The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘geithner

Bank asset revlauation – unfortunately its the next mortgage crisis

In keeping with the theme that bank assets need to be properly valued before confidence can be returned to the system, this piece summarises the next immediate problem.  As you read this, bear in mind that the American system for most states employ the non-recourse system.  This little known implication just came known to me recently, and further explains the extent of the fear on bank asset value.  Non-recourse means the homeowner can walk away from a home where the mortgage exceeds the home value with no recourse from the bank back to that homeowner for the shortfall.  This is quite different than other countries, and frankly an insane provision for a rational economy.

Decay is spreading to the upper floors of America’s mortgage market | economist

The sums involved are depressingly large. In the worst case, losses on the $600 billion of securitised Alt-A debt outstanding—roughly the same as the stock of subprime securities—could reach $150 billion, reckons David Watts of CreditSights, a research firm. Analysts at Goldman Sachs put possible write-downs on the $1.3 trillion of total Alt-A debt—including both securitised and unsecuritised loans—at $600 billion, almost as much as expected subprime losses. Add in option ARMs, a particularly virulent type of adjustable-rate loan, many of which are essentially the same as Alt-A, and the potential hit climbs towards $1 trillion.

The amounts are alarming.  Bear in mind these amounts will also have been securitised and purchased by banks elsewhere.  The above statistics suggest that even Roubini’s estimate (courtesy of John Maudlin)  of 50- 60% of US bank assets being bad could in fact be optimistic.

This is the challenge facing Geithner, and his preparatory words to Congress and G7 this week suggests to me he understands the extent of the challenge.


Written by Colin Henderson

February 14, 2009 at 18:14

A future that has hope for banking innovation only in North America?

In something that is a bit ironic, the Democratic US government is looking the most conservative in management of banks amongst the G-7 scheduled next week in Italy.  Geithner is also looking the most thoughtful of the finance ministers, alongside Lagarde in France.

This is seriously not a time for grandstanding as Brown and Darling continue to do too often.  Time to get it right with a sustainable approach that will not relegate banks to becoming permanent financial utilities which I fear is happening when you read this dire summary of the current state.

Could we have a system in the future that has the private (and presumably innovative) banks existing only in North America?

Question of control over banks awaits Geithner at upcoming G-7 meeting |

Ireland injected €7 billion, or $9 billion, into its two largest banks Wednesday. In return, it gained the right to appoint four directors, limit executive pay, set lending parameters, require the suspension of home foreclosures, as well as an option to buy a 25 percent equity stake at fire sale prices some time in the future. The government already owns 75 percent of Anglo Irish bank.

In Britain, four of the most troubled financial institutions — two of them were officially nationalized — are already under the de facto control of a newly formed government holding company.

Officials are pushing Lloyds Bank and the Royal Bank of Scotland, among others, to pare bonuses and increase lending to British homeowners and businesses.

Both countries’ actions conform to a growing sense in Europe that the best way to revive banks is to put them on the tightest possible leash. But in an interview in advance of the Friday and Saturday G-7 meetings, a senior Treasury official reiterated that the Obama administration is committed to the proposition that banks must remain in private hands.

Written by Colin Henderson

February 13, 2009 at 16:55

Liveblogging C-Span | Timothy Geithner, Secretary of the Treasury on bank bailout package 10th Feb

Two minutes to go – running a little late.  This set of announcements to talk about the plans for the remaining $250 Bn TARP money.

Expect to see these dramatic developments.

  • A public / private investment fund
  • a new pre-requisite requirement for banks before receiving for government aid
  • major expansion to consumer / business lending programme

I will update this post every few minutes.

Here we go.  Sen Chris Dodd, D Banking, Housing and Urban Affairs Committee Chairman  introduces Geithner.

Treasury Department Financial Markets Assistance Plan.

Notes listening to him:

“Introduction has talked about unfreezing credit 5 times – interesting that is the focus.  Anyhow here is Geithner.

Economic strength is derived from the makers and do-oers of things.  The financial system is central to that process, finance for first home and new car.  Immediately speaking on new credit.

Credit markets are not working – borrowing costs risen sharply.

Many banks are reducing lending and tightening terms.  Referring to job losses, demand dropping.  Trade between nations drying up.  Credit worthy borrowers having trouble.  Financial ssystme working against recovery and against banks.

Unless we restore the flow of credit problem will be deeper.  Today as Congress passes the stimulus we are implementing the market assistance plan.


banks and investors took risks they did not understand.  Systematic failures by Board of Directors, and Rating Agencies.  Insufficient constraints to limit risk.  These failures laid the groundwork for the worst crisis in generations.  The emergency actions taken so far have added to anxiety and failed.

Las fall Congress acted quickly and pulled the system back from the edge of catastrophic failure and were essential but inadequate.  Distrust has turned to anger as senior execs – lavish perks.  American people have lost faith in leaders of fincancial institutions.    This has to change.

Policy has to be comprehensive and forceful.  Not gradualism.  Must be sustained until recovery is established.  In Japan etc governments applied the brakes too early.  We cannot make that mistake.

Need transparency to see the impact of those investments.  Must support not replace private capital.  US must send a clear message to replace the current programme with a new one to support recovery.

The Dept of Treasury and Finance Reserve must work together but we are one government serving the American people.

Here is what we will do.  –  Site setup underway.  There is a link 02/10/2009 – Financial Stability Plan Fact Sheet PDF Icon that goes nowhere.  Link now live.  This is work in progress as we post.

Talking a lot about transparency to American people.

Three steps:

1.  Stress test for Banks.  Consistent review of Banks balance sheets.  New funding mechanism.  Every dollar will generate a level of lending,  New Trust to manage.  [Need to understand better]

2.  Financing for bad assets. Private capital and market managers to manage these assets.  A programme.  $1 trillion in capacity – beginning at $500 bn.

3.  Jointly with the Federal Reserve kick start lending and get credit flowing again.

Housing:  some borrowed beyond their means.  Government should have moved more forcefully.  Houseing prices fall, and we should find a new balance, but foreclosures and deepening crisis mean we must do something.  Focus will be to bring down mortgage payments and mortgage interst rates. Next couple of weeks.

Working in preparation for London G20 in April.  International co-operation on regulation.

Wrapping up now.  His speaking style is very direct clear, and no hesitation.  However he is not taking questions.  Thats weird.

Relevance to Bankwatch:

The messages above clearly add to notion of highly regulated banks.  The stress test remarks mean that banks will be under direct scrutiny and intervention.  Financial utilities are coming closer to fruition.

It appears that in the the internal debates  between Obama’s aids and Geithner (thanks @modernmod) that Geithner was able to introduce some compromises that are critical.  The stress test 9refer below) appears to be a pro-active measure that allows the government to step in and insist on banks taking capital in the form of preferred share injections.  This with a view to retaining confidence in the banking system.  The compromise is that they are first of all preferred and not common shares.  Secondly they will be managed through a trust that is handled by private instment managers, and will be supported by private capital.

The 64 thousand dollar question remains to what extent those private managers will be directed by politics and political intervention.  This becomes important as we see banks that would otherwise be bankrupt, continue to operate with this quasi government support.  Again the important point will be the resulting motivation of the Banks’ managers and the impacts on the customers.  As we progress towards the notion of banks managing government arranged and guaranteed loan programmes the notion of financial utilities comes ever closer.


Here is an extract from the online version outlining the Bank stress test and trust mechanisms.

Financial Stability Trust: A key aspect of the Financial Stability Plan is an effort to strengthen our financial institutions so that they have the ability to support recovery. This Financial Stability Trust includes:
A Comprehensive Stress Test: A Forward Looking Assessment of What Banks Need to Keep Lending Even Through a Severe Economic Downturn: Today, uncertainty about the real value of distressed assets and the ability of borrowers to repay loans as well as uncertainty as to whether some financial institutions have the capital required to weather a continued decline in the economy have caused both a dramatic slowdown in lending and a decline in the confidence required for the private sector to make much needed equity investments in our major financial institutions. The Financial Stability Plan will seek to respond to these challenges with:

Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

Coordinated, Accurate, and Realistic Assessment: All relevant financial regulators — the Federal Reserve, FDIC, OCC, and OTS — will work together in a coordinated way to bring more consistent, realistic and forward looking assessment of exposures on the balance sheet of financial institutions..

Forward Looking Assessment – Stress Test: A key component of the Capital Assistance Program is a forward looking comprehensive “stress test” that requires an assessment of whether major financial institutions have the capital necessary to continue lending and to absorb the potential losses that could result from a more severe decline in the economy than projected.

Requirement for $100 Billion-Plus Banks: All banking institutions with assets in excess of $100 billion will be required to participate in the coordinated supervisory review process and comprehensive stress test.
Capital Assistance Program: While banks will be encouraged to access private markets to raise any additional capital needed to establish this buffer, a financial institution that has undergone a comprehensive “stress test” will have access to a Treasury provided “capital buffer” to help absorb losses and serve as a bridge to receiving increased private capital. While most banks have strong capital positions, the Financial Stability Trust will provide a capital buffer that will: Operate as a form of “contingent equity” to ensure firms the capital strength to preserve or increase
lending in a worse than expected economic downturn. Firms will receive a preferred security investment from Treasury in convertible securities that they can convert into common equity if needed to preserve lending in a worse-than-expected economic environment. This convertible preferred security will carry a dividend to be specified later and a conversion price set at a modest discount from the prevailing level of the institution’s stock price as of February 9, 2009. Banking institutions with consolidated assets below $100 billion will also be eligible to obtain capital from the CAP after a supervisory review.
Financial Stability Trust: Any capital investments made by Treasury under the CAP will be placed in a separate entity – the Financial Stability Trust – set up to manage the government’s investments in US financial institutions.
Public-Private Investment Fund: One aspect of a full arsenal approach is the need to provide greater means for financial institutions to cleanse their balance sheets of what are often referred to as “legacy” assets. Many proposals designed to achieve this are complicated both by their sole reliance on public purchasing and the difficulties in pricing assets. Working together in partnership with the FDIC and the Federal Reserve, the Treasury Department will initiate a Public-Private Investment Fund that takes a new approach.

Public-Private Capital: This new program will be designed with a public-private financing component, which could involve putting public or private capital side-by-side and using public financing to leverage private capital on an initial scale of up to $500 billion, with the potential to expand up to $1 trillion.

Private Sector Pricing of Assets: Because the new program is designed to bring private sector equity contributions to make large-scale asset purchases, it not only minimizes public capital and maximizes private capital: it allows private sector buyers to determine the price for current troubled and previously illiquid assets

Written by Colin Henderson

February 10, 2009 at 11:08

Posted in Uncategorized

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The difference between good and evil – welcome to the new world order of finance

It may seem a petty matter, but the Cit Jet issue is now officially a fiasco.  This follows on the expulsion of John Thain for the famed $87,500 carpet.

In both cases the common thread is that no amount of rationalisation can make the matter right.  The rationalisation goes that the purchase was executed months or years ago and represented commitments that must be honored.  In the case of the Citi jet if was further rationalised that they had sold two other jets and those funds almost made up the $50 million for the new one.  Classic MBA / finance rationalisation, and in 2003 may have been even considered conservative.

Geithner forces Citi to cancel jet order | Financial Times

Bank rescue process to be more transparent

Mr Geithner’s action came as he raced against time to change public perceptions of the government’s bank rescue effort – the troubled asset relief programme inherited from the Bush administration.

The Obama team wants to move forward with a comprehensive bank clean-up and recapitalisation programme. Senior Wall Street executives said yesterday that they had been sounded out on plans for an “aggregator bank” that would purchase toxic assets from banks

Fast forward to 2008, TARP and a new government that, politics aside, is based on positive ideals and doing things right.  I keep going back to the Umair vision of how good will beat out evil.  While there is a risk of being overly Pollyannish on this, no-one can question that banking has been tarnished by the work of Investment Banking and their approach using cheap money to make enormous profits that seem disproportionate and at little personal risk, till now.  The mood at the World Economic Forum validates that shift.

The point is, where to now?  A good start would be to do good things and the right things.  The Citi Jet decision represents a lost opportunity for Citi to display some leadership and they blew it.  Now they have had their wrist slapped like a bad little boy.

Relevance to Bankwatch:

The psychology of smart banks and bankers has to take a new leadership role that disassociates itself from investment bankers.  Lest there is any doubt at all simply remember this

  1. Investment banking = evil (think jets, carpets, first class etc etc)
  2. Basic banking = good

This simple formula will stand all decisions in good stead for the forseeable future, and may even result in some new business.  Rather than resist the obvious directions being telegraphed from the Federal Government in the US that will obvoiusly represent a leadership beacon to other governments, time to get ahead of the pack with a valid strategy for the new order of finance we are entering.

Written by Colin Henderson

January 28, 2009 at 10:37

Posted in Banking Strategy

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