Is Geithner breaking the law?

by | Apr 6, 2009 | Economics and development

Just adding to my post below, there’s an excellent interview by Bill Moyers at PBS with William Black, an American academic expert in fraud, and one of the people who helped clean up the savings and loans mess in 1991.

Black points out that the FBI warned of an ‘epidemic of mortgage fraud’ as early as 2004, though the FBI didn’t do much about it, because 500 of its financial investigators had been re-tasked to the war on terrorism.

The FBI were aware that many banks were fraudulently increasing the size of their mortgage portfolios. These fraudulent ‘liar’s loans’ were then parcelled up by investment bankers, who never checked what they were selling, and given AAA ratings by rating agencies who also never saw the loan files on the mortgages that were securitised and then sold on to unfortunate investors.

When the rating agency Fitch finally looked at some of these files in 2007, it found ‘widespread fraud’, but by then it had already given many bonds a clean bill of health.

Black is refreshingly indignant at the free ride the banks are getting – he points out that UBS received $5bn in US tax-payers’ money, at the same time as it was being indicted for avoiding hundreds of millions in tax.

He suggests that the government is obliged to put insolvent banks into receivership under the Prompt Corrective Action law, which he helped to introduce in 1991.

The law was designed to make it mandatory to step in and put banks into receivership if they are insolvent, so as not to keep bailing them out while needlessly wasting tax-payers’ money.

As he puts it, by continually supporting insolvent banks, Paulson and Geithner aren’t (or weren’t) just being foolish – they’re actually breaking the law.

Another bank scam?

by | Apr 6, 2009 | Economics and development

Schroders’  head of ABS, Chris Ames, thinks the Public-Private Investment Programme (PPIP) set up by US Treasury secretary Tim Geithner is in danger of being another big rip off of tax-payers:

We constantly hear that banks can’t get toxic assets off their books because there are no buyers. This is not true. The US secondary market is open – there is a price at which buyers will buy virtually any bond. So the problem isn’t primarily liquidity, the problem is primarily price. This seems to be the big elephant in the room that policymakers don’t want to talk about, but it’s quite obviously the case.

If banks genuinely need to get these assets off their books in order to begin properly functioning again, then if market prices were close to the banks’ holding values for those assets, they’d happily sell.

Many of the asset-backed bonds that the banks own, which were formerly rated AAA but now rated much lower, are sellable, in Ames’ estimate, at around 30 cents on the dollar.

But if banks valued them at their real price, they would be forced to make such cripplingly big write-downs, they would be declared insolvent. So at the moment, they are sitting on these bonds, too afraid to admit how little they are now worth.

The PPIP envisages banks selling off their toxic assets to authorised money managers, using some equity from the money managers, and a lot of leverage provided by the Federal Reserve and the US Treasury under the TALF scheme. It’s a hybrid, market-friendly scheme.

But Ames says no money-manager will buy the banks’ toxic assets at the valuation banks need to charge to avoid insolvency. They’d pay fair value for the assets – around 30 cents on the dollar. And the banks can’t afford to sell at that price, while staying in existence.

However, Ames has spotted a loophole in the programme – it says that ‘any private investor’ can also bid for assets in the programme. So the banks could buy the assets from themselves, via an off-balance-sheet vehicle or a friendly hedge fund. All they would need is a small amount of equity from themselves, and a lot of cheap leverage from the Federal Reserve and the US Treasury.

They can then write-off those assets at the new price which they sold them at, even though they set the new price fictitiously high. And if the price then plummets, well, that’s the Fed’s problem, they bank-rolled the acquisition.

So there we have it. The program isn’t likely to get many assets sold by banks to the money-manager partners at appropriate prices. And if the loophole allowing private investors direct access to TALF funds isn’t closed, banks will be able to shift large amounts of their risk directly onto the taxpayer. Instead of punishing management and shareholders for poor investment decisions, it has the scope to give them a free pass.

We’re all teenagers again

by | Apr 4, 2009 | London Summit

Cute story from the Obama visit: a few Foreign Office staffers picked up that Obama and Brown were going to do their joint press conference on Wednesday in the FCO’s (vast) Locarno Room rather than the smaller room usually used for press conferences at Number 10.  So, obviously, they decide to loiter around the grand staircase to catch a glimpse of the great man as he passes.

Well, the security staff soon cotton on to their little game and usher them away.  A game of cat and mouse proceeds for a few minutes until, in an example of the kind of lateral thinking one looks for from a 21st century ministry of foreign affairs, they hit on the idea of “having a meeting” in a room that just happens to be strategically placed on the way to the Locarno suite.

A long while later, David Miliband passes with Hillary Clinton, who gives them a nice smile and a friendly wave, and this is thought to be pretty cool. 

A further wait ensues. 

Then, at last, Gordon and Barack stride past.

Squeals of delight are stifled. 

And then Obama glances back… catches sight of them… pauses… breaks stride… turns around… and comes in to say hello, while Gordon chuckles indulgently in the corridor. 

Bastards.  Bastards!

(I, on the other hand, spent 15 minutes amidst the crowd of tourists loitering outside the gates to Downing Street later that day, hoping in equal measure to (a) see the Motorcade sweep in, and (b) avoid being caught behaving in this embarrassingly starstruck way by anyone I know. First the motorcade drops the President off in Horseguards Parade, on the other side of the block. And then, two minutes later, a Downing Street foreign policy adviser I know walks past… catches sight of me… pauses… breaks stride… turns around… and asks solicitously: “are you protesting?” Bastard. Bastard!)