Friends Don’t Let Friends Drive Toxic Assets

The Legacy Loans program, a sizable chunk of the Geithner Plan, is dead, reports the New York Times.  The FDIC has “called off plans to start a $1 billion pilot program this month that was intended to help banks clean up their balance sheets.”

I’ve used my car before to explain this program, so maybe I can use it to explain the death.  In this scenario, the role of the Bad Bank is played by me; the Toxic Asset is my car; and Tim Geithner and Sheila Bair, Treasury Secretary and FDIC chair respectively, play themselves. 

^{By CatKaoe}

Remember, if you will, that in our last scenario, my accountant, Tim, had offered to partner with his friend Sheila to offer potential buyers of my car a pretty sweet deal: Sheila would loan 80 percent of the money to any potential buyer, and Tim would invest up to half of the remaining cost of the purchase, which meant someone could buy my car for about 10 percent of its auction price.  That would give me extra money to spend in the economy (hooray!).  It would also allow the dealer that bought my lemon the chance to fix it up and hold onto it until the market for bad cars goes back up.  Win-win, with the possibility of Tim and Sheila taking a big hit (taxpayer lose).

But what’s happened since this initial offer is that I, holder of the toxic car, have fallen back in love with it.  That burning oil smell — it’s the scent of nostalgia, of summers spent on hot tar highways.  The scratches and dents merely make the car more hip, like a worn pair of jeans.  I’m starting to think I could convert it to bio-diesel.  In short, I’m no longer willing to sell for anything less than the original $1,000 I thought it was worth.  I am not willing to put it up for auction, as Tim said I had to do.

Now, maybe I’m being honest about that.  Maybe I really do think the car’s gonna make it.  But maybe I don’t want to put the car up for auction because last month, I applied for a new apartment, and as part of my credit check I listed the car as an asset when I did that — an asset worth $1,000.  Now, I don’t want to put the car up for auction, because it will become clear pretty quickly that the car is only worth $700, and I could lose my apartment. 

Or maybe I don’t want to sell the car because I no longer need to sell it.  The market’s getting a little better, I’m feeling more flush, and I think I can afford to pay to maintain it until the time comes when it will be worth what I’m willing to sell it for.  It will be vintage soon, you know?

Now, Tim and Sheila — Tim in particular — have an interest in making sure I’m telling the truth about my motivation.  Because if I’m not selling because selling will make me look insolvent, well — that means I’m already insolvent.  If I’m not selling because I’m ready to spend, spend, spend anyway, then that means the market is improving, and the healing has begun (and quick, Tim says, let’s get some posters printed about that one, and make sure we send one to Paul Krugman).

Ezra Klein outlined both of these reasons as why the banks might not be willing to jump into the Geithner plan.  Kevin Drum at Mother Jones says it’s probably the insolvency problem, and that’s really, really bad, because it means that not only did the Geithner plan not solve the banks’ problems, but the banks are being allowed — and maybe, post-stress test, encouraged — to live on in denial that will eventually come back to bite us all.

To extend the metaphor: there exists a danger to the community if I continue to drive around a broken car while swearing that really, it’s fine.  Not only am I not spending as much as I could be, since I’m constantly worried about my toxic asset, but I might be actively making the whole community less safe by showing them that it’s cool to keep broken cars.

I think there’s also a third option, here.  Banks might be deluding themselves; they might be healthy enough to afford hanging onto their loans; and they might actually be afraid to deal with the government.  Several banks, post-stress test, raised a bunch of capital in advance of leaving TARP.  If they get re-entangled with the Geithner Plan now, they’ll also get pulled back into the shady land of government regulation over compensation.

In short: am I unwilling to sell the car because I still love it, because I still need it, or because you’re not the boss of me, Tim Geithner?

It could be all three (and none of these are particularly good reasons, really).  But whatever it is, I hope there’s a plan B.  I hope Tim and Sheila and Ben Bernanke have a better idea of what to do next than just what Sheila Bair said they’re going to do, which is wait and see if the PPIP might be needed later.  That’s only an OK plan if the assets don’t get worse — and I am not at all encouraged by our jobless rates, the rise in foreclosure and bankruptcy claims, and the continued need of companies with terrible mortgages on their books (yesterday GMAC got another $7.5 billion).

At some point, Friends Don’t Let Friends Drive Toxic Assets.  Apparently the banks still want to keep the keys — but at some point, Tim, Sheila, or Ben might have to step up and say, no way, man.  The PPIP was the gentlest possible way of doing that, so I’m sorry to see it die.

^{By wireheadinc / CC license}

G.M., Chrysler Announce Thousands of Dealership Cuts

It hasn’t been a good year for car dealerships.  Gas prices skyrocketed, meaning more people were eyeing the bus and the bike; the economy downshifted, meaning more people were eyeing the electrical tape than the new-car circulars; and now two of the Big Three U.S. automakers have announced plans to cut a combined 3,158 dealerships in the next year or so.

G.M. made its announcement today.  The company plans to cut its network of dealerships by 2,369 (40 percent) by 2010.  These cuts will come from cutting off 1,100 dealerships that underperform, closing 500 dealerships that only sell the Pontiac, Saab, Hummer, and Saturn lines that G.M. is looking to get rid of, and by combining other franchises.  Right now, G.M. says this will happen in late 2010, when contracts expire, but if it files for bankruptcy, the closures might move up significantly — say, to this fall.  They haven’t yet announced which dealerships will close, but have said they’re focusing on underperformers, a logical way to make cuts.

Chrysler made its announcement yesterday, complete with a list of who’s going to close, where.  They’ve asked the court to cut off these contracts on June 9.  You can download the full bankruptcy filing [huge .pdf] and search for your home state, if you’re curious (I was). 

What you might find is that some dealerships aren’t closing outright — they’re just losing the Chrysler side of their business, as the Jeep-Volvo-Volkswagon dealer near me will be.  That’s still a big hit in product supply, of course, but the reports that say unambiguously that 3,000 dealerships are going out of business seem to miss the nuance: 3,000 dealerships will lose supply of brand-new G.M. and Chrysler vehicles, but the industry is so cross-pollinated now that it doesn’t automatically mean 3,000 dealerships will fold.  It will be a huge loss for these businesses, which will also (presumably) lose financing arrangements through GMAC, but it’s not the end of the road for every one.

Yet G.M. in particular seems to be ready to cut off its smallest dealerships, those that sell only a few dozen cars a year and are probably likely to be heavily tied to one brand.  While that makes perfect business sense, I wonder if won’t also contribute to the declining economy in the middle of the country, where, like the slogan says at one my old hometown car-dealerships, “a handshake is still a deal.”  Small dealerships are everywhere in the Midwest, and while they do a fair trade in used cars, there’s still a culture of The Car Dealer, the small town salesman who can talk you into a new Cadillac when you came in for a tire rotation, that seems sure to die.

Should Treasury Bail Out Califonia?

This may come as quite the shocker, but California has bigger problems right now than its wayward Miss USA contestant.  The treasurer of the State of California has asked U.S. Treasury Secretary Tim Geithner to use TARP to guarantee the state’s debts.

California faces a budget shortfall of $13 billion next year.  There’s a state constitutional amendment that says California must always balance its budget, and the state got into a DEFCON-1 fight this year because no one will raise taxes.  Bill Lockyer, the California Treasurer, predicted that the state will be out of money by July, and will have to “delay” paying what’s owed to “school districts, counties, social service providers, vendors,” and other State-dependent agencies.  Lockyer predicts this will force some school districts into bankruptcy.  So, like any financially struggling institution that is too big to fail, they have turned to the federal government.

Lockyer’s request is particularly clever, almost Citibank-like.  He proposes the following: California needs to borrow in order to make up for the shortfall.  It wants to borrow by issuing Tax and Revenue Anticipation Notes (TRANS), which are what they sound like: they sell $X billion in these notes, saying, hey, look, we’re anticipting tax revenue down the road, and we’ll pay you back when this hits.  So investors (banks) buy the notes, expecting that they’ll get paid back what they put in plus interest.  But, as with any investment, there’s a risk involved.  If California defaults, then the banks that they issue the bonds through are left holding the $X billion bag.  They would still be required to pay the bonds off — California isn’t going to file for bankruptcy protection, after all — but no bank wants to take the chance that it will be left holding a multi-billion dollar outstanding debt.  California’s credit rating is the lowest of all 50 states.

So Lockyer has asked Treasury to guarantee California’s borrowing.  If California defaults, he wants Treasury to say, we will step in and buy their debt from you, the banks.  This way, the banks feel confident that they’re going to get paid no matter what, and California will be able to borrow more easily because Treasury has just made them a sure-fire investment.

If this sounds familiar, it’s because it is very, very close to what the intention of the TARP is: Treasury guarantees bad assets, so that banks are more willing to loan money.  Lockyer — and California — are right to say that this is the point of TARP.

Lockyer also argues — again, correctly — that the overall goal of TARP and all its acronymish brethren is to improve financial security and stability in the market overall.  A default by California, or even a major stall in its payments to state agencies, wouldn’t exactly help the nation’s economy.  Please imagine the unequaled BAD of schools staying closed, fire stations shutting down during fire season, mental health centers shuttering, and everyone who works in those places sitting at home, not spending any money.

Now, I’d expect yelling from the right about this.  The governors who have declined (or tried to decline) stimulus spending have all done so standing on the soap box of States’ Rights, which would seem to imply that they believe each state should have to stand on its own.  If California should default, here, then residents of faraway states would end up paying for their debt, at least immediately.  California would still eventually have to pay the government back, but the big outlay necessary to pay off its bank debts would be more money coming out of Treasury and less money that could go toward… well, toward the original goal of the TARP, shoring up banks.

Yet this seems to me a better way to spend that money, or at least a more urgent need.  If California, which is something like the world’s sixth largest economy, has to undertake IMF-levels of austerity in its budget, the impact on the national economy would be dramatic.  This wouldn’t be wilting green shoots: this would be like setting the green shoots on fire and then putting them out by pouring concrete on top.  Hate on Cali all you want, but as it goes, so goes 13 percent of national GDP.

I suddenly feel a need to buy an avocado.  Short of a similar massive national sentiment, the TARP bailout sounds reasonable.  I hope Geithner writes a positive reply to the letter — and soon.

Whirling Derivative Dervishes: Treasury Takes on the CDS Market

Also in the news yesterday (underneath the photo-release reversal madness, which I think Glenn Greenwald has pretty much covered) was the Obama administration’s proposal to press for regulation of Credit Derivatives [emphasis added]:

The administration asked Congress to move quickly on legislation that would allow federal oversight of many kinds of exotic instruments, including credit-default swaps, the insurance contracts that caused the near-collapse of the American International Group.

The Treasury secretary, Timothy F. Geithner, said the measure should require swaps and other types of derivatives to be traded on exchanges or clearinghouses and backed by capital reserves, much like the capital cushions that banks must set aside in case a borrower defaults on a loan. Taken together, the rules would probably make it more expensive for issuers, dealers and buyers alike to participate in the derivatives markets.

The proposal will probably force many types of derivatives into the open, reducing the role of the so-called shadow banking system that has arisen around them. 

I know, not nearly as sexy as the legal intricacies of a fight against FOIA, but still important.  (Believe me, I tried for at least five minutes to think of a way to attach Paris Hilton’s picture to this, too, but I’ve got nothing).  This is a dry topic, and if I didn’t know Americans so well, I’d say the boring tedium of it all was one of the reasons no one took this up a couple of years ago when it might have actually made a difference.  Oh, wait, it turns out I do know Americans that well.  Anyway, now that the financial world is falling apart, suddenly everyone’s concerned about the “shadow banking industry,” so we might see some real change, since voluntary national alcoholism doesn’t seem like a passable strategy to get through the days.  Like Andrew Leonard says, it is a bit like “closing the barn door after the derivatives escaped,” but there are still plenty of derivatives in the barn that could use some supervision.

It turns out, though, there was somebody pushing for this exact strategy five years ago.  Wait, did you say five years ago?  I did, self, I did.  Who was this forward-thinker?

Waaait a second.  Where’s his Darth Vader mask?

In 2004, Tim Geithner gave a speech¹ on “Hedge Funds and Their Implications for the Financial System,” in which he discussed, briefly, the need for credit derivatives to be traded more openly, and with some system of regulation.  Later that year, he convened the heads of the banks and got them to volunteer to update their tracking systems and get things onto a standardized computer system, instead of everyone running their own haphazard (think: sticky notes) show.  But the actual regulation of derivatives never went any further than that, whether because Geithner lacked the power, the resources, the guts, the inclination, the kickback, the conspiracy, or the political savvy or support (please remember who was running Treasury back then) to see that it did.

So, unlike PPIP and TARP and TALF and WTF (yes I made that last one up), this is a plan that someone’s thought about for more than a week or two.  Consider this Revenge of the Government Servants.  The plan for regulating derivatives is… well, I won’t risk putting you to sleep, but it’s been in the works for a while — we heard shades of it mentioned during Geithner’s earlier Congressional testimony — and it would consist, essentially, in rolling back big slices of the Commodities Modernization Act of 2000, which was adopted under the Clinton administration and, oh yeah, as both Andrew Leonard and the New York Times point out, with the full approval of one Larry Summers.

^{“Stop trying to help, Larry! Seriously!”}

It would push for most “derivative instruments” to be traded openly, so that investors and regulators could actually get a look at the ways companies hedge themselves against risk.  And it would also require certain capital reserves to be on hand before banks could trade these things — so an insolvent, constantly-borrowing-to-survive guy like Bear Stearns would have some trouble here. 

Openness?  What?  Accountability?  On Wall Street?  Surely you jest.

Well, a little bit, I do, because one of the agencies likely to be charged with overisght responsibilities is the Securities and Exchange Commission.  If you haven’t read TPM’s overview of the scathing GAO report on the SEC, well, that’s ten minutes of appalled laughter and stomach-sinking dread that you really owe yourself.  The SEC is pretty much a dead agency.  Giving it new things to do will only help if the President and Congress have plans to staff it up — and they’d better not be sending Summers over there.  SEC restructuring or, honestly, replacement is the biggest missing piece in this plan.

But overall, this is good news.  Yes, it comes too late, and yes, it’s probably not a perfect plan, but it’s complex with some pleasantly optimistic overtones and just a hint of bitter, bitter regulatory nuttyness.  Vintage government-label work, here.  I’ll drink to it.

^{1 Should you ever have trouble sleeping, I really, truly recommend perusal of the New York Fed’s speech archive, btw.  Skip the lively speeches by the other guys — Dudley’s “May You Live in Interesting Times” is just no match for the somnia-inducing Geithner tome, “The Economic Dynamics of Global Integ...”  Wha?  What?  Oh, sorry, nodded off.}

Take GMAC Down

The big news, really, is that GMAC needs $11.5 billion (and will need $4 billion more if it takes on Chrylser financing).  Can you think of anyone who would loan GMAC $11.50 right now, not to mention $11.5 billion?  Who should they even ask?  Well, I can think of one guy.  Can you guess?

OK, him too, but I’m not allowed to blog about Tim Geithner anymore, am I?  Keep guessing.

Getting warmer, but who knows if he’ll be able to stay awake long enough to count out the money (which, yes, he might have on hand). 

You don’t even know who that is, do you?  It’s OK; you’re not alone.  Hint: It’s Gary Locke.  He’s the Commerce Secretary.

Give up?  The auto task force guy with the power of the purse on this one might actually be this guy:

That’s Steven Rattner, the Car Czar.  Not really sure why he’s so far in the back during this Shame on You Chrysler Lenders speech, since he’s apparently the guy who fired Rick Wagoner at G.M. and heavily rumored to be the guy who told Chrysler’s non-complying creditors the White House would destroy them if they didn’t cooperate.  (He’s also, according to that first link, the guy who’s eyeing Tim Geithner’s parking space at Treasury — or at least was before his own possible scandal popped up).  Rattner is also the guy who will be poring over G.M.’s you-have-60-days-to-get-it-together filing, which is due at the end of this month.

Also due 30 days from now (June 8, to be precise)?  A plan from each of the banks listed above that needs to raise capital about how, exactly, those banks plan to raise that needed capital by November. I’m guessing GMAC’s plan can be summed up in two words: Government bailout.

So my thought is this: How can GMAC make any kind of plan without including the viability of GM (and Chrsyler, for which it might be taking up sales financing for) in its plan?  And if it includes those pieces of the puzzle, doesn’t that make Rattner the point man?

This seems like a good thing. Rattner’s the one who spear-headed the Chrysler effort, which ended, you may remember, with not much government concession to bondholders.  Rattner has shown that he’s willing to see a car company fail.  It can’t be that hard for GMAC to imagine that he wouldn’t mind watching a car company’s finance wing fail, too.

And though Treasury has said that they will support GMAC as needed, I’d guess that’s a reassurance meant more for its counterparties than for GMAC itself.  This is a bank that probably needs to go into receivership.  It’s a bank that, as Floyd Norris writes, “concluded, disastrously, that a good way to offset possible losses on auto loans was to get into mortgage lending.”  Going forward, what are the prospects for GMAC to revive?

I’m not convinced that a GMAC failure would be the same systemic threat that a failure of Citi or BoA might be.  First, I don’t think it would send a confidence shock through the system if GMAC went down — in fact, I think it’s more shocking that it’s being allowed to stand.

Second, GMAC does provide financing for dealerships to buy new inventory, and then provides financing for customers to buy that inventory — but if a contraction in that particular market is going to happen anyway (and it certainly seems it will, as part of Chrysler’s bankruptcy deal will include dealership closings), why not just hand GMAC off to the FDIC now?  Why not call this bank, and all of its attached pieces, a failure?

If anyone’s going to have a come-to-Jesus meeting with this bank, Steven Rattner seems like the guy to do it.  He’s probably got the clearest picture of GM’s predicament right now, and I hope that qualifies him to deal with their semi-detached financing arm, too.

Stress Testes of Steel

I cannot explain how much I love that headline, and how hard I’m going to work to make it relevant.  So the stress test results [.pdf] came out yesterday, and revealed that, while none of the banks are currently considered insolvent, several of them could go that way if the government’s “more adverse” scenario of unemployment hitting 10.3% comes to pass.  So they’re asking 11 bank-holding companies to raise capital to meet their preferred “cushion” level.  Here’s the summary of who needs what, in billions, as per the Wall Street Journal’s colorful front page:

Bank of America: $33.9
Wells Fargo: $13.7
Citigroup: $5.5
GMAC: $11.5
Regions Financial: $2.5
SunTrust: $2.2
KeyCorp: $1.8
Fifth Third: $1.1
PNC Financia: $l .6
Morgan Stanley: $1.8
J.P. Morgan Chase, BB&T, Capital One, US Bancorp, MetLife, Goldman Sachs, Bank of NY Mellon, American Express, and State Street: $0
Having six months to raise new, private capital: Priceless.

Let me highlight the surprises:

• Wells Fargo needs quite a bit of funding to be adequately cushioned against any further decline in the economy.  The predictions for Wells are already being called overly optimistic by some, because Wells — like several of the passing institutions — is heavily invested in real estate that may go further south than the government’s prediction.  
• Capital One is not on the needy list — let’s hope credit card defaults don’t surpass the government’s more adverse scenario numbers (18-20% losses).
• The Citi number seems low — until you realize that they need to raise $5.5 billion IN ADDITION to the $45 billion from the government that they just converted to common stock and the $3.4 billion it just sold Nikko for.  So put them down for $50 billion and change.
• GMAC suuuuucks.  I’ve got another post on that one coming later, though.

So, what do you do, the day after the government tells everyone that you aren’t sufficiently capitalized to survive a 1.4 percent rise in unemployment?  If you’re Wells Fargo and Morgan Stanley, well, you use that encouraging news to raise $7.5 billion each today:

In the capital-raising exercises, Wells Fargo sold $7.5 billion of common stock; regulators had ruled it needs to fill a capital hole of $13.7 billion.

Morgan Stanley raised $8 billion by selling $4 billion in common stock and $4 billion in bonds. It increased the total amount it raised compared with its initial plans by $3 billion because of strong investor demand, it said. Regulators had declared that the investment bank needed to raise money to fill a $1.8 billion hole.

Here’s my question — who bought those public offerings?  Friends of Bernie Madoff?  The Morgan Stanley results show that 45% of their expected loan losses are in Commercial Real Estate Loans, a category in which we aren’t even close to the bottom of the market — but their overall.  They did, however, manage to raise $6.5 billion last quarter, and their overall exposure to bad parts of the market is much slimmer than most.

But how bad did people think this was going to be that the news that Wells Fargo’s adverse-case-scenario losses will be $89.6 billion made Wall Street happy?  Shares were up 3.4 today (13.8 percent) on the news.  What?

I’m glad that there’s private capital to be found to shore up these banks, because it does mean that less government money will be needed.  But the sheer, amazing balls of these guys, to use a report of “it’s not as bad as we thought!” to raise billions of dollars — it certainly reminds us that nothing’s really changed on Wall Street in terms of risky behavior.

Ten Banks Expected to “Fail” Stress Tests

It’s Stress Test Week!  (Again).  But this time, we’re talking results instead of just, you know, hey, guess what’s happening behind closed doors.  The nation’s 19 largest banks have all seen their results by now, and rumors have been flying since Monday about what, exactly, those results showed.  I thought I’d do a round-up of expectations now, and then come back tomorrow and see how the banks fared in reality.  I’ve waxed on about what the tests mean before.  And I’ve said my faith in Treasury rests largely on the results.  So here it is: judgment day.  Rumor has it, ten banks aren’t expected to pass (which is different than a bank failing outright, because if they don’t pass, they’re given time to raise capital).  Here’s the Top Ten:

Citibank is held by Citigroup.  It’s expected to need a major infusion of cash — talk is $10 billion.  Citi apparently appealed the government’s findings.  Just this week, it sold its Japanese finance company, Nikko Cordial, for about $3.4 billion (it bought Nikko in 2008 for around $18B) to raise some much-needed cash.  Citi is largely considered the bell-weather of this test, in that if it’s deemed to “pass,” the rest of the test should be considered a joke.
Current government investment in Citi: ~$45 billion (some in common stock).

Bank of America is the nation’s largest retail bank, as of last fall when it bought Merrill Lynch — and is also expected to be the bank in the most trouble, since last fall it — hey! — bought Merrill Lynch.  BoA is expected to need a whopping $33.9 billion in additional capital post-test.
Current TARP investment in BoA: ~$45 billion (unless you count the government’s asset guarantees in.  Then we’re talking 45 + $142 billion = $187 billion).

Wells Fargo was considered in prime shape this fall when it bought out troubled Wachovia, and it took money from the TARP — but only under duress.  Now, despite the CEO’s protests that the stress tests are “asinine,” the bank is considered one of the most likely to be under pressure to raise new capital.  Warren Buffet, whose Berkshire Hathaway investment group owns shares of Wells Fargo (and US Bancorp, SunTrust, and BoA) and pushed for the Wachovia takeover, called Wells and US Bancorp “extremely strong banks” Monday.
Current TARP investment: ~$25 billion.

KeyCorp owns the Key Bank franchises.  It’s considered to be widely and heavily exposed in the commerical real-estate market, which is taking some significant hits as businesses suffer during the recession.  Analysts at several research/investment firms have said KeyCorp is quite likely to need to raise additional capital, and it has shown a loss in all of the last four quarters.
Current TARP investment: ~$2.5 billion

Regions Financial is in about the same boat as KeyCorp.  Oppenheimer analysts said late last month that they expected Regions to fail the stress tests and have to raise more capital.  Regions posted a 92% loss in the first quarter.  Holy mackeral.
Current TARP investment: ~$2.5 Billion

US Bancorp owns U.S. Bank, the sixth largest commercial bank in the country.  It’s not widely expected to need a big capital raise; it cut dividends earlier this year by 88 percent to maintain its capital cushion.  Its CEO also announced late last month that US Bancorp is ready to repay its TARP money as soon as possible.  The bank had a $529 million profit in the first quarter, down significantly from past years but a better showing than expected.
Current TARP investment: $6.6 billion

Fifth Third Bancorp is another regional bank expected to need additional capital.  It’s based in Florida, where the burst of the housing bubble is still taking down everything in its path.  Like Regions, were the government to convert its preferred shares to common shares, it would own a majority stake (54 percent) of Fifth Third.  One wonders if that’s enough ownership to induce a name change.
Current TARP investment: $3.4 billion

Like Fifth Third, Georgia-based SunTrust is a considered a regional bank likely to be told to get thee more capital, according to a report issued by Mogan Stanley last month.  Then again, Morgan Stanley though BoA fell into a “grey zone” and might not need new capital, so who knows. SunTrust wrote off $610 million in bad loans just in the first quarter this year, and apparently holds a big balance sheet of home mortgage loans in the Southeast.  Last week, a huge Georgia banker’s bank with similar ugly exposure became the fifth largest bank failure this year.  In January, analysts were already predicting SunTrust would need another $2 billion.  They went back for $1B from TARP, so at this point, I’d guess they’ll need at least $1B.
Current TARP investment: ~$5 billion.

PNC Financial Services Group posted a profit last quarter, mostly on the strength of its acquisition of National City — a move that some say gave the bank a needed capital boost.  Analysts at Keefe, Bruyette and Woods say PNC is likely to need more capital despite cutting dividend payments earlier this year.
Current TARP investment: ~$7.5 billion

And lucky number 10.  Capital One Financial Group is mentioned with some regularity as a bank expected to need additional capital.  Its exposure is largely in credit cards, and as unemployment rises (in the stress tests, it went over 10 percent) so do expected defaults on credit card payments. 
Current TARP exposure: $3.5 billion

Ten banks are expected to have “failed,” or, in the nicer terminology, to need to raise new capital so as to have a nice cushion in case of the economy continuing to decline.  The remaining nine banks are considered variably secure right now, though BB&T is mentioned in several articles as likely to be asked to raise capital, too, and I’m a little surprised that no one thinks GMAC is going to need any further funding.
Current BB&T TARP Investment: ~$3 billion

Current GMAC TARP Investment: $5 billion

The remaining banks (bank holding companies) are:

• J.P. Morgan Chase.  Current TARP Investment: $25 billion
• Goldman Sachs Group.  Current TARP Investment: $10 billion
• Morgan Stanley.  Current TARP Investment: $10 billion
• State Street Corp.  Current TARP Investment: $2 billion
• Bank of New York Mellon.  Current TARP Investment: $3 billion
• American Express Co.  Current TARP Investment: ~$3.4 billion
• MetLife.  No TARP Investment.

Well, so, let’s see what happens now.

Fiat’s Chrysler Buy: Just the Ideas, Ma’am

Here’s the question that matters this week: If you had $14,000, would you buy this car?

It’s the Fiat 500, and the concept most likely to be coming soon to a Chrysler plant near you, should the Fiat/Chrysler merger come together.  Sergio Marchionne, Fiat’s CEO, has been saying since last year that he’d like to bring the 500 to the American market.  And Chrysler’s been encouraged by the government to produce smaller, more fuel-efficient cars pronto.  The 500, which would fit in my car’s trunk, gets 46 miles to the gallon on its base model (a more eco-friendly version gets 67 mpg, with carbon emissions nearly equal to a Smart car).  Did I mention it currently goes for 10,500 euro ($14,000)?

The 500 and its Fiat brethren (The Fiat Panda seems a likely companion, but only for people who never listen to Top Gear’s Jeremy Clarkson) are the future of Chrysler.  They are, in fact, what Fiat is “buying” into Chrysler with — the company is offering no money at all to take a 20 percent stake in the company.  Instead, they’re offering concepts and techonology — $10 billion worth.

It’s probably a good deal.  The government viability report [.pdf] on Chrysler mentioned again and again that the company was, basically, out of ideas.  It spent everything it had to keep pace with its larger competitors, putting everything it had into production, so that it had cut back sadly and deeply on research and development.  The merger will offer Chrysler a way back into the new-car market, putting its plants to work on constructing cars based on Fiat-researched models.  What we’ll get won’t be the 500 — Ford took that name already — but a twist on it, a Fiat with the familiar Chrysler wings on front.  Sounds like a happy ending, right?

Except what we’ve come to is that an Italian company is going to buy an American car-maker not on the strength of its money, but on the value of its ideas.  In that respect, it’s hard to think of Fiat as the savior of the American manufacturing industry.  If innovation is the problem, well, it’s hard to think of a way to save the industry at all.

WSJ: Chrysler Heads to Bankruptcy, Or Fiat, Or Not, Or…?

The Wall Street Journal has a rambling piece about the possible future of Chrysler that starts with this:

Chrysler LLC is preparing to file for Chapter 11 bankruptcy protection as soon as next week, whether or not it reaches a deal with its lenders or forges an alliance with Fiat SpA, said several people familiar with the matter.

This sentence kicks off an 1,100 word article in which only three words — “in its totality,” in the last line — are attributed to anyone by name.  The rest of the article quotes:

• “these people” (x4)
• “people familiar with the matters”
• “people familiar with the matter” (again)
• “Fiat” (no clarification on whether that’s the whole company, the signage out front, or someone’s talking car)
• “The Obama administration” (again, no clarification on whether they spoke united)
• “an administration official”
• “one person”
• “people familiar with the situation” (x2)
• “Obama advisers”
• “Officials with President Barack Obama’s auto task force”
• “people familiar with the talks”

That final quote from Fiat CEO Sergio Marchionne came from a conference call.

From this combination, it’s hard to figure out whether there’s any original reporting at all in this story.  It’s also hard to tell what qualifies one to be a person familiar with the situation — let’s hope it requires more than just reading WSJ coverage every day.

The point the story starts out making — that Chrysler is going into bankruptcy even if it cuts a deal with its lenders — is seriously undercut by anonymous quotes within.  We start with the above lede, then travel to someone in the administration and an unnamed Fiat negotiator saying that bankruptcy won’t be necessary, travel to a Chrysler source saying to lenders (via some third party source) that yes, they’re going into bankruptcy so Fiat can pick and choose pieces of Chryster, then finally land on Marchionne’s quote that Fiat is “interested in Chrysler ‘in its totality.'”  In the middle, there’s a side-show story about Fiat seeking a possible merger with G.M. — and the story says both that this will be only a takeover of G.M. European Opel division and a way for Fiat to spread into the American market.

I should not be more confused at the end of the story than I am at the beginning — unless the point of the story is to show the chaos that’s currently reigning within automaker negotiations.  What I get a sense of here instead is the chaos in the newsroom of a paper that sees itself as the premiere source of business news in the country.  Really, it took five reporters to write this?

A friend on OS asked a while back why there aren’t any embeds in the financial crisis — people on the ground, covering the story from within, sending reports back from the front lines.  I spent some time trying to answer this, and kept coming back to the same problem: Embedding a reporter in a bank — in any private enterprise — would seem to be a breach of privacy.  At best, even assuming a reporter did get internal access to the major goings-on, I figured we’d end up with some Bob Woodward-like book on the financial crisis a year after things are concluded, revealing who made who do what and for how much (read that in any way you want — I assume it’s all very messy in the banking industry right now).

But while real-time insider reporting might not be feasible, actual reporting is necessary.  As I rarely spend a day making any calls myself, I’m lecturing from a glass podium on a stage made of very thin crystal — but I’m an unpaid opinion writer, whereas the five reporters who contributed to this Wall Street Journal article about what could be one of the more important financial incidents in a year that hasn’t yet been boring get paid to go out and report the news.  That means not just talking to sources, but getting them to go on the record — and when they won’t go on the record, it means finding more sources who will.  It means telling a story that makes sense, and that’s credible, and that can be tracked and proven.

It also means reporting without a pre-set agenda.  Consider these three paragraphs:

Reorganizing three auto makers on three continents could move the world-wide car industry a big step toward the kind of large-scale consolidation that long has been overdue. For years, auto makers have struggled with excess capacity that has fostered intense price competition and squeezed profits.

The problem has festered because stronger car makers have steadily added plants while governments often have stepped in to prop up ailing car companies to preserve jobs.

Any bid to restructure three auto makers is likely to prove highly complex and risky for the companies involved and the Obama administration. Chrysler is in such bad shape precisely because its cross-border merger with Daimler AG ended in failure after eight years.

That may all be true, but I have no idea who’s claiming it.  Who says consolidation is long overdue?  The reporters?  Half of the reporters?  An unnamed source?  The Wall Street Journal itself?

Hundreds of experts exist in the U.S. who would have been willing to assist in this story, even on a Thursday when there’s good new T.V. to watch.  Likewise, though perhaps no one directly involved with the ongoing negotiations might be willing to go on the record, official sources at all of the companies involved get paid to answer media inquiries, and I bet even their non-denial denials of the statements above would have told us something.

Beyond even that, every time the government thinks about making a deal, a tree dies.  There’s paper out there.  Someone must have been willing to hand over a report or a sketch of where things could be headed.  Someone must be already working on the court filing for Chrysler.

I agree whole-heartedly with Glenn Greenwald that anonymity is being granted all too often these days, and I think we’re in more danger of being complacent about it when it appears in an article full of numbers and semi-familiar economic arguments.  The more complex the argument, the more carefully it should be explained.  The more controversial the event, the higher the bar for granting anonymity.

The more I read of the Wall Street Journal, the more frustrated I get.

Small Wonder: A Terrible Day for Tim Geithner

Felix Salmon had a nice post today suggesting that major U.S. banks holding Chrysler’s debt are willing to let the company go into bankruptcy instead of taking a haircut on their debt in part because there’s no real way the public could think less of them.  Being the automatic villain gives one a certain freedom to be horrible, and J.P. Morgan Chase and friends certainly find themselves there.

What this made me wonder is, at what point will Tim Geithner hit the so-hated-he-can-do-whatever stage?

I mean, this has been a totally sucky week to be Geithner.  Consider he went into the weekend with Paul Krugman’s “it’s gonna get so much worse” column and Rachel Maddow having invited the “Hey Paul Krugman” singer onto her show (for the 5 people who hadn’t already heard him sing, “Timothy Geithner, he’s like some little weasel,” via the Internet).  Yesterday, he had the hey-guys, cut-your-budgets Cabinet meeting (check out the body language here, too — that’s Geithner slumped next to Biden).  At this point, I’m not sure the man could buy friends (though I have no doubt at least one commenter will say he’s tried).  Just take the last 24 hours:

• The Special Inspector General issued his report, which initially made news for saying that, contrary to the Secretary’s earlier assertions, firms who wanted to participate on either side of the Public-Private Investment Partnerships would be subject to compensation limits.
• Then it made news because, at The Economist, that sounds like the end of the PPIP.
• Then it made news because there are already 20 fraud cases being investigated.
• Then Felix Salmon pointed out that, within the report, there’s open speculation that it could encourage out-right criminal organization money-laundering schemes.
• The IMF also released its Global Financial Stability Report today, and said that bank losses are over $4 trillion, with more than half of that originating in the U.S.  Oh, and we’re going to need substantial additional investment to recapitalize banks, and may need to nationalize some at least temporarily.  And soon.
• All of this before the real fun started: Geithner testified before Elizabeth Warren’s Congressional Oversight Panel.  You may remember her as the woman who made Jon Stewart feel better last week, or the one who released the highly critical — and commendable, at that — report on the Treasury’s plans so far.  Wanna guess how that meeting went down?  Let Andrew Leonard summarize:

The pattern is now sufficiently well established to be definitive. The treasury secretary appears before a congressional committee, and is asked tough, detailed questions by members of both parties. He invariably compliments and thanks the questioner for a “thoughtful” and “important” question, and then proceeds to answer in vague generalities, rarely committing himself to specifics.

I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. 

(I would say it was sort of like watching the robot from Small Wonder face off with Minerva McGonagall from Harry Potter — you start off rooting for both sides, but by the end, you just want McGonagall to put the robot out of her repetitve, wide-eyed misery).

• The stock market did rally a bit over Geithner’s assertion that “the vast majority of banks have more capital than they need to be considered well capitalized by their regulators.”  That sounds like great news, until you realize he never said that (he skipped those pages, somewhat dramatically, in his testimony).
• Also, even if he had said that, it was meaningless and earned, again, bafflement and concern (and use of the word “ominous” in the first paragraph) from Paul Krugman.
• Finally, The Wall Street Journal ran an interview with Geithner (“Geithner Weighs Bank Repayments“) where he said he’s considering whether to let banks repay their TARP debt early or not.
• Finance blogger Nemo and a reader point out that, no, he can’t do that — he has to let banks pay the money back whenever they want to.  Strike… what? 56 or so? for Geithner.

It’s those last two points that bring us to the importance of the villain question.  The two banks currently talking about repayment are Goldman Sachs and J.P. Morgan Chase.  Paying back TARP funds would free these two from compensation limits — present and looming — and also make them look strong and solvent.  JPMC CEO Jamie Dimon has called TARP assistance a “scarlet letter,” and he’s looking to shed it as quickly as possible.  This would possibly inspire further investment in these banks and certainly encourage concentration of power into their hands.

Which is partly why the Treasury Department isn’t keen on just letting them repay so quickly.  Banks shedding TARP funds could make other banks want to jump ship — banks whose life-vests aren’t properly inflated.  So you could see Bank of America trying to pay back TARP, and either failing after payback, or failing to payback at all — and either way looking so weak as to inspire (who thought it was possible) less confidence than even now.  Which would, of course, benefit those who do survive the leap — probably a big part of the JPMC/Goldman dream right now.

In fact, the only reason that a firm wouldn’t leave TARP right now is a desire NOT to piss off the U.S. Treasury Department.  It’s in their individual interests to run, even while it might be in the interest of the entire system for them to stay a while.  So let me ask you this: Is Tim Geithner someone you’d want mad at you?  Does a real villain lurk somewhere within the Small Wonder facade, just waiting for the day when it no longer matters what Wall Street thinks — and if so, was today that day?  Does he have enough power, inside or out of the Treasury, to make things more uncomfortable for these banks than they already are?

My guess?  If there’s pressure to be brought to bear, it will have to be done by the President — and if that’s the case, Geithner’s days at the grown-up table are going to be limited.