Investment News: Money Morning » Bank Bailout Series http://www.moneymorning.com Investment News Provider Sat, 21 Nov 2009 18:52:59 +0000 http://wordpress.org/?v=2.8.4 en hourly 1 Congressional Watchdog Criticizes Treasury for Failing to Track $350 Billion in Bank Bailout Money http://www.moneymorning.com/2009/01/12/700-billion-bank-bailout-funds/ http://www.moneymorning.com/2009/01/12/700-billion-bank-bailout-funds/#comments Mon, 12 Jan 2009 08:30:50 +0000 William Patalon III http://www.moneymorning.com/?p=4281 [This is the sixth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The U.S. Treasury Department has done nothing to make sure $700 billion in taxpayer-provided bailout money is used to buttress the weak U.S. mortgage market, which was the catalyst for the growing global financial crisis, congressional watchdog Elizabeth Warren said Friday.

Warren, who heads a congressionally appointed oversight panel, told ABC News there was no evidence the Treasury had used money from the Troubled Assets Relief Program (TARP) to put a floor under the falling U.S. housing market by avoiding preventable foreclosures.
“There’s just no money that’s gone in that direction,” Warren said. “This one’s not even arguable. The TARP funds themselves have not been used in this way despite congressional statutes requiring them to do so.”

The government has spent the first half ($350 billion) of the bailout money. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. set aside the second half to be deployed by the incoming Barack Obama Administration. President-elect Barack Obama said last week that he wants more transparency and stricter guidelines for using the second half of the TARP money.

The congressional investigation is just the latest in a series of revelations demonstrating the misallocation of the taxpayer-provided bailout money. An ongoing investigation by Money Morning has detailed how banks have used the first $350 billion: They’ve used the capital to finance investments in other banks – including an investment in China – and to pay bonuses to executives. Then they audaciously refused to say where the money went, or how it was used, Money Morning has shown.

The Congressional Oversight Panel has now added to that list of criticisms. In a draft of a report released Friday, the panel said the Treasury Department has failed to reveal its strategy for stabilizing the financial system and had done little to track how the money was used.

The draft report cited “significant gaps in Treasury’s monitoring of the use of taxpayer money,” including asking financial institutions to account for what those banks, brokerages and insurance companies have done with the taxpayer money. The report also questioned whether Treasury fulfilled the promises made to Congress when it pushed for lawmakers to approve the rescue funds.

Indeed, the panel said in its report that “for Treasury to take no steps to use any of this money to alleviate the foreclosure crisis raises questions about whether Treasury has complied with Congress’s intent that Treasury develop a plan that seeks to maximize assistance for homeowners.”
According to the report, the TARP panel had asked the Treasury Department to respond to 45 questions, but the department either didn’t – or couldn’t – answer a number of them.

The Treasury Department “set up the system and [it] didn’t put any tracking mechanisms on it. [It] didn’t put any restrictions on the banks,” Warren said during an interview on ABC TV’s “Good Morning America.”

“So the money could be used in lots of different ways. It might be used for lending, which was supposedly the initial purpose,” Warren added. “It might be used to buy other banks, it might be used to buy other assets, it might to buy things overseas. Or it may just be stuffed in vaults and left there.”

A Treasury spokesman declined comment, saying the department had not seen a copy of the report, Reuters said.

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According to Reuters, the panel said the Treasury hasn’t used any of TARP’s first $350 billion tranche to help borrowers refinance or deal with mortgages that have a face value that is more than the current market value of their homes.

“Treasury needs to be clear as to what, if anything, it has done, and if it insists on taking credit for private sector efforts, it must explain what ‘help’ means,” the draft report said.

Asked if the Treasury had been given too much discretion in the use of the funds, Warren, a Harvard Law School Professor, told TV interviewers that “Congress may want to take a very hard look at that question.

“Ultimately, (I) don’t have a badge, don’t have a gun,” Warren said. “It’s up to Congress what they’re going to do about making more requirements and how Treasury uses this money.”

The Treasury Department must request congressional approval to access the bailout fund’s second $350 billion. President-elect Barack Obama’s economic team, including U.S. Treasury Secretary Nominee Timothy Geithner, is working on an overhaul of the fund to speed the flow of credit to consumers and the economy.

President-elect Obama’s economic team has been talking with the Bush administration about having Treasury Secretary Paulson ask Congress as early as this week for access to the $350 billion remaining in the bailout fund. If Congress rejected such a request, a presidential veto could still free up the money, unless Congress overrode the veto.

“Let’s lay out very specifically some of the things that we are going to do with the next $350 billion of money,” Obama said on the ABC News program, “This Week.” “And I think that we can regain the confidence of both Congress and the American people that this is not just money that is being given to banks without any strings attached and nobody knows what happens, but rather that it is targeted very specifically at getting credit flowing again to businesses and families.”

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]]> http://www.moneymorning.com/2009/01/12/700-billion-bank-bailout-funds/feed/ 9 U.S. Banks Refuse to Detail How They’re Spending Federal Bailout Money http://www.moneymorning.com/2009/01/06/us-banks-federal-bailout/ http://www.moneymorning.com/2009/01/06/us-banks-federal-bailout/#comments Tue, 06 Jan 2009 10:38:29 +0000 William Patalon III http://www.moneymorning.com/?p=4138 [This is the fifth installment of an investigative series in which Money Morning examines how U.S. banks are using federal bailout funds.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

After receiving hundreds of billions of dollars in taxpayer-funded federal bailout money, the biggest U.S. banks say they can’t track how that money is being spent.

Some of the banks are outright refusing to discuss the matter, a new study has found.

“We have not disclosed that to the public. We’re declining to,” Thomas Kelly, a spokesman for JP Morgan Chase & Co. (JPM) told The Associated Press, which surveyed 21 banks that received at least $1 billion in federal bailout money, and asked how that capital was being used. JP Morgan received a $25 billion infusion as part of the U.S. Treasury Department’s $700 billion Troubled Assets Relief Program (TARP).

As an ongoing Money Morning investigation has demonstrated, billions in U.S. bank rescue funds are financing buyouts worldwide – instead of lending at home. Some of those buyouts deals are being done in markets as far away as China. Meanwhile, credit remains tight here in the U.S. market, a situation that could be alleviated if only the banks made the bailout money available to consumers in the form of loans.

Money Morning was one of the first news organizations to really examine how TARP money was being misdirected, and wasn’t being deployed as originally intended. More recently, The AP has joined the journalistic posse and published several investigative pieces, including one that looked at executive pay at financial institutions that received bailout money.

Some experts – such as investing icon Jim Rogers – say that bailouts in general are bad deals. They’re even worse if they’re funded by taxpayers who don’t know how their money is being spent [A related story on Rogers' views about the U.S. banking-bailout initiative appeared last week in Money Morning. To access that story, please click here].
The bottom line: Banks won’t say how they’re using the bailout money. That refusal – coupled with the almost non-existent disclosure and oversight of the TARP program – means the country may well never find out how hundreds of billions of taxpayer dollars were spent.

Anatomy of a Survey

In its latest investigative offering, The Associated Press contacted 21 banks that received at least $1 billion in government money and asked four questions: How much has been spent? What was it spent on? How much is being held in savings? And what’s the plan for the rest?

According to The AP, none of the banks provided specific answers.

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For instance, when Kevin Heine, a spokesman for Bank of New York Mellon Corp. (BK) – which received about $3 billion in TARP money – was asked how his institution was using the emergency infusion, he replied by stating that “we have not disclosed that to the public. We’re declining to.”

The words varied, but the basic message was the same from one bank to another. For instance, Barry Koling, a spokesman for SunTrust Banks Inc. (STI), the Atlanta, Ga.-based lender that received $3.5-billion in taxpayer cash, told the wire service that “we’re not providing dollar-in, dollar-out tracking.”

Some banks actually admitted that they simply didn’t know where the money was going.

For instance, a spokesman for the Birmingham-based Regions Financial Corp. (RF) said the company is not tracking how it is spending the $3.5 billion in TARP money that it received.
“We manage our capital in its aggregate,” said Regions spokesman Tim Deighton.

These answers – or lack thereof – highlight both the secrecy surrounding the TARP program, as well as the lack of oversight by Congress. Given that the entire TARP program is worth at least $700 billion – roughly the equivalent of the economy of The Netherlands – those aren’t small issues.

About half of the $700 billion was earmarked for bailouts. But because the U.S. financial crisis was escalating so quickly – and because the Bush administration pushed Congress to approve the TARP plan quickly – Congress attached virtually no strings to the bailout funds. The Treasury Department has been using the money to buy stakes in key U.S. banks, allegedly hoping that the infusion of cash would enable them to heal themselves and start lending again.

As the deepening U.S. credit crisis has shown, that hasn’t happened.

No Oversight, No Accountability

There has been no accounting of how banks spend that money. Lawmakers summoned bank executives to Capitol Hill late last year and implored them to lend the money – instead of hoarding it, spending it on executive bonuses, or for buyouts to get bigger. But there’s no process in place to guide this. And there are no consequences for banks that fail to comply with what U.S. lawmakers are asking.

Even worse: There’s no vehicle that enables taxpayers to find out what banks are doing – at least, not yet.

“It is entirely appropriate for the American people to know how their taxpayer dollars are being spent in private industry,” Elizabeth Warren, the top congressional watchdog overseeing the financial bailout, told The AP. Stating that it takes “a lot of nerve not to give answers.”

Warren said her oversight panel will try to force the banks to say where they’ve spent the money. But she also noted that she was quite surprised to learn that she even has to ask for that information.

“If the appropriate restrictions were put on the money to begin with, if the appropriate transparency was in place, then we wouldn’t be in a position where you’re trying to call every recipient and get the basic information that should already be in public documents,” Warren said.

In fact, the due diligence on the legislation that created TARP was so lax that lawmakers didn’t realize until much later that the bill they passed actually managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers were furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

“Those are legitimate questions that should have been asked on Day One,” said U.S. Rep. Scott Garrett, R-N.J., a financial services committee member who opposed the bailout as it was being pushed through Congress. “Where is the money going to go to? How is it going to be spent? When are we going to get a record on it?”

Buyouts Not Bailouts

Nearly every bank questioned – including Citigroup Inc. (C) and Bank of America Corp. (BAC) – recipients of some of the largest TARP infusions – responded to AP inquiries with generic public relations statements explaining that the money was being used to strengthen balance sheets and to continue making loans to ease the credit crisis.

As a Money Morning story detailed Friday, BofA just finalized its buyout of Merrill Lynch & Co. Inc. (MER), creating the largest U.S. bank – as well as the biggest challenge yet for longtime BofA Chief Executive Officer Kenneth D. Lewis. And Wells Fargo & Co. (WFC) completed its $12.7 billion purchase of Wachovia Corp. (WB) – outbidding Citigroup Inc. (C) and making a massive bet that it accurately quantified the still existing risks in Wachovia’s huge portfolio of mortgage and real estate loans.

Those were just the latest in a long series of buyout deals being funded at least partly by TARP money, the ongoing Money Morning investigation has shown.

In response to The AP survey questions, a few banks detailed company-specific programs, such as a JP Morgan plan to lend $5 billion to nonprofit organizations and healthcare companies over the next year. Marshall & Ilsley Corp. (MI), said the $1.75 billion bailout infusion it received allowed the Wisconsin-based bank to temporarily stop foreclosing on homes, said Senior Vice President Richard Becker.

This “foreclosure moratorium” will run through the end of March, the bank announced in December.

No Real Answers

But no bank provided even the most basic accounting for the federal money. Some even said that the money couldn’t be tracked.

The bailout money “doesn’t have its own bucket,” said Bob Denham, a spokesman for North Carolina-based BB&T Corp. (BBT).

Denham said taxpayer money wasn’t used in BB&T’s recent purchase of a Florida insurance company. When asked how he could make such a statement – after stating that TARP money couldn’t be tracked – said BB&T would have made that deal even without the infusion.

Interestingly, a spokesman for BB&T told the Charleston (W.V.) Daily Mail newspaper just before Christmas that the bank doesn’t like the federal government’s $700 billion financial rescue plan – and actually didn’t want to participate – but took the $3.1 billion because competitors are participating and because the Treasury Department urged it to.

According to the newspaper, BB&T – the largest bank in West Virginia – has been asked how it justifies participating in the federal government’s Troubled Asset Relief Program, or TARP, in light of BB&T Chairman John A. Allison IV’s promotion of the late author Ayn Rand’s philosophy of free market capitalism.

The reticence banks displayed when it came to discussing their use of TARP money bordered on the absurd. Most banks wouldn’t even say why they were keeping the details secret.
“We’re not sharing any other details. We’re just not at this time,” Wendy Walker, a spokeswoman for Dallas-based Comerica Inc. (CMA), which received $2.25-billion from the government, told The AP.

One didn’t even want to say they wouldn’t say, the wire service reported.

Heine, the New York Mellon spokesman who said he wouldn’t share spending specifics, added: “I just would prefer if you wouldn’t say that we’re not going to discuss those details.”
Morgan Stanley (MS) offered to discuss the matter with reporters on condition of anonymity. When The AP refused, Morgan Stanley spokeswoman Carissa Ramirez sent the wire service an e-mail saying: “We are going to decline to comment on your story.”

Lawmakers say they want to tighten restrictions on the second half of the TARP money, the yet-to-be-released block worth $350 billion. U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the federal department is trying to build up its monitoring of bank spending.

“What we’ve been doing here is moving, I think, with lightning speed to put necessary programs in place, to develop them, implement them, and then we need to monitor them while we’re doing this,” Paulson said at a recent forum in New York. “So we’re building this organization as we’re going.”

But that may all be too late, says Garrett, the New Jersey Republican congressman. Indeed, it’s entirely possible that U.S. taxpayers will never get a clear answer on where hundreds of billions of dollars went.

[Editor's Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this "New Reality" will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as "The Golden Age of Wealth Creation." But Fitz-Gerald brings more than a realization - and an understanding - to the table, here. After a decade of work, he's also developed a new computerized trading model based on a mathematical concept known as "fractals." This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and this new market environment.]

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]]> http://www.moneymorning.com/2009/01/06/us-banks-federal-bailout/feed/ 38 Banks That Got $188 Billion in Bailout Money This Year Paid Out $1.6 Billion to Top Execs Last Year http://www.moneymorning.com/2008/12/23/executive-compensation-at-banks/ http://www.moneymorning.com/2008/12/23/executive-compensation-at-banks/#comments Tue, 23 Dec 2008 09:30:30 +0000 William Patalon III http://www.moneymorning.com/?p=3991 By William Patalon III
Executive Editor
Money Morning/The Money Map Report

The 116 banks that are receiving billions in taxpayer-provided bailout money this year actually paid out $1.6 billion in compensation and benefits to their top executives last year – even though the results at some of these institutions were so poor that they would soon have to turn to Washington for a government-engineered rescue.

The $1.6 billion was paid out to nearly 600 executives at the 116 banks that have so far accepted federal money to bolster their financial foundations, The Associated Press concluded after a review of U.S. securities filings. In addition to salary, the compensation included bonuses paid in both cash and stock. The benefits reaped by top executives included the use of company jets for personal purposes, personal chauffeurs, home-security services, country-club memberships and professional-wealth-management services, the news service said.

U.S. Rep. Barney Frank, D-Mass., a longtime critic of the fat pay packages given to U.S. executives, said the bonuses and perks tallied by The AP review amounted to a bribe paid “to get [CEOs] to do the jobs for which they are well paid in the first place.”

“Most of us sign on to do jobs and we do them best we can," Frank, chairman of the House Financial Services committee, told the news service. But "we’re told that some of the most highly paid people in executive positions are different. They need extra money to be motivated!"

The AP review is just the latest in a series of media investigations that have questioned the effectiveness of – and banks’ commitment to – the so-called “Troubled Assets Relief Program” (TARP), part of an overall $700 billion bailout plan that was originally unveiled in late September.

The plan was originally conceived to boost the strength of U.S. financial institutions by having the federal government purchase non-performing mortgages and other bad assets. In November, the Bush administration changed TARP’s objectives, instructing the U.S. Treasury Department to pump tax dollars directly into banks in a bid to prevent wholesale economic collapse.

Ideally, TARP was supposed to jumpstart bank-to-bank and bank-to-consumer lending, helping to unfreeze a credit crisis that may be the worst the U.S. economy has experienced since the Great Depression. But that hasn’t happened. Instead, as a Money Morning investigation has shown, banks are using the money to buy other banks in a dual effort to build market share for when the economy recovers, and to perhaps make themselves “too big to fail” in the interim, many experts say.

TARP did set restrictions on some executive compensation for participating banks, but it did not limit salaries and bonuses unless they had the effect of encouraging excessive risk to the institution. Banks were barred from presenting so-called “golden parachute” financial packages to departing or ousted executives and from deducting some executive pay for tax purposes.

The AP study found that the 116 banks received $188 billion in TARP money. The study also discovered that:

  • The average amount paid to each of the 116 banks’ top executives was $2.6 million in salary, bonuses and benefits.
  • Lloyd C. Blankfein, president and chief executive officer of Goldman Sachs Group Inc. (GS), took home nearly $54 million in compensation in 2007. The company’s top five executives received a total of $242 million. On Oct. 28, Goldman received $10 billion in federal bailout money. On Dec. 16, Goldman reported a $2.12 billion quarterly loss, its first since it went public back in 1999. So for 2008, Goldman’s seven top-paid execs will work for their base salaries of $600,000 each, but will forgo any cash and stock bonuses, the company said. Facing increasing concern by its own shareholders on executive payments, the company described its pay plan in a written report back in the spring as being essential to retain and motivate executives "whose efforts and judgments are vital to our continued success, by setting their compensation at appropriate and competitive levels." Goldman spokesman Ed Canaday would not elaborate beyond that written report.
  • Even where banks slashed pay, some executives still reaped a payday of seven – or even eight – figures. Richard D. Fairbank, the chairman of Capital One Financial Corp. (COF), which received $3.56 billion in bailout money back on Nov. 14, took a $1 million hit in compensation after his company had a disappointing year, but still got $17 million in stock options.
  • Merrill Lynch & Co. (MER) CEO John A. Thain topped all banking chieftains with more than $83 million in total earnings in 2007. Thain, a former chief operating officer for Goldman Sachs, took over the top job at Merrill in December 2007, avoiding the blame for a year in which Merrill lost $7.8 billion. Since he began work late in the year, he landed a $15 million signing bonus, $57,692 in salary, and an additional $68 million in stock options. Like Goldman, Merrill got $10 billion from taxpayers on Oct. 28. Merrill shareholders have approved its sale to Bank of America Corp. (BAC), though the value of the deal has plunged to $20 billion (from $50 billion at the time the deal was announced) as a result of the stock market decline. BofA will reportedly slash 35,000 jobs as a result of the combination.
  • JPMorgan Chase & Co. (JPM) CEO James Dimon ran up a $211,182 private jet travel tab last year, because his family lived in Chicago and he was commuting to New York. JP Morgan received $25 billion in bailout funds.
  • Bank of New York Mellon Corp., (BK) CEO Robert P. Kelly received $66,748 for financial services – on top of his $975,000 salary and $7.5 million bonus. His car and driver cost $178,879. Kelly also received $846,000 in relocation expenses, including help selling his home in Pittsburgh and purchasing one in Manhattan, the company said. At Goldman, the bill for leased cars and drivers ran as high as $233,000 per executive. The firm told its shareholders this year that financial counseling and chauffeurs are important because it grants executives more time to focus on their jobs.
  • Wells Fargo & Co. (WFC), which received $25 billion in bailout cash, gave its top executives as much as $20,000 each for personal financial planners.

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When asked to justify the personal use of company aircraft for some executives, banks cite security as a key reason. But U.S. Rep. Brad Sherman, D-Calif., questioned that rationale, saying executives visit many locations more vulnerable than the nation’s security-conscious commercial air terminals.

U.S. Rep. Brad Sherman, D-Calif., a member of the House Financial Services Committee, said excessive pay and perks undermines the development of good economic policies at banks and fuels an already problematic pay spiral in the U.S. financial sector. And that’s especially difficult for shareholders and taxpayers to accept when virtually the entire sector needs bailing out [Check out this related story on the growing U.S. CEO pay controversy that appears elsewhere in today’s issue of Money Morning].

Sherman told The AP that he wants the banks to appear before Congress, like the automakers did, and spell out their spending plans for the bailout money.

Said Sherman: "The tougher we are on the executives that come to Washington, the fewer will come for a bailout.”

[Editor’s Note: The ongoing financial crisis has changed the investing game forever, making uncertainty the norm and creating a whole set of new rules that will help determine who wins and who loses. Investors who ignore this “New Reality” will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive – they will thrive.

Money Morning Investment Director Keith Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as “The Golden Age of Wealth Creation.” But Fitz-Gerald brings more than a realization – and an understanding – to the table, here. After a decade of work, he’s also developed a new computerized trading model based on a mathematical concept known as “fractals.” This system allows him to predict price movements of broad indexes, or individual stocks, with a high degree of certainty. And it’s particularly well suited to the kind of market we’re all facing right now. Check out our latest report on these new rules, and this new market environment.]

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]]> http://www.moneymorning.com/2008/12/23/executive-compensation-at-banks/feed/ 19 Billions in U.S. Bank Rescue Funds are Fueling Buyouts Worldwide – Instead of Lending at Home http://www.moneymorning.com/2008/12/05/banking-buyouts/ http://www.moneymorning.com/2008/12/05/banking-buyouts/#comments Fri, 05 Dec 2008 10:30:14 +0000 William Patalon III http://www.moneymorning.com/?p=3618 [This is the newest installment in an ongoing news series that looks at the anticipated “aftershocks” of the global financial crisis, and the profit plays those events can trigger.]

By William Patalon III
Executive Editor
Money Morning/The Money Map Report

Bank of American Corp. (BAC), which is getting $15 billion from the U.S. government as part of the Treasury Department’s $250 billion “recapitalization” effort, is doubling its stake in state-owned China Construction Bank Corp., and will hold a 20% stake worth $24 billion in China’s second-largest lender when that deal is finalized.

PNC Financial Services Group Inc. (PNC), which will get $7.7 billion from Treasury’s Troubled Assets Relief Program (TARP), is using that cash infusion to help finance its $5.2 billion buyout of embattled National City Corp. (NCC).

And U.S. Bancorp (USB), which received a $6.6 billion capital infusion from that same rescue package, has acquired two California lenders – Downey Savings & Loan Association, F.A., a subsidiary of Downey Financial Corp. (DSL), and PFF Bank & Trust, a subsidiary of PFF Bancorp Inc. (OTC: PFFB). U.S. Bank agreed to assume the first $1.6 billion in losses from the two, but says anything beyond that amount is subject to a loss-sharing deal it struck with the Federal Deposit Insurance Corp. (FDIC).

While the Treasury Department’s investment of more than $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, buyout deals such as these three show that the recapitalization plan has actually had a much different result – one that’s left whipsawed U.S. investors and lawmakers alike feeling burned, an ongoing
Money Morning investigation continues to show.

Those billions have touched off a banking-sector version of “Let’s Make a Deal,” in which the biggest U.S. banks are using government money to get even bigger. While that’s admittedly removing the smaller, weaker banks from the market – a possible benefit to consumers and taxpayers alike – this trend is also having a detrimental effect: It’s reducing the competition that’s benefited consumers and kept the explosion in banking fees from being far worse than it already is.

This all happens without any of the economic benefits that an actual increase in lending would have had. And it does nothing to address the billions worth of illiquid securities that remain on (or off) banks’ balance sheets – as the recent Citigroup Inc. (C) imbroglio demonstrates.

In fact, Treasury’s TARP program has even managed to create a potentially illegal tax loophole that grants banks a tax-break windfall of as much as $140 billion. Lawmakers are furious – but possibly powerless, afraid that a full-scale assault on the tax change could cause already-done deals to unravel, in turn causing investor confidence to do the same.

One could even argue that since this first bailout (the $700 billion TARP initiative) has fueled takeovers – and not lending – the government had no choice but to roll out the more-recent $800 billion stimulus plan that was aimed at helping consumers and small businesses – a move that may spur lending and spending, but that still adds more debt to the already-sagging federal government balance sheet.

At the end of the day, these buyout deals are bad ones no matter how you evaluate them, says R. Shah Gilani, a retired hedge fund manager and expert on the U.S. credit crisis who is the editor of the Trigger Event Strategist, which identifies trading opportunities emanating from such financial-crisis “aftershocks” as this buyout binge.

“Why in the name of capitalism are taxpayers being fleeced by banks that are being given our money to grow their businesses with the further backstop of more of our money having to be thrown to the FDIC when they fail?” Gilani asked. “Consolidation does not mean that bad loans and illiquid securities are somehow merged out of existence. It means that they are being acquired under the premise that a larger, more consolidated depositor base will better be able to bear the weight of those bad assets. What in heaven’s name prevents depositors from exiting when the merged banks continue to experience massive losses and write-downs? The answer to that question would be … nothing.”

Lining Up for Deal Money

In launching TARP, U.S. Treasury Secretary Henry M. “Hank” Paulson Jr. said the government’s goal was to restore public confidence in the U.S. financial services sector – especially banks – so private investors would be willing to advance money to banks and banks, in turn, would be willing to lend.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said.

Whatever Treasury’s actual intent, the reality is that banks are already sniffing out buyout targets, while snuffing out lending – and the TARP money is the reason for both.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, says Louis Basenese, a mergers-and-acquisitions expert who is also the editor of The Takeover Trader newsletter. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Indeed, banking executives have been quite open about their expansionist plans during media interviews, or during conference calls related to quarterly earnings.

Take BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the government program. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans, The Wall Street Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

And BB&T is hardly alone. Zions Bancorporation (ZION), a Salt Lake City-based bank that’s been squeezed by some bad real-estate loans, recently said it would be getting $1.4 billion in federal money. CEO Harris H. Simmons said the infusion would enable Zions to boost “prudent” lending and keep paying its dividend – albeit at a reduced rate.

Sounds good, right? Not so fast. During a conference call about earnings, Zions Chief Financial Officer Doyle L. Arnold said any lending increase wouldn’t be dramatic. Besides, Arnold said, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

With all the liquidity the world’s governments and central banks have injected into the global financial system, the pace of worldwide deal making is already accelerating. Global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer for that to happen this year than it did a year ago.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial-sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $250 billion in TARP money, or other deals that Paulson & Co. are helping engineer – JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ), for instance.

If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climates – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”

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There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors.

The afore-mentioned stealthy shift in the U.S. Tax Code actually gives big U.S. banks a potential windfall of as much as $140 billion, says Gilani, the credit crisis expert and Trigger Event Strategist editor. What does this tax-change do? By acquiring a failed bank whose only real value is the losses on its books, the successful suitor would basically then be able to use the acquired bank’s losses to offset its own gains and thus avoid paying taxes.

“While everyone was panicking, the Treasury Department slipped through a ruling that allows banks who acquire other banks to fully write-off all the acquired bank’s bad debts,” Gilani says. “For 22 years, the law was such that if you were to buy a company that had losses, say, of  $1 billion, you couldn’t just take that loss against your own $1 billion profit and tell Uncle Sam, ‘Gee, now my loss offsets my profit, so I don’t have any profit, and I don’t owe you any tax.’ It was a recipe for tax evasion that demanded an appropriate law that only allows limited write-offs over an extended period of years.”

Given these incentives, who will be doing the buying? Clearly, the biggest U.S.-based banks will be the main hunters. But The Takeover Trader’s Basenese says that even foreign banks will be on the prowl for cheap U.S. banking assets.

Basenese also believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders.” Each will use TARP funds to help accelerate its transformation from an investment bank into a bank holding company. The changeover will require each company to build up a big base of deposits. And the best way to do that is to buy other banks, Basenese says.

 “One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

Not everyone agrees with that assessment. Investors who play the merger game correctly will do well. But the game itself won’t necessarily whip the industry into championship form, Gilani says.

“While consolidation, instead of outright collapses, in the banking industry may serve to relieve the FDIC of its burden to make good on failed banks, it in no way guarantees fewer failures,” he said. “In fact, it may only serve to guarantee, in some cases, even larger failures.”

[Editor’s Note: Uncertainty has been the watchword for much of this year, as the global financial crisis continues to whipsaw the U.S. financial markets in a manner that hasn’t been seen since the Great Depression. It’s almost enough to make you surrender. But what if you knew, ahead of time, what marketplace changes to expect? Then you’d be in the driver’s seat – right? You’d know what to anticipate, could craft a profit strategy to follow, and could then just sit back, watching and waiting – and finally profiting from – the very marketplace events you anticipated.

R. Shah Gilani – a retired hedge fund manager and a nationally known expert on the U.S. credit crisis – has predicted five key financial crisis “aftershocks” that he says will create substantial profit opportunities for investors who know just what these aftershocks are, and how to play them. In the Trigger Event Strategist, Gilani describes how investors can use these aftershocks, or “trigger events,” as a gateway to massive profits. To find out all about these five financial-crisis aftershocks, and about the trigger-event profit strategy they feed into, check out our latest report.]

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]]> http://www.moneymorning.com/2008/12/05/banking-buyouts/feed/ 26 Billions in Bank Rescue Funds are Fueling Buyout Deals, and not the Increase in Loans That Would Help Ease the Financial Crisis http://www.moneymorning.com/2008/10/30/banking-system-bailout-money/ http://www.moneymorning.com/2008/10/30/banking-system-bailout-money/#comments Thu, 30 Oct 2008 09:00:34 +0000 William Patalon III http://www.moneymorning.com/?p=2962 By William Patalon III
Executive Editor
Money Morning/The Money Map Report

While the U.S. government’s plan to invest $250 billion in U.S. financial institutions has been billed as a strategy that will bolster the health of the banking system and also jump-start lending, the recapitalization plan is likely to have a secondary effect – one that whipsawed U.S. taxpayers won’t be very happy to learn about.

Those billions are a virtual lock to set off a merger tsunami in which the biggest banks use taxpayer money to get bigger – admittedly removing the smaller, weaker banks from the market, but ultimately also reducing the competition that benefited consumers and kept the explosion in banking fees from being far worse than it already is.

One last point: Experts say that takeovers financed by the government infusions are likely to have less of a beneficial impact on the economy than an actual increase in lending levels would have. And because so much of this money will be used for buyouts, the reduction in the benchmark Federal Funds target rate announced yesterday (Wednesday) by central bank policymakers will likely do very little to actually spur lending, experts say.

Fueled by this taxpayer-supplied capital, the wave of consolidation deals is “absolutely” going to accelerate, Louis Basenese, a mergers-and-acquisitions (M&A) expert and the editor of The Takeover Trader newsletter, told Money Morning. “When it comes to M&A, there’s always a pronounced ‘domino effect.’ Consolidation breeds more consolidation as industry leaders conclude they have to keep acquiring in order to remain competitive.”

Lining Up for Deal Money

Late last week, the Pittsburgh-based PNC Financial Services Group Inc. (PNC) became the first U.S. bank to make use of the government’s Troubled Assets Relief Program (TARP), announcing plans to purchase the beleaguered National City Corp. (NCC) for $5.2 billion. To help finance the purchase, PNC will sell $7.7 billion worth of preferred stock and warrants to the U.S. Treasury Department, as part of that the Treasury’s bank-recapitalization program.

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With regards to the recapitalization program, U.S. Treasury Secretary Henry M. “Hank” Paulson recently said, yet again, that the government’s goal was to restore the public’s confidence in the U.S. financial services sector – especially banks – so that private investors would be willing to advance money to banks and banks, in turn, would be willing to lend, The Wall Street Journal reported.

“Our purpose is to increase the confidence of our banks, so that they will deploy, not hoard, the capital,” Paulson said last week.

Whatever the Treasury Department’s actual intent, the reality is that banks are already sniffing out buyout targets, thanks to the TARP money. Indeed, they’ve been quite open about it during conference calls related to quarterly earnings, or in media interviews.

Take  BB&T Corp. (BBT). During a conference call that dealt with the bank’s third-quarter results, Chief Executive Officer John A. Allison IV said the Winston-Salem, N.C.-based bank “will probably participate” in the bailout program, accepting federal infusions. Allison didn’t say whether the federal money would induce BB&T to boost its lending. But he did say the bank would likely accept the money in order to finance its expansion plans,
The Journal said.

“We think that there are going to be some acquisition opportunities – either now or in the near future – and this is a relatively inexpensive way to raise capital [to pay the buyout bill],” Allison said during the conference call.

He’s certainly brazen. But he’s not alone. For instance, there’s also Zions Bancorporation (ZION), a Salt Lake City-based bank that’s feeling financial crisis pain due to losses from bad real-estate loans. On Tuesday, Zions announced it would be receiving $1.4 billion in capital from the Treasury Department – cash it would use to boost lending and keep paying a dividend, albeit at a reduced rate.

“As a strong regional bank with a major focus on financing small and middle-market businesses, we are pleased to have this additional capital to better serve the lending needs of customers throughout the Western United States,” Chairman and CEO Harris H. Simmons said. “We expect to deploy this new capital in the form of prudent lending in the markets we serve. This new lending will be good for our country’s economy, our customers and our company.”

However, during a recent earnings conference call, Zions Chief Financial Officer Doyle L. Arnold said that while new capital might allow it to boost lending, the increase wouldn’t necessarily be a dramatic one, The Journal said. Besides, Zions will also use the money “to take advantage of what we would expect will be some acquisition opportunities, including some very low risk FDIC-assisted transactions in the next several quarters.”

Buyouts Already Accelerating

With all the liquidity the world’s governments and central banks have injected into the global financial system, the global game of “Let’s Make a Deal” has already become a reality.

Indeed, as WSJ.com reported a week ago, global deal volume for the year has already passed the $3 trillion level – only the fifth time that’s happened, although it took about three months longer this year than it did a year ago.

This time around, the new kings of deal making aren’t such highly compensated “Masters of the Universe” as The Blackstone Group (BX) LP’s Stephen A. Schwarzman, or KKR & Co. LP’s Henry R. Kravis, The Journal’s blog reported. Instead, they are the much-lower-paid – but decidedly more powerful – civil servants of the U.S. and U.K. governments: Treasury Secretary Paulson, U.S. Federal Reserve Chairman Ben S. Bernanke, U.K. Prime Minister Gordon Brown and Chancellor of the Exchequer Alistair Darling, the Web site stated.

At a time when the global financial crisis – and the accompanying drop-off in available deal capital (either equity or credit) – has caused about $150 billion in already-announced deals to be yanked off the table since Sept. 1, liquidity from the U.S. and U.K. governments has ignited record levels of financial sector deal making.

According to Dealogic, government investments in financial institutions has reached $76 billion this year – eight times as much as in all of 2007, which was the previous record year. And that total doesn’t include the $125 billion the U.S. government is investing in the large U.S. banks as part of its rescue package, similar to the amount it may invest in smaller banks, or other deals that the feds are helping engineer [JPMorgan Chase & Co.’s (JPM) buyouts of The Bear Stearns Cos. and Washington Mutual Inc. (WAMUQ) are two such examples).]  [For a better understanding of just how dramatic this upswing in deal making has been, check out the accompanying chart, “Packing a Punch.”]

When the dust settles on this buyout boom, we may well have a record in hand that’s even less beatable than Joe DiMaggio’s 56-game hitting streak. That’s because with the Fed, the U.K. and other governments and central banks doling out the capital, there’s no financial-sector equivalent of Kenny Keltner to bring this buyout fest to an abrupt close.

That means that the “hits” – the buyout deals – will just keep coming.

If You Can’t Beat ‘em… Buy ‘em?

When it comes to identifying possible buyout targets, M&A experts such as The Takeover Trader’s Basenese say there are some very clear frontrunners.

“I’d put regional banks with solid footprints in the Southeast high on the list, and for two reasons,” Basenese said. “First, demographics point to stronger growth [in this region] as retirees migrate to warmer climes – and bring their assets along for the trip. Plus, the Southeast is largely un-penetrated by large national banks. An acquisition of a regional bank like SunTrust Banks Inc. (STI) would provide a distinct competitive advantage.”

With a lot of bigger deals already in the books, many analysts agree with Basenese’s assessment, and are now watching to see if regional banks will  succumb next to dealmakers’ bids. Indeed, earlier this month, Matthew Schultheis, a senior analyst at Boenning & Scattergood Inc., told a reporter that he expected this to be a “trend that continues at least through the first half of ’09, unless some of these [companies] stabilize. It could even last beyond that.”

There’s a very good reason that smaller players may be next: Big banks and small banks have the easiest times – relatively speaking, of course – of raising capital. It’s toughest for the regional players. Big banks can tap into the global financial markets for cash, while the very small – and typically, highly local – banks can raise money from local investors. Regional banks have a tougher time, says Doug Landy, a partner in the U.S. banking practice of the law firm of Allen & Overy.

“A regional bank lacks both the international access and the local character,” Landy told The Associated Press.

Several big regional banks at least acknowledged the possibility of buyouts on recent earnings conference calls, The Journal reported.

The Cincinnati-based Fifth Third Bancorp (FITB) talked about raising $1 billion in capital by selling non-core assets. Bank executives said that a difficult 2009 is “a view that continues to seem likely to us.” They confirmed discussions with a number of possible investors or asset-purchasers, and said they were “confident that an attractive transaction would be available to us as the opportunity and timing are appropriate, including the ability to generate capital in excess of our original expectations.” Earlier this week, however, it announced that it was getting $3.4 billion in TARP funds, the Cleveland Plain Dealer newspaper reported.

Clearly, the bank isn’t thinking in terms of an outright sale, or at least doesn’t admit to that publicly.

One other potential buyout candidate includes Huntington Bancshares Inc. (HBAN), a Columbus, Ohio-based regional that just received a $1.4 billion federal infusion of its own, the Plain Dealer said.

Who will be doing the buying? The Takeover Trader’s Basenese tells investors to “also look for banks with foreign ownership” to be on the prowl for acquisitions.

“Just like Spain’s Banco Santander SA (ADR: STD) [which earlier this month said it would buy the 76% of Philadelphia-based Sovereign Bancorp Inc. (SOV) it didn’t already own for about $1.9 billion], foreign-based banks will likely jump at the opportunity to expand their U.S. presence at a discount,” Basenese said. “M&T Bank Corp. (MTB) fits the bill, as Allied Irish Banks PLC (ADR: AIB) already owns a 24% stake.”

Then there’s the Minneapolis-based U.S. Bancorp (USB), which is one of the few regionals still in a strong position. CEO Richard K. Davis has reportedly rejected the idea of buying large banks that are already in trouble and was asked if the new rescue plans might change his mind.

“It makes it a little easier to do those things,” Davis told The Journal. “But first and foremost, whether the capital is less expensive or the opportunity that TARP is present, we’ll continue to look at deals on an accretive basis where they make sense and where they would fit into this company’s long-term structure. So it would definitely make it more attractive, and so some of our positioning and our targets look more attractive and our valuation is easier now.”

There’s also another point to consider, Davis said.

“To the extent that [a deal] has to hit all of the normal bellwether marks and the expectations we have for the near term and long term, it still has to be a good deal. So it doesn’t really change our philosophy, but it does make it easier to find our way to partnerships that might be more accretive sooner,” he said.

Basenese, the M&A expert, believes that Goldman Sachs Group Inc. (GS) and Morgan Stanley (MS) will be “big spenders,” using the TARP funds to help accelerate their conversions from an investment bank to a bank holding company – a transition that will require them to bulk up their deposit bases. And the quickest way to do that is to buy other banks, Basenese says.

“One thing [the wave of deals] does is to restore confidence in the sector,” Basenese said. “It will go a long way in convincing CEOs that it’s safe to use excess capital to fund acquisitions, and to grow, instead of using it to defend against a proverbial run on the bank.”

[Editor’s Notes: For more information about The Takeover Trader, check out this new report. Also, make sure to read Money Morning next week, when retired hedge fund manager and Contributing Editor Shah Gilani gives readers an inside look at how the capital infusions and the merger deals they finance are totally subverting what the rescue plan should have been. Gilani’s series on the credit crisis has been read by more than a quarter of a million people on the
Money Morning Web site alone.]

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]]> http://www.moneymorning.com/2008/10/30/banking-system-bailout-money/feed/ 42 Foreign Bondholders – and not the U.S. Mortgage Market – Drove the Fannie/Freddie Bailout http://www.moneymorning.com/2008/09/11/fnm/ http://www.moneymorning.com/2008/09/11/fnm/#comments Thu, 11 Sep 2008 09:50:50 +0000 William Patalon III http://www.moneymorning.com/2008/09/11/fnm/ By William Patalon III
Executive Editor
Money Morning/The Money Map Report

For anyone who still doubted the growing global influence of such emerging powerhouses as China, consider this: The U.S. government’s decision to take control of foundering mortgage giants Fannie Mae (FNM) and Freddie Mac (FRE) was driven not by worries about the fading U.S. housing market, but by concerns that foreign central banks in China, Japan, Europe, the Middle East and Russia might stop buying our bonds.

As the bailout announced Sunday is currently structured, more than $1.3 trillion worth of Fannie Mae and Freddie Mac debt currently held by the central banks and other investors in those regions will be guaranteed by the U.S. government – even if one or both of the two government-sponsored enterprises (GSEs) were to fail. That means that U.S. taxpayers – government parlance for you and me – will ultimately foot a big part of the bill for making sure those foreign bondholders are “made whole.”

The government apparently felt it had no choice. As speculation about the possible collapse of the two firms spiraled higher in recent weeks, central banks, sovereign wealth funds and foreign investors throughout the world were reportedly threatening to halt their purchases of Fannie and Freddie debt, grousing that the mounting risk was making them leery of buying any more bonds. And that would make it virtually impossible for the two mortgage operators – and by extension, the U.S. mortgage market – to function effectively.

“It was the mounting evidence that central banks, sovereign wealth funds, and other global investors were growing [increasingly] reluctant to invest in the debt that was the catalyst for the Treasury Department’s actions,” Mark Zandi, chief economist for Moody’s/Economy.com in West Chester, Pa., wrote in a recent research report. “Fannie and Freddie debt is now effectively U.S. Treasury debt, ensuring that holders will remain whole.”

Fannie and Freddie together own or guarantee about half of the country’s $12 trillion in mortgage debt. On Sunday, however, Federal Housing Finance Agency Director James Lockhart said the two companies’ market share of newly issued mortgages had actually exceeded 80% earlier this year, before falling off recently.

And yet, that wasn’t the mortgage market itself that forced the hand of U.S. Treasury Secretary Henry M. “Hank” Paulson: It was the $5.2 trillion in so-called Fannie and Freddie “agency debt” – of which more than $1.3 trillion, or about 25%, was held by foreign investors. Total U.S. agency debt of all types was said to be slightly more than $1.5 trillion.

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Without the bailout, China’s financial position may have been damaged: Of that country’s $1.8 trillion in foreign currency reserves, as much as 70% is held in dollar-denominated assets.

With $376 billion in GSE debt, China was also the top holder of the bonds issued by Fannie Mae and Freddie Mac.

If China were to lose confidence in the U.S. currency – dumping the dollar – it’s hard to say with certainty just how bad things could get. Should foreign investors rampantly discard the dollar, the greenback would plunge against other currencies.

And that would be highly inflationary, translating into what would effectively be big price increases on such key imports as oil, steel, electronics, and other wares.

That could finally force the U.S. Federal Reserve to raise interest rates – a move the central bank has been trying to avoid, due to concerns that markedly higher rates would shove the U.S. economy into a deep recession.

So it’s not surprising that the Treasury and Fed took very seriously any concerns about the Fannie-and-Freddie debt situation that were expressed by central bankers from around the world.

In an interview with The Washington Times, Council on Foreign Relations Geo-Economics Fellow Brad Setser said the federal bailout proposal is a remarkable development.

“I suspect this is the first case where foreign central banks exercised their leverage as creditors to push the U.S. government to make a policy decision that protected their interests,” said Setser, who has tracked rising foreign investment in Fannie, Freddie and other debt issued by U.S. agencies.

It’s certainly an odd development: The bailout takes great pains to protect foreign investors – even though common shareholders will be wiped out.

However, the consequences of a default on the debt “would have been devastating,” former Treasury Secretary John Snow – Paulson’s predecessor – told the Washington-based daily newspaper.

“There is [now] relief around the world that the U.S. government is standing behind this paper (debt),” Snow told The Times.

Two major China-based banks that together held $8 billion in Fannie and Freddie debt early this week lauded the U.S. government’s decision to back the debt issued by the two mortgage firms.

“We think this is good for Fannie and Freddie because the U.S. government used to be ‘invisibly’ guaranteeing them, but now it is taking explicit action to [tacitly] guarantee them,” Wang Zhaowen, a spokesman for the Bank of China Ltd., told CNNMoney.com.

Tine Olsen, an economist with Moody’s/Economy.com, wrote in a recent research note that because “the debt issued by Fannie Mae and Freddie Mac is now essentially backed by the U.S. Treasury, holders no longer need to fear losing their investments. A great sigh of relief will have reverberated through the markets in Asia when the U.S. Treasury injection of capital was announced.”

Such views of approval are by no means universal, however. Capital to finance the bailout will have to come from somewhere, and that somewhere is from taxpayers’ wallets.

Estimates of the bailout’s cost to taxpayers range from $100 billion to $300 billion. John Hussman, a fund manager and president of Hussman Econometrics Advisors – and a financial-sector expert I often cited as a news story source during my years as a business journalist – this week said that $250 billion was “a fairly conservative estimate.”

The problem, of course, is that the U.S. government has established what could be a costly and ill-advised precedent – the bailout. First it was The Bear Stearns Cos., now it’s Fannie Mae and Freddie Mac and tomorrow it could be Lehman Brothers Holdings Inc. (LEH).

And it’s not just the direct costs of the bailouts that are a cause for concern. By backing the $5.2 trillion in Fannie/Freddie indebtedness, the United States has essentially doubled its public debt load.

That’s not just an idle worry, either. Once privatized, even slimmed-down versions of Fannie Mae and Freddie Mac won’t be anywhere near as easy to package and sell-off as was busted investment bank Bear Stearns, which was bought out by JPMorgan Chase & Co. (JPM).

Some have actually warned that the U.S. government could end up being in the mortgage business – literally – for years.

The other option would have been to let Fannie and Freddie fail and to take the economic pain now – instead of spacing it out over a period of years, or even a decade. In a recent interview with Money Morning, investing guru Jim Rogers warned that the U.S. government has no business being in the bailout business.

FreedomWorks, a conservative non-profit organization that’s based in Washington, characterized the Fannie Mae/Freddie Mac bailout as a deal by politicians that’s nothing more than a transfer of “possibly hundreds of billions of U.S. tax dollars to sophisticated investors and governments overseas.”

According to FreedomWorks President Matt Kibbe, “the prospectus for every GSE bond clearly states that it is not backed by the United States government. That’s why investors holding agency bonds already receive a significant risk premium over Treasuries … a bailout of GSE bondholders would be perhaps the greatest taxpayer rip-off in American history. It is bad economics and you can be sure it is terrible politics.”

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]]> http://www.moneymorning.com/2008/09/11/fnm/feed/ 47 Jim Rogers: “Nowhere does it say you’re supposed to bail out investment banks” http://www.moneymorning.com/2008/03/24/jim-rogers-nowhere-does-it-say-youre-supposed-to-bail-out-investment-banks/ http://www.moneymorning.com/2008/03/24/jim-rogers-nowhere-does-it-say-youre-supposed-to-bail-out-investment-banks/#comments Mon, 24 Mar 2008 21:44:39 +0000 Keith Fitz-Gerald http://www.moneymorning.com/2008/03/24/jim-rogers-nowhere-does-it-say-youre-supposed-to-bail-out-investment-banks/ By Keith Fitz-Gerald
Investment Director
Money Morning/The Money Map Report

A year ago, a share of The Bear Stearns Cos. Inc. (BSC) would have cost you $150.

Yesterday, the shares closed at $11.26 – and that’s after they soared 90% from the opening bell price on news that JPMorgan Chase & Co. (JPM) had boosted its bid.

The "why" has already been discussed, but no one seems to be concerned about the "how" right now, particularly where white knight JPMorgan and the U.S. Federal Reserve are concerned.

On the surface, this tie-up is being billed as a bailout to avert another crisis on Wall Street. However, upon closer examination I think it’s more evidence that the Fed suffers from "attention to deficits disorder."

I put this very question to Jim Rogers during an exclusive interview last Saturday in Singapore.

Mr. Rogers stated: "I’ve read the Federal Reserve Act. Nowhere in it does it say you’re supposed to bail out Wall Street. Their mandate was to have a sound currency and it was later expanded to help employment. But nowhere does it say you’re supposed to bail out investment banks."

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Then, as Rogers is well noted for doing, he put it more bluntly: "You don’t see a bunch of 29-year old cotton farmers driving around in Maseratis and flying in private planes to exotic places."

He continued, "You see a lot of guys on Wall Street doing that and the idea that we’re supposed to bail them out is ludicrous. I don’t see any of those guys sending their bonus checks back. Huge amounts of money were made in the debt market we know now incorrectly, if not fraudulently… and now we’re supposed to bail them out?"

"It’s insanity," Rogers said.

(I’ll have Mr. Roger’s complete comments on this and a number of related global investing topics in an upcoming installment series so stay tuned.)

Here at Money Morning, we couldn’t agree more with Mr. Rogers, which is why we think all is not what it seems with the Bear Stearns/JPMorgan deal, any more than we did with the Bank of America Corp.’s (BAC) buyout of troubled mortgage lender Countrywide Financial Corp. (CFC).

So, let’s tally up the winners and the losers.

JPMorgan didn’t get Bear for the original paltry $236 million offer, but $1 billion isn’t bad. Especially when you consider JPMorgan will get complete access to Bear’s operations, including the legendary prime brokerage and clearing operations, which are regarded as crown jewels. JPMorgan will also get Bear’s brand spanking new Madison Avenue office tower that could be valued north of $1 billion on its own.

Meanwhile, as part of the deal the Fed ponies up another $30 billion to guarantee Bear’s more "illiquid assets" (read: toxic sludge) – so JPMorgan doesn’t have to trouble itself with actually running a failing business.

Which begs the question: Why can’t somebody do that for millions of Americans who are having trouble making ends meet right now as a result of all this?

The bottom line is that there’s nothing "Federal" about this crisis today any more than there was a year ago when we began sounding the alarm bells and taking a more defensive posture.

Even though it’s being spun as a good thing, by stepping into the fray yet again, the Fed is involuntarily forcing you and me and every other taxpayer to act as guarantors.

And then there are the insiders.

The former CEO Mismanagement Club, including members Chuck Prince, Stanley O’Neil and Angelo Mozilo are walking away with hundreds of millions, after almost single-handedly destroying an entire industry and perhaps even wrecking our economy in the process.

And what about the timing?

The Fed – Bear Stearns – JPMorgan triad came together literally over the weekend. And you don’t just crank out a deal like that overnight, no matter what anybody says about burning the "midnight oil."

There are many who will argue that saving Bear Stearns staves off a wave of defaults from other interconnected borrowers and lenders. That it somehow gives the system "breathing room to pay off Bear’s debts gradually" as Business Week’s Matthew Goldstein so eloquently put it.

I’ll concede that it might… if we are really lucky.

My concern, however, is that the cost of trying to prevent a recession will ultimately cost us more than simply enduring one.

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