Wednesday, 22 October 2008 02:00

How much money would the Treasury have to put into banks to make a difference?

The government announced that it will be investing $250 billion of capital directly into banks, which IMO is preferable to trying to manipulate the MBS market by buying worthless securities. The trillion dollar (literally) question is "How much money is enough money". Well, the trillion dollars may be a good start. Mayhaps the best solution is the to let the insolvent go bust....

Downey Financial Posts $81.1 Million Net Loss: The California thrift company was again hit by heavy costs from bad credit and foreclosed properties. In a news release, CEO Charles Rinehart said, "We continue to work with our financial advisor towards raising additional external capital and we are reviewing the recently announced governmental programs to determine which programs, if any, might be available and appropriate for us."

Wachovia Posts $24 Billion Net Loss: The Charlotte banking company took an $18.8 billion goodwill impairment charge and set aside $6.6 billion for credit losses. In a news release, Wells Fargo CFO Howard Atkins said, "The asset write-downs, reserve build, and other items are consistent with our acquisition assumptions." (Presentation, supplement, prepared remarks.)

For just two banks, in just this past 24 hours, we have a hole of $25 billion - or 10% of all the monies that is to be invested by our esteemed government on our behalf. Add in Citibank, WaMu (if still reporting as an operating entity, I don't know), and a few regionals on the Doo-Doo 32 list, and you've eaten up at least 50% of the taxpayer's money before even getting out of the quarter, not to mention being right back where you started from last quarter - which was being in enough trouble to allegedly warrant an emergency $750 billion bailout thrown together in a week from a 3 page proposal by Treasury Secretary "The worst is behind us" Paulson, America's bastion of credibility. Keep in mind that we have many thousands of banks in this nation, so two or three or four are simply statistical blips on the radar screen.

Last modified on Wednesday, 22 October 2008 02:00


  • Comment Link a b Thursday, 23 October 2008 03:48 posted by a b

    Fantastic mutiny by the Minneapolis Fed. Home state of the great Al Franken, and capable of managing $500/barrel oil even if with their harsh winter. The heartland.

    The Far Side: I couldn't resist buying CALLS on GGP today, both to hedge a moronic rally and for the sheer gamble.

  • Comment Link Thomas Salada Wednesday, 22 October 2008 14:02 posted by Thomas Salada

    This article from the Minneapolis Fed ( says in part:

    [i]The Financial press and policymakers have made four claims about the nature of the crisis.
    1. Bank lending to non financial corporations and individuals has declined sharply.
    2. Interbank lending is essentially nonexistent.
    3. Commercial paper issuance by non financial corporations has declined sharply and
    rates have risen to unprecedented levels.
    4. Banks play a large role in channeling funds from savers to borrowers.
    [b]Here we examine these claims using data from the Federal Reserve Board. At least
    based on data up until October 8, 2008, we argue that all four claims are false1 .[/b]

    So if the fed is saying the rationale for the bailout is bogus, just what the heck is going on here?

  • Comment Link DAVE Hoffman Wednesday, 22 October 2008 11:47 posted by DAVE Hoffman

    What's your take?

    Fears about Lehman CDS deadline seen as overstated
    Tuesday October 21, 1:09 am ET

    By Karen Brettell

    NEW YORK (Reuters) - Tuesday's deadline to settle an estimated $400 billion in credit default swaps on debt in failed investment bank Lehman Brothers is unlikely to trigger new havoc in the market, derivatives analysts said.

    Tuesday is the final day credit default swaps on Lehman's (LEH - News; Other OTC:LEHMQ.PK - News) debt can be paid out.

    Speculation has mounted that banks and other sellers have been hoarding cash to pay out a massive 91 percent loss on the contracts.

    Some analysts on Monday attributed gains in the U.S. dollar to demand for dollars needed to pay the insurance.

    But experts say the fears are exaggerated and in any case, losses may not be made public until companies post their next quarterly earnings in the months to come.

    "There's been a lot of talk about this but I don't think it's that material, there has been a lot of misunderstanding," said Sivan Mahadevan, head of credit derivative and structured credit research at Morgan Stanley in New York.

    "I think it's been overdone."

    Credit default swaps are insurance-like securities that protect against the risk of a borrower defaulting on debt.

    The $55 trillion market has created concerns that it may pose systemic risks as the private nature of the market makes it impossible to know who holds what risk, and how large any exposures are.

    Part of the worry about the Lehman swaps is the $400 billion in insurance outstanding, although this number overstates the amount of money that will actually be transferred.

    The Depository Trust and Clearing Corporation, which clears the vast majority of trades in the over-the-counter market, said this month only $6 billion may actually change hands.

    This is because large players in the market, such as dealers and some hedge funds, have both bought and sold protection, subsequently taking both gains and losses on Lehman's default that will offset each other.

    For companies with net exposure to pay out protection, much of the pain of settling the swaps has also already been taken.

    "If you were the seller of protection, you had to pay collateral and that collateral was changed on a daily basis, based on where Lehman's bonds were trading," Mahadevan said.

    "The money's already in the system. The loss is already in the system. I don't think of it as a big deal in terms of losses exchanging hands," he added.

    The price of Lehman's bonds dropped to about 12 or 13 cents on the dollar after the investment bank filed for bankruptcy in September, meaning sellers of protection needed to post collateral to cover a loss of 87 percent to 88 percent on the contracts at the time.

    Some buyers of protection would have used these bonds to settle their contracts. Others participated in an auction on October 10 to determine the value of the contracts.

    When a borrower defaults on debt, sellers of protection pay buyers the full sum insured and, in return, receive the defaulted debt or a cash payment, which is determined by auction.

    The October 10 auction involved 358 market players and determined the swaps were worth just 8.625 cents on the dollar, meaning sellers needed to pay out 91.375 cents on every dollar of insurance sold.

    "The auction for Lehman CDS was successful and the amount that was paid out on this credit event is significantly lower than what has been mentioned in the press," analysts at Barclays said in a report.

    Meanwhile, of the companies that have so far announced exposures to Lehman's default swaps, none have indicated any threat to the viability of the firm.

    Genworth Financial (GNW.N), for example, said it had only $5.4 million in credit default swap exposure to Lehman credit default swaps, and Hartford Financial Service Group (HIG.N) said it had $30 million in exposure to Lehman's swaps.

    (Reporting by Karen Brettell; Editing by Jan Paschal)

  • Comment Link Phil V Wednesday, 22 October 2008 10:59 posted by Phil V

    is selling massive amounts of tax equity in buying these losses: give $1.5 worth of writeoffs for ever $1 of home bought by some investor.

  • Comment Link Jawad Qasrawi Wednesday, 22 October 2008 10:51 posted by Jawad Qasrawi


    Did you notice how it became "not that bad" for you to loose 24 BILLION???!!!!!!!

    IN a couple of quarters, a Trillion will be fne

  • Comment Link Reggie Middleton Wednesday, 22 October 2008 10:49 posted by Reggie Middleton

    Oops, I'll correct that.

  • Comment Link Xenu Wednesday, 22 October 2008 10:43 posted by Xenu

    That Downey amount is 80 [u]Million [/u] not its not quite as bad.

    Still, agree with ur sentiments...


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