KeNo's Housing and Economic Portal: Monday November 23 Housing and Economic stories

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Geithner "Burned Billions," Shafted Taxpayers on CIT Loan - (finance.yahoo.com) Another one of the nation's largest lenders has filed for bankruptcy. On the brink for months, CIT filed for Chapter 11 protection on Sunday. The prepackaged plan allows CIT to restructure its debt while trying to keep badly needed loans flowing to thousands of mid-sized and small businesses. The plan keeps CIT's operations alive and makes it possible for the company to exit bankruptcy by year's end. But here's the bad news: While senior debt holders will only lose 30% of their investment, we, the U.S. taxpayer, will lose the entire $2.3 billion we lent the company this summer. William Black, professor at the University of Missouri-Kansas City School of Law is dumbfounded. "We put ourselves on the hook in a completely inept way where we lose first. We lose entirely as the taxpayers." Black, a former top federal banking regulator, blames Treasury Secretary Timothy Geithner for negotiating such a bad deal on behalf of the American public. His argument goes as follows: The government was in no way obligated to lend the struggling CIT money and, in fact, initially refused to provide it bailout funds. More importantly, being the lender of last resort, the government should have guaranteed we'd be the first to get paid if CIT eventually filed Chapter 11. By failing to do so, "it's like he [Geithner] burned billions of dollars again in government money, our money, gratuitously," says Black. Black believes the problem stems from regulators' fears that if the banks recognize a loss on the bad assets it will create a domino effect that will wipe out the entire financial system. "If that's true we've got to get rid of capitalism," he warns, "because if we can't recognize losses in a capitalist system we have no future."

Wall Street Cries ’Feed Me’or World Will End – (www.bloomberg.com) In the musical comedy “Little Shop of Horrors,” a dangerous and gluttonous plant dubbed “Audrey II” signals its insatiable appetite for human blood with a baritone demand, “feed me.” In the real-life Shop of Horrors, the evil plant is gone. In its place is our voracious financial industry, which has been partaking in menacing feedings while stirring up fear of the havoc to come if it doesn’t keep getting what it wants. A year after the world’s banking system almost collapsed, you might think financial bosses would be agonizing over how they would be depicted in history books, and anyone with a job would be offering to stick around and clean up the mess for a pittance. You’d be both silly and wrong, as we all know by now. Finance’s version of Audrey II is thrashing about with threats that, crisis or not, they’d better get their extravagant pay and light-touch regulation. Anything less and -- real horrors -- financial innovation will decline and the world as we know it will end. We’ll get to that financial innovation silliness in a minute. A poll of Bloomberg customers released last week revealed that 21 percent of traders, analysts and fund managers polled in the U.S. expect their 2009 bonuses to be bigger than last year. Another 24 percent expect their bonuses to be about the same, which is pretty good when you consider the employment woes of the rest of the nation. Frustrated taxpayers wonder how they got into a mess where $700 billion of their money went to bailing out people who today are poised to pocket record amounts in some cases (9 percent in the Bloomberg survey). Argument Trumped: In the financial industry, though, the attitude of entitlement trumps any argument that there would be no job, no employer and no paycheck without the bailouts. In fact, those Bloomberg customers said any limits on pay will boomerang. Asked “Do you think limits on executive compensation in the financial industry will do more to control excessive risk-taking or more to discourage useful innovation?” 65 percent of the ones working in the U.S. said limits on pay would choke innovation.

Candidates for Scrutiny Under Barney Frank's Corporate 'Death Panel' - (www.politicsdaily.com) At Thursday's House Financial Services Committee hearing on systemic regulation, Chairman Barney Frank, Democrat of Massachusetts, argued that it is time to stop using taxpayer funds to save firms that pose a systemic risk to the U.S. economy. Frank knows exactly how he wants to put this practice to an end: "There will be 'death panels' set up by Congress to put these institutions out of business," he said. Frank has not yet provided details about how the "death panel" would make its decisions, nor can we even say if such a panel will in fact be created. But, a discussion draft the committee released on Tuesday proposed creating a Financial Services Oversight Council that will evaluate companies posing a risk to the U.S. economy. The council would have nine voting members. Based on their current positions, the membership would include Treasury Secretary Timothy Geithner, Chairman of the Federal Reserve Board Benjamin Bernanke, Comptroller of the Currency John Dugan and six others. The panel also would have two non-voting members from the state banking and insurance regulatory bodies. The council's broad responsibilities would include the authority "to advise the Congress on financial regulation and make recommendations that will enhance the integrity, efficiency, orderliness, competitiveness, and stability of the United States financial markets; and to monitor the financial services marketplace to identify potential threats to the stability of the United States financial system." The discussion draft also says that the identity of the companies would remain secret. Despite that intent, it might not be difficult to determine which companies would fall under federal scrutiny. For reasons explained below, the council might consider the following entities as candidates. First, to identify potential threats to the stability of the financial system, the council should take a look at the most recent quarterly report from Dugan's Office of the Comptroller of the Currency (OCC). U.S. commercial banks now hold more than $200 trillion in derivatives, or nearly double the level at the end of 2005. Just five commercial banks account for 97 percent of that amount in notional derivatives and 88 percent of net credit exposure. While the OCC data do not cover the entire derivatives market, when just five banks control such a large percentage of a market, we should be concerned. In order of their credit exposure to risk-based capital, these five are Goldman Sachs, J.P. Morgan Chase, Citibank, Bank of America and Wells Fargo Bank.

Some banks hoarding cash, " as if another financial crisis were on the way," - (www.huffingtonpost.com) Call it the Great Cash Hoard. The Wall Street Journal reports this morning that, in response to the financial crisis, U.S. companies are hoarding more cash than they have in the last 40 years. Among these corporate cash-savers are banks like Citigroup and JPMorgan Chase, two institutions are holding onto funds "as if another financial crisis were on the way," reports Bloomberg. Citigroup has almost doubled its cash reserves since Lehman's fall last year, a move which seems to be very popular move among Wall Street's mega-banks: "The four largest U.S. banks by assets -- Bank of America Corp., JPMorgan, Citigroup and Wells Fargo & Co. -- have increased their combined liquidity by 67 percent to $1.53 trillion as of Sept. 30 from $914.2 billion in June 2008, before Lehman's collapse, according to the companies' third-quarter reports. The amount equals 21 percent of the banks' total assets, up from 15 percent." In fact, as Bloomberg points out, Citigroup's massive cash holdings are more than five times great than those held by Warren Buffett's Berkshire Hathaway. Here's one particularly striking quote from Bloomberg: "In my 44 years in the business, I have never seen a company with remotely as much cash as this," said Richard X. Bove, an analyst at Rochdale Securities in Lutz, Florida. For its part, JPMorgan is maintaining what has been called "a fortress balance sheet," with $456 billion in liquidity. JPMorgan's cash holdings have shot up to 22 percent of its total assets, up from 9.5 percent before the financial crisis took hold. The WSJ points out that the trend isn't just happening on Wall Street: "In the second quarter, the 500 largest nonfinancial U.S. firms, by total assets, held about $994 billion in cash and short-term investments, or 9.8% of their assets, according a Wall Street Journal analysis of corporate filings. That is up from $846 billion, or 7.9% of assets, a year earlier. The trend appears to have continued in the third quarter, despite an improving economy. Of those 500 companies, 248 have reported third-quarter results. Their cash increased to 11.1% of assets, from 10.1% in the second quarter. Companies as diverse as Alcoa Inc., Google Inc., PepsiCo Inc. and Texas Instruments Inc. all reported big third-quarter increases in cash holdings."

Roubini sounds another dire warning - (www.moneyweb.co.za) - Investors worldwide are borrowing dollars to buy assets including equities and commodities, fuelling "huge" bubbles that may spark another financial crisis, said New York University professor Nouriel Roubini. "We have the mother of all carry trades," Roubini, who predicted the banking crisis that spurred more than $1,6trn of asset write downs, said. "Everybody's playing the same game and this game is becoming dangerous." Roubini explains that investors who're "shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20% cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions". "Let us sum up: traders are borrowing at negative 20% rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70% range since March," he writes in the FT. In effect, say Roubini, this has become "one big common trade - you short the dollar to buy any global risky assets". The dollar has dropped 12% in the past year against a basket of six major currencies as the Federal Reserve, led by Chairman Ben Bernanke, cut interest rates to near zero in an effort to lift the US economy out of its worst recession since the 1930s. Roubini said the dollar will eventually "bottom out" as the Fed raises borrowing costs and withdraws stimulus measures including purchases of government debt. That may force investors to reverse carry trades and "rush to the exit", he said. He supposes that the "combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe - for now - for the mother of all carry trades and mother of all highly leveraged global asset bubbles".