by Calculated Risk on 9/29/2008 08:13:00 AM

From the FDIC: Citigroup Inc. to Acquire Banking Operations of Wachovia

Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.

"For Wachovia customers, today's action will ensure seamless continuity of service from their bank and full protection for all of their deposits." said FDIC Chairman Sheila C. Bair. "There will be no interruption in services and bank customers should expect business as usual."

Citigroup Inc. will acquire the bulk of Wachovia's assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

In consultation with the President, the Secretary of the Treasury on the recommendation of the Federal Reserve and FDIC determined that open bank assistance was necessary to avoid serious adverse effects on economic conditions and financial stability.

"On the whole, the commercial banking system in the United States remains well capitalized. This morning's decision was made under extraordinary circumstances with significant consultation among the regulators and Treasury," Bair said. "This action was necessary to maintain confidence in the banking industry given current financial market conditions."
emphasis added

by Calculated Risk on 9/29/2008 07:55:00 AM

From the NY Times Dealbook: Citigroup Nears a Deal for Wachovia

Citigroup executives are meeting to complete the deal Monday morning, people briefed on the matter said, cautioning that the talks could unravel. Wells Fargo, which had also been in talks with Wachovia, could also revive its bid.
...
Citigroup worked feverishly to cement a deal on Sunday night, with the discussions moving past the midnight hour, according to a person briefed on the talks. Officials from the F.D.I.C. and Treasury Department stayed up late to try to get the transaction done.

The NY Times suggests the price would be at best "a few dollars per share" for Wachovia. Meanwhile, Wachovia's share price is cliff diving this morning off over 60% from Friday's closing price.

by Calculated Risk on 9/28/2008 07:13:00 PM

Sunday is the new Monday ...

UPDATE 2: Der Hypo Real Estate droht die Insolvenz or in English from AFP: German mortgage bank near bankruptcy: report

Germany's Hypo Real Estate, a mortgage bank, is on the brink of bankruptcy, the daily Financial Times Deutschland reported in an advance copy of its Monday edition.

Update: From the Financial Times: Fortis thrown €11bn lifeline by governments (hat tip Alain)

Fortis was thrown an €11.2bn (£8.8bn) lifeline on Sunday night as the Belgian, Dutch and Luxembourg governments combined to inject capital into the embattled banking and insurance group in a last-ditch effort to shore up confidence among savers.

The partial nationalisation was announced in Brussels by Yves Leterme, Belgium’s prime minister, after a frantic weekend of talks involving ministers, central bankers and financiers.

In the U.K., Bradford & Bingley is being nationalized. From The Telegraph: Financial crisis: Bradford & Bingley nationalisation will cost taxpayers £150bn

British taxpayers will be liable for more than £150 billion of potentially toxic mortgage debt following the nationalisation of Bradford & Bingley, one of the country’s biggest mortgage lenders.

Alistair Darling, the Chancellor, will announce on Monday that the Government is taking over the bank’s mortgages and selling off the savings business and the branches. Savers are reassured that their money is safe although people owning shares in the bank will lose out.

The Government may merge the bank, which has mortgages worth more than £40 billion, with the nationalised Northern Rock. Every taxpayer in Britain will be exposed to the equivalent of £5,500 in mortgage debt as a result.

Meanwhile, as mentioned in the previous post, Citigroup and Wells Fargo are in negotiations today with regulators about a potential emergency takeover of Wachovia.

And the BIG story - the proposed bailout legislation was released earlier today. See: Emergency Economic Stabilization Act of 2008 Professor Krugman is being told there are "significant changes from this draft", so there is probably more to come.

by Calculated Risk on 9/28/2008 06:10:00 PM

From the NY Times: Citigroup and Wells Fargo Said to Be Bidding for Wachovia

Citigroup and Wells Fargo were locked in a bidding war on Sunday over a possible emergency takeover of the Wachovia Corporation ...

The government, led by the Federal Reserve and Treasury Department, has been involved in the talks as well ...

The government has ... opposed taking over Wachovia the way it did Washington Mutual earlier this week, these people said, unless its financial position deteriorates more rapidly.
...
Citigroup and Wells Fargo are unlikely to bid more than a few dollars per share for Wachovia

Wells and Citi would probably like a structure similar to the JPMorgan deal for WaMu assets (with the FDIC seizing WaMu first). Probably all they have to do is wait ...

by Calculated Risk on 9/28/2008 04:01:00 PM

From the House Financial Services Committee:

Emergency Economic Stabilization Act of 2008

Washington, DC - Click the following links to view documents:

Emergency Economic Stabilization Act of 2008

Summary of Emergency Economic Stabilization Act of 2008

Section-by-Section of Emergency Economic Stabilization Act of 2008

On suspending Mark-to-Market:

SEC. 132. SUSPENSION OF MARK-TO-MARKET ACCOUNTING.
(a) AUTHORITY.—The Securities and Exchange Commission shall have the authority under securities laws (as such term is defined under section 3(a)(47) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(47)) to suspend, by rule, regulation, or oder, the application of Statement Number 157 of the Financial Accounting Standards Board for any issuer (as such term is defined in section 3(a)(8) of such Act) or with respect to any class or category of transaction if the Commission determines that is necessary or appropriate in the public interest and is consistent with the protection of investors.

And on allowing banks to earn interest and maintain a "zero reserve ratio":

SEC. 128. ACCELERATION OF EFFECTIVE DATE.
Section 203 of the Financial Services Regulatory Relief Act of 2006 (12 U.S.C. 461 note) is amended by striking ‘‘October 1, 2011’’ and inserting ‘‘October 1, 2008’’.

Here is the previous text (hat tip Falcor):

Financial Services Regulatory Relief Act of 2006 - Section 203.

"Interest on Reserves and Reserve Ratios

"Federal Reserve Banks are authorized to pay banks interest on reserves under Section 201 of the Act. In addition, Section 202 permits the FRB to change the ratio of reserves a bank must maintain relative to its transaction accounts, allowing a zero reserve ratio if appropriate. Due to federal budgetary requirements, Section 203 provides that these legislative changes will not take effect until October 1, 2011."

Here are some parts on pricing mechanism:

(d) PROGRAM GUIDELINES.—Before the earlier of the end of the 2-business-day period beginning on the date of the first purchase of troubled assets pursuant to the authority under this section or the end of the 45-day period beginning on the date of enactment of this Act, the Secretary shall publish program guidelines, including the following:
(1) Mechanisms for purchasing troubled assets.
(2) Methods for pricing and valuing troubled assets.
(3) Procedures for selecting asset managers.
(4) Criteria for identifying troubled assets for purchase.

So it's all up to the Secretary to establish the rules. Same with Warrants - it's up to the Secretary to negotiate.

Here is the section on transparency:

SEC. 114. MARKET TRANSPARENCY.
(a) PRICING.—To facilitate market transparency, the Secretary shall make available to the public, in electronic form, a description, amounts, and pricing of assets acquired under this Act, within 2 business days of purchase, trade, or other disposition.

(b) DISCLOSURE.—For each type of financial institutions that is authorized to use the program established under this Act, the Secretary shall determine whether the public disclosure required for such financial institutions with respect to off-balance sheet transactions, derivatives instruments, contingent liabilities, and similar sources of potential exposure is adequate to provide to the public sufficient information as to the true financial position of the institutions. If such disclosure is not adequate for that purpose, the Secretary shall make recommendations for additional disclosure requirements to the relevant regulators.

At least transactions will be made public online.

by Calculated Risk on 9/28/2008 02:28:00 PM

From Reuters: U.S. Senate vote Wed. at earliest on bailout-sources

Legislation providing up to $700 billion to bail out the U.S. financial industry will be voted on in the U.S. Senate no earlier than Wednesday, sources close to the discussions said on Sunday.

The House of Representatives will vote on the bill on Monday, said House Financial Services Chairman Barney Frank, a Massachusetts Democrat.

by Calculated Risk on 9/28/2008 02:14:00 PM

The AP is reporting: Belgian government to guarantee Fortis deposits

From Reuters: Fortis in play as Trichet joins emergency talks

It sounds like Fortis might be sold off or nationalized.

by Calculated Risk on 9/28/2008 12:58:00 PM

As we discussed last night, B&B will be nationalized. It looks like U.K. officials have learned about bank runs from the Northern Rock collapse, and will announce some sort of plan to protect savers.

From the Telegraph: Financial crisis: Bradford & Bingley savers told money is safe

Yvette Cooper, the minister, confirmed that the Government was “stepping in” to rescue the bank, Britain’s eighth biggest mortgage lender.

"We are very clear that depositors and ordinary savers must be properly protected and they will be as part of the arrangements we will set out," Ms Cooper told the BBC.
...
A full statement will be made by Alistair Darling, the Chancellor, either late on Sunday or early on Monday morning before the stock market opens.

by Calculated Risk on 9/28/2008 09:44:00 AM

From Office of Speaker Nancy Pelosi -- Sept. 28, 2008

REINVEST, REIMBURSE, REFORM

IMPROVING THE FINANCIAL RESCUE LEGISLATION

Significant bipartisan work has built consensus around dramatic improvements to the original Bush-Paulson plan to stabilize American financial markets -- including cutting in half the Administration's initial request for $700 billion and requiring Congressional review for any future commitment of taxpayers' funds. If the government loses money, the financial industry will pay back the taxpayers.

3 Phases of a Financial Rescue with Strong Taxpayer Protections

Reinvest in the troubled financial markets … to stabilize our economy and insulate Main Street from Wall Street

Reimburse the taxpayer … through ownership of shares and appreciation in the value of purchased assets

Reform business-as-usual on Wall Street … strong Congressional oversight and no golden parachutes

CRITICAL IMPROVEMENTS TO THE RESCUE PLAN

Democrats have insisted from day one on substantial changes to make the Bush-Paulson plan acceptable -- protecting American taxpayers and Main Street -- and these elements will be included in the legislation

Protection for taxpayers, ensuring THEY share IN ANY profits

Cuts the payment of $700 billion in half and conditions future payments on Congressional review

Gives taxpayers an ownership stake and profit-making opportunities with participating companies

Puts taxpayers first in line to recover assets if participating company fails

Guarantees taxpayers are repaid in full -- if other protections have not actually produced a profit

Allows the government to purchase troubled assets from pension plans, local governments, and small banks that serve low- and middle-income families

Limits on excessive compensation for CEOs and executives

New restrictions on CEO and executive compensation for participating companies:

No multi-million dollar golden parachutes

Limits CEO compensation that encourages unnecessary risk-taking

Recovers bonuses paid based on promised gains that later turn out to be false or inaccurate

Strong independent oversight and transparency

Four separate independent oversight entities or processes to protect the taxpayer

A strong oversight board appointed by bipartisan leaders of Congress

A GAO presence at Treasury to oversee the program and conduct audits to ensure strong internal controls, and to prevent waste, fraud, and abuse

An independent Inspector General to monitor the Treasury Secretary's decisions
Transparency -- requiring posting of transactions online -- to help jumpstart private sector demand

Meaningful judicial review of the Treasury Secretary's actions

Help to prevent home foreclosures crippling the American economy

The government can use its power as the owner of mortgages and mortgage backed securities to facilitate loan modifications (such as, reduced principal or interest rate, lengthened time to pay back the mortgage) to help reduce the 2 million projected foreclosures in the next year

Extends provision (passed earlier in this Congress) to stop tax liability on mortgage foreclosures

Helps save small businesses that need credit by aiding small community banks hurt by the mortgage crisis—allowing these banks to deduct losses from investments in Fannie Mae and Freddie Mac stocks

by Calculated Risk on 9/28/2008 02:17:00 AM

From the NY Times: Breakthrough Reached in Negotiations on Bailout

Congressional leaders and the Bush administration reached a tentative agreement early Sunday...

The bill includes pay limits for some executives whose firms seek help, aides said. And it requires the government to use its new role as owner of distressed mortgage-backed securities to make more aggressive efforts to prevent home foreclosures. In some cases, the government would receive an equity stake in companies that seek aid, allowing taxpayers to profit should the rescue plan work and the private firms flourish in the months and years ahead.

The White House also agreed to strict oversight of the program by a Congressional panel and conflict-of-interest rules for firms hired by the Treasury to help run the program.

From the WSJ: Lawmakers Reach Tentative Bailout Deal

"I think we're there," an exhausted Mr. Paulson said, a sentiment echoed in the statements of negotiators such as House Financial Services Chairman Barney Frank (D., Mass.) and Senate Banking Committee head Christopher Dodd (D., Conn.)

Those present said the bailout plan still needs to be drafted in its final form, but a formal announcement should come some time Sunday. ...

"We worked out everything," said Sen. Judd Gregg, the chief Senate Republican in the talks. He said the House should be able to vote on it Sunday, and the Senate could take it up Monday.

Hopefully the details will be released Sunday.

by Calculated Risk on 9/27/2008 08:30:00 PM

"It would be my hope that this could be resolved today, that we'd have a day for the American people and members of Congress to review the legislation on the Internet."
House Speaker Nancy Pelosi, Sept 27, 2008.

From Bloomberg: Senate Leaders Say Agreement Nears on Rescue Program

by Calculated Risk on 9/27/2008 06:50:00 PM

From the Telegraph: Financial crisis: Bradford & Bingley likely to be nationalised by Treasury

The biggest buy-to-let operator is on the verge of being nationalised by the Government as time runs out on attempts to find a private buyer.

B&B’s shares will be suspended when the stock market opens on Monday. By that point, the Government will either nationalise the bank or announce a deal to sell it.

[T]he deal will require public support, with many of the one million B&B mortgages left with the Treasury. As a result, taxpayers are likely to be left holding the mortgages most likely to default from the £40 billion portfolio.

From The Times: B&B and Fortis both in crisis

BELGIUM’s Fortis is this weekend poised to become the first large continental bank to fall victim to the credit crunch, as the global chaos continues with Bradford & Bingley and American savings giant Wachovia both teetering on the brink.

The Belgian central bank and the country’s regulator are paving the way for a bailout of the huge banking and insurance group, which has a £540 billion balance sheet and a market value of £12 billion.

In Britain, the fate of Bradford & Bingley will be decided today. Fren-etic talks between the Bank of England, the Financial Services Authority and the government have been taking place this weekend to save the troubled mortgage bank.
...
If no buyers come forward, B&B will be nationalised and broken up. However, while the fate of B&B offers a fascinating insight into the hardship faced by financial institutions, in terms of international significance the problems faced by Fortis are far more serious.

by Calculated Risk on 9/27/2008 04:40:00 PM

Not much new except a new thread...

According to the WSJ the meeting started at 3PM ET with four negotiators: Senators Dodd (D-Connecticut) and Gregg (R-New Hampshire), and Congressman Frank (D-Massachusetts) and Blunt (R-Missouri).

The story notes that the Treasury is pushing for a larger initial installment ($500 billion as opposed to $250 billion). Also the insurance idea might be included as optional, although I think everyone realizes no one will be interested.

by Calculated Risk on 9/27/2008 10:24:00 AM

From MarketWatch: Bush confident of financial rescue plan bill 'very soon'

President Bush said Saturday morning he's confident that Congress will pass a bill ... "very soon." ... The president also stressed ... "our entire economy is in danger." Negotiators from Congress and the administration are returning to talks Saturday with an eye toward finalizing a deal by Sunday.

During the Presidential debate, Senator McCain said he would vote for the bill, and Senator Obama said he wanted to see the details, but he would probably support the bill too.

We will probably have more details sometime this weekend.

by Calculated Risk on 9/27/2008 08:46:00 AM

From the NY Sun: Wall St. Woes Give Rise to Talk of 'Black September'

"Due to the recent events, rents are down by at least 10% to 15% and trending downward," the president of Newmark Knight Frank, James Kuhn, said.
...
"An increase in availability of approximately 10 million square feet would imply an increase in the New York office vacancy rate to 8.5%," [chief economist at REIS, Sam Chandan] said.

"Current and anticipated increases in sublet availabilities are fomenting greater competition for the smaller pool of prospective tenants. The full measure of sublet availabilities will depend, in large part, on the job losses that ultimately follow from the current wave of consolidations in the banking sector. The risks are to the downside that a near term spikes in layoffs and a resulting rise in sublet availabilities will coincide with anemic demand for space, undercutting occupancy. Even a modest slowdown, as we have already observed in the New York market, confutes the underwriting assumptions that prevailed in the period leading up to the last year's investment peak."
...
Mr. Slocum of Capital One said: "The key issue is what happens to the overleveraged properties purchased and financed in the past three years. In many cases, the financial projects were based on rising rents and debt markets remaining stable. Many of the loans required the borrowers to provide interest reserves, but they will likely exhaust over the 2009-2010 time frame." He added: "It always comes back to cash flow on commercial real estate. Properties financed on true cash flow should be fine."
emphasis added

The financial crisis is now hitting New York office space, and this will impact many of the recent commercial deals that were based on overly optimistic rent projections. The lenders didn't offer 'liar loans' on CRE like for residential, but they did offer loans based on optimistic pro forma projections - and the results will be the same: rising defaults.

by Calculated Risk on 9/26/2008 09:38:00 PM

From Professor Nouriel Roubini: Why the Treasury TARP bailout is flawed

The Treasury plan (even in its current version agreed with Congress) is very poorly conceived and does not contain many of the key elements of a sound and efficient and fair rescue plan. ... It is a disgrace that no professional economist was consulted by Congress or invited to present his/her views at the Congressional hearings on the Treasury rescue plan.

Specifically, the Treasury plan does not formally provide senior preferred shares for the government in exchange for the government purchase of the toxic/illiquid assets of the financial institutions; so this rescue plan is a huge and massive bailout of the shareholders and the unsecured creditors of the firms; with $700 billion of taxpayer money the pockets of reckless bankers and investors have been made fatter under the fake argument that bailing out Wall Street was necessary to rescue Main Street from a severe recession. Instead, the restoration of the financial health of distressed financial firms could have been achieved with a cheaper and better use of public money.

Moreover, the plan does not address the need to recapitalize badly undercapitalized financial institutions: this could have been achieved via public injections of preferred shares into these firms; needed matching injections of Tier 1 capital by current shareholders to make sure that such shareholders take first tier loss in the presence of public recapitalization; suspension of dividends payments; conversion of some of the unsecured debt into equity (a debt for equity swap).

The plan also does not explicitly include an HOLC-style program to reduce across the board the debt burden of the distressed household sector; without such a component the debt overhang of the household sector will continue to depress consumption spending and will exacerbate the current economic recession.

Thus, the Treasury plan is a disgrace: a bailout of reckless bankers, lenders and investors that provides little direct debt relief to borrowers and financially stressed households and that will come at a very high cost to the US taxpayer. And the plan does nothing to resolve the severe stress in money markets and interbank markets that are now close to a systemic meltdown.

by Calculated Risk on 9/26/2008 06:31:00 PM

I'll post a thread on the debate tonight (starts at 9PM ET).

Here is a live feed. (hat tip AF)

Hopefully there will be some questions on the Bailout Plan. I'd like to see both Senators McCain and Obama explain the economic problem, why they see a need for the government to be involved (or not), what the purpose of the plan should be, and specifics on the plan they would propose or support.

I really don't care about lengthy discussions on how we got here and hopefully that will be avoided tonight.

Important for the comments: I encourage everyone to stay focused on economic issues only. I'll delete comments (or the entire thread) if it gets out of hand. I think this is an important issue and one of these two men will be elected President in just over one month.

My perspective: I believe there is a significant credit crisis right now. The credit markets are in severe distress and we can see evidence of this in the various credit spreads.

A number of financial institutions made bad decisions, and they now need to deleverage. For the most part these institutions can't raise private capital, and as a result they have all but stopped lending. Given a little time, this lack of lending to credit worthy borrowers will significantly impact the real economy.

In response to these problems, the government announced last week that they would present a plan to bailout the banks. Last Friday I predicted the Paulson Plan would have some of the features of the Depression era Reconstruction Finance Corporation (RFC) and make preferred stock investments in banks (with the taxpayers owning the preferred). This would help the banks recapitalize, and punish the existing shareholders by diluting their shares.

My view is that it is in the public interest to make sure the banks continue to lend to credit worthy customers. But it is not in the public interest to protect the management and shareholders of these institutions.

Over time this preferred stock would be sold on the public market. The RFC was one of most successful programs of the Depression, and has been praised by many economists including Milton Friedman.

Unfortunately that wasn't the Paulson Plan. I was very surprised. The Paulson Plan was to recapitalize the banks by paying a premium for toxic assets compared to market prices, leaving the taxpayers on the hook for any losses and rewarding the management and shareholders of the banks that made bad decisions. That is a bad idea and was immediately opposed by many economists like Paul Krugman and Nouriel Roubini who both support some sort of equity investment for taxpayers.

I would prefer that the current plan be junked, and a new RFC type plan proposed. I do feel there is a serious problem and there are reasons for some government involvement. However, at the least, I'd like to see equity investments for taxpayers.

I know that others believe any and all plans should be stopped, and there should be no government involvement. I understand that view, but I respectfully disagree.

Let's see what the candidates have to say.

Note: This week I've received hundreds of alternative proposals - many of them with very good ideas. Unfortunately I haven't had time to read them all, and I apologize for not responding to all the emails I've received. I do appreciate the input and ideas.

by Calculated Risk on 9/26/2008 05:36:00 PM

Stop me if you've heard this story before ...

From the WSJ: Wachovia Explores Sale

Wachovia Corp. has entered into preliminary discussions with a handful of potential suitors, including Banco Santander SA of Spain, Wells Fargo & Co. and Citigroup Inc., according to a person familiar with the situation.
...
Wachovia declined to comment on the discussions. Earlier Friday, a spokeswoman said the bank is "aggressively addressing our challenges" and "working to strategically strengthen and manage capital and liquidity in this challenging environment." The bank's deposit base, stretching from California to the Northeast, is "large and stable," the Wachovia spokeswoman added.

Anyone else feeling a little deja vu?

S&P acknowledged that WaMu's deposit base appears to be stable and the company has enough liquidity to meet all fixed obligations throughout 2010.
Financial Times, Sept 16, 2008

by Calculated Risk on 9/26/2008 04:20:00 PM

From the NY Times: Wachovia Begins Early Deal Talks with Citi

Wachovia has begun preliminary talks with Citigroup about a potential merger, people briefed on the matter said Friday afternoon.

Meanwhile Wachovia stock was off 27%.

National City was off 27%.

First Federal was off 45%.

Downey Savings was off 48%.

Vineyard was only off 20%.

by Calculated Risk on 9/26/2008 02:22:00 PM

The TED Spread from Bloomberg is still very high at 2.91, although down a little from yesterday.

Note: the TED spread is the difference between the three month T-bill and the LIBOR interest rate. Usually the TED spread is less than 0.5%. The higher the spread, the greater the perceived credit risks (compared to "risk free" treasuries).

This will probably be one of the first indicators to show any benefit from any plan.