Did Fifth Third need $2.6 billion in additional reserves, instead of the $1.1 billion claimed by the final results of the “stress test”? Or was this the kind of test where you could negotiate your grade?
The basic problem with estimating required capital reserves is that we’re measuring an inherently uncertain variable, i.e., the likelihood of a bank running out of cash under very bad economic conditions. To properly evaluate this, the analyst must quantify the bank’s assets and liabilities, the degree to which they would vary under a broad range of possible future environments, including how the different parts of that environment would vary with respect to each other, as well as how significant changes in those various parts would impact the various assets and liabilities of the subject bank.
I would guess that even if the Fed came close to having the tools to do this right, political management would render it impossible to properly bring those tools to bear on the problem in the few months these tests have been conducted.
Given the difficulty of the question, the inherent uncertainty around any answer, and the practical stakes held by distinct interests in those answers, we have a recipe for a very silly exercise, which is what we got. While it’s clear that the banks wanted to have as low a number as possible for the capital deficit, it’s not clear that the government had any interest in seeing any particular number for any particular bank, except that the overall report should look like it came up with plausible answers. In other words, all the banks couldn’t have a zero deficit, or the same deficit, or anything else that looked like what a third or fifth grader would have come up with on an afternoon with a spreadsheet. Politics dictated that the numbers couldn’t be too big, either, enough to spook the markets into thinking that widespread insolvency was a possibility.
So, we ended up with a negotiation. This article gave a hint about how that went:
“In the end we agreed with the number. We didn’t necessarily like the number,” said Wells Fargo Chief Financial Officer Howard Atkins. He said the company was particularly unhappy with the Fed’s assumptions about Wells Fargo’s revenue outlook.
At Fifth Third Bancorp, the Fed was preparing to tell the Cincinnati-based bank to find $2.6 billion in capital, but the final tally dropped to $1.1 billion. Fifth Third said the decline stemmed in part from regulators giving it credit for selling a part of a business line.
Citigroup’s capital shortfall was initially pegged at roughly $35 billion, according to people familiar with the matter. The ultimate number was $5.5 billion. Executives persuaded the Fed to include the future capital-boosting impacts of pending transactions.
SunTrust Banks Inc. also persuaded the Fed to significantly reduce the size of its estimated capital gap to $2.2 billion, after identifying mathematical errors (!) in the Fed’s earlier calculations, according to a person familiar with the matter.
PNC Financial Services Group Inc., saw a capital hole materialize at the last minute. As recently as Wednesday, PNC executives were under the impression they wouldn’t need to find any new capital, according to people familiar with the matter. Thursday morning, the Fed informed PNC that it had a $600 million shortfall.
So, does PNC really need $600 million to make it through a really bad time (worse than what we’ve just gone through)? Does Fifth Third need $1.1 billion or $2.6 billion? Will the $1.5 billion difference make then more or less competitive? How did competitiveness figure into the estimation of their survivability? Somehow, I doubt that the central planners come up with a better answer than doing nothing. But doing nothing is clearly not an option for the central planners.
Fritz Henderson is nominally in control of GM. He’s, you know, the CEO. In theory, that means he also has a fiduciary duty to his investors. So, when he gets a proposal from certain of his creditors that they will not accept getting flucked sideways by accepting 10% for their $27 billion in debt while other, more Democrat-like creditors would be getting 39% for giving up $10 billion in junior claims, why, he’s supposed to consider their arguments against some standard, preferably a reasonable one.
Henderson’s response: Sorry, I can’t give more than 10 percent to the bondholders.
“It’s outside of what the Treasury has told us they would support,” Henderson said. “It’s about as factual as I can be.”
Translation: The politicians are in control. And we all know who controls them.
President Obama said he was looking for someone who has “empathy for ordinary Americans” in a Supreme Court justice. I was taught that the role of judges in our system of checks and balances was to interpret the law. The legislature makes law. Empathy is a good thing in lawmakers. Laws affect everyone, and one should appreciate their effect on others when creating them. The executive implements and enforces the law. There are lots of ways to apply rules, and we’d like to think that they are being implemented in the most humane and reasonable way possible. Judges interpret the law. What does empathy mean in the context of interpretation? Here’s what he meant:
Judicial empathy: Ignoring the law to achieve an outcome the judge desires.
You will note that is more or less the same as the definition of judicial activism.
Senator Specter (R then D-PA) might be instructive on this point, explaining why a blatantly discriminatory approach to selecting judges would work best:
We have a very diverse country. We need more people to express a woman’s point of view or a minority point of view, Hispanic or African-American, so that somebody who has done something more than wear a black robe for most of their lives.
I would like to know what the woman’s point of view is with respect to: “Congress shall make no law respecting an establishment of religion, or prohibiting the free exercise thereof; or abridging the freedom of speech, or of the press.” Is there a Hispanic or African-American way to read: “The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause?”
Specter is a liar. Given a choice between Janice Rogers Brown and any of a passel of liberal white males, the sharecropper’s daughter doesn’t have a chance with the Democrats on the Senate Judiciary committee, and he knows it. Neither would a conservative Hispanic against a liberal white male.
Senator Leahy proposes an even more disingenuous standard. He’s looking for “somebody who can reflect the feelings of real Americans.”
As opposed to the Americans on the other side of the political debate, no doubt.
Unfortunately for Obama, the government doesn’t control the whole financial sector yet. If it did, then it could have forced all of Chrysler’s lenders to bend over for the country.
As of last night’s deadline, we were part of a group of approximately 20 relatively small organizations; we represent many of the country’s teachers unions, major pension and retirement plans and school endowments who have invested through us in senior secured loans to Chrysler. Combined, these loans total about $1 billion. None of us have taken a dime in TARP money.
As much as anyone, we want to see Chrysler emerge from its current situation as a viable American company, and we are committed to doing what we can to help. Indeed, we have made significant concessions toward this end — although we have been systematically precluded from engaging in direct discussions or negotiations with the government; instead, we have been forced to communicate through an obviously conflicted intermediary: a group of banks that have received billions of TARP funds.
…We have a fiduciary responsibility to all those teachers, pensioners, retirees and others who have entrusted their money to us. We are legally bound to protect their interests. Much as we empathize with Chrysler’s other stakeholders, the capital is just not ours to contribute to their cause by accepting a deal that is outside the well established legal framework and cannot be rationalized as being commercially reasonable.
This was signed: “The Committee of Chrysler Non-Tarp Lenders”
Translation: We know you want the capitalists to subsidize the workers. We read Marx, too. You might be able to get away with those kinds of demands with the banks under your control using whatever forms of financial waterboarding you’re employing on them. But that’s not how we’re going to play this. Our vision of what’s fair doesn’t involved screwing our investors for your politically favored constituencies. Don’t like it? Tell it to the judge.
“The lack of corporate responsibility and accountability to shareholders is one of the core problems we face,” the New York Democrat said. (It was Schumer, but does it really matter which?)
Congress is all for responsibility and accountability… from others. Schumer’s bill would include:
– Requiring “Say On Pay,” based on the fallacy that investors need more input into HR strategy
– Also “Say on Severance,” based on the widespread, but false perception that exiting CEOs of faltering firms get huge severances
– Elimination of staggered boards
– Requiring “Proxy Access”
What all these measures have in common is the increasing federalization of corporate governance. Every single company incorporates under a charter designed and approved by the original shareholders (generally founders). Every subsequent shareholder buys into the company under the existing by-laws in that charter, by-laws that explicitly lay out what rights the shareholders have. These charters and by-laws are adjudicated in the jurisdiction of incorporation, often the state of Delaware, which has highly experienced, highly respected, and predictable courts. Congress wants to trump that with central planning about how all corporations should be governed, by changing the rules for all existing corporations after the fact.
Congress commands a very different level of respect:
The Glass House of Representatives
How much accountability does Congress have when, with ratings like that, they manage to have a re-election rate that rivals the old Soviet Politburo?
The main difference between Congress and corporate boards, of course, is that even with the overwhelming advantages of incumbency, failing boards still get replaced all the time, in the market for corporate control. When a company performs as poorly as our government has, it gets taken over by another company. When a company fails to provide an honest accounting of its assets as badly as Congress has failed, the board is replaced and sued for breach of their fiduciary duties, and those directly responsible go to jail. Congress has no level of accountability that even comes close.
Speak clearly directly into the mic, please. Now say again? At the moment you realized that your shareholders would be screwed by the ML transaction, and it was time to invoke ‘material adverse change’ to back out of it, why didn’t you do it?
I can’t recall if [Hank Paulson] said “we would remove the board and management if you [invoked the material adverse change clause to block the Merrill deal]” or if he said “we would do it if you intended to.” I don’t remember which one it was, before or after, and I said, “Hank, let’s deescalate this for a while. Let me talk to our board.”
There it is. When the BAC board, including Lewis, came face-to-face with doing right by their shareholders or keeping their jobs, they chose to “deescalate.” Later they rationalized: getting fired = systemic risk.
So, Ken, you decided not to back out of the deal, what about at least telling your shareholders what you were getting them into?
Q: Were you instructed not to tell your shareholders what the transaction was going to be?
A: I was instructed that ‘We do not want a public disclosure.’
Q: Who said that to you?
A: Paulson…
Q: Had it been up to you would you [have] made the disclosure?
A: It wasn’t up to me.
So, the government ordered you to shoot your shareholders from behind a curtain, and you pulled the trigger.
Show some restraint. Show that you get that this is a crisis and everybody has to make sacrifices.
That must have been a little confusing for many of the CEOs in that room. JP Morgan’s Dimon didn’t take any bonus. Morgan Stanley’s Mack didn’t get one, either, for the second year in a row. Citigroup’s Pandit didn’t get a bonus, although it’s difficult to consider how he could have justified one. Goldman Sach’s Blankfein didn’t take any bonus, plausibly leaving about $20 million on the table.
In fact, President Obama, did anyone in the U.S. make a bigger sacrifice in dollar terms than Lloyd Blankfein? Did any one you know give back $20 million? Or any group that gave up the $200 million sacrificed by his peers? Back in November, I suggested that the politicians would take credit for this sacrifice. I was wrong. They aren’t even acknowledging it.
So, what sacrifices is Obama talking about, then?
It’s very difficult for me as president to call on the American people to make sacrifices to help shore up the financial system if there’s no sense of mutual obligation.
Funny, last I checked, the only people of whom President Obama was asking sacrifices was the “wealthy.” The sacrifice he was asking them to make was to accept a higher taxes on their earnings. If he’s now asking the wealthy to accept lower earnings, isn’t he asking the rest of Americans to be making a sacrifice?
But a zero bonus rule would be too simple. Congress doesn’t want to keep it simple because they’re afraid of getting outsmarted by the bankers, once again. So, like inept batters who keep swinging and missing, they’re simply pulling the backstop to the plate with a catch-all prohibition on “unreasonable and excessive” compensation. Or, to use a card analogy, this would be like handing themselves a trump card. In Tarot the trump card is represented by the Fool, which the French call “L’excuse,” as in “any excuse will do.” This is quite appropriate as we move toward French attitudes about wealth creation.
The market will reasonably interpret this bill, should it make it into law as: TARP = bankruptcy…why draw out the agony? Fair enough. But there are precedents being set here.
Precedents like confiscating or eliminating all pay above a certain level would be bad enough. But precedents where the government gets to decide what is reasonable in broad compensation matters invites unlimited meddling, especially when reasonable is whatever Barney Frank thinks is reasonable. Is Barney Frank even capable of distinguishing reasonable? Isn’t reasonable kind of different from “driven purely in reaction to headlines of the moment that stoke raw, unchecked emotion?
But Rep. Stephen Lynch, D-Mass., angrily told the witness the contract read like “the captain and the crew of the ship reserving the lifeboats.”
Liddy replied that he was not at the firm when the contracts were negotiated, and said, as he has before, that he would not have approved them.
Lynch said the terms had been put in place in December, after Liddy arrived at AIG.
But Liddy disputed that. “I take offense, Sir,” he said.
“Well you take it rightly. Offense was intended,” shot back Lynch.
In this case, the offense is so nonsensical that a defense is hardly warranted. It was like watching Michael Scott going after his nemesis. What is it about Massachusetts that creates batshit crazy congressmen?
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