*****Bailout Insanity And Bank Arrogance*****

Bloomberg reports that JPMorgan's WaMu windfall turns bad loans into income.

(emphasis mine) [my comment]

JPMorgan's WaMu Windfall Turns Bad Loans Into Income
By Ari Levy and Elizabeth Hester



May 26 (Bloomberg) -- JPMorgan Chase & Co. stands to reap a $29 billion windfall thanks to an accounting rule that lets the second-biggest U.S. bank transform bad loans it purchased from Washington Mutual Inc. into income. [Where did this tax "Windfall" come from? See article below]

Wells Fargo & Co., Bank of America Corp. and PNC Financial Services Group Inc. are also poised to benefit from taking over home lenders Wachovia Corp., Countrywide Financial Corp. and National City Corp., regulatory filings show. The deals provide a combined $56 billion in so-called accretable yield, the difference between the value of the loans on the banks' balance sheets and the cash flow they're expected to produce.

Faced with the highest U.S. unemployment in 25 years and a surging foreclosure rate, the lenders are seizing on a four-year-old rule aimed at standardizing how they book acquired loans that have deteriorated in credit quality. By applying the measure to mortgages and commercial loans that lost value during the worst financial crisis since the Great Depression, the banks will wring revenue from the wreckage, said Robert Willens, a former Lehman Brothers Holdings Inc. executive who runs a tax and accounting consulting firm in New York.

"It will benefit these guys dramatically," Willens said. "There's a great chance they'll be able to record very substantial gains going forward."
...
JPMorgan said first-quarter gains from the WaMu loans resulted in $1.26 billion in interest income and left the bank with an accretable-yield balance that could result in additional income of $29.1 billion.
...
Wells Fargo arranged the $12.7 billion purchase of Wachovia in October, as the Charlotte, North Carolina-based bank was sinking from $122 billion in option ARMs. As of March 31, San Francisco-based Wells Fargo had marked down $93 billion of impaired Wachovia loans by 37 percent. The expected cash flow was $70.3 billion.

Last November, I wrote an entry called Bailout Bonanza, where the Washington Post reported about a quiet windfall for u.s. banks:

Quiet Windfall For U.S. Banks
With Attention on Bailout Debate, Treasury Made Change to Tax Policy

By Amit R. Paley
Washington Post Staff Writer
Monday, November 10, 2008; A01

[This is the source of JPMorgan's tax "windfall"]

The financial world was fixated on Capitol Hill as Congress battled over the Bush administration's request for a $700 billion bailout of the banking industry. In the midst of this late-September drama, the Treasury Department issued a five-sentence notice that attracted almost no public attention.

But corporate tax lawyers quickly realized the enormous implications of the document: Administration officials had just given American banks a windfall of as much as $140 billion.

The sweeping change to two decades of tax policy escaped the notice of lawmakers for several days, as they remained consumed with the controversial bailout bill. When they found out, some legislators were furious. Some congressional staff members have privately concluded that the notice was illegal. But they have worried that saying so publicly could unravel several recent bank mergers made possible by the change and send the economy into an even deeper tailspin.

"Did the Treasury Department have the authority to do this? I think almost every tax expert would agree that the answer is no," said George K. Yin, the former chief of staff of the Joint Committee on Taxation, the nonpartisan congressional authority on taxes. "They basically repealed a 22-year-old law that Congress passed as a backdoor way of providing aid to banks."

The story of the obscure provision underscores what critics in Congress, academia and the legal profession warn are the dangers of the broad authority being exercised by Treasury Secretary Henry M. Paulson Jr. in addressing the financial crisis. Lawmakers are now looking at whether the new notice was introduced to benefit specific banks, as well as whether it inappropriately accelerated bank takeovers.

The change to Section 382 of the tax code -- a provision that limited a kind of tax shelter arising in corporate mergers -- came after a two-decade effort by conservative economists and Republican administration officials to eliminate or overhaul the law, which is so little-known that even influential tax experts sometimes draw a blank at its mention. Until the financial meltdown, its opponents thought it would be nearly impossible to revamp the section because this would look like a corporate giveaway, according to lobbyists.

Andrew C. DeSouza, a Treasury spokesman, said the administration had the legal authority to issue the notice as part of its power to interpret the tax code and provide legal guidance to companies. He described the Sept. 30 notice, which allows some banks to keep more money by lowering their taxes, as a way to help financial institutions during a time of economic crisis. "This is part of our overall effort to provide relief," he said.

The Treasury itself did not estimate how much the tax change would cost, DeSouza said.

A Tax Law 'Shock'

The guidance issued from the IRS caught even some of the closest followers of tax law off guard because it seemed to come out of the blue when Treasury's work seemed focused almost exclusively on the bailout.

"It was a shock to most of the tax law community. It was one of those things where it pops up on your screen and your jaw drops," said Candace A. Ridgway, a partner at Jones Day, a law firm that represents banks that could benefit from the notice. "I've been in tax law for 20 years, and I've never seen anything li ke this."

More than a dozen tax lawyers interviewed for this story -- including several representing banks that stand to reap billions from the change -- said the Treasury had no authority to issue the notice.
...
Section 382 of the tax code was created by Congress in 1986 to end what it considered an abuse of the tax system: companies sheltering their profits from taxation by acquiring shell companies whose only real value was the losses on their books. The firms would then use the acquired company's losses to offset their gains and avoid paying taxes.

Lawmakers decried the tax shelters as a scam and created a formula to strictly limit the use of those purchased losses for tax purposes.

Here is a video about this illegal $140 billion tax windfall for big banks.




Last March, I also made an entry on how AIG payouts since receiving taxpayer bailout.

The money Goldman Sachs received via AIG between last September and December is stunning: $2.6 billion in collateral from AIG Financial Products, $5.6 billion to purchase securities underlying selected credit swaps and $4.8 billion to meet lending agreements.

The federal bailout of AIG now totals about
$160 billion and Goldman Sachs is one of the largest beneficiaries. Federal officials say the money was needed to prevent the collapse of the insurance company and avoid the threat its failure posed to the US financial system. On Sunday, AIG bowed to public pressure and said it shoveled a total of about $105 million to Societe General, Deutsche Bank (DB), Goldman Sachs, as well as several US states, including California and Virginia.

Payments made by AIG after September 16, 2008, the date on which AIG began receiving government assistance:

[US tax dollars at work]

Goldman Sachs - $12.9 Billion [US Treasury Secretary Henry Paulson lead the push to bailout AIG. Henry Paulson is also an ex-CEO of Goldman Sach. This stinks to the heavens.]
Merrill Lynch/Bank of America - $12 Billion
Morgan Stanley - $1.2 Billion
Wachovia - $1.5 Billion
JP Morgan - $400 Million
Citigroup - $2.3 Billion

[Total paid to Wall Street prime dealers = 43 Billion (so far...)]

Societe General (FRANCE) - $11.9 Billion
Deutsche Bank
(GERMANY) - $11.8 Billion
Calyon
(FRANCE) - $2.3 Billion
Barclays
(U.K.) - $8.5 Billion
UBS
(Switzerland) - $5.0 Billion
DZ Bank
(GERMANY) - $700 Million
Rabobank
(HOLLAND) - $800 Million
KFW
(GERMANY) - $500 Million
Banco Santander
(SPAIN) - $300 Million
Danske
(DENMARK) - $200 Million
HSBC Bank
(U.K.) - $3.5 Billion
Bank of Montreal
(CANADA) - $1.1 Billion
Royal Bank of Scotland
(U.K.) - $700 Million [RBS was nationalized last year, so this $700 Million went directly into the pockets of British taxpayers.]
BNP Paribas
(FRANCE) - $4.9 Billion
Credit Suise
(SWITZERLAND) - $400 Million
ING
(HOLLAND) - $1.5 Billion
Deutsche Zentral
(GERMANY) - $1.0 billion
Dresdner Bank
(GERMANY) - $2.6 Billion

[Total paid to foreign institutions = 58 Billion (so far...)]

CNN reports about US banking's FDIC crutch.

[Notice the huge amount of FDIC-backed debt that has been sold by Wall Street giants: 44 billion for Bank of America, 40 billion for JPMorgan Chase, Etc...]



NEW YORK (Fortune) -- Banks lining up to repay bailout funds are easing away from the Federal Deposit Insurance Corp.'s debt insurance plan, a program that helped banks through last fall's financial storm -- and has made money for the FDIC to boot.

Since the Temporary Liquidity Guarantee Program, or TLGP, took effect last November, financial firms have issued more than $330 billion worth of federally backed bonds and notes at below-market interest rates.

That subsidy has been a sweet deal for stressed-out debt issuers such as Bank of America (BAC) and General Electric (GE). It gave them access to low-cost funding and helped boost their profits.

Zacks asks is there any limit to bank arrogance?

Any Limit to Bank Arrogance? [No]
By: Dirk van Dijk, CFA
May 27, 2009

Apparently there is no limit to the arrogance and sense of entitlement at the nation's largest banks. From today's Wall Street Journal we get this:

"Some banks are prodding the government to let them use public money to help buy troubled assets from the banks themselves. Banking trade groups are lobbying the Federal Deposit Insurance Corp. (FDIC) for permission to bid on the same assets that the banks would put up for sale as part of the government's Public Private Investment Program (PPIP). PPIP was hatched by the Obama Administration as a way for banks to sell hard-to-value loans and securities to private investors, who would get financial aid as an enticement to help them unclog bank balance sheets."

Let's recap a bit. Banks make a ton of bad loans and come to the brink of insolvency. The government has to guarantee their debt and injects billions and billions of dollars to shore up their capital base on extremely generous terms.
Then the banks all whine and complain that the government might want some say about how much of that capital goes out the back door in the form of mega-sized bonuses to the very same people who lead the world to the edge of the economic abyss.

The ever-powerful Bank Lobby leans on Congress so that it will lean on the Financial Accounting Standards Board (FASB) to substantially ease the mark-to-market accounting rules, so they do not have to reflect the market value of the toxic assets on the balance sheet. The claim was that the bids in the market did not represent "true value," but were a fire-sale price.

It is true that there was not a lot of activity going on in the mortgage-backed securities market, especially the non-GSE backed paper that was created by the investment banks that held the worst loans. In an attempt to revive this market,
Treasury Secretary Geithner came up with the PPIP program, where the government would invest side-by-side with private investors to buy up this bad paper.

Then, another arm of the government --
the FDIC -- would guarantee loans so the private/public investment partnership could leverage things way up. If the deal goes south, the private investor can then simply walk away from the deal.

[Also, Treasury Secretary Geithner made a rule that only institutions with over 10 Billion in toxic assets (ie: Wall Street's corrupt prime dealers) can run the government's PPIP program]

The underlying assumption was that the reason there was no market for this stuff was that there were no buyers -- not that the sellers could not afford to sell at the "true value" of the assets. The latter is far more likely to be the case. They have the real motive to try to pretend that the assets are worth more than they actually are.

Buyers, on the other hand, would be inclined to bid against each other until a rational price level was found. In any case,
the idea was to get this paper off the books of the banks.

Now the banks want to be able to buy the stuff themselves, with the government (FDIC) backing. This is insane. Any bank that is selling this stuff should be absolutely prohibited from buying it -- not only the assets on their own books, but from any other institution as well. A shell game where J.P. Morgan (JPM) buys the toxic assets from Citigroup (C), which then buys the assets of Bank of America (BAC), which in turn buys the assets of J.P. Morgan is not significantly different from the banks buying their own bad paper.

The PPIP program, if properly carried out, does have some advantages over the original ex-Secretary Paulson "Cash for Trash" plan that was at the heart of TARP when it was first passed. On any individual deal, if the private investor makes money, then the government will also make money. However,
given the leverage and the non-recourse nature of the debt, the private side will make out like a bandit and the government will make a modest return.

On an individual deal that goes south, the private side will lose what they put in, but that is a small fraction of the total loss, so the government will get kicked in the teeth. This structure does give an incentive to the private investor (who will make the investment decisions) to bid as low as possible on each asset to maximize their potential return. If the banks are allowed to bid on their own assets, or engage in wash-sale transactions with other banks, then there is no such incentive.
Indeed the incentive is for them to overpay as much as possible. They get the cash up front from selling the asset, and then when the paper goes bad, the government takes most of the loss.
...
If the banks get their way, it will turn the potentially promising PPIP program into yet another rape of the American taxpayer by the banks. Enough with the Welfare Queens of Wall Street. It is time for someone in Washington to stand up against the bankers. That would be change we could believe in.

RTT News reports that Goldman Sachs, JPMorgan, Morgan Stanley apply to repay TARP funds.

Goldman Sachs, JPMorgan, Morgan Stanley apply to repay TARP funds
5/18/2009 11:48 PM ET

(RTTNews) - Goldman Sachs, JPMorgan, Morgan Stanley, and American Express were among the nineteen banks that underwent the government stress tests. Of the nineteen banks tested, authorities said nine banks, including Goldman Sachs, JPMorgan and American Express passed the government's "stress test," and did not need to raise any more capital. The other banks that are not required to raise capital are U.S. Bancorp (USB), Bank of New York Mellon Corp. (BK), MetLife Inc. (MET), State Street Corp. (STT), BB&T; Corp. (BBT), and Capital One Financial (COF). But, Morgan Stanley was asked to address a capital shortfall of $1.8 billion following the government stress tests.

However, the banks that have passed the stress test are raising funds in order the quickly pay back the TARP bail-out funds. One of the biggest reasons for the banks to quickly repay the money is to free it from restrictions placed on it by the government. By repaying TARP funds, banks will be able to function independently and without government scrutiny as well as any unnecessary restrictions on bonus payments and salaries to executives. Further, the banks have reportedly received concerns from clients about being under the government's thumb.

Seeking Alpha asks what does paying back this TARP money actually mean?

JPMorgan Chase (JPM), Goldman Sachs (GS), State Street Bank (STT), Morgan Stanley (MS) and Bank of America (BAC) are all taking the opportunity to raise big money by selling shares into this bear market rally. They are also all talking about paying back the "TARP" bailout money with which they were endowed at taxpayer expense. The sudden desire to give back these funds, once so fervently coveted, seems to arise mostly from fear that restraints will be placed on excessive executive compensation.

The last I heard, giving all of these banks their TARP allocations was going to save the world. These are allegedly "systemically important" institutions that cannot be allowed to fail. Now, apparently, they are going to pay back this allegedly critical bailout money, for which former Treasury Secretary Henry Paulson got on his knees to beg for, in front of certain female members of Congress.

Does that mean they will now be allowed to fail, if their executives engage in another series of unprofitable fiascoes? Or, does it simply mean that, with Federal Reserve lending rates so low, and the spread between the rate at which they borrow and lend so high, that the profits, yet again, will go to the executives, while the losses, if there are new ones, will, yet again, go to the taxpayers?

In other words, in practical terms, what does paying back this TARP money actually mean? The truth is that these "bad boy" banks are getting bailed out in a million different ways that go far beyond TARP. How about the FDIC guarantees for their bonds, and hundreds of billions in trades, exchanging toxic mortgage bonds for treasury bills at the Fed?

How about the TALF, and the myriad of different "loan windows" that the Federal Reserve has now opened up for them. Will they now escape close scrutiny over overly risky bad behavior in the financial markets simply because they pay back a small part of their bailout which happens to be the most publicly visible?

Do we award them a "get out of jail free" card? Do we now free them from the close supervision over oversized bonuses and other dangerous behavior that other banks will have to endure? Do we let them jump around the sandbox again, unfettered, free to ride roughshod over their shareholders, and the world's economy just as they have in the past? Should we allow this even though their past behavior put the entire world's financial system at risk?

[The above pretty accurately summarizes my opinion on banks paying back this TARP]

My reaction: US financial firms have received taxpayer assistance in the form of:

1) A $140 billion (illegal) tax giveaway
2) $43 Billion from AIG bailout (so far)
3) They have sold $330 billion worth of federally backed bonds
4) They are currently borrowing $555 billion from the fed. ($933 billion total reserves — 378 billion nonborrowed reserves = 555 billion borrowed reserves. (See Fed's website for more info))
5) They have exchanged $300 billions toxic securities for treasury bills at the Fed.
6) Fed has purchased $430 billion mortgage-backed securities
7) The PPIP program will soon buy $500 billion of their toxic assets.
8) $200 billion TARP funds
9) etc...

Total = more than $2500 billion

Now some banks want to return a tiny portion of their taxpayer handout, the TARP funds, and start paying oversized bonuses again (with the rest of their taxpayer money). This is insane.

This entry was posted in Background_Info, Bailouts, Federal_Reserve, Financial_Wizardry, Market_Skepticism, Wall_Street_Meltdown. Bookmark the permalink.

4 Responses to *****Bailout Insanity And Bank Arrogance*****

  1. Anonymous says:

    capitalism at its best Eric.

    Democracy = capitalism

    If you haven't figured it out yet.

    BTW - great writeup!

  2. Anonymous says:

    haha this isn't capitalism. This is facist crony capitalism.

  3. Hugo says:

    @Democracy is tiranny, not capitalism. Democracy is a fascist system. It is not capitalism at all. Get your facts straight.

  4. Silver Bug says:

    I agree with Hugo. Democracy is tyranny. Capitalism is allowing consumers to vote with their dollars, allowing the market to determine who fails or prospers. Democracy is nothing short of mob rule.

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