by Calculated Risk on 4/06/2009 09:04:00 AM

From The Obersver: US watchdog calls for bank executives to be sacked (ht several!)

Elizabeth Warren, chief watchdog of America's $700bn (£472bn) bank bailout plan, will this week call for the removal of top executives from Citigroup, AIG and other institutions ...

"The very notion that anyone would infuse money into a financially troubled entity without demanding changes in management is preposterous."

The report will also look at how earlier crises were overcome - the Swedish and Japanese problems of the 1990s, the US savings and loan crisis of the 1980s and the 30s Depression. "Three things had to happen," Warren said. "Firstly, the banks must have confidence that the valuation of the troubled assets in question is accurate; then the management of the institutions receiving subsidies from the government must be replaced; and thirdly, the equity investors are always wiped out."

by Calculated Risk on 4/06/2009 01:53:00 AM

Here is an open thread for discussion. The futures are slightly positive ...

Bloomberg Futures.

CBOT mini-sized Dow

CME Globex Flash Quotes

Futures from barchart.com

And the Asian markets. The Asian markets are up 1% to 2%.

And a graph of the Asian markets.

Best to all.

by Calculated Risk on 4/05/2009 07:48:00 PM

I've switched the comments over to Ken's Hoocoodanode system. This should work well with an iPhone, Blackberry and other handheld devices. Also "comments" provides a link for those who want to open the comments in a new tab.

Currently the "comments" indicator on the blog doesn't indicate the number of comments. This should be added soon.

Also Ken will be adding the number of visitors online and an indicator that new comments are pending - plus much much more!

There is a nice preview, and you can also edit your comments. Please try it out. If you see any glitches, please post a comment. Enjoy. CR

by Calculated Risk on 4/05/2009 05:02:00 PM

UPDATE: A reader notes:

One more point worth making - Results of the stress tests, especially if they show potential capital shortage, surely constitute a reportable material event and therefore must be publicly disclosed to the SEC to protect the shareholders, who are likely to be diluted.

It is not just the matter of public trust and fairness, it is the SEC law.

The WSJ has an update: Bank Stress Test Meeting Planned. A few points:

Top federal bank regulators plan to meet early this week to discuss how to analyze the results of stress tests being conducted on the country's 19 largest banks ... The Federal Reserve is overseeing the stress-test analysis process. People familiar with the matter said the final analysis isn't likely to be completed until at least the end of the month.

The end of April was the original schedule, FAQ:

Q10: When will the process be completed?

A: The Federal supervisory agencies will conclude their work as soon as possible, but no later than the end of April.

A suggestion for regulators: Ignore the "baseline case" - it is inoperative.

On the differences between assets with the same characteristics:

"[All loan portfolios, even with the same surface characteristics, don't perform the same at all." [said Eugene Ludwig, chief executive of Promontory Financial Group, which advises financial firms]

This is an understatement. Last April, Ambac discussed a Bear Stearns deal:

"Ambac originally projected that losses on the underlying collateral of the Bear Stearns transaction would be between 10% and 12%, but now expects losses at 81.8% of underlying collateral ..."

This is part of the problem in valuing assets - assets with identical characteristics may have significantly different losses. If it was securitized by Bear Stearns, or the loans were originated by New Century (and others), I'd be especially careful.

And on transparency:

"I think serious efforts will be made to respect the confidential nature of the test and its results," [Ludwig] said, but added that "there is a real danger that the results of the stress test are uncovered and this roils the markets."

The results of the stress test should be made public - at least for any bank taking TARP money. This would build confidence in the process, otherwise serious doubts will remain.

by Calculated Risk on 4/05/2009 12:15:00 PM

Here is a CQ Transcript: Treasury Secretary Geithner on CBS’s ‘Face the Nation’. Here is a brief excerpt:

SCHIEFFER: Let me ask you about this plan you have put together to create these public-private partnerships to buy these toxic assets that these banks owned to get them off these bank books so they -- the idea is that, if they can do that, then they can start lending again.

But last week the government did change the accounting rules. So the banks can, in essence, put a different value on those assets. Some people are now saying that, with this in place, the banks may no longer want to sell those toxic assets.

So I guess the question is, can you get the banks to participate in this program?

And do you feel you have the power to force them to sell those toxic assets?

GEITHNER: Bob, banks have a large incentive, now, to clean up their balance sheets, to make it easier for them to go raise equity from the markets, from private investors. So they’re going to have significant incentives to clean up their balance sheets. This gives them a way to do that that did not exist before that.

Just as an example, you know, if you had to sell your home tomorrow, in a world where nobody could get a mortgage to buy your home, you’d have to sell at an enormously low price.

You’d reluctant to sell. You might end up keeping your home longer than you want, not moving to some -- to take a new job, where you can earn more money, going forward.

That’s part of what’s happening to our financial system today.

GEITHNER: So what we try to do is lay out a proposal for how to create a market for these loans, bring in private investors to help protect the government from not overpaying for these assets.

This is just part, though, of a broad set of programs to help address the housing crisis, make sure banks have enough capital to lend even in a deeper recession, make sure we’re providing direct lending to help get small business lending going again. It’s an important part of this -- part of this (inaudible) program.

Three comments (addressing text in bold):

The government did not change (Mark-to-market) Update: Mort_fin notes: FASB did change the rules on Other Than Temporary Impairments (OTTI) which is a big part of the story. FASB provided some clarifications to mark-to-market.

Geithner seems to be arguing that the toxic asset legacy asset issue is primarily a liquidity problem, and not a solvency problem. I think this is backwards - it is primary a solvency problem with some liquidity issues.

Geithner says one goal is to "make sure banks have enough capital to lend even in a deeper recession". The problem is the "more adverse" scenario is really not a "deeper recession" - it is the new baseline.