bank run blog

Cleaning house before their outright nationalization, Fannie Mae announced a shakeup in senior management this afternoon after the markets closed. The Financial Times reports :

“Fannie Mae, the US government-sponsored mortgage financier, yesterday unveiled a management restructuring that put new executives in charge of its plan to improve capital management and cut credit losses.

‘As we move through the bottom of this cycle, maintaining capital, managing credit and driving revenues are priorities and we have to organise staff accordingly,’ Daniel Mudd, Fannie Mae chief executive, said.

Fannie said Stephen Swad, its chief financial officer, had chosen to leave the company after little more than a year to pursue work in the private equity field, while Enrico Dallavecchia, chief risk officer, was leaving to pursue other finance and risk management opportunities.”

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The coverage by the Associated Press included a rare quote from a bearish analyst, who puts the losses at the GSEs at $1 trillion or more :

“Other analysts, however, continue to express a gloomier outlook. Peter Schiff, president of Euro Pacific Capital in Darien, Conn., a longtime bearish investor, predicts that the companies’ losses could eventually hit $1 trillion or more as housing prices fall far further than most analysts expect.

‘The end result is probably going to be that they go bankrupt and the government nationalizes the function,’ Schiff said. ‘There’s no way they can survive.’

Concern also has been growing that a government rescue of Fannie and Freddie could be costly for scores of investment, banking and insurance companies that hold billions of dollars in their preferred shares. The two companies had nearly $36 billion in preferred shares outstanding as of June 30, according to filings with the Securities and Exchange Commission.”

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In the wake of yesterday’s downbeat report for the second quarter, the FDIC is acting to tap new lines of liquidity, signaling that federal regulators are expecting the failures of significant institutions. FDIC chief Sheila Bair announced the move in an interview with the Wall Street Journal. According to Reuters :

“Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.”

The expected shortage of cash has prompted the FDIC to consider proposals to revamp its fee structure :

“’I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses,’ Chairman Sheila Bair said in an interview with the paper.

Bair said such a scenario was unlikely in the ‘near term.’ With a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained.

In a bid to replenish the $45.2 billion fund, Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.”

In a related story, the Office of Thrift Supervision published its quarterly report, following on yesterday’s release by the FDIC. The Associated Press reports :

“U.S. thrifts lost $5.4 billion in the second quarter and set aside a record amount to cover losses from bad mortgages and other loans.

Data from the U.S. Office of Thrift Supervision released Wednesday show federally-insured savings and loan institutions posted their second-largest quarterly loss ever in the April-June period, after the $8.8 billion loss in the fourth quarter of last year. Heavily focused on mortgage lending, thrifts have been stung by mounting home-loan defaults.

The $5.4 billion quarterly loss compared with net profits of $3.8 billion in the year-ago period, and a loss of $627 million in the first quarter.

The 829 thrifts also set aside a record $14 billion to cover losses from bad mortgages and other loans.”

Reuters : FDIC may borrow money from Treasury: report

Associated Press : US thrifts 2Q loss of $5.4B is second largest ever

The New York Times web site features a photo essay on partially constructed and otherwise abandoned residential real estate projects in California. The Times writes, “In the three years since housing peaked in Merced, the median sales price has fallen by 50 percent.”

“A sidewalk leads to nowhere in one development in Merced.”

“Mayor Wooten at the stagnant pool of a foreclosed home she listed.”

see slideshow-
New York Times : Where Housing Crashed the Hardest

In a quarterly report described by Chairman Sheila Bair as “pretty dismal”, the Federal Deposit Insurance Corporation revealed that earnings for US banks dropped 86 percent year over year. The FDIC raised the number of banks on its watch list to 117. The Associated Press reports :

“The number of troubled U.S. banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.”

According to CNN, bad loans and failed investments have forced banks to set aside more and more capital to cover losses :

“Facing additional deterioration in the housing market and further weakness in the broader economy, FDIC-insured banks set aside $50.2 billion during the quarter, more than four times the quarterly total of $11.4 billion from a year ago.

At the same time, nonperforming assets and net charge-offs, or loans banks don’t think are collectable, continued to rise, totaling $26.4 billion in the second quarter, almost three times the $8.9 billion during the second quarter of 2007.”

Associated Press : FDIC: troubled banks highest in 5 years; bank profits dropped by 86 percent in second quarter

CNN Money : Problem bank list keeps growing

A report by an insurance industry analyst at Credit Suisse raised new fears of insolvency at the conglomerate AIG, which was already the subject of rumors that it had downplayed some of its exposures. In one day, estimates for third quarter losses increased an unheard of $4 billion, according to CNN :

“American International Group Inc. (AIG) may be sitting on losses that are billions of dollars greater than Wall Street expects, according to an analyst’s report Monday.

Credit Suisse analyst Thomas Gallagher estimated losses from the insurance giant’s financial-products division will reach $6.5 billion during the third quarter, compared with his prior estimate of $2.6 billion.”

The company hedged its insurance bets in the now moribund MBS market, and now, like many US banks, AIG has to tune in each day to discover the extent of its losses :

“The health of AIG’s financial products unit is directly tied to the credit market indicies that are used to value the mortage-backed securities on its balance sheet. Those indicies have turned sharply lower in the last three months, some declining as much as a quarter in value.

As a result, Gallagher now expects AIG to post a loss of 86 cents a share when it reports third-quarter results in November. The average analyst estimate is for a profit of 75 cents a share.”

MarketWatch is reporting that the rumors are about to lead to ratings downgrades for AIG, which will only make the company’s position less tenable :

“On Friday, Fitch Ratings said it may downgrade ratings of AIG and its subsidiaries because of uncertainties about a business review the company plans to complete in September.

A possible downgrade ‘also reflects ongoing uncertainty associated with [AIG’s] potential for additional realized and unrealized losses on its various residential mortgage-backed securities-related exposures, including its portfolio of credit default swaps and resultant collateral posting and capital needs,’ Fitch said.

Credit Suisse analysts said action by the ratings agencies would dramatically hurt AIG. ‘In the event of a one-notch ratings downgrade from both Moody’s and S&P, AIG would be required to post up to $13.3 billion of additional collateral,’ they said.”

CNN Money : Analyst: AIG May See $6.5 Billion In 3Q Losses From Credit Market Pain

MarketWatch : AIG down as Credit Suisse predicts quarterly loss

At least one investment group has stepped forward to indicate interest in the top-performing asset in the Lehman Brothers portfolio. According to CNBC :

“Kohlberg Kravis Roberts, the private-equity firm run by Henry Kravis, has ‘expressed a high level of interest’ in buying Lehman Brothers Holdings’ crown jewel, the Neuberger & Berman money management firm, people close to the negotiations said.

But Blackstone Group, the private equity powerhouse run by financier Steve Schwartzman, has told officials working for Lehman that so far it has almost no interest in Neuberger.

Lehman has been shopping all or part of its investment-management unit, which includes Neuberger & Berman, to offset what many analysts expect to be billions of dollars in additional losses in the third quarter because of soured debt assets on Lehman’s books.”

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The story that talks have fallen apart with South Korean investors may turn out to be nothing more than a negotiating tactic to counter Dick Fuld’s unrealistic terms. The Los Angeles Times reports :

“South Korea’s Maeil Business newspaper today said that Korea Development Bank still is interested in a Lehman stake, but at a much lower price than what had been discussed, according to Bloomberg.

Talks on a possible investment ended after Lehman insisted that the Korean bank buy shares at a price 50% higher than the firm’s book value, the Korean newspaper said, citing an unnamed source. Lehman’s book value, or net value of its assets, was about $35 a share at the end of May, but any further write-downs of troubled assets would of course drag that number lower.”

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Before the US markets opened this morning, the Associated Press filed this brief report on a highly unusual bank failure in Denmark :

“The Danish central bank said Monday it has taken over the country’s 10th largest bank after it was hit by the subprime housing crisis.

Roskilde Bank will receive 4.5 billion kroner ($892 million) in cash from Nationalbanken and the financial sector in Denmark after the bank was unable to find a buyer.

The Danish central bank also said it would assume 37.3 billion kroner ($7.43 billion) of debt in the deal. Last month the central bank granted a liquidity facility to Roskilde Bank and bought its debt until it could be resold.

Nationalbanken said that it has the backing of the government and would get a guarantee to cover any losses it might suffer in the takeover. Roskilde Bank’s operations will continue in a new bank under the same name, it said.

Bailouts are rare in Denmark. Nationalbanken has only rescued a few banks in crisis, most recently in 1984.”

Bloomberg quoted the chief of the Danish central bank, who said he was trying to avoid the spread of a “contagion” in his country’s financial sector :

“’We wanted to secure financial stability in Denmark,’ central bank Governor Nils Bernstein said at a press conference in Copenhagen today. ’The alternative would have been that Roskilde went bankrupt and that would have resulted in a considerable contagion throughout the financial sector.’”

Associated Press : Danish central bank rescues crisis bank

Bloomberg : Danish Central Bank to Lead Takeover of Roskilde Bank

The private mercenary organization Blackwater has come under scrutiny for misrepresenting the size of its company in order to acquire federal contracts set aside for small businesses. The falsifications came to light in an audit performed by the Office of the Inspector General for the Small Business Administration that also found that Blackwater benefited from assessments made by the SBA that favored broad definitions of what it means to be an employee of Blackwater. Blackwater eventually received more than 130 SBA contracts worth over $100 million. Blackwater has received over $1.2 billion worth of government contracts since 2000.

The Inspector’s audit found that Blackwater gave conflicting information in its proposals and applications for federal loans and applied for contracts under the business names of companies that it owned in the effort to disguise the fact that the contracts would in reality be awarded to Blackwater.

The auditors also found that the Small Business Association accepted Back-water’s interpretation of which of its employees were “private contractors” allowing the company to assert that ithas far fewer employees than are actually paid by Blackwater. The auditors found, for example, that Blackwater said in its SBA applications that the number of employees of an affiliate, Presidential Airlines, was just over 700 and Blackwater reported to Dunn and Bradstreet that the company had more than 1500 employees. Presidential went on to receive a $107 million dollar SBA contract. The SBA’s policy is to not offer contracts to companies with over 1000 employees.

The falsifications, misrepresentations and favorable SBA rulings were uncovered by Congressional investigators who reported that Blackwater used its special designations of employees as “private contractors” to evade paying “millions in federal tax payments.” Chairman of the House Committee on Oversight and Government Reform, Henry Waxman (D-CA), concluded that the designation of employees as contractors also enabled the Blackwater to secure the SBA contracts unfairly.

The Inspector General said that the findings indicated that Blackwater might have used the same fakery to secure additional contracts from other federal agencies.

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redstateupdate.net

Lehman Brothers Holdings entered the weekend on the verge of collapse, and many analysts were expecting the announcement of some sort of sale before the markets opened. That hasn’t happened, and consequently the investment bank is now facing a potentially disastrous week.

In the meantime, a trio of articles from the British press highlight different aspects of the drama unfolding behind the scenes at Lehman. The Independent reports Lehman chief in race against time :

“Lehman Brothers chief executive, Dick Fuld, is in a race against time to rebuild the investment bank’s battered balance sheet and set out a reason for the company to remain independent amid growing calls for new leadership or a sale of the company.

Mr Fuld, the longest-serving chief executive of an independent Wall Street bank, will this week redouble his efforts to find buyers for major assets, as Lehman prepares to close the books on another quarter of multibillion-dollar losses.”

full story

Fuld won’t make it through the current crisis, according to the Observer, which reports Lehman chief faces internal coup :

“Richard Fuld’s days as Lehman Brothers chief are numbered as a plan is being hatched within the troubled Wall Street investment bank to strip him of his executive duties.

The planned coup comes amid rumours a Korean investor is planning either a sizeable investment in Lehmans or an outright acquisition of the firm.”

full story

The Times has an interesting piece on a company bailout for its own senior executives, Lehman Brothers payout for top staff :

“Lehman Brothers is working on plans to compensate senior executives for the huge loss of value in their share options, alongside plans to raise capital.”

The move is seen as necessary to retain key staff :

“Alongside plans to shore up the balance sheet, Lehman executives are said to be planning a morale-boosting exercise to prevent a potential exodus of its senior staff.

Following the 85% collapse in the firm’s share price, lucrative share options awarded to executives and bankers have been all but wiped out.

‘There has been talk at a senior level about finding some form of compensation for the loss of value in the share options,’ said a source.”

full story

A report released last week by the Government Accountability Office reveals that two-thirds of US corporations claimed zero federal income tax liability between 1998 and 2005. The report, which was compiled at the request of Democratic Senators Carl Levin of Michigan and Byron Dorgan of North Dakota, also finds that 68 percent of foreign-controlled corporations with US operations paid no taxes over the same period. The GAO concluded that together the companies reported trillions in US revenues during the years studied.

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” said Dorgan, who called the report “a shocking indictment of the current tax system.” Levin highlighted the sophisticated accounting practices that enable companies to legally reduce their tax liabilities through the transfer of funds, saying, “corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.” The report comes in the wake of the Bush administration announcement that the US budget deficit for next year will reach a record $486 billion.

In 2005, the most recent year for which figures are available, 66.7 percent of US corporations, more than 1.2 million companies, paid no federal income tax. Additionally, more than 38,000 foreign corporations also avoided US corporate tax in the same year. The companies avoiding income tax reported a combined $2.5 trillion in sales. The GAO also found that 72 percent of foreign corporations and 57 percent of US companies paid zero income taxes for at least one year between 1998 and 2005. More than 42 percent of US corporations and half of all foreign companies avoided all taxes for two or more years during that period.

The GAO report did not name specific companies. Corporations typically claim zero liability when they report an operating loss, or by the application of tax credits or other government incentives, which may include tax deferments. Critics of US corporate tax policy accuse large corporations of aggressively avoiding tax liability through elaborate transfer pricing structures that shift profits and losses to the most advantageous tax jurisdictions.

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redstateupdate.net