by Calculated Risk on 9/14/2009 07:35:00 PM

From Bloomberg: U.S. Said to Explore Selling Stock Acquired in Citigroup Rescue (ht jb)

Bloomberg is reporting that the Treasury and Citigroup are discussing how the U.S. can sell the 34 percent stake (7.7 billion shares) that the U.S. acquired as part of the bailout. At $4.50 per share, the U.S. stake is worth almost $35 billion.

In the February bailout, the U.S. increased it's common stake in Citi by converting $25 billion in preferred shares into common. And the U.S. is still also guaranteeing about $306 billion in assets (per the bailout agreement last November).

But selling some common would be a good first step ...

by Calculated Risk on 7/09/2009 03:06:00 PM

From the WaPo: Treasury Works on 'Plan C' To Fend Off Lingering Threats

... the Treasury Department has assembled a team to examine what could yet bring it down and has identified several trouble spots ... Informally known as Plan C, the internal project is focused on vexing problems such as the distressed commercial real estate markets, the high rate of delinquencies among homeowners, and the struggles of community and regional banks, said government sources familiar with the effort.
...
The team is also responsible for considering potential government responses, but top officials within the Obama administration are wary of rolling out initiatives that would commit massive amounts of federal resources ...

The officials in charge of Plan C -- named to allude to a last line of defense -- face a particular challenge in addressing the breakdown of commercial real estate lending. ... these groups face a tidal wave of commercial real estate debt -- some estimates peg the total at more than $3 trillion -- that they will need to refinance. ...

Thousands of these institutions wrote billions of dollars in mortgages on strip malls, doctors offices and drive-through restaurants. These commercial loans required a lot of scrutiny and a leap of faith, and, for much of the decade, the smaller banks that leapt were rewarded with outsize profits.

In doing so, many took on bigger and bigger risks. By the beginning of the recession in December 2007, the median midsize bank held commercial real estate loans worth 3.55 times its capital cushion -- its reserve against unexpected losses -- according to the Federal Deposit Insurance Corp.

... Another issue identified by the Plan C team is homeowner delinquencies, which continue to rise as large numbers of people lose their jobs and miss monthly payments.

"A lot of scrutiny and a leap of faith"? More of the later, not enough of the former. It didn't take much "scrutiny" to understand there was substantial overbuilding in CRE, especially for retail space and for hotels. And yet banks kept making loans in 2006, 2007 and even in 2008 ...

by Calculated Risk on 7/08/2009 04:50:00 PM

Press Release: Joint Statement by Secretary of the Treasury Timothy F. Geithner, Chairman of the Board of Governors of the Federal Reserve System Ben S. Bernanke, and Chairman of the Federal Deposit Insurance Corporation Sheila Bair

Today, the Treasury Department, the Federal Reserve, and the FDIC are pleased to describe the continued progress on implementing these programs including Treasury's launch of the Legacy Securities Public-Private Investment Program.

Financial market conditions have improved since the early part of this year, and many financial institutions have raised substantial amounts of capital as a buffer against weaker than expected economic conditions. While utilization of legacy asset programs will depend on how actual economic and financial market conditions evolve, the programs are capable of being quickly expanded if these conditions deteriorate. Thus, while the programs will initially be modest in size, we are prepared to expand the amount of resources committed to these programs.

Legacy Securities Program

The Legacy Securities program is designed to support market functioning and facilitate price discovery in the asset-backed securities markets, allowing banks and other financial institutions to re-deploy capital and extend new credit to households and businesses. Improved market function and increased price discovery should serve to reinforce the progress made by U.S. financial institutions in raising private capital in the wake of the Supervisory Capital Assessment Program (SCAP) completed in May 2009.

The Legacy Securities Program consists of two related parts, each of which is designed to draw private capital into these markets.

Legacy Securities Public-Private Investment Program ("PPIP")

Under this program, Treasury will invest up to $30 billion of equity and debt in PPIFs established with private sector fund managers and private investors for the purpose of purchasing legacy securities. Thus, Legacy Securities PPIP allows the Treasury to partner with leading investment management firms in a way that increases the flow of private capital into these markets while maintaining equity "upside" for US taxpayers.

Initially, the Legacy Securities PPIP will participate in the market for commercial mortgage-backed securities and non-agency residential mortgage-backed securities. To qualify, for purchase by a Legacy Securities PPIP, these securities must have been issued prior to 2009 and have originally been rated AAA -- or an equivalent rating by two or more nationally recognized statistical rating organizations -- without ratings enhancement and must be secured directly by the actual mortgage loans, leases, or other assets ("Eligible Assets").
...
Legacy Loan Program (this is the second program, and is essentially on hold)

There is a list of approved PPIP firms (no PIMCO!)

And some more info:
To view the Letter of Intent and Term Sheets, please visit link
To view the Conflict of Interest Rules, please visit link
To view the Legacy Securities FAQs, please visit link

by Calculated Risk on 6/08/2009 10:22:00 PM

From Bloomberg: U.S. Treasury Said to Plan Approving 10 Banks to Repay TARP

The Treasury is preparing to announce tomorrow it will let 10 banks buy back government shares, people familiar with the matter said, signaling confidence some of the largest U.S. lenders won’t again need a taxpayer rescue.

JPMorgan Chase & Co. is among those cleared to repay Troubled Asset Relief Program funds ... Goldman Sachs Group Inc., American Express Co. and State Street Corp. are also among those that have sold shares and debt unguaranteed by the government ...

Here is your handy table ...according to the Bloomberg article 10 of these stress tested banks will be approved to repay the TARP money (MetLife didn't take TARP money). I've noted the banks mentioned in various articles ... let the guessing games begin!

Name	TARP Amount	Comment
Bank of America	$52.5 billion	No way!
Citigroup	$50 billion	No way!
JPMorgan Chase	$25 billion	Mentioned
Wells Fargo	$25 billion	Unlikely
GMAC	$12.5 billion	No way!
Goldman Sachs	$10 billion	Mentioned
Morgan Stanley	$10 billion	Mentioned
PNC Financial Services	$7.6 billion	-
U.S. Bancorp	$6.6 billion	Mentioned
SunTrust	$4.9 billion	-
Capital One Financial Corp.	$3.6 billion	-
Regions Financial Corp.	$3.5 billion	-
Fifth Third Bancorp	$3.4 billion	-
American Express	$3.4 billion	Mentioned
BB&T	$3.1 billion	Mentioned
Bank of New York Mellon	$3 billion	Mentioned
KeyCorp	$2.5 billion	-
State Street	$2 billion	Mentioned
MetLife	None	-

Bailout amounts from Pro Publica : Eye on the Bailout

by Calculated Risk on 6/02/2009 07:39:00 PM

From Bloomberg: Fed Said to Raise Standards for Banks’ TARP Repayment

Federal Reserve officials surprised bankers in the past week by demanding they raise specific amounts of new capital before repaying taxpayer funds, applying a more stringent assessment than the stress tests in May.

JPMorgan Chase & Co. and American Express Co. were told they need to boost common equity ... Morgan Stanley was directed to raise more funds after already selling stock to cover its stress-test shortfall. One firm was told only yesterday ...

From the WSJ: Banks' Telethon Is Nearly Over

J.P. Morgan Chase & Co., Morgan Stanley, American Express Co. and regional bank KeyCorp said Tuesday they sold a combined $8.7 billion in common stock. That pushed the total ... to at least $65 billion since the [stress test] results were announced May 7.

This will be interesting next week. I don't expect to see BofA, Wells Fargo, Citi or GMAC on the list. Heck, GMAC was queued up at the FDIC lending facility today.

by Calculated Risk on 5/20/2009 08:32:00 AM

From the Detroit News: Feds to inject $7.5B more into GMAC (ht jb)

The Treasury Department is preparing to announce as early as today that it will invest an additional $7.5 billion in GMAC LLC in a deal that could allow the U.S. government to hold a majority stake in the Detroit-based auto finance company.

The Stress Test results showed GMAC needs another $11.5 billion in capital, so there is probably more coming.

by Calculated Risk on 5/14/2009 09:17:00 PM

After the insurers comes ...

From the WSJ: YRC to Apply for Bailout Funds

YRC Worldwide Inc., one of the nation's largest trucking companies, will seek $1 billion in federal bailout money to help relieve pension obligations, the chief executive said Thursday.
...
Chief Executive William Zollars said the company will seek the money to help cover the cost of its estimated $2 billion pension obligation over the next four years.
...
By applying to the U.S. Treasury for money under the Troubled Asset Relief Program, Mr. Zollars said he hopes to "get the conversation started" with federal authorities about reducing the company's pension obligations. He said YRC will submit an application to the Treasury Department as early as Friday.

Is YRC a bank holding company?

by Calculated Risk on 4/07/2009 09:25:00 PM

The WSJ reports: Treasury Plans to Extend TARP to Life Insurers

The Treasury is expected to announce within the next several days the inclusion of life insurers that are bank holding companies or own a thrift...

This is apparently for life insurers that are bank holding companies or own a thrift. These bank holding were already eligible for TARP money.

The WSJ mentions that Prudential, Hartford, and Lincoln National have all applied.

by Calculated Risk on 4/04/2009 08:52:00 AM

From the WaPo: Administration Seeks an Out On Bailout Rules for Firms

The Obama administration is engineering its new bailout initiatives in a way that it believes will allow firms benefiting from the programs to avoid restrictions imposed by Congress, including limits on lavish executive pay, according to government officials.

Administration officials have concluded that this approach is vital for persuading firms to participate in programs funded by the $700 billion financial rescue package.

The administration believes it can sidestep the rules because, in many cases, it has decided not to provide federal aid directly to financial companies, the sources said. Instead, the government has set up special entities that act as middlemen, channeling the bailout funds to the firms and, via this two-step process, stripping away the requirement that the restrictions be imposed ...

by Calculated Risk on 3/30/2009 01:11:00 AM

From the WSJ: Government Forces Out Wagoner at GM

The administration's auto team announced the departure of [General Motors Corp. Chief Executive Rick Wagoner] on Sunday. In a summary of its findings, the task force added that it doesn't believe Chrysler is viable as a stand-alone company, and suggested that the best chance for success for both GM and Chrysler "may well require utilizing the bankruptcy code in a quick and surgical way."

On Chrysler:

The government said it would provide Chrysler with capital for 30 days to cut a workable arrangement with Fiat SpA, the Italian auto maker that has a tentative alliance with Chrysler.
...
If the two reach a definitive alliance agreement, the government would consider investing up to $6 billion more in Chrysler. If the talks fail, the company would be allowed to collapse.

From the NY Times: U.S. Moves to Overhaul Ailing Carmakers

President Obama is scheduled to announce details of the auto package at the White House on Monday, but two senior officials, offering a preview on condition of anonymity, made clear that some form of bankruptcy — a quick, court-supervised restructuring, as they described it — could still be an option for one or both companies.

On GM:

G.M., on the other hand, has made considerable progress in developing new energy-efficient cars and could survive if it can cut costs sharply, the task force reported. The administration is giving G.M. 60 days to present a cost-cutting plan and will provide taxpayer assistance to keep it afloat during that time.

As expected, it sounds especially grim for Chrysler.

by Calculated Risk on 3/28/2009 10:32:00 PM

From the WSJ: US Treasury: $134.5 Billion Left in TARP

The U.S. Treasury Department estimates that it has about $134.5 billion left in its financial-rescue fund, which would mean that about 81% of the $700 billion program has been committed.

In its estimate, the Treasury projects that it will receive about $25 billion from banks that have participated in the department's Troubled Asset Relief Program, or TARP.

If you need a bailout, you'd better get in line soon!

by Calculated Risk on 3/27/2009 10:18:00 PM

From the NY Times: U.S. Expected to Give More Financing to Automakers

The Obama administration will probably extend more short-term aid to General Motors and Chrysler on Monday ...

The administration is expected to set a short deadline — weeks rather than months — to compel the automakers, their lenders and the U.A.W. to reach agreement.

Both G.M. and Chrysler are close to exhausting the loans they received since December. ...

G.M.’s request for up to $16.6 billion more in federal loans will be treated separately from Chrysler’s request for an additional $5 billion ...

The announcement on Monday will usher in a more intensive period of oversight by the government of G.M. and Chrysler ...

Another week, another bailout.

by Calculated Risk on 3/23/2009 11:57:00 PM

On existing home sales, here are a few posts:

Existing Home Sales Increase Slightly in February

More on Existing Home Sales

Existing Home Sales: Turnover Rate

News Hour - Paul Krugman & Donald Marron discuss Geithner's plan Part I

Part II:

by Calculated Risk on 3/23/2009 05:27:00 PM

From Mark Thoma at Economist's View: Which Bailout Plan is Best?

... I prefer nationalization because it provides a certainty in terms of what will happen that the other plans do not provide, the Geithner plan in particular, but it also appears to suffer from the political handicap of appearing (to some) to be "socialist," and there are arguments that the Geithner plan provides better economic incentives than nationalization (though not everyone agrees with this assertion). The Geithner plan also has its political problems, problems that will get much worse if the loans that are part of the proposal turn out to be bad as some, but not all, fear.
...
I am willing to get behind this plan and to try to make it work. It wasn't my first choice, I still think nationalization is better overall, but I am not one who believes the Geithner plan cannot possibly work. Trying to change it now would delay the plan for too long and more delay is absolutely the wrong step to take. There's still time for minor changes to improve the program as we go along, and it will be important to implement mid course corrections, but like it or not this is the plan we are going with and the important thing now is to do the best that we can to try and make it work.

I tend to agree with Mark on this. The Geithner plan is suboptimal, but it is probably the best we can get in the current environment. I'd add a caveat: this plan is easy for the banks to game or arb - and if a bank is caught gaming this plan, the AIG bonus flap will seem like a light Summer breeze.

From Matt Padilla: Economists mostly bullish on $500 billion toxic asset plan

An excerpt:

“My gut reaction is that this is an excellent plan. This plan will go a long way toward getting banks in better position to lend more aggressively and break the deleveraging feedback loop that is now in place."
Scott Anderson, senior economist, Wells Fargo

I think this is a myth that banks will lend "more aggressively" once the toxic assets are off their balance sheets. To whom? Perhaps Anderson is making the moral hazard argument here - maybe he is saying since the banks (and their investors) are being bailed out with above market prices for toxic assets that they will once again engage in risky lending. I hope that isn't his argument.

The key problem with the Geithner plan is that it incentivizes investors to pay more than market value for toxic assets by providing a non-recourse loan and with below market interest rates. (See Krugman on the price impact of a non-recourse loan). The investors do not receive this incentive, the banks do. And the taxpayers pay it, so this is a transfer of wealth from taxpayers to the shareholders of the banks.

This can be thought of as a European style put option - it can only be exercised at expiration. The taxpayers will pay the price of the option in the future, the investors receive any future benefit, and the banks receive the current value of the option in cash. Geithner apparently believes the future value will be zero, and that is a possibility. If so, this is a great plan - if not, the taxpayers will pay that future value (and it could be significant).

Still I agree with Mark Thoma:

[T]his is the plan we are going with and the important thing now is to do the best that we can to try and make it work.

Oh well, Paul Kedrosky quotes T. Boone Pickens today:

My dad said a fool with a plan can beat a genius with no plan.

by Calculated Risk on 3/23/2009 08:29:00 AM

From the Treasury: Details on Public Private Partnership Investment Program

And some reading material ...

Public Private Investment Program (PPIP)

Fact Sheet
White Paper

Geithner speaks at 8:45 AM. Here is the CNBC feed.

by Calculated Risk on 3/23/2009 12:14:00 AM

Treasury secretary Timothy Geithner writes in the WSJ: My Plan for Bad Bank Assets

... [T]he financial system as a whole is still working against recovery. Many banks, still burdened by bad lending decisions, are holding back on providing credit. Market prices for many assets held by financial institutions -- so-called legacy assets -- are either uncertain or depressed. With these pressures at work on bank balance sheets, credit remains a scarce commodity, and credit that is available carries a high cost for borrowers.

Today, we are announcing another critical piece of our plan to increase the flow of credit and expand liquidity. Our new Public-Private Investment Program will set up funds to provide a market for the legacy loans and securities that currently burden the financial system.

The Public-Private Investment Program will purchase real-estate related loans from banks and securities from the broader markets. Banks will have the ability to sell pools of loans to dedicated funds, and investors will compete to have the ability to participate in those funds and take advantage of the financing provided by the government.

The funds established under this program will have three essential design features. First, they will use government resources in the form of capital from the Treasury, and financing from the FDIC and Federal Reserve, to mobilize capital from private investors. Second, the Public-Private Investment Program will ensure that private-sector participants share the risks alongside the taxpayer, and that the taxpayer shares in the profits from these investments. These funds will be open to investors of all types, such as pension funds, so that a broad range of Americans can participate.

Third, private-sector purchasers will establish the value of the loans and securities purchased under the program, which will protect the government from overpaying for these assets.

The new Public-Private Investment Program will initially provide financing for $500 billion with the potential to expand up to $1 trillion over time, which is a substantial share of real-estate related assets originated before the recession that are now clogging our financial system. Over time, by providing a market for these assets that does not now exist, this program will help improve asset values, increase lending capacity by banks, and reduce uncertainty about the scale of losses on bank balance sheets. The ability to sell assets to this fund will make it easier for banks to raise private capital, which will accelerate their ability to replace the capital investments provided by the Treasury.

This program to address legacy loans and securities is part of an overall strategy to resolve the crisis as quickly and effectively as possible at least cost to the taxpayer. The Public-Private Investment Program is better for the taxpayer than having the government alone directly purchase the assets from banks that are still operating and assume a larger share of the losses. Our approach shares risk with the private sector, efficiently leverages taxpayer dollars, and deploys private-sector competition to determine market prices for currently illiquid assets. Simply hoping for banks to work these assets off over time risks prolonging the crisis in a repeat of the Japanese experience.

The details will be released Monday at 8:45AM ET.

by Calculated Risk on 3/22/2009 07:54:00 PM

From Kevin Hall at McClatchy Newspapers: Treasury to deliver details of "toxic asset" treatment plan

Treasury Secretary Timothy Geithner will meet with reporters shortly before the 9:30 a.m. opening bell for trading on the New York Stock Exchange. ...

Geithner is expected to announce a plan in which Treasury will use $75-100 billion from last year's $700 billion Wall Street bailout. ...

Mark Zandi supports the plan, although I'm not sure what he means by "fair price" since the price will be above market prices (because of the low interest rate, non-recourse loans):

"This plan has a good chance of success; certainly much better than the plan Treasury put forward six weeks ago," said Mark Zandi, chief economist at Moody's Economy.com, a forecaster in West Chester, Pa. "This plan relies much less on private investors and much more on direct government purchases of banks' troubled assets. Only a handful or so of private investors need to participate in this plan to establish workable auctions for the assets and thus determine a fair price for the assets."
...
"The government can then come in and buy these assets on a large scale at these prices. (Roughly) $1 trillion is not enough; it probably needs to be twice that," said Zandi. "But if the plan works well enough, I think Congress will provide more money to solve the problem once and for all. This plan makes me more optimistic about the financial prospects for the financial system and the economy".

Brad DeLong also supports the plan, but thinks much more is needed:

Our guess is that we would need to take $4 trillion out of the market and off the supply that private financial intermediaries must hold in order to move financial asset prices to where they need to be in order to unfreeze credit markets ...

Krugman and Atrios disagree with DeLong.

It is pretty clear the administration opposes nationalizing insolvent large banks, and is instead willing to have taxpayers subsidize shareholders of the banks. So the question isn't "Is this the optimal solution?" (it isn't) but "Will it work?" Maybe, but at what cost?

Oh well, what's a few trillion between friends?

by Calculated Risk on 3/21/2009 05:30:00 AM

The NY Times has some details ...

From Edmund L. Andrews, Eric Dash and Graham Bowley: Toxic Asset Plan Foresees Big Subsidies for Investors

The plan to be announced next week involves three separate approaches. In one, the Federal Deposit Insurance Corporation will set up special-purpose investment partnerships and lend about 85 percent of the money that those partnerships will need to buy up troubled assets that banks want to sell.

In the second, the Treasury will hire four or five investment management firms, matching the private money that each of the firms puts up on a dollar-for-dollar basis with government money.

In the third piece, the Treasury plans to expand lending through the Term Asset-Backed Secure Lending Facility, a joint venture with the Federal Reserve.

More approaches doesn't make a better plan.

The FDIC plan involves almost no money down. The FDIC will provide a low interest non-recourse loan up to 85% of the value of the assets.

The remaining 15 percent will come from the government and the private investors. The Treasury would put up as much as 80 percent of that, while private investors would put up as little as 20 percent of the money ... Private investors, then, would be contributing as little as 3 percent of the equity, and the government as much as 97 percent.

With almost no skin in the game, these investors can pay a higher than market price for the toxic assets (since there is little downside risk). This amounts to a direct subsidy from the taxpayers to the banks.

Oh well, I'm sure Geithner will provide details this time ...

by Calculated Risk on 3/10/2009 12:26:00 AM

From the WaPo: Detox for Troubled Assets

The government's plan to strip banks of troubled assets could force some firms to record large losses, but the painful purge would help restore confidence in the banking system, according to Sheila C. Bair, chairman of the Federal Deposit Insurance Corp.

Bair said yesterday that the effort might require more money than the $700 billion Congress has approved to aid the financial industry ...

This is an interesting interview. It it not clear that Sheila Bair understands that the "public-private investment funds" will overpay for toxic assets because they are receiving low interest non-recourse loans with limited downside risk (a direct subsidy from taxpayers to the banks). She thinks that

"The government, by providing low-cost funding, it will help to tease out that liquidity premium from the pricing and hopefully get the pricing a little higher."

And even at these above market prices, selling these assets will still leave a huge hole in the banks' balance sheets. However Bair sees this as a positive:

Bair emphasized that banks forced to take large losses might not need more government money because, newly cleansed, they would be in position to raise money from private investors. She said the size of the write-downs actually could be a positive, by establishing that banks are free of their problems.

Insolvency is success.

by Calculated Risk on 3/05/2009 10:51:00 PM

From the WSJ: Bill Seeks $500 Billion for FDIC Fund

Senate Banking Committee Chairman Christopher Dodd is moving to allow the Federal Deposit Insurance Corp. to temporarily borrow as much as $500 billion from the Treasury Department.
...
The FDIC would be able to borrow as much as $500 billion until the end of 2010 if the FDIC, Fed, Treasury secretary and White House agree such money is warranted.
...
The FDIC's deposit-insurance fund has fallen precipitously with 25 bank failures in 2008 and 16 so far in 2009.

It was just last September that the FDIC disputed a story by David Evans at Bloomberg:

Bloomberg reporter David Evans' piece ("FDIC May Need $150 Billion Bailout as Local Bank Failures Mount," Sept. 25) does a serious disservice to your organization and your readers by painting a skewed picture of the FDIC insurance fund. Let me be clear: The insurance fund is in a strong financial position to weather a significant upsurge in bank failures. The FDIC has all the tools and resources necessary to meet our commitment to insured depositors, which we view as sacred. I do not foresee – as Mr. Evans suggests – that taxpayers may have to foot the bill for a "bailout."

I guess the proposed $500 billion is just a loan and not a bailout.