Now I will admit my headline overstates John Dizard’s current column in the Financial Times a hair, but only a hair. Dizard has a somewhat baroque way of presenting his messages, and the color can take the edge off his communiques. Nevertheless, he has cultivated contacts among central bankers as well as at the major financial firms, so he typically has good intelligence.
The big messages are that Washington simply cannot make all the bank bondholders good, despite its pretenses it can. Citi is going to become a test case sooner than most realize. Dizard also says that the charade that the banks have a liquidity problem not a solvency problem, is wearing thin even on those who have good reason to play along (and as far as I can tell, there is absolutely no Plan B when the world wakes up and realizes what a crock Plan A was).
Dizard’s certainty that Geithner and Citi are goners comes through loud and clear even through his elaborate prose.
From the Financial Times:
“That piece of shit up there, I never liked him. I never trusted him… But that’s history, I’m here, he ain’t.” Tony Montana (Al Pacino), watching a colleague hanged from a helicopter.
It’s nearly time for some Washington careers to get the helicopter-noose treatment, particularly among the crowd of unvetted advisers and the tiny group of confirmed appointees at the Treasury Department. Politicos and policy hustlers have a style that differs slightly from Tony’s, but they’re about as sentimental. Secretary Timothy Geithner, not a bad or dishonest person, just a mediocrity who picked the wrong friends and trusted them for too long, can probably hear the rotor blades in the distance. Sadly, the prospective compensation packages for his next career are more modest than they would have been even a year ago…
For the rest of us, the question is who can be the next to take the lead on the national workout. That is probably Sheila Bair, chairman of the Federal Deposit Insurance Corp. But the FDIC needs serious reinforcement of its talent, and a different capital structure, for this to work.
You can pick out the likely geographical spot where the present bail-out wave will recede: 399 Park Avenue, the Citigroup HQ. Already, the Federal Deposit Insurance Corp’s resolution planners are circling the holding company’s shareholders, bondholders, and – at last! – top management.
Even other Tarp financed Wall Streeters are getting tired of the pretence that the Treasury and its advisers are brilliant or that their schemes make sense. Vishwanath Tirupattur, a Morgan Stanley credit strategist, said on a conference call last week that “The policymakers think lack of liquidity and leverage is the main problem…they think prices are depressed more for technical than underlying reasons. There are clearly several asset classes where current prices are better explained by collateral performance.”
“Collateral performance” means that the banking system’s real losses, not temporary mark to market losses, are overwhelming the capital injections finance-able by Federal bail-out appropriations. Congress won’t vote for any more, because they want to safely return home to their districts and maybe get re-elected.
So who’s left? The receivers at the FDIC. They’re sort of like the Internal Revenue Service, though without the Service’s easygoing institutional nature and its agents’ good sense of humour.
When there is a seizure, or “resolution”, of a bank, they take over as owner, guarantee deposits, and fight to take control of any assets. They are not customer-centric, relationship lenders. The FDIC is a corporation owned by the US government, but its costs are paid through levies on member banks.
Before Sheila Bair puts up government buildings colour swatches on the wall of Mr Geithner’s office, though, she will want to decide whether it might make more sense to stay in her current position. Senate confirmation would not be a challenge for her. Maybe, though, having some other punching bag at the Treasury would be better, especially since the FDIC faces staff shortages. Managing that, as well as a leadership transition and a raft of resolutions, would be difficult.
Also, while the Wall Streeters in Mr Geithner’s corner are demoralised enough to be brushed aside, and the big bank shareholders are either playing some derivative arb or totally out of it, the bondholders of the banks aren’t going to run away crying like little girls. Their basic implied threat is to withhold any further capital investment in big banks, which example would be followed by foreigners. That is less scary than it was before Hank Paulson’s crash.
Yves here. That is a standard threat, “Stiff the bondholders, and you’ll never raise cash again,” and it is utter rubbish. Bond investors LOVE investing in nice cleaned up companies exiting bankruptcy. Happens all the time. And note Dizard’s claim that Geithners’ Wall Street defenders are losing faith. Back to the article:
Chris Whalen of Institutional Risk Analytics, which, among other activities, profiles bank credit quality, says “The administration has said that all the senior debt of the banks is money good, but they don’t have the money to back that u.p,,,,Before the end of the second quarter, we have to come to a decision on Citibank. Government cannot write a cheque for $200bn, $300bn or $400bn to bail out the bondholders.”…
Citi might buy some time with writeups on assets formerly marked to market. And even with bank bondholders sliced up and turned into mere stockholders, and with the FDIC backed with a $500bn (£341bn, €377bn) (or bigger) line of credit with the Treasury, a systemic workout will eventually need new law.
Yves here. Geithner has given lip service before Congress to being able to put big banks in receivership, but I have seen nada in the way of concrete steps to make that happen. Back to the article:
The key problem is this: if the cash the FDIC uses for big bank resolutions really is a loan from the Treasury, then it will have to be repaid with a usurious assessment on the rest of the insured banks. That would not leave sufficient operating cash flow, or capital accumulation, for the banks to finance recovery. So the loan must turn into an equity capital contribution from the taxpayers.
However, since the FDIC is owned by the same taxpayers, and insures their deposits, that will be an easier sell than any more capital “investments” in the banks or dealers. Also, FDIC managers have modest houses in the suburbs, and drive minivans rather than limos. Better optics.