Is Obama Fixing to Own Some Banks?

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The other day, I suggested that Obama’s principles of government ownership sounded like they were designed for more than just GM.

There’s evidence to support that suggestion in this reasonably good David Sanger article on the GM bankruptcy.

In interviews in recent days, Mr. Obama’s economic team said it anticipated [political pressues regarding business decisions related to companies the government owns], and had moved to cut them off early.

“It started right around the time of the bank stress tests,” said Rahm Emanuel, Mr. Obama’s chief of staff, in an interview on Monday. During one of the president’s daily economic briefings, Mr. Emanuel added, “he said that taking over companies like this is a big deal, and that no president has ever faced anything like this before. And he said he wanted to see some rules of the road about how the government should act” when it suddenly becomes the biggest shareholder in the market.

Mr. Obama clearly wanted protection: a set of principles he could hand to angry members of Congress, campaign contributors or executives to explain why he would not call Fritz Henderson, G.M.’s chief executive, to discuss whether an engine should be made in Saginaw or Shanghai.

The result was an interagency task force informally called “The Government as Shareholder,” headed by Diana Farrell, the deputy director of the National Economic Council and formerly the head of the McKinsey Global Institute, the research arm of McKinsey & Company.

It was Ms. Farrell’s report, delivered to the Oval Office fewer than 10 days ago, that laid out the principles that Mr. Obama described on Monday.

The White House insists the principles will apply equally to the government’s investment in the American International Group, the fallen insurer, or in Citigroup and other banks that the government has rescued. [my emphasis]

Sanger doesn’t seem to get the implication of Rahm’s comment. Rahm tells us these principles–principles the government will use with companies it owns–came up not during auto task force discussions, but during the bank stress tests.  That means the conversation about socialism how big a deal it is for the government to own companies came up in the context of owning banks, not owning car companies.

Sure, we already own an insurance company and Freddie and Fannie. Sure, maybe the reference to Citi is a very pointed reference. 

But it sure seems like these principles suggest we’re going to be owning a bank in the near future, to go along with GM and AIG.  Read more →

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Obama “Looks Forward” on Financial Fraud, Too

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Obama just issued a signing statement to the bill establishing the "Pecora Commission," mandated to investigate the financial meltdown. The statement seems to signal a desire to "look forward" on financial fraud, in the same way he continues to try to "look forward" on torture an other abuses of power.

The complete statement reads,

Today I have signed into law S. 386, the "Fraud Enforcement and Recovery Act of 2009." This Act provides Federal investigators and prosecutors with significant new criminal and civil tools to assist in holding accountable those who have committed financial fraud. These legislative enhancements will help the Department of Justice to combat mortgage fraud, securities and commodities fraud, and related offenses, and to protect taxpayer money that has been expended on recent economic stimulus and rescue packages. With the tools that the Act provides, the Department of Justice and others will be better equipped to address the challenges that face the Nation in difficult economic times and to do their part to help the Nation respond to this challenge.

Section 5(d) of the Act requires every department, agency, bureau, board, commission, office, independent establishment, or instrumentality of the United States to furnish to the Financial Crisis Inquiry Commission, a legislative entity, any information related to any Commission inquiry. As my Administration communicated to the Congress during the legislative process, the executive branch will construe this subsection of the bill not to abrogate any constitutional privilege.

Which affects the following section, laying out the Commission’s investigative power. 

(d) Powers of the Commission-

(1) HEARINGS AND EVIDENCE- The Commission may, for purposes of carrying out this section–

(A) hold hearings, sit and act at times and places, take testimony, receive evidence, and administer oaths; and

(B) require, by subpoena or otherwise, the attendance and testimony of witnesses and the production of books, records, correspondence, memoranda, papers, and documents.

(2) SUBPOENAS-

(A) SERVICE- Subpoenas issued under paragraph (1)(B) may be served by any person designated by the Commission.

(B) ENFORCEMENT-

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Geithner NY Fed & Congress Knew About AIG Bonuses All Along

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It is not just torture hearings on the training table this morning, there is a plateful of AIG/Bankster/Bailout fun on tap too. At 10:00 am EST, the House Oversight and Government Reform Committee will hold a hearing on “AIG: Where is the Taxpayer Money Going?”.

In advance of the big hearing, David Cho and Brady Dennis in the Washington Post have a significant article out this morning confirming what any sane mind has thought all along, namely that the government and the Fed were way deeper in the muck of the AIG bonuses, and knew full well about the issue, long before they have admitted:

Documents show that senior officials at the Federal Reserve Bank of New York received details about the bonuses more than five months before the firestorm erupted and were deeply engaged with AIG as well as outside lawyers, auditors and public relations firms about the potential controversy. But the New York Fed did not raise the alarm with the Obama administration until the end of February.

Timothy F. Geithner, who became Treasury secretary early this year, was the head of the New York Fed when it became aware of the bonus details. But his name is not among those of senior New York Fed officials mentioned in the summaries of phone calls, correspondence and other documents obtained by The Washington Post.

Those documents also illuminate who in the government, beyond the New York Fed, knew what about the bonuses at AIG’s most troubled unit, and when.
…
By Sept. 29, the bonus matter first appeared on the radar of the New York Fed, which was designated as the primary contact for AIG, documents show. Senior officials from the New York Fed met with AIG officials to discuss the compensation plans in place at Financial Products, whose risky derivative contracts had brought the insurance giant to the brink of collapse.

AIG e-mailed officials at the New York Fed copies of the company’s compensation plans, which detailed bonuses and retention payments, including those at Financial Products, documents show. The issue arose in scores of meetings and conference calls over the ensuing months. AIG also disclosed its retention programs in public filings.

Weeeeeeee! Another shocking instance of gambling going on at the casino. Or not. Actually, when we first learned of the Semtex laden AIG Retention Contracts there were immediate questions as to how it could be that the Fed and the rest of government had no idea of the explosive potential. Now that we know they knew, it sure is hilarious that Treasury Secretary Tim Geithner, in mid-March 2009, tried to devise a laughably bogus plan to fix the very same problem he apparently full bore ignored in October 2008 at the previous job where he was supposedly the smartest kid in the room.

Of course, it wasn’t just the New York Fed, and their purportedly detached head, that have completely misrepresented their depth of knowledge of the pending AIG Bonus Scandal. Congress did too (and Read more →

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Stressing Teh Kitty

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The bank stress test results are in! Wonderful news, the economy is totally groovy man! Well, except not. For what are being hailed as great results, there are some disturbing numbers. Said stress tests of the 19 largest U.S. banks show they will need a total of $74.6 billion to withstand a deeper recession. For some reason, the NYT seems to think this is good news:

Federal regulators told the country’s 19 largest banks that they must raise $75 billion in extra capital by November, a more upbeat verdict on the health of the financial system than the industry had feared just two months ago.

Ten of the 19 bank holding companies deemed “too big to fail” by the Obama administration will be required to raise additional capital, according to the results of the government’s stress tests, released late Thursday afternoon. But the 10 banks will have to raise much less capital than some analysts had expected as recently as a few days ago.

Citigroup must raise $5.5 billion in new capital, on top of converting $45 billion in rescue funds into ordinary stock, which would give the United States ownership of 36 percent of Citi.

Bank of America must raise $34 billion, but it is likely to resist achieving all or some of that by converting its $45 billion in bailout money into common stock. Instead, the bank is expected to fill its capital hole by selling off smaller divisions, a stake in China Construction Bank and other asset sales.

The stress tests are aimed at estimating how much each bank would lose if the economic downturn proved even deeper than currently expected. Under the worst-case scenario — an unemployment rate of 10.3 percent, an economic contraction of 3.3 percent this year and a 22 percent further decline in housing prices — the losses by the 19 banks could total $600 billion this year and next, or 9.1 percent of the banks’ total loans, regulators concluded. Losses to the banks’ loan portfolios alone could total $455 billion this year and next.

“There is a reassurance in clarity," Treasury Secretary Timothy F. Geithner said at a news briefing on Thursday afternoon.

A "reassurance in clarity". Thanks for that Mr. Geithner. Bank of America Inc – $33.9 billion; Wells Fargo – $13.7 billion, GMAC – $11.5 billion, and Citigroup Inc needs $5.5 billion. Good thing it wasn’t bad news I Read more →

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The Next Anti-Union Myth: Obama Gave Them Chrysler

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Prepare to see lots more stories like this one–stories that suggest Obama, out of whatever good intentions, decided to "give" the UAW Chrysler even while he deprived banks of their rightful return on debt.

Regardless of its literary influences [in Machiavelli], the Obama administration’s decision to give unions a big stake in the ailing Chrysler while strong-arming banks into forgiving a huge portion of debt is a sign of the times.

A nearly bust carmaker, several lenders that owe the government billions of dollars (and, in some cases, their survival) and an interventionist president eager to be seen to be tackling the nation’s economic ills: welcome to the United States of America 2009.

I have heard the arguments supporting the decision to short-change debt holders and carve out Chrysler between the unions (which get 55 per cent but just one board seat), Fiat (up to 35 per cent and three board seats) and the government (most of the rest of the equity and four board seats).

They boil down to this: extraordinary times require extraordinary measures (the end justifies the means, if you like).

In other words, with Chrysler employing more than 50,000 people in the US and Canada, it was paramount to avoid a long bankruptcy that would have destroyed the company.

If that meant giving junior creditors such as the unions favourable treatment at the expense of senior debt-holders, so be it. As for those hedge funds that rejected the plan, they are nothing but “speculators” according to Mr Obama.

Absolutely critical to the myth of the poor little hedge funds being strong-armed by the evil union and the interventionist President is the conflation of "the union" with VEBA, the fund to provide retiree health care that is controlled by the union to which Chrysler actually owes the money. I know it makes Financial Times readers lash out to hear of an evil union budging ahead of productive hedge funds, but in truth this was a matter of dealing with Chrysler’s biggest creditors–whether it be JP Morgan Chase or a fund run by a union–and not a matter of class warfare. 

Now to be fair, there is a germ of truth in this article: the poor little hedge funds purportedly being strong-armed by the union do hold debt that takes precedence over the VEBA fund. In relative terms, a tiny bit of it. Read more →

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JP MorganThe Banks Forces Chrysler into Bankruptcy

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the end of Chrysler

photo courtesy of S and C

The UAW was willing to negotiate, but the banksters weren’t. So Chrysler will now enter bankruptcy.

The Obama administration will announce at noon today that it will take Chrysler LLC into a historic bankruptcy to force a cut in debt key to a partnership with Fiat S.p.A. after three firms refused a sweetened offer.

With the UAW late Wednesday ratifying cost cuts in its contract and cuts in the money due its retiree health-care trust fund, President Barack Obama will announce a Chrysler-Fiat deal and the government’s “surgical” bankruptcy plan later today.

The administration "was willing to give the holdout creditors a final opportunity to do the right thing," an administration official said. But "the agreement of all other key stakeholders ensured that no hedge fund could have a veto over Chrysler’s future success."

The lack of an agreement will not "impede the new opportunity Chrysler now has to restructure and emerge stronger going forward," the official said.

The Administration claims they’ll be able to pull off a surgical bankruptcy and still pull off the Fiat deal on the other side, leaving Chrysler with some lease on life. But meanwhile, the banksters get to collect on their bets against Chrysler and get rich rich rich! All while sucking at the Federal teat. 

Update: JPMorgan Chase may have been willing to deal. It was a couple of hedge funds that were the final holdouts.

The holdouts are no longer the big four banks (and TARP recipients) that together own 70 percent of Chrysler’s debt. Both the Journal and the Washington Post have fingered three hedge funds — Oppenheimer Funds, Perella Weinberg Partners’ Xerion Capital Fund and Stairway Cap Management — as the sticklers. The government is faced with the unenviable prospect of getting unanimous consent from all the bondholders to make a deal, which gives the hedge funds extraordinary leverage. In the parlance of Wall Street, taking a hit on what you are owed is known as a "haircut." The hedge funds seem to be allergic to the barbershop.

From Obama’s statements.

He starts by saying they get a new lease on life. 

Talks about its role in US history, and in building the middle class. 

It’s been a pillar of our economy, but a pillar that’s been weakening. Designing cars that were less reliable and less fuel efficient than competitors. As I’ve said from the start, we cannot keep this Read more →

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Ponzi Nation, TARP Edition

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Small potatoes, as far as Ponzi schemes goes–$4.9 million. But by making claims you’re investing in TARP funds? That’s gets you on the Ponzi nation list for sure.

Federal authorities this morning announced that Gordon B. Grigg of Franklin has agreed to plead guilty to four counts of mail fraud and four counts of wire fraud, after operating a Ponzi scheme that dated back to 1996.

Joining U.S. Attorney Ed Yarbrough to make the announcement was Neil Barofsky, special inspector general of the Troubled Assets Relief Program, which runs the financial bailout enacted by Congress last year. Barofsky came down from Washington to highlight the fact that part of Grigg’s fraud involved claims that he could get investors into high-yielding notes issued by the government as part of the TARP.

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Dan Quayle’s and John Snow’s Flunkies Putting Greed Ahead of America

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quaylegmcrop.thumbnail.jpg (Image by twolf)

Now for an update from the most loathsome intersection of the financial and the auto crisis…

You’ll recall that last we heard, Chrysler was hoping to stay alive long enough to have Fiat’s Sergio Marchionne swoop in and save it. Even if that happens, though, Chrysler will need to get some customers to buy its cars until such a time as Marchionne can do his magic.

And to get customers, they’re going to need to get credit to offer those customers. As a reminder, to get credit, they’re sort of reliant on Chrysler Financial, a separate company from Chrysler, the part Cerberus wants to keep.

Only, the flunkies that John Snow and Dan Quayle have running Chrysler Financial are refusing to take government money to get that credit because–you guessed it–they don’t want executive pay limits.

Top officials at Chrysler Financial turned away a $750 million government loan because executives didn’t want to abide by new federal limits on pay, sources familiar with the matter say.

The government had been offering the loan earlier this month as part of its efforts to prop up the ailing auto industry, including Chrysler, which is racing to avoid bankruptcy. Chrysler Financial is a vital lender to Chrysler dealerships and customers.

In forgoing the loan, Chrysler Financial opted to use more expensive financing from private banks, adding to the burdens of the already fragile automaker and its financing company.

Oh. And don’t wory. Jamie Dimon and Vikram Pandit are in on the act, too:

But by forgoing the government loan, the company must borrow money from a group of private banks, including JP Morgan and Citigroup, sources said. That line of financing had been arranged in August, when the company was on the brink of bankruptcy, according to an industry official. The financing from the private banks comes at a higher borrowing cost for Chrysler Financial, a source said. 

Because that’s what Michigan needs, to owe JP Morgan Chase more money.

Read the whole story. It’ll get you saying "loathsome" too.

So nice to see the guy who used to be Vice President and the guy who used to be Treasury Secretary showing such an interest in the future of our country.

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Ponzi Nation, Monday Edition

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Another day another Ponzi scheme broken up by the SEC.

The Securities and Exchange Commission has charged a Philadelphia-area investment adviser and its principal with misappropriating millions of dollars in client assets, and obtained an emergency court order freezing their assets.

The SEC alleges that through a commingled brokerage account, Donald Anthony Walker Young of Coatesville, Pa., and Acorn Capital Management, LLC misappropriated more than $23 million from investors buying limited partnership interests in Acorn II LP, which invested in publicly traded securities. Young used investor funds to pay other investors in the nature of a Ponzi scheme, and directly stole some of the money to purchase a vacation home in Palm Beach, Fla., and pay personal expenses related to horse ownership and racing, construction, boats, limousines, chartered aircraft and other luxuries.

Even with the two bank failures on Friday, Ponzi nation still appears to be leading Bank Failure nation this year (though I’m still working on guidelines for the definitive comparison). 

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Do CEOs Really Matter?

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There’s a BusinessWeek report that confirms two things I’ve been arguing for a while: that Bob Nardelli will be ousted no matter what happens with Chrysler in the upcoming two weeks.

Chrysler CEO Robert Nardelli confirmed in a letter to employees today that he will likely be replaced as CEO of the automaker in the coming weeks as the company faces either an alliance with Italian automaker Fiat or a bankruptcy reorganization or liquidation. The company’s board, too, would be replaced, he said.

And that one of the reasons the Obama Administration treats the Fiat deal as a viable option for Chrysler is that they hope to put Sergio Marchionne, the head of Fiat, in charge of the merged company.

In Nardelli’s letter to employees, the former Home Depot CEO said a new board of directors will have the power to appoint a new CEO. “The majority of the directors will be independent (not employees of Chrysler or Fiat),” Mr. Nardelli wrote. He added that the board “will have the responsibility to appoint a chairman and select a CEO with Fiat’s concurrence.”

Executives close to Chrysler say that it is possible that Fiat CEO Sergio Marchionne will hold the title of CEO, similarly to the way Carlos Ghosn was CEO of both Renault and Nissan for a few years after he was granted the job at Renault. Renault has a controlling interest in Nissan, and had sent Ghosn to Nissan to turnaround the then-ailing Japanese automaker.

 Now, Marchionne is a darling of the Wall Street types because he managed to turn Fiat around. 

"The turnaround he steered at Fiat was just as miraculous as what Carlos Ghosn did at Nissan," says Tony Faria, business professor at the University of Windsor. "Fiat was in big difficulty, losing a lot of money. He had them in profitability in less than two years. The turnaround he steered was just magnificent."

Fiat–one of the oldest industrial businesses in Europe–was on the brink of bankruptcy when Marchionne was appointed CEO in 2004. Less than two years later, the maker of such brands as Ferrari, Alfa Romeo and Maserati returned to profitability as a world leader in environmentally friendly vehicles.

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