Calling the Game at the top of the First Inning

[FrenchieCat]

Is premature, unwarranted, reactionary, and unhelpful to all involved.


Inside the Obama-Bank CEO Meeting
By Rob Blackwell
March 30, 2009

As bank chief executives left the White House Friday after a roughly 90-minute meeting with President Obama, they presented a united front to the media horde outside.

But inside the meeting, which was held in the state dining room, it was clear the CEOs took different approaches. The bluntest was from Ken Lewis, the chief executive of Bank of America Corp.

"Mr. President, I am not going to suck up to Larry and Tim like the rest of these guys," Lewis said, according to sources in the meeting. Lewis was referring to Treasury Secretary Tim Geithner, and Lawrence Summers, the head of the National Economic Council, who also attended.

Obama laughed along with the rest of the CEOs, before listening to Lewis get to his point: he wants to pay back Troubled Asset Relief Program funds.

And he was not the only one.

Jamie Dimon, the CEO of JPMorgan Chase & Co., arrived with check in hand to give to Geithner before the meeting started, according to the participant. Geithner took the check briefly to examine it before handing it back. (The check was fake).

Dimon tried again later during the meeting, telling the president he would like to give back his $25 billion in Tarp money.

The overall tone of the meeting was cordial, participants said, with no raised voices or significant tension. Obama's message was essentially one of mutual dependence: we need you, and you need us.

"My administration is the only thing between you and the pitchforks," Obama said.

Still, Lewis complained that all institutions were being tarred with the same brush, saying policymakers should better distinguish between commercial bankers and investment bankers.

But Obama had a rejoinder to that, saying the industry essentially brought that problem upon itself. He offered to call Sen. Byron Dorgan and ask him to re-establish the Glass-Steagall Act, which was repealed a decade ago. The law put barriers between commercial and investment banks.
http://www.bankinvestmentconsultant.com/news/-2661449-1.html



Wagoner's exit puts BofA CEO Lewis in hotseat

NEW YORK (Reuters) - Bank of America Corp Chief Executive Kenneth Lewis may be the next corporate boss to feel the heat after the administration forced General Motors Corp Chief Executive Rick Wagoner to resign in return for further government assistance.

The second-largest U.S. bank has received $45 billion from the government, making it one of the biggest recipients of government bailout money in the banking system.

Big shareholders have been calling for Lewis to step down since Bank of America announced in January it took a $20 billion government bailout to secure the acquisition of troubled Merrill Lynch & Co, which lost almost $16 billion in the last quarter of 2008.

The government may now add to the pressure from shareholders, analysts said. The sudden departure of Wagoner after nine years in the top job at GM signals the Obama administration is looking for management changes at bailed-out companies.

"His longevity in the job is probably very much in question," said Keith Wirtz, chief investment officer of Fifth Third Asset Management and a former CIO at a Bank of America subsidiary. Fifth Third holds shares in the bank.

more
http://www.reuters.com/article/newsOne/idUSTRE52T6DP20090330?pageNumber=1&virtualBrandChannel=10112

Proposed outline of regulatory framework:

On taking over institutions:

"Depending on the circumstances, the FDIC and the Treasury would place the firm into conservatorship with the aim of returning it to private hands or a receivership that would manage the process of winding down the firm. The trustee of the conservatorship or receivership would have broad powers, including to sell or transfer the assets or liabilities of the institution in question, to renegotiate or repudiate the institution's contracts (including with its employees), and to deal with a derivatives book. A conservator would also have the power to restructure the institution by, for example, replacing its board of directors and its senior officers. None of these actions would be subject to the approval of the institution's creditors or other stakeholders." (Among other things, the trustee can step in, sell or keep whatever he or she felt was best for the company, completely replace the BoD, eliminate any necessary executives, void contracts and do so without stock or debt holder approval.)

Hedge funds -(This has been a long time coming):
"U.S. law generally does not require hedge funds or other private pools of capital to register with a federal financial regulator, although some funds that trade commodity derivatives must register with the Commodity Futures Trading Commission and many funds register voluntarily with the Securities and Exchange Commission. As a result, there are no reliable, comprehensive data available to assess whether such funds individually or collectively pose a threat to financial stability. The Madoff episode is just one more reminder that, in order to protect investors, we must close gaps and weaknesses in the regulation and enforcement of broker-dealers, investment advisors and the funds they manage."

ivatives and swaps:
"In our proposed regulatory framework, the government will regulate the markets for credit default swaps and over-the-counter derivatives for the first time."

(This is just the first part of the proposals for the swaps, the others are well worth reading.)

http://www.treas.gov/press/releases/tg72.htm

--------------------------------
problem with Krugman, et al and their theories.....

When economists don't address the issue of how world investors would react to the largest capitalistic country on Earth nationalizing its financial institutions (which in themselves represent capitalism) as Krugman has recommended, it makes their theories extremely narrow and blind to large uncontrolled variables that play into our markets, and our economy daily.

I would hope and do believe that Krugman does understand that countries like China and others who hold our debt do so in part because of the stability the American political system and all that it entails. America was built on capitalism, and to suddently having it change course as drastically as Krugman suggests, would send a signal of panic, and one would see investors with hair on fire cashing out of government bonds as quickly as you can say Boo, and the market crash would be so severe, I'm not sure this country would recover.

Does Krugman ever discuss his bet on the reaction of investors, which because the US is in such large deficits, could result in the US becoming a 3rd world nation? I'm curious on this.

An overt act of nationalization such as Krugman suggest, as opposed to the covert one which is what the Obama administration are signaling (by virtue of the power they are asking from congress), in reference to one of our largest institutions such as BoA or Citi would have unintended consequences.

Currently we have the luxury of effectively nationalizing private debt through the issuance of government debt at very low rates (The principal amount of debt is less relevant than cost of carrying it). We get these low rates, because many foreign buyers of treasuries believe things are worse where they are than where we are. The nationalization of a major American banking institution, no matter how justified, would be a public acknowledgement that our system is broken to a point of no return. This would shake the confidence of our international investors who hold our debt. There could be a a run on not only the banks, but our government by the debt holders. There is a possibility that this wouldn't happen, but that is not a bet anyone would want to risk because if compared to the cost of bailing the banks out through giving them a gift of shadow capital, nationalization reaction could be a tragic disaster for this country.

I think that the administration understand this well, which is why they are doing what they are doing, as opposed to what Krugman is calling for.

----------------------------------

Right now, Obama's got a job to do, and that is save the global economy, not just our own....

But in so doing, restoring faith in foreign investors is our key.....considering our debt level, in particular held by foreign investors.

The fact that the counterparties are overseas means that out of the three options: bailout, bankruptcy, or nationalization — none are satisfactory.

A bailout means that the government makes good on the value of the securities, including the derivatives which are tied to the collapse of the U.S. economy. That means the worse things get, the more money flows out of the country. Not politically acceptable.

Letting insolvent banks go bankrupt is the option being pushed by some politicians, including John McCain. In some ways it would be the cleanest solution, allowing the bankruptcy courts and the FDIC to do the tough job of allocating the losses from the toxic securities.

The problem, though, is that they tried the bankruptcy option with Lehman, and they nearly broke the global financial system in the process. The Lehman bankruptcy backfired, creating new panic around the world. This reflects how much money many foreign investors had put into the U.S., and how many worried about losing it when Lehman went under.

Nationalization creates a political problem. Once the government buys a company, it is financially and morally responsible for its debts. It puts the U.S. government in the position of either using taxpayer money to bailout foreign investors, or telling foreign investors, no, the richest country in the world is not going to pay its debts.

What’s the solution?

Conclusion:

Sometime later this year we will have a massive global conference aimed at simultaneously resolving the banking crises in the major developed countries. The goal will be a political negotiation of the value of the toxic assets, and a clearing of the books.

If the conference succeeds, then it will be possible to fix the financial system relatively easily. But if it fails, then things get dicey.
http://www.businessweek.com/the_thread/economicsunbound/archives/2009/03/a_simple_guide.html?chan=top+news_top+news+index+-+temp_news+++analysis

folks are asking for an awful lot, and yet have only given this President very few days.

To attempt to come to a conclusion after 70 days of a presidency, pointing out what hasn't been done yet is....well, I call foul!

[NJmaverick]

1. The TARP program was supposed to give funds to institutions that were in desperate situations

if they have the luxury of giving the money back, then I doubt they should have gotten it in the first place.

[PBS Poll-435]

5. The money was spread around to nearly every bank

The idea was that they didn't want Treasury inadvertently causing a run on the banks that actually needed recapitalization.

[lyonn]

2. Thanks, replying so I can read it more carefully later. nt

[geek tragedy]

3. He busted out the Byron Dorgan stick. n/t

[Median Democrat]

7. Obama to Lewis - Boom Goes The Dynamite

That is a great way to call B.S. on a lie.

/snip

Still, Lewis complained that all institutions were being tarred with the same brush, saying policymakers should better distinguish between commercial bankers and investment bankers.

But Obama had a rejoinder to that, saying the industry essentially brought that problem upon itself. He offered to call Sen. Byron Dorgan and ask him to re-establish the Glass-Steagall Act, which was repealed a decade ago. The law put barriers between commercial and investment banks.

/snip

[FrenchieCat]

8. It's coming back.....you wait.

[depakid]

4. As to "how investors would react"

They'd probably have a cow for couple of days- maybe a week or two. Over time, biting the bullet and solving the problems with the insolvent institions once and for all, rather than having them fester (with repeated crises and interventions) will do a lot more for investor's confidence and ultimately the markets- than the current "plan."

Which is why that talking point is bogus. And also why the situation is politically unnerving.

[FrenchieCat]

6. So what makes you such an authority on how Foreign investors would react?

And why is your version so honky dory?

Because you want what you say to be so,
although there is no evidence to that fact.
That's what makes what you have to say
far more bogus than what I have presented.