By Michael Gray
The “Bad Bank” plan being floated by the Obama administration has buoyed the markets and the bank stocks. Uncle Sam is coming to the rescue, again. But is it going to work?
The “Bad Bank” would have to price all the toxic paper it will take in for less than the marks currently on the banks’ balance sheets. In order to balance the writedowns on the balance sheets as a result of this pricing, the feds will have to inject cash into common stock not preferred shares.
The biggest problem with this plan is that the amount paper sitting on balance sheets is so enormous that with capital injections for common stocks will amount to nationalization, thereby wiping out the common shareholders. And yet the shares are soaring today.
The feds have the lowest cost of lending and the longest time horizon. So the thought going forward is that the FDIC (perhaps) will slightly overpay for the “assets” and sit on them until maturity. This puts a great deal of risk on the feds balance sheet, which will be funded, again, by the kindness of strangers.
Nothing has been said about the Credit Default Swaps that were generated as a hedge to this paper. This could be a huge hit on counterparties, which could include the banks themselves.
Here was my take on Sunday on the merits of the three plans.
John Thain’s subpoena by NYAG Andrew Cuomo could spell the end of Ken Lewis’ reign atop Bank of America.
Thain alleges that BofA knew of the mounting losses and bonus pool prior to closing the deal. This makes sense from the talks Lewis had with Fed officials in late Dec. stating that he was not going to close the deal because of the mounting losses on Merrill’s books.
At that time Lewis was told by Treasury officials to close the deal and that the government would backstop the losses. So how can he feign ignorance for the losses and the amount of bonuses that were leaked last week and then fire Thain?
Lewis, who is insulated by being located in Charlotte, NC. with a board of directors not tied to Wall Street, nevertheless the board must be smarting from its involvement in the Merrill fiasco.
Admittedly it’s difficult to take Thain’s side on this matter because he is just as slimy in this transaction.
Thain’s mea copula road show on Monday proves this by him professing that most of the losses reverted back to predecessor Stan O’Neal’s tenure and O’Neal’s office needed to be renovated to the tune of $1.22M.
Why did Thain –– in a little over a year –– not get these toxic “assets” off the balance sheet? Cause he had a built-in O’Neal excuse to push the blame off on.
Looking back on Thain’s tenure as head of the NYSE, he was despised by the floor traders, who were moved out for the technology of Archipelago. Accused by the traders of selling them out for the benefit of larger firms such as Goldman Sachs, his former shop.
When Thain was CFO at Goldman, he is said to have sided with Co-Chairman Hank Paulson in the chairman’s suite coupe, which left Jon Corzine –– Thain’s mentor –– out on the street.
Is Citi’s Vikram Pandit totally arrogant or stupid? I would guess he had no clue that the bailed out banking firm was taking delivery of a private jet, which was contracted year’s prior.
But how could he or his staff not come the minute this hit to say they would cancel or sell the option to this jet. It must be hubris.
If you’re a CEO of a TARP-funded firm, your life has changed for the worst. My suggestion would be to look up the Civil Service guidelines for business ethics, and substitute private jet for box of chocolate under postal carrier.
Treasury Secretary Time Geithner was confirmed late Monday night. I stated I did not think it would come true, alas I was wrong for now. However, I do not think he will be in the position a year from now. But we have time to speak on that later.
For more on Wall and Washington and the cratering economy see: https://mgray12.wordpress.com