Monday, October 6, 2008

S&L Redux-2008 Version

"The [Fed], unleashing its latest attempt to inject more cash into the nation's ailing banks, loosened longstanding rules that had limited the ability of buyout firms and provate investors to take big stakes in banks. It marks the latest move by the Fed to rewrite the rulebook in response to the financial crisis. ... The Fed has been crafting this policy for at least two years, and private-equity firms have been more aggressively lobbying for more lenient policies. ... The rules were designed to prevent investors from abusing their bank stakes to benefit their nonfinancial investments. ... The Fed also showed wiggle room in how it interprets an investor's conversations with management. It has generally prohibited noncontrolling investors from holding talks with a bank's chief executive or other top officials, on the theory that these investors might use the talks to sway the bank's decisions in favor of their personal interests", my emphasis, Peter Lattman & Damian Paletta at the WSJ, 23 September 2008.

Been there done that. In the early 1980s, down here in Texas, I saw real estate (RE) developers buy S&Ls. I didn't initially understand why. Then I saw the RE developers used the S&Ls as cheap financing for their other investments. Is Zimbabwe Ben so naive as to think some "Chinese Wall" or "Corporate Ethics Statement" will prevent banks giving "VIP" treatment, like Countrywide gave "Friends of Angelo", in funding LBOs and such for their owners? Get real.

1 comment:

Anonymous said...

Clearly what is going on here has nothing to do with kick starting the credit markets or stabilising the equity markets or restoring depositor confidence in banks. (Treasury official: “No provision in the legislation that mandates re-lending.”) What is going on here is a blatant attempt to provide government funds to a select cadre of firms (not all banks) which are chosen to be the survivors feasting off the carcasses of their less fortunate and less well-connected brethren as the downturn intensifies in the years to come.

The crash in equities will still happen. The debt deflation of the economy leading to mass commercial and consumer credit defaults will still happen. The collapse of many national, regional and local financial institutions will still happen. The bankruptcy of many municipalities and shortfalls in state budgets will still happen.

This bill is about engineering survivor bias to friends of the Bush administration so that they profit disproportionately from the collapse of these markets using the funds provided by the taxpayer via the unreviewable and unconditional authority of the Secretary of the Treasury.

The basic plan is to set up a federal money laundering operation. Bad assets come in, get laundered by the Treasury and put in a new AAA “wrapper” (as it’s termed on the call), and good assets go out, issued as Treasury guaranteed securities. Whether the final value of the legislation this week is $700 billion or $150 billion is irrelevant as long as the laundering operation can accommodate the throughput, as that number is only a cap on total extensions at any one time.

The SEC will support the plan and survivor bias by relaxing FASB 157 on mark to market accounting. If there is no agreement on what an asset is worth, it is worth whatever the firm holding it says in its Level 3 accounts or the Treasury Secretary accepts in buying it.

The Federal Reserve will support the plan by relaxing the definition of “control stake” in US banks and bank holding companies to allow secretive cabals to hold through private equity and offshore hedge funds. No one knows the beneficial owners of these ill-transparent private equity investors, and so it is the ideal way to reward loyal and helpful insiders, legislators and officials – as well as cede further ownership of American assets to foreign stakeholders who would be politically unacceptable if publicly acknowledged. Many foreign creditors are irate at the losses their funds, banks and pensioners have sustained from investments in the United States, and this plan provides a secret way to buy them off and keep them lending and investing as their own economies are roiled by the deflation to come.