Material: The fact that the UAW negotiated the sale of the common
stock does not change the origin and nature of the costs Chrysler
paid for the redemption. The provisions of the LGA placed the
UAW, perhaps anomalously, in the role of representative of the
largest single block of shareholders in Chrysler. The fact
remains that although these sellers of Chrysler common stock were
also employees of Chrysler, they received the cash Chrysler now
seeks to deduct in their capacities as owners and sellers of corporate stock. Their status as shareholders was not
“incidental” to the transaction; it was essential.

The undisputed facts
show that, although the Government required Chrysler to establish
the ESOP, it did not require the redemption which gave rise to
the claimed deduction. Moreover, even if a redemption had been
required as a condition of the loan guaranty, such a requirement
would not affect the origin and nature of the redemption as a
capital expenditure.

doc holiday says:

The reason this bailout wont work, is because we are bailing out fraud and trying to give value to derivatives that are worthless and then bailout a consortium of crooks with taxpayer cash. Look at Chrysler as a real example of government intervention. Chrysler had crappy cars, but turned around a product and motivated their workforce to be more efficient, and make a profit for the employees and the taxpayers, because of warrants.

Paulson and Bernanke are suggesting that taxpayers give these financial engineers unlimited shots at supercharging an $800 Billion taxpayer heist, and to roll the dice in a super-casino-bet, intended to wind down their trillion dollar bad bets. Wall street just crashed the global economy and now they wanna try doubling down and going for broke!

Looking back, bailing out Chrysler, essentially was a simple means to keep several thousand people in the business of building cars that could be sold to people that needed new transportation. If Chrysler would have failed, many of those union employees would have simply been forced to retrain and move on — and the world would have gone on and the business of making cars would have gone on without them. Chrysler was not really that important in a global perspective. Failure was an option then, just as it is now and IMHO, there are crooked banks that need to go under ASAP.

Hence, when we look at the current argument of financial collapse and global systemic failure, we seem to have a system that has failed, versus a single entity. However, that is the fallacy of this ploy, i.e, to believe that if a few wall street derivative shops close, that the world will fall apart and that your local grocery store will not be able to use currency hedging and swaps and CDS and CDOs and SIVs and to bet the farm on bread futures and hamburger futures and soup derivatives and halloween candy that is linked to shorting toothpaste that uses LIBOR as a reset mechanism for hedging cornflakes.

The argument of the world crashing is bullshit and IMHO, the only thing that might crash — hopefully will crash, will be the option grant compensation and synthetic careers of a shitload of wall street crooks that hopefully will spend the rest of their lives in nasty prison cells — where the devil will be in the details!

Life will go on, without the crooks and the crooked banks and life will be better without them!

john bougearel says:

hmmm,

The Cash injections comes “with no guarantee the investments will spur lending and unfreeze credit markets.”

perhaps what the taxpayer really needs to do is buy an insurance policy that the cash injection is properly used for its intended purpose

Could be a nice little cottage insurance industry of sorts for this bank rescue plan Paulson has cooked up. Just sit back, collect the premiums, and hope the banks don’t misallocate or redirect the funds.

Anonymous says:

if the government agrees today, it can refuse to allow the permits, or drag out a design approval process for years, maybe decades…he had to keep making sure it was in their best interest, no matter what any documents said.

This thought starts to get at the root of the problem. The sovereign is sovereign and can rewrite the Law at a moment’s notice. And in this situation the sovereign is guaranteed to change in a few months, and no one knows what the new king’s policies will be. The sovereign can’t even be sued in his own courts unless he agrees to it. And in the case of TARP the sovereign has specifically barred that.

Credit markets are structured to abhor risk and uncertainty. Truth is, we now have a total risk inversion. The organized options and futures exchanges have become the most predictable, reliable and functional markets. The debt markets are now the least predictable. How this state of affairs came to be will fuel many a Ph.d dissertation in coming decades.

Meanwhile Paulson has a new plan every day. Over in euroland Sarkozy announces “Two trillion euros!” one day and the next day says it probably won’t be necessary to really commit that much.

So is it really there or is it just more jaw boning?

And meawhile credit markets specialist Yves searches for and fails to find solid ground in quicksand. She can say here that it’s essential to unfreeze lending. What advice would she give in her day job today to a paying customer? Commit now or wait?

Bendal says:

That does it; every Congressman who voted for this Taxpayer Money Giveaway Bill is NOT getting my vote in November. I’m no economist (an engineer by trade), but I didn’t want this bill passed in the original form because Paulson had no oversight, but it appears that the bill as passed doesn’t limit his power in any reasonable manner anyway.

At the least he should insist that the banks begin relaxing their constipated lending practices as a prerequisite to getting taxpayer money; it appears, however, that he thinks that just throwing piles of cash at them will cause them to start throwing it back at us.

tompain says:

The problem is not lack of control over the banks. The problem is the mixed message that the banks are receiving from the government. On the one hand, Paulson is telling them they’d better lend and it’s good for them to lend. But the banks have already seen that shareholders of institutions that get in too much trouble with their balance sheet will be arbitrarily and summarily wiped out by the government. FNM, FRE, WM, WB all have been the subject of coerced action or confiscation by the government, to the great detriment of shareholders, even though they were not in immediate danger of collapse at the time.

Recall that the CEOs of FNM and FRE were summoned to a conference room at Treasury on a Friday afternoon and told, to their great surprise, that they were going to hand over their companies and “voluntarily” accept the government’s “bailout”.

Now the big 9 are summoned to a meeting at Treasury just over a month later, last Friday afternoon, and they are told, to their great surprise, that they are going to “voluntarily” accept a government bailout. Some of them don’t think they need it, like FNM and FRE thought. Some of them don’t understand why those among them who have behaved more responsibly are being treated the same as those who are in deeper trouble, like FNM was surprised to get the same treatment as FRE. But the government tells them to take the assistance OR ELSE. Or else what? The implication seems to be that if you don’t take the assistance now, and you get in trouble later, you will be wiped out the way others have been wiped out. So you take the assistance, recognizing that the government is still very much in the business of wiping out shareholders even though it has been a whole 2 weeks or so since they last did so.

But now you go back to HQ and ask yourself, what should I do with this new capital in this uncertain environment? The government wants me to lend. But I have seen what happens to those who lend and get themselves in trouble – they are wiped out by Paulson. Why should I risk that, when instead I can hang onto the capital as an extra margin of safety? Paulson might be unhappy about that, too, but I will worry about that later, he’s only going to be here another few months anyway.

The government would not be needing to put this capital into the banks in the first place if it had not already scared away almost all the private capital. As soon as they send a credible signal that private capital can rely on clearly stated policies the government will follow in its future actions, private capital will begin to flow into the banking sector again.

Confiscatory government behavior will always drive capital away.

Anonymous says:

Treasury Secretary Paulson, Fed Chairman Bernanke and Federal Reserve Bank of NY president Timothy Geithner are all tools of the banking industry who use taxpayers’ money to do Wall Street’s bidding. Regardless of the economic outcome, which is dubious at best, bankers will be stuffed to the gills with $700 billion dollars of bailout money and will live in style during the coming recession. To think that the free-market crooks on Wall Street will do anything but bend the rules as much as possible and use taxpayers’ money for their own advantage is Pollyannaish.

Anonymous says:

Anonymous October 15, 2008 3:07 AM said”
“FYI: In the Chrysler case, Chrysler was saved, along with all the related jobs and
economic activity. Under the CLGA, Chrysler employees received approximately 15% of the company’s stock, the loan was repaid in full to the government ahead of schedule, and the U.S. government made over $300 million when it sold its stock warrants.”

Oh and how is that working for Detroit now…Chrysler was saved and the auto industry still collapsed.

Dave Raithel says:

After reading through this and the preceding post and comments re Paulson v. the Bankers, what comes to my mind is this: In an effort to satisfy irreconcilable demands to let the market do what it will while also directing an outcome other than what it would do, the Treaury policy manages to encourage none of the virtues but all of the vices of laissez-faire and central planning…