Posts Tagged ‘AIG’

It’s Impossible to Remove Toxic Assets

March 21, 2009

Information came out yesterday and today that the Obama administration is about to unveil their plan to buy up toxic assets from banks.  They plan to use up to a trillion dollars from the previous bailouts, help from the Federal Reserve and a form of a public/private partnership to accomplish this.  After the uproar over the AIG bailout and bonuses, the administration does not want to go to Congress for more money.

However, it does not matter what kind of plan the Obama team comes up with for one key reason:  Banks will not sell any of their toxic assets.  They will not sell because the second they do, they will have to revalue their assets to the market value, and that will lead to failures across the board.

They would rather sit with billions of dollars of toxic assets on their books, not try to get rid of them, and collect billions from the government.  The only way banks will sell their assets is if the government suspends the mark-to-market accounting rule.

Mark-to-market means that banks have to value assets for their market value.  This is similar to how things operate in the real world for you and I.  Previously, they could use “mark-to-model” accounting, which meant they could value their assets using a computer model to determine their value.

For example, if we bought a home for $500,000, and we want to refinance or pull out equity, the bank will look at the value of our home if we sold it, or the market value.  If it’s value has dropped to $450,000, we have to adjust our plans for the new value.

You will hear some “economists” argue that banks should not have to use mark-to-market because there is no market right now and prices are artificially depressed.  There is a market right now, it’s just that no one will price assets that low because it will trigger all the other banks having to write down their assets.

If the value of these assets was artificially depressed, people should be buying them because their true value is really higher.  Just because it involves millions of dollars and the banking industry does not mean that the rules should be different.

If we suspend mark-to-market it will only lead to inflated prices for worthless assets.  Then the government will buy them and lose all their money and the losses will be stuck on the American taxpayer.  Sounds like a great idea to me.

There is a very simple alternative to all the bailouts and failed schemes – let the banks fail and let the bad debt be liquidated.  Only one politician has been a proponent of this, Ron Paul, and only a small handful of economists have called for this alternative.  It is amazing how the debate is limited to how many billions we should give away and how mad we should get for less than 1% of those billions being handed out in bonuses.

If you talk about bank failures, you are bound hear about Lehman Brothers and how disasterous that was.  I would argue though, that the Lehman failure has nothing to do with the crisis we are in.  Sure, lots of people lost money, but it was pretty orderly, proving the bankruptcy system worked.   Shareholders got wiped out, bondholders settled for 20 cents on the dollar, and the derivatives settled for about $6 billion.

Are we still talking about Lehman?  No.  Are we still talking about another firm that failed but had a government negotiated failure, Bear Sterns?  No.  The government got involved and arranged for a way to settle the debts and found a buyer.

Are will still talking about firms the government has tried to rescue through all the bailouts?  AIG?  Fannie and Freddie?  Bank of America?  Citi?  I know this is anectdotal evidence, but it seems that firms we let fail have gone by the wayside, and those that we’ve saved have just kept causing more trouble.

The point is that spending more taxpayer money and coming up with more schemes to help the banks are futile attempts to put humpty back together again.  The banks will not cooperate and liquidate their debt when they have the promise of government overpaying for worthless assets.  However, we will keep these insolvent institutions alive by giving them money to offset the writedowns on their bad debts.  It is an endless cycle with no light at the end of the tunnel.

The only way to move through this is to let the insolvent banks fail, liquidate their debts, and let the healthy or new institutions fill the void.  Until we do this, the current crisis will continue and eventually lead to the failure of the dollar and our economy as a whole.

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The “Outrage” Over AIG

March 17, 2009

I find it very amusing that Fed Chairman Bernanke, President Obama and all of these members in Congress are so “outraged” by the AIG bonuses that add up to $170 million.

Aren’t these the same people who said we had to act swiftly and boldly to help avert falling into a financial abyss?  I know that Bush was still President then, but Obama and McCain both favored the massive government intervention.

This is what happens when you just say things like “protect the taxpayer” but you don’t take the time to read the bill to see if those provisions are really in there.

The AIG bailout was one that was not executed by Congress, but it is still their responsibility to ask questions and press the Treasury and Fed on what their plans are.  You can’t just let things happen and then get mad later at the outcome.

I’m more mad at the $170 billion we’ve given to AIG so far to keep it afloat.  They doled out almost $60 billion to all their big bank friends.  Why aren’t we outraged at that?  Why are we so mad about $170 million?  We need to stop focusing at the small stuff and AIG and start focusing on the bigger picture and the horrible job the Fed and Treasury Department are doing.

You’d think if you gave someone $170 billion, you’d keep good tabs on where it is going, right?  Wrong.  YOou would know that they are just handing over billions to their banking friends, right?  Wrong.  You think you’d actually put in provisions to protect the taxpayers and not just say you did, right?  Wrong.

The AIG bonus “outrage” is just a political ploy to make it look like our politicians care about us, and we’re taking the bait.  Instead of focusing on the mismanagement by the government, we’re making those big, bad greedy executives the scapegoat.

Now Congress wants to tax these bonuses to recoup the money.  However, some people got bonuses of $1000.  It’s more than just the top level that relies on bonuses for a big chunk of their salaries.  I don’t think the execs should be getting this money, but a secretary or administrative assistant?  Let’s take their money too.

This whole thing was a mess from the start and now we’re paying the price.  The government told us how we needed to act urgently and this is what happens.  When will we, the people stop buying it and stand up to this nonsense?

So, This is What the SEC Does

November 18, 2008

Today, the SEC announced it was bringing insider trading charges against Mark Cuban.  He sold a large position in Mamma.com (some lousy search engine) with some insider info and saved himself about $750,000 in losses.  The big part of this dispute is that the SEC says he pledged to keep the information confidential and therefore could not act on it.  Cuban says he never said anything about confidentiality, and therefore could trade with the knowledge he had.

Not that it really matters, but the information was that the company was going to do a PIPE the next day.  A PIPE is “Private Investment in Public Entity” which means they sell a number of shares to private investors to raise money.  The disadvantage is that it dilutes the amount of shares outstanding, which in turn makes each share worth less.  So, Cuban sold his shares before the announcement of the PIPE and the subsequent decline.  He sold only a portion of his position and saved himself $750,000 by selling early.

This was all done back in 2004 too!  They spent 4 years researching this?  You have to be kidding me!  What a waste of taxpayer dollars and government resources.

While the entire financial system is crumbling and hundreds of billions of dollars in shareholder equity has been lost and we’re printing trillions of dollars as well, the SEC is investigating a deal by Mark Cuban that equated to less that ONE MILLION dollars?

This is our government in a nutshell.  Instead of going after the CEOs of the financial institutions that wrecked our economy, they go after Mark Cuban for $750,000.  The decisions by the heads of subprime lenders and Wall Street firms that securitized and sold these assets have cost us all billions of dollars.  How can there not be any investigations into these firms?  What a joke!

What about AIG?  They got bailed out to the tune of $85 billion and then sent employees on a luxury retreat that cost over $400,000!  That’s our money!  Cuban’s trade, while it was unethical if not illegal, was his own money and mainly benefitted himself.  AIG was using taxpayer money to pamper themselves.  Where are the fines for this?  Why isn’t anyone in jail yet?

The SEC needs to look at the CEOs and officers of Goldman, Merrill and any other big Wall Street firm.  I can bet that they had “planned” sales that happened to occur right before a drop in stock price.  Just because it’s “planned” doesn’t mean they were not setting up these sales with inside knowledge.

We should all be outraged that during this time of crisis, the SEC is busy investigating Mark Cuban for three quarters of million dollars.  The top 100 employees at any of these investment banks were getting bonuses many times the money Cuban saved himself.  These bonuses were created by financial instruments like mortgage backed securities, that the SEC was supposed to regulate.  Now look who is footing the bill – the average Joe.

If they really want to crack down, they should go back and put every exectutive of an investment bank or subprime lender or AIG in jail right now.  Christopher Cox, the head of the SEC should be forced to resign as well.  He just let all this happen and then has the gall to go after Cuban.  His lack of leadership is criminal in itself.

Of all the “change” Obama wants, the first one he should make is to get the SEC to actually do it’s job and not try to make martyrs out of celebrities.