by Calculated Risk on 9/23/2008 05:55:00 PM

Just headlines from MarketWatch:

Goldman to sell $5 bln preferred stock to Berkshire Hathaway

Berkshire also to get $5 bln in Goldman common warrants

A Buffett rumor that is true!

by Calculated Risk on 9/23/2008 04:37:00 PM

Wells Fargo Jumbo 30 year fixed mortgage rates are now at 9.0% (9.176% APR). (hat tip patrick.net)

Click on graph for larger image in new window.

This will really hurt the markets with house prices above the conforming loan limit. Here are the conforming loan limits by County from Fannie Mae (excel file).

by Calculated Risk on 9/23/2008 04:22:00 PM

From FinancialWeek.com: Goldman eyes IndyMac to build bank network

We plan to build our banking business organically and by buying retail deposits and bank assets in the wholesale market, not through opening branches,” a Goldman Sachs spokesman said.

“For example, the FDIC is selling IndyMac assets and those might be the sort of thing we’d be interested in looking at.”

by Calculated Risk on 9/23/2008 01:38:00 PM

From Reuters: Bernanke's comments on asset auction process

I believe that under the Treasury program, auctions and other mechanisms could be devised that will give the market good information on what the hold-to-maturity price is for a large class of mortgage-related assets. If the Treasury bids for and then buys assets at a price close to the hold-to-maturity price, there will be substantial benefits.

[B]anks will have a basis for valuing those assets and will not have to use fire sale prices. Their capital will not be unreasonably marked down.

Originally I expected the plan to have two components: 1) buy troubled assets from institutions, and 2) an RFC type recapitalization plan. However the plan did not include the recapitalization provision, so the clear intent is to pay premium prices (to current market prices) for troubled assets to recapitalize the institutions (with no equity participation for taxpayers).

Bernanke and Paulson are clearly arguing the current market prices are wrong - that they are "fire sale prices".

Krugman has more: Getting real — and letting the cat out of the bag

[T]he key question is what price Treasury pays for the assets. And here we have Bernanke effectively saying that it’s going to pay above-market prices — prices that allegedly reflect “hold-to-maturity” value, but still more than private investors are willing to pay.
...
[T]he plan only helps the financial situation if Treasury pays prices well above market — that is, if it is in effect injecting capital into financial firms, at taxpayers’ expense.

What possible justification can there be for doing this without acquiring an equity stake?

No equity stake, no deal.

One thing is clear - something we all guessed correctly - is that the intention of the plan is to pay premium prices for troubled assets to recapitalize the banks. It’s still not clear how the price mechanism will work, and unfortunately Paulson and Bernanke are unable to describe how this will work.

Except Paulson did say they would hire “really good asset managers” to determine the price. A little sarcasm: I suppose these are asset managers that have been shorting financials for the last couple of years (hat tip Seminole).

by Calculated Risk on 9/23/2008 01:08:00 PM

From the Independent: Hedge funds suffer mass redemptions

Hedge funds could have an unprecedented level of cash pulled out by investors this quarter, according to insiders, just as they faced millions of pounds of losses from last week's shock regulation of short selling.
...
The redemptions seem to have started in earnest, although currently the evidence is mainly anecdotal. One UK hedge fund manager confided that last week had the highest number of investors rushing to withdraw funds that he has known. The industry will know for sure whether it is a drip or a deluge when the data providers release their statistics for the third quarter, next month. One market analyst said: "I know even the good hedge funds have been suffering withdrawals recently. Investors are very nervous."

Roubini predicted that the next phase would be hedge fund withdrawals:

“The next stage will be a run on thousands of highly leveraged hedge funds. After a brief lock-up period, investors in such funds can redeem their investments on a quarterly basis; thus a bank-like run on hedge funds is highly possible. Hundreds of smaller, younger funds that have taken excessive risks with high leverage and are poorly managed may collapse. A massive shake-out of the bloated hedge fund industry is likely in the next two years.”

If this report is accurate, kudos (again) to Roubini!

by Calculated Risk on 9/23/2008 11:51:00 AM

A few quotes from Secretary Paulson's Testimony:

"I believe we need oversight. We need protection. We need transparency. I want it. We all want it."
...
"I am convinced that this bold approach will cost American families far less than the alternative - a continuing series of financial institution failures and frozen credit markets unable to fund everyday needs and economic expansion."
...
"I'm frustrated. The taxpayer is on the hook. The taxpayer is already on the hook. The taxpayer is already going to suffer the consequences if things don't work they way they should work. ...The best protection for the taxpayer is to have this work."

by Calculated Risk on 9/23/2008 09:58:00 AM

From the Financial Times: Pressure mounts for WaMu sale

Washington Mutual was under mounting pressure from regulators yesterday to reach a deal with prospective buyers that would put the beleaguered US bank in stronger hands.

The Office of Thrift Supervision was pushing for a speedy solution, said people familiar with the talks.

If no outright buyer emerges in the coming days, the regulator could push to broker a deal that would split WaMu between several banks. The consortium would share WaMu's attractive deposit base and retail branch network, and would also share the bank's troubled mortgage portfolio.

Another possibility is that the interested banks will let the FDIC close WaMu, the FDIC will take the toxic mortgage portfolio, and then the banks will buy the attractive assets from the FDIC.

by Calculated Risk on 9/23/2008 08:49:00 AM

Here is the text of Fed Chairman Ben Bernanke's testimony before the Senate Banking Committee today:

Chairman Dodd, Senator Shelby, and members of the Committee, I appreciate this opportunity to discuss recent developments in financial markets and the economy. As you know, the U.S. economy continues to confront substantial challenges, including a weakening labor market and elevated inflation. Notably, stresses in financial markets have been high and have recently intensified significantly. If financial conditions fail to improve for a protracted period, the implications for the broader economy could be quite adverse.

The downturn in the housing market has been a key factor underlying both the strained condition of financial markets and the slowdown of the broader economy. In the financial sphere, falling home prices and rising mortgage delinquencies have led to major losses at many financial institutions, losses only partially replaced by the raising of new capital. Investor concerns about financial institutions increased over the summer, as mortgage-related assets deteriorated further and economic activity weakened. Among the firms under the greatest pressure were Fannie Mae and Freddie Mac, Lehman Brothers, and, more recently, American International Group (AIG). As investors lost confidence in them, these companies saw their access to liquidity and capital markets increasingly impaired and their stock prices drop sharply.

The Federal Reserve believes that, whenever possible, such difficulties should be addressed through private-sector arrangements–for example, by raising new equity capital, by negotiations leading to a merger or acquisition, or by an orderly wind-down. Government assistance should be given with the greatest of reluctance and only when the stability of the financial system, and, consequently, the health of the broader economy, is at risk. In the cases of Fannie Mae and Freddie Mac, however, capital raises of sufficient size appeared infeasible and the size and government-sponsored status of the two companies precluded a merger with or acquisition by another company. To avoid unacceptably large dislocations in the financial sector, the housing market, and the economy as a whole, the Federal Housing Finance Agency (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and the Treasury used its authority, granted by the Congress in July, to make available financial support to the two firms. The Federal Reserve, with which FHFA consulted on the conservatorship decision as specified in the July legislation, supported these steps as necessary and appropriate. We have seen benefits of this action in the form of lower mortgage rates, which should help the housing market. The Federal Reserve and the Treasury attempted to identify private-sector approaches to avoid the imminent failures of AIG and Lehman Brothers, but none was forthcoming. In the case of AIG, the Federal Reserve, with the support of the Treasury, provided an emergency credit line to facilitate an orderly resolution. The Federal Reserve took this action because it judged that, in light of the prevailing market conditions and the size and composition of AIG’s obligations, a disorderly failure of AIG would have severely threatened global financial stability and, consequently, the performance of the U.S. economy. To mitigate concerns that this action would exacerbate moral hazard and encourage inappropriate risk-taking in the future, the Federal Reserve ensured that the terms of the credit extended to AIG imposed significant costs and constraints on the firm’s owners, managers, and creditors. The chief executive officer has been replaced. The collateral for the loan is the company itself, together with its subsidiaries. (Insurance policyholders and holders of AIG investment products are, however, fully protected.) Interest will accrue on the outstanding balance of the loan at a rate of three-month Libor plus 850 basis points, implying a current interest rate over 11 percent. In addition, the U.S. government will receive equity participation rights corresponding to a 79.9 percent equity interest in AIG and has the right to veto the payment of dividends to common and preferred shareholders, among other things.

In the case of Lehman Brothers, a major investment bank, the Federal Reserve and the Treasury declined to commit public funds to support the institution. The failure of Lehman posed risks. But the troubles at Lehman had been well known for some time, and investors clearly recognized–as evidenced, for example, by the high cost of insuring Lehman’s debt in the market for credit default swaps–that the failure of the firm was a significant possibility. Thus, we judged that investors and counterparties had had time to take precautionary measures. While perhaps manageable in itself, Lehman’s default was combined with the unexpectedly rapid collapse of AIG, which together contributed to the development last week of extraordinarily turbulent conditions in global financial markets. These conditions caused equity prices to fall sharply, the cost of short-term credit–where available–to spike upward, and liquidity to dry up in many markets. Losses at a large money market mutual fund sparked extensive withdrawals from a number of such funds. A marked increase in the demand for safe assets–a flight to quality–sent the yield on Treasury bills down to a few hundredths of a percent. By further reducing asset values and potentially restricting the flow of credit to households and businesses, these developments pose a direct threat to economic growth. The Federal Reserve took a number of actions to increase liquidity and stabilize markets. Notably, to address dollar funding pressures worldwide, we announced a significant expansion of reciprocal currency arrangements with foreign central banks, including an approximate doubling of the existing swap lines with the European Central Bank and the Swiss National Bank and the authorization of new swap facilities with the Bank of Japan, the Bank of England, and the Bank of Canada. We will continue to work closely with colleagues at other central banks to address ongoing liquidity pressures. The Federal Reserve also announced initiatives to assist money market mutual funds facing heavy redemptions and to increase liquidity in short-term credit markets.

Despite the efforts of the Federal Reserve, the Treasury, and other agencies, global financial markets remain under extraordinary stress. Action by the Congress is urgently required to stabilize the situation and avert what otherwise could be very serious consequences for our financial markets and for our economy. In this regard, the Federal Reserve supports the Treasury’s proposal to buy illiquid assets from financial institutions. Purchasing impaired assets will create liquidity and promote price discovery in the markets for these assets, while reducing investor uncertainty about the current value and prospects of financial institutions. More generally, removing these assets from institutions’ balance sheets will help to restore confidence in our financial markets and enable banks and other institutions to raise capital and to expand credit to support economic growth.

At this juncture, in light of the fast-moving developments in financial markets, it is essential to deal with the crisis at hand. Certainly, the shortcomings and weaknesses of our financial markets and regulatory system must be addressed if we are to avoid a repetition of what has transpired in our financial markets over the past year. However, the development of a comprehensive proposal for reform would require careful and extensive analysis that would be difficult to compress into a short legislative timeframe now available. Looking forward, the Federal Reserve is committed to working closely with the Congress, the Administration, other federal regulators, and other stakeholders in developing a stronger, more resilient, and better regulated financial system.

by Calculated Risk on 9/22/2008 10:05:00 PM

From Reuters: Fed eases minority bank investor guidelines

Key changes in the guidelines include allowing an investor to buy up to a 15 percent voting stake instead of the previous 9.9 percent limit. Investors can also buy up to 33 percent total equity interest, including voting and non-voting shares, instead of the 25 percent prior limit.

This will allow private equity companies to own a larger share of a bank without being designated a "bank holding company" and falling under the supervision of the Federal Reserve.

This is not a huge change, but those that remember the S&L crisis are a little nervous. In 1982, the Garn-St Germian bill allowed S&Ls to have just one owner, and this led to developers buying S&L and lending to their development companies at attractive rates (note: there were many other provisions to the bill that probably contributed to the S&L crisis). There is the same concern here with the new Fed guidelines - that private equity firms will lend to their other businesses excessively.

by Calculated Risk on 9/22/2008 08:14:00 PM

The WSJ reports: Stronger Oversight Gets Nod in Talks

The administration agreed to allow tougher oversight over the cleanup and provide fresh assistance to homeowners facing foreclosure, two Democratic priorities. In addition, negotiators neared agreement on allowing the government to take equity stakes in companies that participate in the rescue, a measure Treasury had wanted to avoid.

But differences remain on two big items: possible limits on executive compensation at firms taking advantage of the bailout; and changes to bankruptcy law that would let judges adjust the terms of mortgages.

It's hard to call the executive compensation provision a "big item", and the cram-downs have been a sticking point for some time. This is actually getting pretty close.