October 10, 2008 11:24

Why Treasury won't explicitly insure all bank debts

From the FT:

Officials have reviewed the nuclear option of providing an Irish-style sovereign guarantee for all US bank deposits and many or all categories of bank debt as a means of restoring banks’ access to private funds.

But they fear that providing formal guarantees only for banks would trigger the implosion of financial firms that compete with them, producing massive disorderly flows of funds across the financial sector. So they hope to rely on implicit guarantees instead.

Great, another implicit guarantee! We know how well the last one of those worked out.

Update: And another thing: If you borrow short and lend long, you're effectively a bank. It's becoming ever less clear to me what justification there is for nonbank borrow-short-lend-long-institutions other than regulatory arbitrage.

October 10, 2008 7:05

Getting there but not there yet

The G-7 finance ministers say they're going to "take decisive action and use all available tools to support systemically important financial institutions and prevent their failure." Hank Paulson says that:

As we develop plans to purchase equity ... we are working to develop a standardized program that is open to a broad array of financial institutions. Such a program would be designed to encourage the raising of new private capital to complement public capital. Consistent with the legislation, any equity the government purchases through a broadly available equity program would be on a non-voting basis, except with respect to the market standard terms to protect our rights as investors.

What's missing here--both from the G-7 and Paulson--is a delineation of which financial institutions are "systematically important" and which aren't. Until everybody knows that, things are gonna stay weird.

Update: Actually, another thing missing is any kind of clarity as to how current shareholders of these financial institutions that get government capital injections will make out. Although I guess the shareholders really don't matter nearly as much the creditors do.

Update 2: From Floyd Norris:

The Treasury may have to decide soon if Morgan Stanley is systemically important, and, if so, what to do about it. As speculation swirled this week, the already-depressed Morgan Stanley shares lost more than half their value, and letting it hang in the wind for long could weaken the firm irreparably.

One reason why action may be needed is that the principle allows for two interpretations, even if you assume, as I do, that Morgan Stanley is systemically important. (Mr. Paulson ducked a question about whether it and Goldman Sachs qualified.)

If the Treasury and the Fed will really “support” Morgan Stanley, then it is hard to understand why the stock should be so cheap. But if all they will do is prevent its failure, that could include a Bear Stearns-type takeover, in which shareholders come close to being wiped out. I find it hard to believe that Morgan Stanley is really in desperate straights, but this is a market and a time when almost no one is assumed to be solvent.

October 10, 2008 5:16

Peter Fisher says Hank Paulson needs to be quicker

Peter Fisher used to run the open market desk at the New York Fed. Then he was Under Secretary of the Treasury during the Paul O'Neill years. Now he's co-head of fixed income at BlackRock, the firm that's managing those $29 billion in Bear Stearns assets the Fed took on back in March. So you could say he's kinda plugged in. Here's what he said in a Business Week interview with Maria Bartiromo (it was posted a couple of days ago but I just noticed it):

They've got to help sort out the institutions that are going to be survivors and those that aren't. One of the problems has been that when you give a speech or announce that all the banks in America have got to raise capital, you're pre-announcing dilution, and that doesn't do much for the existing equity owner's confidence. It makes them run for the exits. So I think if banks are going to raise capital, you've got to do it really quickly. Goldman Sachs raised capital in a heartbeat. You don't threaten dilution and therefore upset your shareholders. The other thing is that the authorities have got to close those firms that are not going to be survivors as quickly as possible. We can't wait around for consolidation.

This seems to now be a consensus view now among economists, Wall Streeters and a lot of policymakers in Washington. So why's it taking so long to happen? My first thought is that it's just hard to get everything lined up and figure out who lives and dies and the like. You can't do it in a day or two. But I can't shake the feeling that there's been at least a little bit of foot-dragging about this on Hank Paulson's part. Is it that he sees such triage as admitting failure? Or is he having trouble persuading bank executives that we've reached this point? Or has he had trouble persuading President Bush? Or does he just really really need a nap?

October 10, 2008 3:06

McCain's retirement-account liquidation idea

John McCain is suggesting on the campaign trail today that the IRS rules that require owners of retirement accounts (IRA, 401ks, etc.) to withdraw a certain amount (there's a formula) from those accounts every year after they turn 70 1/2 ought to be suspended because of the market crash.

Sayeth the Senator from Arizona:

To spare investors from being forced to sell their stocks at just the time when the market is hurting the most, those rules should be suspended.

It doesn't seem like a bad idea at first glance. If there are any tax lawyers or others out there who think it is, please let me know. But it also seems pretty trivial. First of all, the only people the suspension would help are those who don't need the money right now. And for the bulk of retirees (that is, people in their 70s) the required annual withdrawal amount is 5% or less of the total in the account. Still, this could be a big deal for 100-year-olds, who must withdraw as much as 16% a year. They should definitely vote for McCain.

Update: From jstnorv in the comments:

I can't believe that no one on McCain's staff knows that you do NOT have to take IRA distributions in cash. You can transfer stocks or mutual funds in kind to a taxable account and depending on the situation could actually benefit from doing so. Do they not know this? I can understand individuals not knowing this but I find it inconceivable that no one on his staff does.

If that's the case, then the verdict on this proposal is clear: Completely bogus.

October 10, 2008 1:20

Barry Ritholtz is turning bullish

Barry Ritholtz, one of those guys who's been right a lot over the past couple years about the market, is sniffing a market bottom. He's just put up a post listing 10 "charts, signals, indicators" that, as he puts it, "suggest to us that we are increasingly close to a bottom that can be purchased for an upside trade of 20-30% from these levels."

I've never been much of a technical-indicator believer myself, but when it's Barry saying it, I listen--partly because he tempers his technical stuff with a lot of fundamental research and actual, you know, thinking. Also, one indicator of his I definitely believe in, the magazine cover indicator, is flashing "buy."

Update: Barbara points out that a lot of people are calling a bottom--on CNBC, in phone conversations she's having, etc. Which I guess means it can't really be a bottom, right?

October 10, 2008 12:47

What regulation needs to look like

Heidi Moore of the WSJ has a fascinating account of a panel discussion this morning featuring Jamie Dimon of JP Morgan Chase, Larry Fink of BlackRock, Lloyd Blankfein of Goldman Sachs, Steve Schwarzman of Blackstone and Glenn Hutchins of Silver Lake. I know a lot of people have soured on anything anybody on Wall Street says, but this bunch is pretty danged smart and I'm a big fan of Dimon and Fink in particular. Anyway, go on and read the whole thing if you're interested. But here's a nice snippet from Fink:

“Any institution that manages over $5 billion should be regulated, whether it’s public or private, an insurance company, bank or private equity fund.” He wants regulation that is principles-based and consistent so that “capitalism will not arbitrage between regulators, capitalism will not arbitrage between public and private. Capitalism at its finest had the ability to arbitrage between different regulators, capital structures and platforms.”

October 10, 2008 12:07

A solution is at hand (but not for today's problem)

Fixing Global Finance, the new book from The Dean himself, FT economics columnist Martin Wolf, just arrived in the mail. Sadly, it doesn't appears to be about fixing the mess we're in today. It's about fixing the huge current account imbalances (we run ginormous deficits, China and Japan run big surpluses) that Wolf says brought on the mess we're in today. Let's get to work on that ... in, I dunno, March or something.

October 10, 2008 11:30

Do we have a plan, people?

The reports keep coming (and they started, sort of, right here on this blog) that Treasury is putting together a plan that will involve recapitalizing banks (in exchange for equity stakes), temporarily guaranteeing all deposits, and guaranteeing all bank debt maturing in the next 36 months or so. There's talk in D.C. that they may make some kinda big announcement on it today. (Update: Now the talk is probably not today.)

What this amounts to is the Swedish solution--a plan of action nearly identical, albeit it of course on a much larger scale, to what the Swedish government undertook during a banking crisis in 1993. And while I certainly am not gonna take credit for introducing this idea (the Swedes should get that, and they in turn give some of it to Franklin Delano Roosevelt and his bank rescue in 1933; plus some guy at the Cleveland Fed wrote a paper on "The Swedish Experience" [pdf] more than a year ago), there was a time early this year when I and Merrill Lynch's David Rosenberg were about the only people discussing it as a legitimate possibility and others seemed to think we were a little nuts. Wrote Paul Krugman back in March:

Justin Fox suggests that we learn from the way Sweden dealt with its financial crisis at the beginning of the 90s. I’m looking into it.

What Justin doesn’t mention, however, is that (according to Reinhart and Rogoff [pdf!]) the resolution of Sweden’s financial crisis imposed a fiscal burden — that is, required a taxpayer-financed bailout — equal to 6 percent of GDP. That would be $850 billion in America today. Just saying.

The Swedes say that they ended up recouping a lot of their losses and that in the end the cost was somewhere between 2% and 0% of GDP. But whatever: At the time my response to Krugman was:

[A]n $850 billion price tag attached to a cleanup that resolves most of the current credit problems, wipes out the shareholders of insolvent institutions, and leaves us with a more rational regulatory setup (as the Swedish bailout seems to have done) actually sounds like a pretty good deal to me.

I'll stand by that. And if Treasury needs any advice on exactly how to proceed, Stefan Ingves, one of the main behind-the-scene architects of the Swedish rescue, is in Washington for the IMF-World Bank meetings (he's now head of Sweden's central bank). So is Bo Lundgren, who was Sweden's Minister of Fiscal and Financial Affairs in those days and now runs the Swedish National Debt Office. I have Lundgren's cell phone number in case Hank Paulson needs it.

October 10, 2008 10:31

Get ready for the B school boom

Quick anecdote: A friend of mine who works at a place that does GMAT prep gave me a call last night to say that the place was full of ex-Lehman employees. It's that time of the business cycle, folks. Everyone back to grad school! Let's just hope these people can get student loans...

Barbara!

October 10, 2008 10:02

Some 9-day-old news about Richard Rainwater and oil

Sorry I missed this, but my friend Brian O'Keefe from Fortune checked in with Richard Rainwater (like I kept saying I would) last week, and it turns out Rainwater got back into oil stocks a little while back:

Back in May, when oil was at $129 per barrel and rising, billionaire investor Richard Rainwater did something as prescient as it was shocking: He sold off all the energy stocks he owned.

Now he's making another bold move: He's betting on oil again.

A few weeks ago, when the price of oil tested a low near $90 per barrel for the first time in many months, Rainwater decided that he had found the right reentry point. "I reinvested back in the oil business, and it's worked out really well for me," he told me the other day. "I bought Exxon (XOM) stock under $75. I bought ConocoPhillips (COP) under $68. I bought Pioneer Natural Resources (PXD) under $50. I bought BP (BP). I bought Statoil. I made a big bet on the sector. I bought a lot of stocks back."

They're obviously all cheaper now, but Rainwater never claimed to be much of a market timer. He does tend to be right over the long-run, though. Which makes this sort of a mixed message: Rainwater's betting on oil companies because he's a big believer that we're at or near peak oil and thus prices will inevitably keep rising. But they won't rise over the next couple of years if nobody can afford to drive their cars. So if Rainwater's right, maybe it's time to start shorting bike stocks.