... it seems the rules of the game have changed.
Back when the world was simple and the banks were audacious enough to mark-to-market, a novice speculator like myself could use news of credit events to short banks before the losses were annouced. But even credit agency reps admit, this is no more...
"The recent credit crisis was over a few trillion in bad, mostly US, mortgage debts, with most of that at US banks. Greek debt is $350 billion, with about $270 billion of that spread among just three European countries and their banks. Make no mistake, a Greek default is another potential credit crisis in the making. As noted above, it is not just the writedown of Greek debt; it is the mark-to-market of other sovereign debt.
That would bankrupt the bulk of the European banking system, which is why it is unlikely to be allowed to happen. Just as the Fed (under Volker!) allowed US banks to mark up Latin American debt that had defaulted to its original loan value (and only slowly did they write it down; it took many years), I think the same thing will happen in Europe. Or the ECB will provide liquidity. Or there may be any of several other measures to keep things moving along. But real mark-to-market? Unlikely. "
So although the Greece bailout, Dubai default, and PIIGS bond auction failures all point to bank losses, a speculator will need to be very careful determining the course of action to protect their financial position.
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Monday, February 15, 2010
Sunday, February 7, 2010
Greek drama
The dramatic events playing out in the press regarding Greek sovereign debt are almost guaranteed to manufacture a happy ending to the final act. But the real outcome will be when the curtains are closed.
It was just a matter of time before all of the global bailouts led sovereign nations to severe debt strains. Unlike the subprime crisis where there was disclosure and mark-to-market accounting for a little while, national fiscal conditions of the PIIGS (Portugal Ireland Italy Greece Spain) are ripe for off balance sheet manipulation. Look at how the US keeps Freddie and Fannie off the official debt tally even though they are now explicitly supported by the US taxpayer.
Moreover, when Iceland's banks were on the brink, the IMF swooped in and recapitalized the country. Who funds the IMF and influences their largesse? The same central bankers (US, Japan, UK, Germany, China) whose banking interests would suffer from any economic shock wave or market turmoil.
"Privately, American officials have said there is next to no chance that Greece will default on its debts. They said European officials were balancing a conviction that the International Monetary Fund should not be involved in solving Greece’s problems with their belief that political pressure was necessary for the Greek political leadership to cut spending and raise revenues."(1)
Greek change of heart? Not even an interesting subplot, Krugman noted that Greece has spent 50 of the last 200 years in default.
But since the issue of sovereign debtors needing forebearence will be a common theme this year, there is lots of interests in not seeming too lenient in the public. Otherwise everyone will want the same sweet deal. Another resolution will be a backdoor bailout by a willing party with an off balance sheet swap deal with funny accounting. If I were to write the script of the conclusion to the third act, it would be "You pay me $100B USD now and I pay you two payments of $75B USD of Yen over the next two years and your government buys only Toyotas for the next ten years." This has been done before.(2)
No matter what monologue of despair or dialogue of conflict plays out in the press, the final act will be a private arrangement where the main actors are major investment banks and quasi government investment vehicles. In fact, Goldman Sachs is at the tip of the spear making sure the conclusion of this drama is a happy one, at least in public. (3)
(1) "Group of 7 Vows to Keep Cash Flowing" New York Times, Feb 6, 2009, by Sewell Chan
(2) "Traders, Guns, and Money", written by Satyajit Das, p. 106-10
(3) "Is Greece’s Debt Trashing the Euro?" New York Times, Feb 6, 2009, by Landon Thomas Jr.
Feb 14, 2009 update
This article confirms my speculation was spot on.
"In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics."
After this initial deception to get into the euro... there was even more deception to stay in the euro...
"The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.
Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”
While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.
George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.
Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.
In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”"
It was just a matter of time before all of the global bailouts led sovereign nations to severe debt strains. Unlike the subprime crisis where there was disclosure and mark-to-market accounting for a little while, national fiscal conditions of the PIIGS (Portugal Ireland Italy Greece Spain) are ripe for off balance sheet manipulation. Look at how the US keeps Freddie and Fannie off the official debt tally even though they are now explicitly supported by the US taxpayer.
Moreover, when Iceland's banks were on the brink, the IMF swooped in and recapitalized the country. Who funds the IMF and influences their largesse? The same central bankers (US, Japan, UK, Germany, China) whose banking interests would suffer from any economic shock wave or market turmoil.
"Privately, American officials have said there is next to no chance that Greece will default on its debts. They said European officials were balancing a conviction that the International Monetary Fund should not be involved in solving Greece’s problems with their belief that political pressure was necessary for the Greek political leadership to cut spending and raise revenues."(1)
Greek change of heart? Not even an interesting subplot, Krugman noted that Greece has spent 50 of the last 200 years in default.
But since the issue of sovereign debtors needing forebearence will be a common theme this year, there is lots of interests in not seeming too lenient in the public. Otherwise everyone will want the same sweet deal. Another resolution will be a backdoor bailout by a willing party with an off balance sheet swap deal with funny accounting. If I were to write the script of the conclusion to the third act, it would be "You pay me $100B USD now and I pay you two payments of $75B USD of Yen over the next two years and your government buys only Toyotas for the next ten years." This has been done before.(2)
No matter what monologue of despair or dialogue of conflict plays out in the press, the final act will be a private arrangement where the main actors are major investment banks and quasi government investment vehicles. In fact, Goldman Sachs is at the tip of the spear making sure the conclusion of this drama is a happy one, at least in public. (3)
(1) "Group of 7 Vows to Keep Cash Flowing" New York Times, Feb 6, 2009, by Sewell Chan
(2) "Traders, Guns, and Money", written by Satyajit Das, p. 106-10
(3) "Is Greece’s Debt Trashing the Euro?" New York Times, Feb 6, 2009, by Landon Thomas Jr.
Feb 14, 2009 update
This article confirms my speculation was spot on.
"In Greece, the financial wizardry went even further. In what amounted to a garage sale on a national scale, Greek officials essentially mortgaged the country’s airports and highways to raise much-needed money.
Aeolos, a legal entity created in 2001, helped Greece reduce the debt on its balance sheet that year. As part of the deal, Greece got cash upfront in return for pledging future landing fees at the country’s airports. A similar deal in 2000 called Ariadne devoured the revenue that the government collected from its national lottery. Greece, however, classified those transactions as sales, not loans, despite doubts by many critics."
After this initial deception to get into the euro... there was even more deception to stay in the euro...
"The answer was no. But in 2002, accounting disclosure was required for many entities like Aeolos and Ariadne that did not appear on nations’ balance sheets, prompting governments to restate such deals as loans rather than sales.
Still, as recently as 2008, Eurostat, the European Union’s statistics agency, reported that “in a number of instances, the observed securitization operations seem to have been purportedly designed to achieve a given accounting result, irrespective of the economic merit of the operation.”
While such accounting gimmicks may be beneficial in the short run, over time they can prove disastrous.
George Alogoskoufis, who became Greece’s finance minister in a political party shift after the Goldman deal, criticized the transaction in the Parliament in 2005. The deal, Mr. Alogoskoufis argued, would saddle the government with big payments to Goldman until 2019.
Mr. Alogoskoufis, who stepped down a year ago, said in an e-mail message last week that Goldman later agreed to reconfigure the deal “to restore its good will with the republic.” He said the new design was better for Greece than the old one.
In 2005, Goldman sold the interest rate swap to the National Bank of Greece, the country’s largest bank, according to two people briefed on the transaction.
In 2008, Goldman helped the bank put the swap into a legal entity called Titlos. But the bank retained the bonds that Titlos issued, according to Dealogic, a financial research firm, for use as collateral to borrow even more from the European Central Bank.
Edward Manchester, a senior vice president at the Moody’s credit rating agency, said the deal would ultimately be a money-loser for Greece because of its long-term payment obligations.
Referring to the Titlos swap with the government of Greece, he said: “This swap is always going to be unprofitable for the Greek government.”"
Thursday, November 5, 2009
FHA: Lending with a 20%+ default rate expectation
This blog has mentioned before that FHA is subprime in sheep's clothing. But how bad is it?
"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)
Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.
"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.
“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."
Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.
Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?
(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009
(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009
"Although the FHA has tightened credit standards, many of the 2007 and early 2008 mortgages are going bad. The agency expects defaults on 24% of all loans insured in 2007, and 20% of those backed in 2008. "The orders from Congress and us were clear: We want to save as many families as we can, recognizing that a lot of loans people were looking to refinance out of should never have been made in the first place," said Brian Montgomery, who served as the agency's commissioner for four years ending in July."(1)
Although there have been lots of assurances to the contrary, it looks like a bailout is now in the works.
"Two House Republicans warned that growing losses at the Federal Housing Administration could lead to a taxpayer-funded bailout and have asked the Department of Housing and Urban Development for data backing up the FHA’s assertion that it won’t need to ask Congress for any taxpayer money.
“Congress and HUD must take whatever steps are necessary to ensure that this program operates in a manner that does not expose the taxpayer to yet another bailout,” wrote Republicans Darrell Issa of California and Spencer Bachus of Alabama in a letter, dated Monday, to HUD Secretary Shaun Donovan."
Apparently news leaked that the stress tests used in the audit showed FHA is doomed at current capital levels.
Likelihood that a bailout will be avoided, I put it at 10%. But who cares, the DOW is up. Right?
(1) "FHA digs out after loans sour", WSJ, written by Nick Timiraos, Nov 4, 2009
(2) "FHA postpones release of audit as bailout worries mount" WSJ, written by Nick Timiraos, Nov 5, 2009
Sunday, September 20, 2009
The TARP game is over, next step is an Uber Big "Bad Bank"
Obama's team came storming into office in the midst of the crisis with all the intent of saving the world financial system. They did it, temporarily at least. As it happened, the crack Obama team handed out cash to failing entities, abandoned accounting scrutiny, and finally provided a little transparency to balance sheets but no accountability for resolution. The markets gained faith in the new system, not because the banks had resolved their problems but because the government was credible and tangible in supporting all major market mechanisms.
This sunlight on the system gave the banks a chance to redeem themselves by opting out of government support by repaying the TARP money. To obtain this freedom, the banks announced their financial health based on increased capital and risk control measures. Was this actually done? No. Now the support programs (agency debt purchases, MBS purchases, T Bond purchases, money market funds(1), home purchase tax credits) are scheduled to lapse. Bloomberg reports "New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious. "The market expects us to complete these programs,” he said Aug 31. “To contradict that market expectation is a pretty high hurdle.”(2)
What now?
The Obama team remedies addressed the symptoms, but the source was the undercapitalized American consumer and no remedy was found for their plight. As credit cards charge offs, unemployment rates, foreclosure statistics, and many other financial measures all zoom past stress test scenarios, the solvency of the banking system will be in question again by the Spring of 2010. At that point, balance sheets will have to be recapitalized again. Will the banks come back for TARP? No sane bank will risk the public anger of returning to the government as doctor after already claimed to be "cured" and going in for the same penicillin. The credibility of the stress tests will be demolished and the actual health of every bank that took the test will once again be on the table.
What will the government do in that situation? There is no way the Congress will hand out another $750B to the Executive Branch with no strings attached like last time. At least not if they care about holding their jobs come election time. The Executive Branch will have lost their opportunity to single handedly manage the crisis. Instead Congress will take center stage in bringing credibility back to the banking system the only way possible for a government entity. That will require complete nationatization of "bad bank assets" with the taxpayers footing the bill but banks taking a major equity hit in the process.
The author is long SKF at $25.
This sunlight on the system gave the banks a chance to redeem themselves by opting out of government support by repaying the TARP money. To obtain this freedom, the banks announced their financial health based on increased capital and risk control measures. Was this actually done? No. Now the support programs (agency debt purchases, MBS purchases, T Bond purchases, money market funds(1), home purchase tax credits) are scheduled to lapse. Bloomberg reports "New York Fed President William Dudley, who is vice chairman of the FOMC, has sounded more cautious. "The market expects us to complete these programs,” he said Aug 31. “To contradict that market expectation is a pretty high hurdle.”(2)
What now?
The Obama team remedies addressed the symptoms, but the source was the undercapitalized American consumer and no remedy was found for their plight. As credit cards charge offs, unemployment rates, foreclosure statistics, and many other financial measures all zoom past stress test scenarios, the solvency of the banking system will be in question again by the Spring of 2010. At that point, balance sheets will have to be recapitalized again. Will the banks come back for TARP? No sane bank will risk the public anger of returning to the government as doctor after already claimed to be "cured" and going in for the same penicillin. The credibility of the stress tests will be demolished and the actual health of every bank that took the test will once again be on the table.
What will the government do in that situation? There is no way the Congress will hand out another $750B to the Executive Branch with no strings attached like last time. At least not if they care about holding their jobs come election time. The Executive Branch will have lost their opportunity to single handedly manage the crisis. Instead Congress will take center stage in bringing credibility back to the banking system the only way possible for a government entity. That will require complete nationatization of "bad bank assets" with the taxpayers footing the bill but banks taking a major equity hit in the process.
(1) "Treasury Announces Expiration of Guarantee Program for Money Market Funds" US Treasury Department Press Release, Sept 18, 2009
(2) "Housing Risking Relapse Confronts Bernanke Conundrum"By Kathleen M. Howley, Sept 21, 2009, Bloomberg.com
The author is long SKF at $25.
Thursday, January 1, 2009
The Treasury is handing out naked puts on behalf of the taxpayer
US Bancorp acquires Downey Savings & Loan and agrees to take the first $1.6B in losses and the FDIC will take any additional losses.
JP Morgan acquires WaMu in a deal that requires JP Morgan to take the first 30B in losses and the FDIC will take any additional losses.
Now IndyMac is acquired by a private equity group for $13.9B in a deal where they liable for the first 20% of losses, and the FDIC is liable for the remaining amount. No quantification of what that 20% is a percentage of. I am looking for the details.
What kind of deals are these? A free put contract for an asset already purchased at a severe discounted asset? The capitalization of the FDIC is not designed to recapitalize distressed mortgage asset portfolios. Thus the bill for these extended losses will be a virtual pass through to the taxpayer.
WaMu, Downey, and other deals like these all potential exposures much bigger than "first loss" amount describe above. My question is why can't the acquirer at least endure some of the extended downside. Maybe 100% first loss, then 25% after a certain threshold? But the current policy gives the companies no incentive to resolve deterioration of the underlying assets after a certain loss level. In fact, it may just make a great extended tax break subsidized by the general public.
In a year of panic and half baked ideas, this was one of the worst ideas to come out of the Treasury and I plan to write my Congressmen to communicate that.
JP Morgan acquires WaMu in a deal that requires JP Morgan to take the first 30B in losses and the FDIC will take any additional losses.
Now IndyMac is acquired by a private equity group for $13.9B in a deal where they liable for the first 20% of losses, and the FDIC is liable for the remaining amount. No quantification of what that 20% is a percentage of. I am looking for the details.
What kind of deals are these? A free put contract for an asset already purchased at a severe discounted asset? The capitalization of the FDIC is not designed to recapitalize distressed mortgage asset portfolios. Thus the bill for these extended losses will be a virtual pass through to the taxpayer.
WaMu, Downey, and other deals like these all potential exposures much bigger than "first loss" amount describe above. My question is why can't the acquirer at least endure some of the extended downside. Maybe 100% first loss, then 25% after a certain threshold? But the current policy gives the companies no incentive to resolve deterioration of the underlying assets after a certain loss level. In fact, it may just make a great extended tax break subsidized by the general public.
In a year of panic and half baked ideas, this was one of the worst ideas to come out of the Treasury and I plan to write my Congressmen to communicate that.
Tuesday, October 21, 2008
Where do we really need the bailout? Hint: It is not the banks
All over the world $1.3T has been provided by governments to bolster the balance sheets of banks. Although this averts any immediate crisis by providing padding to the capital base of many of the most leveraged banks, it is a knee jerk reaction that does not address the root of the cause. It has been observed that the problem with banks is that the value of assets continues to go down in relation to leveraged balance sheets.
But if you gave the banks an infinite amount of money, would the issue be resolved? I contend no, because the real leverage is not tied to the lending institutions, but instead the consumers who provide the collateral to the transactions that the banks perform. The banks, for years, have tried to monetize the value of the undercapitalized consumer through interest rate hikes and extending the length of repayment. Now, with credit unavailable to finance these undercapitalized (regardless of credit rating) commitments long term, the banks are now starting to reflect the same financial situation that has been the case with the American consumer for years. Too many commitments served by way too little actual capital.
Thus before any type of resolution can occur in the credit markets, there will need to be a recapitalization of the American consumer. No more zero collateral purchases of cars, boats, homes, etc. A simple stimulus check providing $1200 is just one month worth of the payments that will need to be provided to float the American consumer. It will require at least 20 of these stimulus packages to get American family to stable balance sheet. What is the lesson in the temporary boost?
In conclusion, I approve of the use of $750B to recapitalize banks to avert an immediate destruction of the financial system. But I also approve a middle class tax cut bigger than what Obama is proposing and lots of personal bankruptcies as steps necessary for Americans to find their footing in a new, disciplined credit environment. The real "Bank of America", the wallets of the American consumer, will never truly be solvent until the people of America realize what fiscal solvency really requires.
But if you gave the banks an infinite amount of money, would the issue be resolved? I contend no, because the real leverage is not tied to the lending institutions, but instead the consumers who provide the collateral to the transactions that the banks perform. The banks, for years, have tried to monetize the value of the undercapitalized consumer through interest rate hikes and extending the length of repayment. Now, with credit unavailable to finance these undercapitalized (regardless of credit rating) commitments long term, the banks are now starting to reflect the same financial situation that has been the case with the American consumer for years. Too many commitments served by way too little actual capital.
Thus before any type of resolution can occur in the credit markets, there will need to be a recapitalization of the American consumer. No more zero collateral purchases of cars, boats, homes, etc. A simple stimulus check providing $1200 is just one month worth of the payments that will need to be provided to float the American consumer. It will require at least 20 of these stimulus packages to get American family to stable balance sheet. What is the lesson in the temporary boost?
In conclusion, I approve of the use of $750B to recapitalize banks to avert an immediate destruction of the financial system. But I also approve a middle class tax cut bigger than what Obama is proposing and lots of personal bankruptcies as steps necessary for Americans to find their footing in a new, disciplined credit environment. The real "Bank of America", the wallets of the American consumer, will never truly be solvent until the people of America realize what fiscal solvency really requires.
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