Banks and the Temple of Mammon

[2dimes]

OK well I'm going to a big Pacific American island for a couple of weeks to practice.

[Fruitcake]

Another week, another trauma of crises to be sorted out. Now before you write in dear reader, a ‘trauma’ is the new collective noun, and highly suitable I feel. So what’s the latest gossip on the street?

Recent reports are that US Federal regulators have directed Fannie Mae and Freddie Mac to start purchasing $40 billion a month in underperforming mortgage bonds as the Bush administration expands its options to buy troubled financial assets and resuscitate the U.S. economy, according to three people briefed about the plan.

Fannie and Freddie began notifying bond traders a couple of weeks back that each company needs to buy $20 billion a month in mostly subprime, Alt-A and non-performing prime mortgage securities. Sources say the purchases would be separate from the U.S. Treasury's $700 billion Troubled Asset Relief Program.

"For now, they're under conservatorship and they have to be used to keep the flow of capital going to the housing market,'' former Treasury Secretary Lawrence Summers said in an interview on Bloomberg Television's `Conversations with Judy Woodruff.' "They're important to maintaining the flow of government finance and need to be used actively”, he said.

They’re having a laugh aren’t they?

On a global scale the G-7 Finance Ministers and Central Bank Governors came up with their idea of a plan of action, they agreed to;

1. Take decisive action and use all available tools to support systemically important financial institutions and prevent their failure.

2. Take all necessary steps to unfreeze credit and money markets and ensure that banks and other financial institutions have broad access to liquidity and funding.

3. Ensure that our banks and other major financial intermediaries, as needed, can raise capital from public as well as private sources, in sufficient amounts to re-establish confidence and permit them to continue lending to households and businesses.

4. Ensure that our respective national deposit insurance and guarantee programs are robust and consistent so that our retail depositors will continue to have confidence in the safety of their deposits.

5. Take action, where appropriate, to restart the secondary markets for mortgages and other securitized assets. Accurate valuation and transparent disclosure of assets and consistent implementation of high quality accounting standards are necessary.

“The actions should be taken in ways that protect taxpayers and avoid potentially damaging effects on other countries. We will use macroeconomic policy tools as necessary and appropriate. We strongly support the IMF's critical role in assisting countries affected by this turmoil. We will accelerate full implementation of the Financial Stability Forum recommendations and we are committed to the pressing need for reform of the financial system. We will strengthen further our cooperation and work with others to accomplish this plan.”

While Britain has pushed for a coordinated agreement to guarantee loans between banks, one official from a G-7 member said it was unlikely the G-7 would endorse their proposal. Two European officials said earlier that the group was considering saying that no systemically important bank would be allowed to fail, and laying out principles for all nations to follow.

Now call me stupid, but what exactly is a ‘systemically important bank’?

My response can only be…"Would you like fries with that?"

Moving across the globe, the next bit of news is about dear Iceland.

OK, so Iceland really is in a scary spot.

True, the small nation has kind of been asking for it by pushing their carry trade these last many months, and inviting the scrutiny of any number of large macro players, any one of whom could, at least in the short term, whipsaw the currency around, and any three of which could cause rather serious medium-term shocks, but we are sort of collectively charmed by the urge Iceland has to swim with the big fish- even when sharks are in the water.

It's one thing for your market to be down 77% on the day. (A rather serious thing-- interesting comment on the usefulness, or lack thereof, of trading halts). It's another all together when the supermarkets are bare. And this time, it seems they really are. Rumours to this effect before seemed overblown, but a friend in Reykjavik tells me by telephone that shortages are quite real, and that the run on the currency makes the obviously import-dependent nation a scary place to be.

Norway, in response to the bank failures in Iceland, had an interesting "mark-to-market" approach for assets in which no ready market exists. To wit:

The OMX Nordic Exchange said in a release recentlyy that it set the prices of the three nationalized banks to zero in the index after 'not being able to receive valuations from market participants.'

Take that, Rule 157!!! Between this and their bank re-capitalization plans, the Norwegians seem to know how to deal with a crisis without pussy-footing around, and without creating fictional marks to support flagging institutions. (It may help that in this case it is Norway setting marks on Icelandic banks, rather than Norway setting marks on Norwegian firms). In short, Norway has set the benchmark price for Icelandic nationalised banks at….nothing, nix, null points. The natural order of logic tells us this means the little country deep in the North Atlantic is in deep doo doo and no mistake.

Back with the big boys on the block, more news crosses my desk daily, here's a few more titbits I have been informed of recently.

Reports are that two former Bear Stearns hedge fund managers have been charged with misleading investors about the health of two funds they ran for the bank, not only that, these two reprobates have also been accused of trying to influence witnesses in the bank's internal probe into the funds. I can see it now, the whispered aside, the hidden threat, the words spoken a la ‘Godfather’ (With the greatest respect to that legend, Francis Ford C)….I must stop my imagination running away with me; it always gets me into trouble.

Back in the real world, Commerzbank CEO Martin Blessing has confirmed that his bank is likely to tap the German government for some 'bailout' smackers. He said “I believe it is the duty of every banker to review participation in the programme, because the ability to give more loans - which is crucial in a downturn - depends on capital strength”. I wish my Bank Manager would think the same whenever I apply to increase my capital strength but hey ho, that’s the way of things. In contrast, Deutsche Bank CEO Josef Ackermann has said that he is not interested in the programme explaining with this statement. “Deutsche Bank does not need any capital. We are one of the strongest and best-capitalized banks in the world. We (have) won customers, deposits and market share in (this) crisis” Well, this makes interesting reading, especially when this bit of gossip was spotted by a mole of mine recently and passed on to me. It reads,”We had been clients of Deutsche Bank for 8 years and they showed us the door last month because they ‘want to concentrate on billion $ funds’”.

Quite right too, after all there are just so many more of them these days aren’t there.

The reports keep landing, or is that impacting? Fund values are doing their best impressions of lead balloons. Fidelity's $28.6bn Magellan fund has dropped some 46% in the year through October 16th. I also read reports that RAB Capital's Energy Fund is said to have fallen 12.26% this month. Word has it that Standard Chartered is standing ready to acquire Royal Bank of Scotland's (RBS) assets in Asia should they become available. Richard Meddings, the bank's CFO, said: “If RBS's strategy involves divestments in areas where we are expanding, we would certainly look”. Well this should run and run. Talking of RBS, Fred ‘the shred’ made a hasty exit stage left recently. I wonder what the reaction of those worker drones at ABN AMRO's London HQ thought of that. Make your own mind up. A report crosses my desk that UBS has had its counterparty credit ratings put on watch for a possible downgrade by Standard & Poor's over concerns about the firm's earnings outlook, hardly surprising considering the next titbit. While on the subject of that part of the world, I see that even fortress Switzerland is feeling the chill wind. UBS got around £30 billion in a bailout while the Swiss National Bank has set up a fund to absorb UBS's "toxic debt". However, Credit Suisse is the real poker player here. They have managed to get 10 billion Swiss Francs from Qatari investors and the Israeli Koor Industries at the same time. Sweet.

A contact over in Brussels sent me this bit of news....Sarkozy visited the European Parliament this week (he being the current President of the EU until Christmas) and told all the assembled MEPs (with a straight face) that not only had the EU stopped a war in South Ossettia but that the eurozone had acted as one to solve the credit crunch. Much clapping from the gathered assembly apart from some notables. Sarko then announced that they needed to have a central government and a central fund from which to solve all similar problems that might occur in the future. The end (of Britain) is close. Amazing number of armed soldiers all over the city, actually on every road junction with snipers walking all over the roof of the government building and all for a man who didn't use the lectern because it's taller than he is.

it all seems to me that our esteemed world leaders still do a pretty good impression of chickens lacking any body part above the neck, and just to mix my metaphors, every time they think they have plugged a hole in the ship, another wave breaks over them. I have a vision of them and its not plugging holes, it’s more like them all swabbing the decks furiously…get those mops and buckets ready team, here comes another!

Last but not least, I did have a chortle at this bit of news. Apparantly Lehman’s outstanding Amex bill of $18 million hadn’t been cleared in the usual timely fashion. The report said that the firm's employees blew the money on 'lavish meals and first class travel'.
Shouldn’t someone tell the reporters that this was how things used to be?

[Pedronicus]

The Bush gang's parting gift: a final, frantic looting of public wealth
The US bail-out amounts to a strings-free, public-funded windfall for big business. Welcome to no-risk capitalism
Comments (60)

* Naomi Klein
*
o Naomi Klein
o The Guardian,
o Friday October 31 2008
o Article history

In the final days of the election many Republicans seem to have given up the fight for power. But don't be fooled: that doesn't mean they are relaxing. If you want to see real Republican elbow grease, check out the energy going into chucking great chunks of the $700bn bail-out out the door. At a recent Senate banking committee hearing, the Republican Bob Corker was fixated on this task, and with a clear deadline in mind: inauguration. "How much of it do you think may be actually spent by January 20 or so?" Corker asked Neel Kashkari, the 35-year-old former banker in charge of the bail-out.

When European colonialists realised that they had no choice but to hand over power to the indigenous citizens, they would often turn their attention to stripping the local treasury of its gold and grabbing valuable livestock. If they were really nasty, like the Portuguese in Mozambique in the mid-1970s, they poured concrete down the elevator shafts.

Nothing so barbaric for the Bush gang. Rather than open plunder, it prefers bureaucratic instruments, such as "distressed asset" auctions and the "equity purchase program". But make no mistake: the goal is the same as it was for the defeated Portuguese - a final, frantic looting of the public wealth before they hand over the keys to the safe.

How else to make sense of the bizarre decisions that have governed the allocation of the bail-out money? When the Bush administration announced it would be injecting $250bn into US banks in exchange for equity, the plan was widely referred to as "partial nationalisation" - a radical measure required to get banks lending again. Henry Paulson, the treasury secretary, had seen the light, we were told, and was following the lead of Gordon Brown.

In fact, there has been no nationalisation, partial or otherwise. American taxpayers have gained no meaningful control over the banks, which is why the banks are free to spend the new money as they wish. At Morgan Stanley, it looks as if much of the windfall will cover this year's bonuses. Citigroup has been hinting it will use its $25bn buying other banks, while John Thain, the chief executive of Merrill Lynch, told analysts: "At least for the next quarter, it's just going to be a cushion." The US government, meanwhile, is reduced to pleading with the banks that they at least spend a portion of the taxpayer windfall for loans - officially, the reason for the entire programme.

What, then, is the real purpose of the bail-out? My fear is this rush of dealmaking is something much more ambitious than a one-off gift to big business: that the Bush version of "partial nationalisation" is rigged to turn the US treasury into a bottomless cash machine for the banks for years to come. Remember, the main concern among the big market players, particularly banks, is not the lack of credit but their battered share prices. Investors have lost confidence in the honesty of the big financial players, and with good reason.

This is where the treasury's equity pays off big time. By purchasing stakes in these financial institutions, the treasury is sending a signal to the market that they are a safe bet. Why safe? Not because their level of risk has been accurately assessed at last. Not because they have renounced the kind of exotic instruments and outrageous leverage rates that created the crisis. But because the market will now be banking on the fact that the US government won't let these particular companies fail. If they get themselves into trouble, investors will now assume that the government will keep finding more cash to bail them out, since allowing them to go down would mean losing the initial equity investments, many of them in the billions. (Just look at the insurance giant AIG, which has already gone back to taxpayers for a top-up, and seems likely to ask for a third.)

This tethering of the public interest to private companies is the real purpose of the bail-out plan: Paulson is handing all the companies admitted to the programme - a number potentially in the thousands - an implicit treasury department guarantee. To skittish investors looking for safe places to park their money, these equity deals will be even more comforting than a triple-A from Moody's rating agency.

Insurance like that is priceless. But for the banks, the best part is that the government is paying them to accept its seal of approval. For taxpayers, on the other hand, this entire plan is extremely risky, and may well cost significantly more than Paulson's original idea of buying up $700bn in toxic debts. Now taxpayers aren't just on the hook for the debts but, arguably, for the fate of every corporation that sells them equity.

Interestingly, mortgage fund giants Fannie Mae and Freddie Mac both enjoyed this kind of unspoken guarantee before they were nationalised at the start of this crisis. For decades the market understood that, since these private players were enmeshed with the government, Uncle Sam could be counted on to always save the day. It was, as many have pointed out, the worst of all worlds. Not only were profits privatised while risks were socialised, but the implicit government backing created powerful incentives for reckless business practices.

With the new equity purchase programme Paulson has taken the discredited Fannie and Freddie model and applied it to a huge swath of the private banking industry. Again, there is no reason to shy away from risky bets, especially since the treasury has made no such demands of the banks (apparently it doesn't want to "micromanage".)

To further boost market confidence, the federal government has also unveiled unlimited public guarantees for many bank deposit accounts. Oh, and as if this were not enough, the treasury has been encouraging the banks to merge, ensuring that the only institutions left will be "too big to fail", thereby guaranteed a bail-out. In three ways, the market is being told loud and clear that Washington will not allow the financial institutions to bear the consequences of their behaviour. This may be Bush's most creative innovation: no-risk capitalism.

There is a glimmer of hope. In answer to Senator Corker's question, the treasury is indeed having trouble dispersing the bail-out funds. So far it has requested about $350bn of the $700bn, but most of this hasn't yet made it out the door. Meanwhile, every day it becomes clearer that the bail-out was sold to the public on false pretences. Clearly, it was never really about getting loans flowing. It was always about doing what it is doing: turning the state into a giant insurance agency for Wall Street, a safety net for the people who need it least, subsidised by the people who will most need state protections in the economic storms ahead.

This duplicity is a political opportunity. Whoever wins on November 4 will have enormous moral authority. It should be used to call for a freeze on the dispersal of bail-out funds, not after the inauguration but right away. All deals should be renegotiated, this time with the public getting the guarantees.

It is risky, of course, to interrupt the bail-out process. Nothing could be riskier, however, than allowing the Bush gang their parting gift to big business - the gift that will keep on taking.

[2dimes]

Fruitcake. What's your take on Dubai right now?

[Fruitcake]

Fruitcake. What's your take on Dubai right now?

It's in the shitter. However, Abu Dhabi has bailed it out (kind of) so far, and will continue to do so for the foreseeable future. The caveat I am hearing is that western banks are being put to the back of the queue in the restructuring. Dubai World triggered the whole crisis with it's standstill on repayments of the $26 billion debt on its books. This has triggered a crisis with the main lenders from that part of the world, Amlak AMLK.DU and Tamweel TAML.DU. I see that they are now going to merge. Reports are that their creditors will be protected...ok, let's wait and see.

We have all heard of the tales of Ferraris etc being abandoned, so one could foresee and investment oppo right now, but in truth I am giving it all a swerve.

[2dimes]

What kind of investment are you suggesting.

Since I'm just a goof with a mortgage, wife, kids and a $10 000 motorcycle I paid $40 000+ to get. As soon as you said abandoned Ferraris I'm thinking Cargo plane and tow truck, the snag in my plan is trying to buddy up to the right dudes to keep from getting jailed. Obviously I'm looking through the fence here.

You're probably thinking commercial property or something? I would think unless you're family anything there could get taken away pretty quick if it actually is good. The rules there are slightly different which is partly why it's much nastier for the hobos. Correct?

[Fruitcake]

The exact amount of total outstanding liabilities is not quite known but is estimated to be close to $80 billion. This however appears to include non interest bearing liabilities such as trade creditors. Based on independent inquiries including sources in Dubai the estimated total interest bearing liabilities are approximately $45 billion. Given below is a thumbnail sketch of some of the outstanding debts and their approximate maturities.

Bonds
Name amount date of maturity
Nakheel 3.52 Dec 09
" 1.00 May 2010
" 0.75 2011
Jafza 2.00 2012
DP World 1.55 2017
DP World 1.75 2037

Loans
Nakheel 1.85 2012
Dubai Drydocks 1.7 2011
" " 0.50 2013
Dubai World Group Finance 5.00 2010-2013
Limitless 1.20 2010

It doesn't take a rocket scientist (or a global class hedge fund operator) to see that most of this is going to have to be rolled over....the question is....on what terms.

Currently Dubai World is seeking to reschedule the immediate $3.52 billion sukuk debt (an Islamic bond) that matured on December 14, 2009 until at least May 30, 2010. Another $1 billion Nakheel sukuk is due to mature in May 2010. In addition, there are two other debt obligations maturing in 2010, namely a $1.2 billion loan from Limitless and a $2 billion loan from Dubai World Group Finance. Total sukuk and other debt obligations that mature is 2010 is approximately $7.7 billion. Unless it secures a financial lifeline, Dubai World may seek further extensions for some of its maturing debt obligations in 2010.

Western banks are in this for a great deal of moolah...HSBC, near on $18 Billion, Standard Chartered, near on $10 billion, Barclays, around $5 billion, ABN Amro, Citi, Bank of Baroda, BNP Paribas and Lloyds, around $2-3 billion each.

Episodes similar to Dubai World may surface in the Gulf Region as there are other companies that have amassed considerable debt particularly on real estate projects. For instance, Saad Group and Ahmad Hamad Algosaibi & Bros Co., two Saudi Arabian conglomerates, have defaulted on an estimated $20 billion debt to some 100 banks. According to the UAE central bank, UAE banks have an estimated $2.9 billion to the two conglomerates. There are other real estate developers particularly in Dubai facing severe financial difficulties. Banks with UAE exposure are heading for a tough time in 2010, with widespread loan loss provisioning in store.

2010 will prove to be very interesting....

[Fruitcake]

What kind of investment are you suggesting.

Since I'm just a goof with a mortgage, wife, kids and a $10 000 motorcycle I paid $40 000+ to get. As soon as you said abandoned Ferraris I'm thinking Cargo plane and tow truck, the snag in my plan is trying to buddy up to the right dudes to keep from getting jailed. Obviously I'm looking through the fence here.

You're probably thinking commercial property or something? I would think unless you're family anything there could get taken away pretty quick if it actually is good. The rules there are slightly different which is partly why it's much nastier for the hobos. Correct?

In fact all property is in free fall regarding values. I have heard as much as 45% has been wiped off the value in some cases...but then I was always of the opinion that once footballers and their ilk start buying an asset class it is time to exit sharpish.

[2dimes]

So are they all in trouble? And if yes why do I only hear about Dubai. Do you think it is because it has the fancy playgrounds?

[Fruitcake]

So are they all in trouble? And if yes why do I only hear about Dubai. Do you think it is because it has the fancy playgrounds?

Almost right. Dubai has been the shining example (so called) of a nation not having the base resource of oil and yet expanding its trade in a way that was, quite frankly, never achievable in the long term. The issue is this. Gulf States investment houses and Sovereign Wealth operations have invested heavily in the west, buying up anything they felt was worthwhile. Now I can see their thinking...in the long term the oil will run out, so buy into cash cows (like BAA, the British Airports operator which just produces volumes of low yield but highly valued cash, on a daily basis). Now to bail out their brethren could often mean cashing their chips at another table so to speak. This would then trigger something of a sharp correction in asset values in the west...lest we forget, we are talking trillions of dollars invested here.

So the nub of the problem is how to extricate themselves from their mess whilst not plunging their investments into a freefall as well, because if they started fire selling their assets over here, the finance boys would be onto it in a trice and exiting the rest before they could!

[2dimes]

So at some point they leave the sandbox toys but a fair portion is owned by western suckers. Or is there going to be a temporary recovery to help draw in more foreign investment first?

[Fruitcake]

So at some point they leave the sandbox toys but a fair portion is owned by western suckers. Or is there going to be a temporary recovery to help draw in more foreign investment first?

Western suckers could be a good name, but seriously, the long term prognosis is that UAE etc will bail them out. As I alluded to previously, the problem is that the western banks do not seem, on the surface, to be getting the same deal in repayments. This, inherently, brings its own set of problems for the Gulf in that the western banks, finance houses, hedge funds etc, will not be easily drawn into another set of financing whilst they believe themselves to be treated unfairly. The conclusion being that this will bring its own form of banking protectionism in. Local (Gulf) banks support their region, whilst London, New York et al avoid.

We live in a finely balanced world when viewing finance...which is a good thing....it does ultimately mean less war, less strife and more settled relationships, however, the Gulf states, rich as they are, still stand quite tiny when compared to, in the first instance, the USA. Abu Dhabi's GDP reached Dh519.9 billion (US$141.5 billion) last year, compared to a 2009 forecast USA GDP of around 14-15 thousand billion...some 100 times larger. Add all the Gulf states together and it still only amounts to a fraction of the USA. The Gulf states know they need the USA and vice versa due to oil. Foreign (western in the main) finance operations will be ensuring their payouts/paybacks are safe (so they do not have to write down too much on their balance sheets) before they consider pulling more moolah out of their pockets. The Gulf states know this, so the horse trading is continuing.

For what it's worth, I still think many asset classes are overvalued across the global economy and like many in my position have opted for low yield cash rich operations...after all Warren Buffet thinks the railways are good enough...and that's good enough for a lowly micro financial organism like me, even though I happen to agree with him. Always remember the old adage...build your wealth with careful aggressive investment tactics (high yield, high risk) then switch to low yield cash rich assets once critical mass is achieved.

[2dimes]

Again being on my side, the side of small potatoes. I was thinking more that most of the buildings or condos and probably a lot of the abandoned Ferarris would be owned by the football stars and b list celeberties. Or more likely westerners that had companies of some sort mostly construction I would think.

[Fruitcake]

Again being on my side, the side of small potatoes. I was thinking more that most of the buildings or condos and probably a lot of the abandoned Ferarris would be owned by the football stars and b list celeberties. Or more likely westerners that had companies of some sort mostly construction I would think.

Well a load of the properties were owned by expats living over there as well as the smart motors. The construction operations were locally owned, but many of the project management team as well as many support services were run/owned by those same expats. They have obviously decided (after not getting paid for a length of time) that they needed to exit sharpish with the cash assets they had (deposited neatly in western banks dontcha know). Many had quite huge loans/mortgages on their assets there so the loan note holders are left holding the baby so to speak...however, many of those loans were packaged into so called AAA rated bonds and sold to....you guessed it....western finance operations. Now these operations would include Pension funds from all over (I know of a Norwegian pension fund that has been quite crippled over the past 12-18 months) . So this brings yet another domino into play as it falls over.

Add to all this the laws of Islamic banking and one has a real interesting mix....In an Islamic mortgage transaction, instead of loaning the buyer money to purchase the item, a bank might buy the item itself from the seller, and re-sell it to the buyer at a profit, while allowing the buyer to pay the bank in installments (thus avoiding the 'interest' element, banned under islamic law). However, the bank's profit cannot be made explicit and therefore there are no additional penalties for late payment. In order to protect itself against default, the bank asks for strict collateral. The goods or land is registered to the name of the buyer from the start of the transaction. Islamic banks handle loans for vehicles in a similar way (selling the vehicle at a higher-than-market price to the debtor and then retaining ownership of the vehicle until the loan is paid). Which of course means that all those Ferraris are now owned by various Islamic banks!!!!

[2dimes]

Now these operations would include Pension funds from all over (I know of a Norwegian pension fund that has been quite crippled over the past 12-18 months) . So this brings yet another domino into play as it falls over.

Oh goody. That kind of thing is my favorite. Who's the loser here, wealthy westerners like them "greedy union members." because I assure you those are the people that have pensions. All the people too smart for a union get nada. It hurts my tummy to think of the actual rich people dodging the whole thing.

The last part where you explain how the banks own those cars figures. I knew there was going to be a reason I got my hand cut off after I resold several batches of "free" cars.