That’s the signpost up ahead – your next stop, the Financial Zone!

The Financial Zone

The following has all been part of my reading today. I’m posting the articles/posts in the order that I came across them. Rolling Stone and Matt Taibbi start us off with some liberal leaning populist outrage, The global economic crisis isn’t about money – it’s about power. How Wall Street insiders are using the bailout to stage a revolution

The latest bailout came as AIG admitted to having just posted the largest quarterly loss in American corporate history — some $61.7 billion. In the final three months of last year, the company lost more than $27 million every hour. That’s $465,000 a minute, a yearly income for a median American household every six seconds, roughly $7,750 a second. And all this happened at the end of eight straight years that America devoted to frantically chasing the shadow of a terrorist threat to no avail, eight years spent stopping every citizen at every airport to search every purse, bag, crotch and briefcase for juice boxes and explosive tubes of toothpaste. Yet in the end, our government had no mechanism for searching the balance sheets of companies that held life-or-death power over our society and was unable to spot holes in the national economy the size of Libya (whose entire GDP last year was smaller than AIG’s 2008 losses).

Taibbi takes up some familiar territory. He points the finger at Joseph Cassano who used the most deadly weapons in America, a spread sheet and a load of BS, to steal $315 million. TPM was out in front on Cassano months ago, so that was familiar ground. As is the complaint that so much of tax payer money is going into keeping AIGFP a float. I wish Taibbi and others for that matter would acknowledge in their otherwise perfectly understandable diatribes that the main part of AIG is or was profitable and does own some solid assets that include paid insurance policies, owned by ordinary working – including for example of Police Union insurance policies. I keep telling myself that AIG may be getting some money it doesn’t deserve, but much of the money is also saving a lot of working American’s life long investments. Then we have this nice article from Newsweek, seemingly written for non-economists like me who make an effort to stay informed, Treasury Secretary Geithner will use heavy incentives—and muscle—to convince banks they should sell toxic assets at a discount

In many ways, the plan is straightforward: Private-sector investors will bid to buy a stake in pools of assets—either residential and commercial mortgage loans, or securities tied to a variety of other troubled debt—and their investments will be matched dollar for dollar by the Treasury. Those funds will then be leveraged as much as sixfold through loans backed by either the Federal Deposit Insurance Corp. or the Federal Reserve.

But the same dynamic that has stymied the normal market for these securities could discourage banks from participating, investors and financial experts say.

At the root of it, banks and investors disagree about what the assets are worth. Investors point to the dramatic collapse of the housing market and rising foreclosure rates, among other factors, that mean many of the assets are unlikely to perform as advertised, particularly as a worsening economy puts further pressure on the underlying borrowers.

Try to forget for a scond that you think the administration’s plan is mostly bad or good and focus on the bold emphasis. This is Paul Krugman’s major concern as I understand it and those, like myself that think that the tax payers would get a little more bang for their buck if we would just nationalize the bad banks. Reorganize them in something like we did with some banks and S&L’s under Reagan back in the 80s. Yes some paper pushing jerks that get way too much money for doing stuff that is so complicated its supposedly like financial quantum physics will still get more money then they deserve, but small price to pay to save the nation billions of dollars. Next stop, this blogger who makes a Krugmanesque argument with lots of nice graphs, but at the center, is the now standard issue of toxic assets and their value, Modeling an FDIC Robbery

The problem for markets is we don’t know what these “toxic waste” assets are worth. If I was a hedge fund whiz-kid, or even a normal ho-hum banker worried about credit defaults on my portfolio of regular mortgages, I’d be assuming the value would look like a lognormal distribution (to be fair, at the end I’ll cover this, I’d normally assume that the losses, not values, look like a lognormal distribution – but these are not normal times).

I don’t want to steal the guy’s thunder so I’ll leave the snip at that.While I think that he might be just a little carried away with some data value assumptions, knowing what we know no, they’re not awful assumptions. This link is something of a break, but good news is welcome at this point, Geithner to Propose Vast Expansion Of U.S. Oversight of Financial System

An administration official said the goal is to set new rules of the road to restore faith in the financial system. In essence, the plan is a rebuke of raw capitalism and a reassertion that regulation is critical to the healthy function of financial markets and the steady flow of money to borrowers.

The government also plans to push companies to pay employees based on their long-term performance, curtailing big paydays for short-term victories. Long-simmering anger about Wall Street pay practices erupted last week when the Obama administration disclosed that AIG had paid $165 million in bonuses to employees of its most troubled division, despite losing so much money that the government stepped in with more than $170 billion in emergency aid.

The administration’s signature proposal is to vest a single federal agency with the power to police risk across the entire financial system. The agency would regulate the largest financial firms, including hedge funds and insurers not currently subject to federal regulation. It also would monitor financial markets for emergent dangers.

“Sources” say most of this new regulatory power will go to the Federal Reserve. I’d prefer the FDIC, but at least, nationalization issues aside, they get it as far as making sure that Wall St is not run like Vegas. Probably not a good comparison since Vegas management has the odds down to a science and the house never loses. The final article adds a twist of irony, “Has the Gaming of the Public-Private Partnership Begun?”

Has the Gaming of the Public-Private Partnership Begun?, Naked Capitalism: It certainly looks as if Citigroup and Bank of America are using TARP funds, not to lend, which was one of the primary goals of the program, but to scoop up secondary market dreck assets to game the public private investment partnership.

And it fleeces the taxpayer a second way: the public has spent enough money on both banks so that in an economic sense, they ought to have been nationalized. Yet for reasons that are largely ideological and cosmetic (the banks’ debt would need to be consolidated were they owned 100% by Uncle Sam), they remain private. So not only are they seeking to extract far more than was intended even with the already generous subsidies embodied in this program, but this activity is also speculating with taxpayer money.

This sort of thing was predicted here and elsewhere. Welcome to yet more looting.

If you appreciate dark humor one cannot help but smile at the idea that the guys who are gettig a lifeline, a transfsion of funds from tax payers, are using said funds to buy up the assets that have been described by just about everyone as toxic. Progressive bloggers, moderate economists and Democratic leaders all agree there are nearly worthless assets out there ( derivative paper is worthless in my opinion), but we are all having some healthy disagreements over how much many of the toxic assets might be worth in the part of Geithner’s plan that includes selling off assets to bidders. Some people are not waiting to find out,

As Treasury Secretary Tim Geithner orchestrated a plan to help the nation’s largest banks purge themselves of toxic mortgage assets, Citigroup and Bank of America have been aggressively scooping up those same securities in the secondary market, sources told The Post…

But the banks’ purchase of so-called AAA-rated mortgage-backed securities, including some that use alt-A and option ARM as collateral, is raising eyebrows among even the most seasoned traders. Alt-A and option ARM loans have widely been seen as the next mortgage type to see increases in defaults.

One Wall Street trader told The Post that what’s been most puzzling about the purchases is how aggressive both banks have been in their buying, sometimes paying higher prices than competing bidders are willing to pay.

Recently, securities rated AAA have changed hands for roughly 30 cents on the dollar, and most of the buyers have been hedge funds acting opportunistically on a bet that prices will rise over time. However, sources said Citi and BofA have trumped those bids.

The secondary market represents a key cog in the mortgage market, and serves as a platform where mortgage originators can offload mortgages in bulk that have been converted into bonds.

Yields on such securities can be as high as 22 percent, one trader noted.

BofA said its purchases of secondary-mortgage paper are part of its plans to breathe life back into the moribund securitization market….

While some observers concur that the buying helps revive a frozen market, others argue the banks are gambling away taxpayer funds instead of lending.

Moreover, the MBS market has been so volatile during the economic crisis that a number of investors who already bet a bottom had been reached have gotten whacked as things continued to slide.

Around this same time last year some of the same distressed mortgage paper that Citi and BofA are currently snapping up was trading around 50 cents on the dollar, only to plummet to their current levels.

One source said that the banks’ purchases have helped to keep prices of these troubled securities higher than they would be otherwise.

Both banks have launched numerous measures to help stem mortgage foreclosures, and months ago outlined to the government their intention to invest in the secondary market to expand the flow of credit.

Much like the Twilight Zone, The Financial Zone has an ironic little twist in the story at the end. In addition to banks buying semi-toxic assets, new home sales are up, but unemployment is also up. At least for today the the Obama administration scores a few points for its plan by way of some ethically dubious behavior by some banking scourdrels. If they think some of these questionable assets are worth investing in – I know why should we trust their judgement now – then maybe long term the administration is close to the path if not on it.

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