When the economic world began to melt down in September 2008, I began writing that the US Treasury would dust off the old Savings & Loan RTC model (1989 to 1995) and start selling off overvalued and unsalable toxic assets. See, Wood, Hugh, The Coming New RTC for Real Estate, September 21, 2008; The NewRTC Jupiter Size Me!, September 24, 2008.
However, in the weeks that followed, to my astonishment, Treasury reversed its position with regard to acquiring "toxic assets," "Somewhat contrary to the public pronouncements made to secure the passage of HR 1424 (which was passed by the Senate and provided 700bn of available funds for "bailout"), Treasury Sec. Paulson has been injecting funds into financial institutions and has not proceeded with the acquisition of any TARP assets stating that doing so now is simply too time consuming. [This is contrary to his TARP request to the US House and US Senate in October of 2008.]." FDIC and Treasury at Odds Over Bailout, November 14, 2008.
On October 3, 2008, Wachovia, NA, agreed to be aquired by Wells Fargo, N.A. At the same time, Treasury was giving its lukewarm support to allowing Wachovia to be acquired by CitiBank for a mere 2.2bn. Really? 2.2bn.
Now, a mere six (6) weeks later, CitiBank, N.A. rolls over and plays dead. Treasury agrees to buy 20bn in Preferred Stock (this story is moving so fast, I cannot confirm it is preferred. However, the other recent stock purchases have been preferred) and Treasury agrees to guarantee 309bn of toxic assets. That means in simple english, if CitiBank, N.A., can't dump those assets even at a fire sale, you and I agree to insure the losses in the final meltdown. [Why do I have to insure the bad lending decisions of bank in New York City?]
This economic disaster seems to be a hurricane storm surge. They just can't seem to contain it.
In August they tell us all is OK.
In September, the sky is falling and they need first 150bn then 500bn then 700bn to stave off financial collapse.
Then every investment bank craters or is absorbed by an FDIC Insured bank.
Wachovia threatens collapse.
Treasury backs CitiBank's aquisition of Wachovia. [Wells Fargo actually gets Wachovia]
Treasury says it will not be involved in acquiring and selling toxic assets. It will only inject capital into backs to prop them up. [Contrary to what it told the House and Senate to obtain passage of HR 1424.]
Treasury surriupticiously changes the Tresury Regulations to eliminate the "mark to market" rule changes of Sarbanes-Oxley. [Done in less than 5 sentences.]
While we are not watching and as fully allowed by its private 1913 Charter, the Federal Reserve pumps 2.5 Trillion dollars into the economy. Read that 2,500 billion. The bailout was only 700 billion.
Now CitiBank (recently the White Knight for Wachovia) threatens to go bust.
Gentlemen, Ladies, whether you can accept it or not, we are living our own 21st Century version of 1932. Even now, we are watching the changing of the guard from Herbert Hoover to FDR. Or, from George Bush to Barack Obama.
My outside observers guess is that the US Treasury is overwhelmed by the storm surge and is simply moving to block the flow and rescue drowning banks whereever it can.
I had given up on the possibility of a NewRTC. However, with today's shocking revelation that the Treasury is going to guarantee 309bn of toxic CitiBank assets, I am not so sure. More banks will show up for the guarantee and soon there will be a collection of NewRTC assets to auction.
So, I do not despair. I expect I will get my billions of toxic assets and the lawyers fees that come along with unloading them before long.
Hugh Wood, Atlanta, Georgia
& & &
Citigroup Bailout Charts New Course for U.S. Government Rescues
By Craig Torres and Robert Schmidt
Nov. 25 (Bloomberg) -- The U.S. government’s emergency rescue of Citigroup Inc. offers a new model for bank bailouts: explicitly insuring against losses on toxic assets, with taxpayers footing the bill.
The Citigroup plan extends the federal commitment beyond the previous framework of capital injections from the Treasury and credit from the Federal Reserve. Now, the U.S. is a partner in the performance of $306 billion in real-estate loans and securities, sharing losses beyond $29 billion on what are likely to be some of Citigroup’s worst holdings.
"Everybody and his brother has got to have their hand out now," said Eric Hovde, chief investment officer at Hovde Capital Advisors, which manages $1 billion in financial-services stocks. "The whole problem is so much bigger and deeper than the Fed and Treasury ever understood."
Taxpayers are likely to be at greater risk from the new template, which may be used to help more companies as debt writedowns continue to climb, analysts said.
"Every situation will need to be evaluated on a case by case basis, but obviously we are able to draw from our experiences as we work through these issues in the financial system," Treasury spokeswoman Brookly McLaughlin said.
Citigroup’s crisis escalated as it was forced to take on its balance sheet a number of special units created to invest in riskier securities. The New York-based bank’s shares lost 60 percent last week, and then recouped some of those losses yesterday after the government’s rescue. Other lenders remain vulnerable.
Wells Fargo & Co. is absorbing Wachovia Corp., the bank that regulators pushed in September to merge amid mounting losses from $120 billion in a portfolio of home loans. Bank of America Corp. has taken on both Countrywide Financial Corp., once the biggest independent mortgage lender, and Merrill Lynch & Co., the securities dealer hobbled by $24 billion of losses. Morgan Stanley slumped almost one third in the past three months.
Other banks "are going to show up" and ask for the Citigroup deal, predicted Joseph Mason, a professor at Louisiana State University in Baton Rouge who previously worked at the Treasury’s Office of the Comptroller of the Currency.
The loss-sharing plan is another twist in the saga of Treasury Secretary Henry Paulson’s management of the $700 billion Troubled Asset Relief Program. Since the rescue fund was approved by Congress and enacted last month, Paulson has been criticized by lawmakers and others for not having a clear design for using the money. President-elect Barack Obama joined the chorus yesterday.
‘Confusion’ on Strategy
There has been "confusion on what the overall direction might be" of the Bush administration’s plans, Obama said in a press conference in Chicago. At the same time, he pledged to "honor the commitments" of the outgoing team.
"The model is that there is no model," said V. Gerard Comizio, senior partner in the banking practice at the Paul, Hastings, Janofsky & Walker law firm in Washington. "It is an improvisation battle plan."
Under the terms of the agreement, Citigroup will cover the first $29 billion of pretax losses from the $306 billion asset pool, in addition to reserves it already set aside.
Citigroup will accept 10 percent of losses above that amount, with the government responsible for 90 percent. The Treasury is second in line, taking $5 billion in losses, and the Federal Deposit Insurance Corp. is third, absorbing up to $10 billion. If the portfolio plummets through those triggers, the Fed steps in with a loan for the remaining assets.
Initial $25 Billion
U.S. authorities acted after the second-biggest U.S. bank by assets touched $3.05, the lowest level since 1992, threatening confidence among its depositors and counterparties. Citigroup had already received a $25 billion infusion under Paulson’s $250 billion capital-injection program.
"The Treasury and the Fed are doing what they can do to hold the pieces together, and it hasn’t been easy," said Martin Regalia, chief economist at the U.S. Chamber of Commerce, which lobbies on behalf of 3 million businesses. "If we don’t keep the financial system going that is going to impose costs on the American public that will be real and palpable."
The Fed’s exposure in the deal also represents a tack in the way the central bank has approached the crisis.
Since what was an effective purchase of $29 billion Bear Stearns Cos. assets in March, Fed officials have shown a preference for providing short-term credits for firms facing a cash squeeze.
The central bank’s balance sheet expanded $1.3 trillion in the past year as the Fed auctioned $415 billion of cash to banks and purchased $272 billion of commercial paper.
Fed officials have pushed to keep the risks involved in future bailouts at the Treasury, which would be forced to negotiate with Congress about the use of taxpayer funds.
Now, the Fed is stepping outside the liquidity boundary once again. The central bank took a step toward risk sharing earlier this month when it opened two new facilities with up to $52.5 billion in loans to help American International Group Inc. wind down its portfolio.
"It is clear that regulators still lack a comprehensive plan to address problems in our financial markets," Senator Richard Shelby of Alabama, the ranking Republican on the Senate Banking Committee, said through his spokesman Jonathan Graffeo. "It is unclear whether they have carefully considered the implications of their continued ad-hoc approach."
To contact the reporters on this story: Craig Torres in Washington at firstname.lastname@example.org; Robert Schmidt in Washington at email@example.com
& & &
Hugh C. Wood, Esq.
Wood & Meredith, LLP
3756 LaVista Road
Atlanta (Tucker), GA 30084
& & &