Comments on: No, Wait! You Got It Backwards!

By: GMAC, MetLife Among Banks Undergoing Stress Tests | Herald de Paris

GMAC, MetLife Among Banks Undergoing Stress Tests | Herald de Paris — Thu, 05 Mar 2009 15:24:06 +0000

[...] Based on those tests, the Treasury will force the bank to raise a specified amount of money – between 1 percent and 2 percent of the company’s risk-weighted assets, though in special cases the Treasury could decide more is needed. If the money can’t be raised privately, the Treasury will provide it. For the biggest banks, like Bank of America and JPMorgan Chase, 1 percent of risk-weighted assets amounts to about billion. If the Treasury decided each institution required the maximum, more than 0 billion would be needed, most of that likely coming from public coffers. The investments will made as preferred shares convertible to common shares. [...]

By: Dave S

Dave S — Wed, 04 Mar 2009 04:31:38 +0000

Dr Kwak-
EXCELLENT work and thank you very much for your analysis and explanation. Just bookmarked baselinescenario and you picked up a new daily reader.
Thanks again.

By: Sarah Jordan

Sarah Jordan — Sat, 28 Feb 2009 16:45:11 +0000

I think the name of the game here is to complicate things to the point that absolutely nobody knows what is going on. If you don’t know what is going on how do you know what to complain about. If you don’t know what to complain about then usually you just go along for the ride hoping for the best. Unfortunately that is where the taxpayers are at this stage of the “rescue”.

By: Kiers

Kiers — Sat, 28 Feb 2009 16:18:19 +0000

P.S. let’s not forget the snarky smiles of Angelo Mozillo and John Thain as well:

http://seekingalpha.com/article/98880-bank-of-america-s-acquisitions-what-was-ken-lewis-thinking

By: Kiers

Kiers — Sat, 28 Feb 2009 16:08:45 +0000

excellent…truly excellent article Dr. Kwak. This PROVES that the CULTURE of slick, investment banking shenanigans pulled off on a spreadsheet STILL EXISTS and thrives….but only at the UPPER ECHELONS of society. The monied class is still at it, I can visualize the snarky self satisfied smiles of Geithner, Bernanke, and Pandit!

Let’s not forget that CBS News declared recently that Morgan STanley has OVER 150+ “offshore subsidiaries” in the CAYMAN ISLANDS alone! (this is where the “asset side of the balance sheet lives” while we work on bailing it out!

By: Lindsay Kellock

Lindsay Kellock — Sat, 28 Feb 2009 15:25:38 +0000

How many informed, concerned and credible economists have taken the time and trouble to outline a course to deal with the banks and\or zombie banks? Is the message and the urgency of acting reaching the ears of policy influencers? Are blogs being read? understood? If so, why is no action taken, save the slow drip infusion infusion animating lifeless institutions? What needs to happen if it is not too late so as save the U.S. and other countries from a lost decade (or millenium)? Many many thanks to Dr. Simon and Dr. Kwak and others for helping us to grasp at least a few of the complexities of the current situation, both for the knowledgeable and the untutored.

By: d4winds

d4winds — Sat, 28 Feb 2009 12:29:31 +0000

The hole is too big for even the USG to plausibly fill, unless the Fed monetizes Treasury debt used for the prop-ups–if Treasury could funds for that purpose in the first place (sayeth the electorate, “No way.”).

Creditors and shareholders for the Gothambanks knew long ago that they were not supplying long-term capital to a viable enterprise but speculating on government salvation.

By: SEO Scums

SEO Scums — Fri, 27 Feb 2009 19:23:10 +0000

“Financial Meltdown » Lunchtime Links 2-27″ is running scripts to pepper this website with links to his site. There are others.

They are doing this as a part of search engine optimization to increase ad revenue to their own site.

It may be a good idea to consider adding a CAPTCHA mechanism to cut down on these scum balls.

These guys freeload off your work and also creates a distraction for your readers.

By: Financial Meltdown » Lunchtime Links 2-27

Financial Meltdown » Lunchtime Links 2-27 — Fri, 27 Feb 2009 18:55:31 +0000

[...] No, Wait! You got it backwards! (Baseline Scenario) A great tutorial on Treasury’s new “Capital Assistance Program.” [...]

By: crazyhog

crazyhog — Fri, 27 Feb 2009 18:31:26 +0000

For these “too big to fail” institutions, we have share holders, creditors, and management. From my understanding, we can only punish the shareholders and the management. We cannot punish the creditors because the financial system is deeply interconnected. If we punish the creditors, these creditors and their companies will fail like dominos. Therefore, I think the US government and US tax payers have no choice but to eat the losses from transactions that were placed way before the crissis hit. I think it is these previously placed transactions that are sinking all these financial companies right now. Punishing shareholders and management will not change the depth of the hole.

By: Kirk

Kirk — Fri, 27 Feb 2009 15:29:16 +0000

I agree the gov is unlikely to force CITI into bk undr scenario 2. But it could sell the preferred interest to longer term investors in tranches, thus allowing an orderly, quiet exit.

Also, isn’t part of the goal here to bring in more private money and thus encourage/lcok-in customers/future deals/revenue for the bank so that it can survive.

Would I rather have a ton of upside? Yes, if I were a pure financial investor, but let’s bear in mind that the USG has broader goals. Existing shareholders have been heavily diluted and so have suffered (amybe not enougg). And, officers can be punished using criminal charges that can be further explored after the present fire is reduced to a lesser risk. That rsik/club also hangs over many others.

By: d4winds

d4winds — Fri, 27 Feb 2009 14:11:17 +0000

The conversion right is backward, as you’ve noted. But the seniority positioning is backward also. Bail-out monies—USG owned preferred shares–should increase in seniority, not decrease, with ever increasing non-performance. (At least, that’s the way of the private sector.) The bail-out monies status should not reduce at the option of the bailed-out bank to that of common equity but should increase at USG option to the level of debtor-in-possession financing (that’s really what the monies are), i.e., senior to all preferred, unsecured debt, and deferred compensation/bonus pools.

It is the end game that is most troubling here. After sinking yet more and more money into an institution, what does the taxpayer have in 6 months? Look at AIG. It has gone through $150bn, is 79.9% owned by the USG, and is now posting the largest loss in US history, $60bn for a single quarter. Now what do we do now–pump in yet more? No matter how much we think some of these institutions are “too big to fail,” some of them must. Their ability to run-up losses exceeds all reason.

By: MK

MK — Fri, 27 Feb 2009 13:48:02 +0000

The convertable preferred stock has no voting rights, that’s a private negotiation. I don’t see a provision for a special issue of common stock without voting rights should these “options” be exercised. Unless such a special tranch of common stock is issued on the conversion, then it would certainly have voting rights.

By: The Smell Of Coffee « The Baseline Scenario

The Smell Of Coffee « The Baseline Scenario — Fri, 27 Feb 2009 12:18:24 +0000

[...] to the public purse, without the taxpayer acquiring a majority of the common stock. The contortions required are striking. But this entire approach is predicated on a rosy stress scenario, which assumes [...]

By: d4winds

d4winds — Fri, 27 Feb 2009 11:49:27 +0000

“Is it plainly risky for a bank to pay hundreds of million to multi billion in dividends to the government when it is already financially stressed …”

We all know–wink, wink–that credit terms will be revised to less “punitive” levels on or prior to the first quarterly report following an infusion. Remember AIG?