Rift at Fed Over AIG Bailout

A Rift at the Fed Over the Bailout of A.I.G.
By LOUISE STORY and GRETCHEN MORGENSON


New documents submitted to Congressional investigators examining the 2008 rescue of the American International Group show that officials at the Federal Reserve were deeply divided over the structure of the bailout and its long-term implications. At the same time, regulators had to contend with major banks that were A.I.G.’s trading partners and were unwilling to accept a discount from the government when closing out the contracts the banks had struck with the insurance giant.


Ultimately, the government decided to make the banks whole on the contracts, a decision that the documents say was approved by Timothy F. Geithner, the Treasury secretary who, at the time, was president of the Federal Reserve Bank of New York. The Fed’s decision to pay A.I.G.’s trading partners in full on tens of billions of dollars in contracts has been controversial because many analysts say they believe the government could have negotiated a price for a fraction of that amount, reducing taxpayer funds used in the rescue. Similar contracts were being settled at heavy discounts in other deals where the government was not involved.

Not good negotiating, for the most important deals. Such incidents increases one's skepticism of government involvement in anything important.


Last Thursday, Thomas C. Baxter Jr., the New York Fed’s general counsel, told Congressional investigators of his frustration with the banks, according to committee staff notes obtained by The New York Times. “We asked for concessions, and they said no,” he said, according to the notes. “I wonder why we even bothered.” Mr. Baxter also said that Mr. Geithner verbally approved the decision to pay full price to the banks. A spokesman for the Treasury Department noted that Mr. Geithner’s decision to give the banks 100 cents on the dollar in the A.I.G. bailout was previously discussed in a report that the Treasury’s inspector general released last fall.

Why bother? Why not push the banks to accept?

According to a 13-page slide show prepared by the asset management firm BlackRock that was submitted to the committee, Merrill Lynch and a French bank, Société Générale, were “resistant to deep concessions” on their A.I.G. contracts. Goldman Sachs, another major trading partner, was willing to accept only “a small concession” on its contracts. The slide show is among more than 250,000 pages of documents provided to the House Committee on Oversight and Government Reform in preparation for a hearing next week on the Fed’s role in the A.I.G. bailout. The committee, which is led by Edolphus Towns, Democrat of New York, has been interviewing some of the people who will testify, including Mr. Baxter.

In October 2008, one month after the A.I.G. rescue was initiated, the New York Fed encountered heavy objections to its plans for structuring the bailout from its overseers at the Federal Reserve Board in Washington. The New York Fed had recommended creating two vehicles — known as Maiden Lane 2 and Maiden Lane 3 — to house securities taken in as part of the A.I.G. rescue. A similar vehicle had been created to hold the assets guaranteed by the government in the Bear Stearns collapse.


In an Oct. 15 e-mail message to Mr. Geithner, Sarah Dahlgren, the New York Fed official leading the A.I.G. effort, wrote, “Board staff again reiterated that they didn’t think that the Governors (unnamed) would go for ML2 or ML3.” Later in the same e-mail message, Ms. Dahlgren noted, “The Governors have cited the Bear Stearns deal as a one-off deal that was done on the understanding it wouldn’t be done again (so ML2 and ML3 aren’t well-received...)”


The e-mail message also summarized the board’s questions about the bailout. Atop the list: “What does any of this buy us?” Plenty, said the Treasury Department in a statement on Friday evening. “Those investments have turned out to be very sensible, and the fund at the center of the controversy is on track to return every dollar to taxpayers, and may well yield a profit,” said Andrew Williams, a Treasury spokesman.


The Fed was advised that the banks had valued the contracts in question at severely depressed levels. The contracts were tied to bundles of mortgage bonds known as collateralized debt obligations, or C.D.O.’s. A senior New York Fed official wrote in an Oct. 22 e-mail message to Mr. Geithner that there was a “discrepancy” between “what our advisers are saying these C.D.O.’s are worth and where the firms have them marked.”


Some of the banks seemed to recognize that the mortgage bundles might wind up being worth more than they were claiming at the time. According to BlackRock’s slide show, Goldman and Société Générale were willing to tear up some of the contracts with A.I.G. if they were allowed to keep the underlying C.D.O.’s, indicating that both banks may have thought they could increase in value. The Fed instead decided to take those C.D.O.’s onto its own books and pay the banks to extinguish the contracts.

Show Me the Money

Who decides what a trader is worth: His bosses? The government? The public? Inside the tug-of-war over pay at AIG, where compensation has become a proxy for a whole lot more.


AIG was saved by the federal government. Of course, it was saved for the benefit of the at-large economy and not for its own sake, but the fact remains that the government saved it. Despite that fact, executives and board members chafe at the pay restrictions imposed by Kenneth Feinberg, federal pay czar. Robert Benmosche, whom I met when he joined Metlife, is now CEO of AIG. He is chafing at Feinberg's rules, and perhaps his very presence.

Feinberg is familiar with emotionally charged disputes about money. As the special master of the 9/11 victim fund, Feinberg ruled on the dispensation of $7 billion to victims’ families. “The 9/11 fund was much more emotional and tragic,” he said. “There you’re dealing with dead bodies and burn victims and families that had their husbands and wives and sons incinerated. No, there’s no comparison.”

But in other ways, there are parallels. His true power as pay czar is not only to set specific compensation guidelines for the seven largest firms still using TARP money but also to inform Masters of the Universe what the taxpayers ultimately think they’re worth. It is a painful ego check many of them can’t stomach. “This is about money, but don’t pooh-pooh money,” he says. “In our society, money is a surrogate for worth, integrity, self-respect, power, and so there’s a lot of emotion associated with this. That’s a very important point. Contrary to what many people think, it’s not just about compensation and how much will be earned. It’s not just dollars and cents.”


Benmosche demanded $10.5 million as his compensation. Money matters greatly to him, in pretty much the way Feinberg defines it above.

On his first official day on the job in August he told the FP traders, “I think you are all worth every dime that you’re owed in these plans,” he said, according to a person present. “If it had been my son or daughter and they had come home and told me the story of what was going on here, I would have been outraged.”

He does not understand the populist revulsion against his ilk.

Next he took on Attorney General Andrew Cuomo, who’d threatened to release names of FP employees who received retention payments. “What [Cuomo] did is so unbelievably wrong,” Benmosche told a group of insurance workers, according to Bloomberg News. “He doesn’t deserve to be in government, and he surely shouldn’t be the attorney general of the State of New York. What he did is criminal. You don’t create lynch mobs to go out to people’s homes and do the things he did.”

Arrogance drips off his words and attitude. Arrogance was obvious when I met him, and that goes back a dozen years.

The AIG board was not happy that Benmosche was potentially inciting a political fight with Washington. A week after his Cuomo remarks, Benmosche apologized to the directors at a board dinner in New York, telling them he had no idea his comments were being recorded. Since then, AIG has muzzled Benmosche and declined to make him available for this piece.

He apologized for being recorded, not for saying what he said.

If anything, the political stakes in the current struggle are even greater than financial ones. In the year since the government committed more than a trillion dollars of taxpayer money to rescue the financial system, AIG remains the proxy for everything the public hates about the bailout and Wall Street’s culture of entitlement and greed. Benmosche’s insistence that FP’s traders receive retention contracts strikes many as outrageous given the billions spent to fix a mess created by traders at the same desks. And AIG suffers from the Goldman Sachs backlash, because Goldman, at the peak of the crisis, when Hank Paulson was Treasury secretary and Geithner was head of the New York Fed, was paid 100 cents on the dollar for its credit-default swap contracts, $13 billion, money it would have lost had the government allowed the firm to go under. A year later, Goldman is set to pay as much as $22 billion in bonuses. For Geithner, everything goes back to Goldman, the original sin. “Everyone is watching Goldman,” one person close to Geithner says. “The pay problem is really a Goldman problem.”

Speaking of arrogance. Blankfein apologized and Goldman donated chunks of money purportedly to help small businesses and others, but filled with empty promises and large tax deductions.

Senior AIG executives contend that an exodus of traders over punitively reduced contracts risks blowing up the $1.1 trillion derivatives portfolio still left to be unwound, destroying the taxpayers’ $180 billion investment in the company and potentially dragging the fragile economic recovery back into the abyss.

That would be bad.

Feinberg, along with everyone in the Obama White House, recognizes the risks. “I’m concerned about that. I don’t want to see that happen.” But privately, Feinberg has indicated to Treasury officials that he’s not sure the FP employees are as crucial as they say. When the crisis erupted last fall, AIG hired McKinsey and Blackstone to study the portfolio and devise a strategy to wind down the trades. If a mass of FP traders leave, advisers might be able to stabilize the positions in time to bring in new traders. “You could triage it,” a former senior FP trader told me. Essentially, as long as someone managed risks to interest-rate and foreign- exchange moves, traders could be hired to continue the unwind.

Is anyone indispensable?

Inside AIG, senior executives came to believe that Treasury was manipulating the debate to deflect populist rage from blowing back on the government’s participation in the bailout.

Congress is good at grandstanding and pomposity, and the amount of demagoguery has been reaching very high levels. And surely Treasury is trying to cover its ass. For AIGers to charge bad faith is incredibly pompous and hypocritical.

Of course, there has been a lot of posturing by Andrew Cuomo and populist groups, fanning the ire of people outraged by remaining pockets of affluence seeming immune to the wretchedness of the recession and the financial crisis.

Inside FP, conspiracy theories have taken hold. Depending on who you talk to, there’s a feeling that Feinberg is a political puppet for the socialist politics of the Obama White House. “Who is truly controlling Feinberg? Our understanding is that it’s Rahm Emanuel,” one FP executive says. Another, more bizarre idea has it that Michelle Obama and Valerie Jarrett have convinced the president to redistribute wealth and make an example out of AIG. “Does Michelle Obama have a social agenda?” one FP employee asked.

Anyone mention the grassy knoll?

It’s the moral-hazard problem writ on a truly gigantic scale: Goldman, Morgan, Merrill, et al., took risks—for what was dealing with AIG but a risk—and didn’t ultimately have to pay any of the costs. AIG should not be a place to get rich, after all that’s happened. But the AIG FP traders are right that, in some sense, they’re stand-ins for the sins of an entire class.

Feinberg told me he doesn’t see binary choices. His job is to weigh competing interests and “come up with a fair number.” The problem is that fairness from a Wall Street point of view is very different from how most Americans think of the word. Part of Feinberg’s job is to bring them into harmony. “The companies will stay in business, they’ll thrive, and the taxpayer will get all, or some, of their loan back,” he says.

And for AIG, that question is a $180 billion gamble. The FP traders are well aware of their leverage in letting everyone know the stakes. “As a trader,” one senior FP executive says, “you’re only as good as the hand you have.”

House Attacks Fed, Treasury

Actually some on House panel, not the House itself, attacked the Fed and the Treasury.

At the Joint Economic Committee, a couple of House Republicans called for the resignation of Mr. Geithner, who, as president of the Federal Reserve Bank of New York, played a major role in last fall's moves to prevent the collapse of the financial system. "The public has lost all confidence in your ability to do the job," said Rep. Kevin Brady, Republican of Texas.

The public? Who the hell is the public? I'm part of the public, and I haven't lost confidence in Secretary Geithner. I have a lot of confidence in him. Whom I don't have confidence in is a Representative who thinks that by grandstanding and demagoguery he can strongarm fiscal policy.

Mr. Geithner, in an unusual public display of pique, fired back. "What I can't take responsibility is for the legacy of crises you've bequeathed this country," he told Mr. Brady.

Exactly. While Geithner is not perfect, by any means, he is dealing with the mess left by the tram of Bush and Greenspan, the most severe economic crisis in three quarters of a century.

Although several Democrats defended Mr. Geithner at the hearing, some liberal Democrats have been complaining that the Obama administration isn't doing enough to combat unemployment. Rep. Peter DeFazio (D., Ore.) called on Mr. Geithner to resign this week, and said in an interview that Mr. Geithner is too close to Wall Street.

Whom would he have? Paulson?

Treasury chief Geithner faced a House Republican who told him, 'The public has lost all confidence in your ability to do the job.' He shot back: 'What I can't take responsibility is for the legacy of crises you've bequeathed this country.'

You go, Timothy.

The House Financial Services Committee voted, 43-26, to approve a measure sponsored by Texas Republican Ron Paul, vociferously opposed by the Fed, that would direct the congressional Government Accountability Office to expand its audits of the Fed to include decisions about interest rates and lending to individual banks. The Fed says the provision threatens its ability to make monetary policy without political interference.

43 plus 26 means there are 69 members in the committee. What in hell could 69 politicians possibly get done? Less than nothing is what.

Greatest trade ever

Zuckerman, Gregory. (2009),
The greatest trade ever : the behind-the-scenes story of how John Paulson defied Wall Street and made financial history.
New York: Broadway Books.



Housing prices had climbed a puny 1.4% annually between 1975 and 2000, after inflation. But they had soared over 7% in the following five years, until 2005. The upshot: U.S. home prices would have to drop by almost 40% to return to their historic trend line. Not only had prices climbed like never before, but Mr. Pellegrini's figures showed that each time housing had dropped in the past, it fell through the trend line, suggesting that an eventual drop likely would be brutal.









By the middle of 2009, a record one in 10 Americans was delinquent or in foreclosure on their mortgages. U.S. housing prices had fallen more than 30% from their 2006 peak. In cities such as Miami, Phoenix, and Las Vegas, real-estate values dropped more than 40%. Several million people lost their homes. And more than 30% of U.S. home owners held mortgages that were underwater, or greater than the value of their houses, the highest level in 75 years.


















John Paulson was among the executives testifying on hedge fund regulation before the House Oversight and Government Reform Committee last November. From left, George Soros of Soros Fund Management, James Simons of Renaissance Technologies, Mr. Paulson, Philip Falcone of Harbinger Capital Partners, and Kenneth Griffin of Citadel Investment.

Eyes didn't have it

Lewis and Mack are easily identifiable, as is Geithner; Fuld not so, not in this picture. Perhaps it is Fuld's mouth that makes him easily recognizable, though the eyes fit in his infamous scowl. His arrogance and chutzpah come through readily in this article.

In the summer of 2008, two months before Lehman Brothers filed for bankruptcy, Richard S. Fuld Jr., the firm's chairman, was continuing his desperate efforts to find a lifeline. They had begun in March, shortly after the demise of Bear Stearns, when Mr. Fuld called the legendary investor Warren E. Buffett seeking a capital infusion, to no avail. Lehman had raised money elsewhere, but that didn't help for long, and its condition again was worsening.

This article is adapted from "Too Big to Fail: How Wall Street and Washington Fought to Save the Financial System — And Themselves." The book, being published Tuesday by Viking, reveals how officials in Washington, worried about the impact of Lehman's possible failure on the financial system, for months helped orchestrate efforts by Mr. Fuld to seek a solution for the firm and stave off its collapse. The conversations recounted are based on hundreds of hours of interviews with dozens of participants, many of whom agreed to speak on the condition that they not be identified as sources.

I've selected a few paragraphs that display Fuld's chutzpah and ego. In the summer of 2008 Lehman Brothers was teetering, buffeted by the market and the general ensuing panic. Fuld started to consider makin gthe firm a bank holding company, so to get Fed funding. Baxter is Tom Baxter, Geithner's general counsel.

Mr. Baxter, who had cut short a trip to Martha’s Vineyard to participate, walked through some of the requirements, which would transform Lehman’s aggressive culture, minimizing risk and making it a more staid institution, in league with traditional banks.

Regardless of the technical issues, Mr. Geithner said, “I’m a little worried you could be seen as acting in desperation,” and the signal that Lehman would send to the markets with such a move.

A talk with Mack of Morgan Stanley did not result in any action. The logical choice seemed to be Bank of America. Fuld's lawyer, Rudgin Cohen (chairman of Sullivan & Cromwell), called Greg Curl, BofA's top deal maker.

Mr. Curl, though intrigued to be getting a call on a Saturday night, was noncommittal; he could tell they must be desperate. “Hmm ... let me talk to the boss,” he said. “I’ll call you right back.” (The boss was Ken Lewis, the silver-haired chief executive of Bank of America.)

A half-hour later, Mr. Curl called back to say he’d hear them out, and Mr. Cohen set up a three-way call with Mr. Fuld.

“We can be your investment banking arm,” Mr. Fuld explained, the idea being for Bank of America to take a minority position in Lehman and for the two to merge their investment banking groups. He invited Mr. Curl to meet in person.

So he's asking for his firm to be rescued, and offers BofA a minority position.

Mr. Fuld walked him though his proposal. He wanted to sell a stake of up to one-third of Lehman to Bank of America and merge their investment banking operations under the Lehman umbrella.

33% of Lehman for BofA to rescue Lehman.

Mr. Curl was dumbfounded, though he characteristically gave no sign of what he was thinking. Far from the plea for help he had been expecting, the pitch he was hearing struck him as a reverse takeover: Bank of America would be paying Mr. Fuld to run its investment banking franchise for it.

A perfect example of Fuld's temerity. Curl demurred, saying he'd need to consult with his boss, Lewis.

Even before meeting with Mr. Curl, Mr. Fuld had been ringing Mr. Paulson about Bank of America, trying to get Mr. Paulson to make a call on behalf of Lehman. “I think it’s a hard sell, but I think the only way you’re going to do it is go to him directly,” Mr. Paulson had told him. “I’m not going to call Ken Lewis and tell him to buy Lehman Brothers.”

This is interesting in itself, in the context of BofA eventually buying Merrill Lynch.

Later, in New York, a secret meeting between Fuld and Lewis was arranged.

Mr. Fuld explained that he would want at least $25 a share from Bank of America to buy Lehman; Lehman’s shares had closed that day at $18.32. Mr. Lewis thought the number was far too high and couldn’t see the strategic rationale. Unless he could buy the firm for next to nothing, the deal wasn’t worth it. But he held his tongue.

His firm is about to implode, and Fuld asks for a premium over the merket price. Lewis turned him down.

Mr. Fuld was beside himself. He called Mr. Paulson to relay the bad news. The only possible suitor left was a group of Korean banks, who had expressed an interest in a separate deal. Mr. Fuld pressed Mr. Paulson to call them on his behalf — a request that Mr. Paulson resisted.

Then Fuld asks the Treasury Secretary to arrange a blind date. The Koreans turned him down, and Lehman is gone, bankrupt.

Futures Climb on Goldman Results

The best on the Street seems to be back.

Goldman Sachs shares were hovering around the flat line on Tuesday. The bank's profit smashed through analyst estimates after its fixed income, currency and commodities unit posted record quarterly revenue. Goldman posted income of $3.44 billion, or $4.93 a share, up from $2.09 billion, or $4.58 a share, a year earlier. The latest results included a $426 million dividend related to the company's paying back its TARP funds. Excluding that, earnings were $5.71 a share, which beat analyst estimates by more than $2 a share. Net revenue jumped 46% to $13.76 billion.

Read: The latest results included a $426 million dividend related to the company's paying back its TARP funds. So the Treasury made money on its investment: $426 million on $10 billion. On June 19 a story confirmed that GS was one of the institutions that had repaid the Treasury (on 17 June). So perhaps GS had TARP funds for six months; the Treasury made about 8.5% in such a case. Not bad.

But many in the market had expected Goldman to post a strong quarter, and in fact stock futures moved off their best levels of the day after the bank's results.

Not worth THAT much

Several Wall Street firms seeking to buy back warrants held by the government as part of the $700 billion financial bailout are complaining that the Treasury Department is demanding too high a price, according to people familiar with the matter.

Driving a hard bargain is not nice when they're on the short side, apparently.

The Treasury has rejected the vast majority of valuation proposals from banks, saying the firms are undervaluing what the warrants are worth, these people said. That has prompted complaints from some top executives. J.P. Morgan Chase & Co. Chief Executive James Dimon raised the issue directly with Treasury Secretary Timothy Geithner, disagreeing with some of the valuation methods that the government was using to value the warrants.

The inability to agree on a price has already prompted J.P. Morgan to take the next step in a complex process to remove the warrants from the hands of the government. The bank has waived its right to buy the warrants and will allow the Treasury to auction them in the public market, which bank executives say will result in an actual market price.

Let the market determine value. Seems reasonable.

The disagreement between banks and the Treasury indicates that the banking sector, despite being pilloried for its role in the financial crisis, is becoming increasingly confident in its dealings with Washington. Some banks have begun pushing back against some government initiatives, a move fraught with political risk.

AIG bonuses furor? One can imagine how it'll look when a source close to the Secretary speaks on background to reporters about the hardball tactics banks are playing, refusing to cooperate fully with the Treasury.

It also is an indication of how tricky it is going to be for the government to extricate itself from its unprecedented investment in the financial sector. The U.S. has flooded the financial sector with hundreds of billions of dollars, most of which is expected to eventually be repaid and, possibly, create a profit for taxpayers.

Possibly? It had better.

Some banks argue they shouldn't have to pay much, saying the government's investment was essentially a short-term loan they accepted under duress to help stabilize the financial sector.

Under duress? Quite a stretch to interpret it that way. It isn't as if the banks could have gotten through without being bailed out.

Others argue that the government shouldn't be draining bank capital at such a fragile time. At least one bank has argued it shouldn't have to pay the government anything at all.

Nice. Nothing at all? One wonders who that genius is.

But the Treasury is under pressure to extract as much money as possible for the warrants and avoid seeming to favor Wall Street over taxpayers. Lawmakers and the bailout's independent overseers have warned the Treasury against settling for too low a price and robbing taxpayers of a richer return.

The banks are tone-deaf, politically deaf, if they can't see the word robbery.

Treasury officials are cognizant that their actions will be highly scrutinized, with likely congressional hearings and reports, and are taking a firm line.

Geithner could not possibly allow a high-profile embarrassment to happen, by approving a low price.

While banks could bid on their own warrants through a public auction, some are reluctant to go that route since it could drive up the price for the warrants and let them out of their control.

And that's the point: they want to get their warrants on the cheap, not a market price: they do not want to buy their warrants in a market, but at an arranged, low price.

Headlines

Sinopec Offers $7.22 Billion for Oil Firm - The takeover of Addax Petroleum would give the Chinese company access to oil fields in Iraq and West Africa.

Deep in Bedrock, Clean Energy and Quake Fears

O.E.C.D. Improves Outlook for Economy - The Organization for Economic Cooperation and Development has revised its forecasts for developed countries upward for the first time in two years.

DealBook Blog: KKR Revises Deal for Affiliate, Postpones NYSE Debut - The giant private equity firm said Wednesday that it is seeking to revise a merger with a publicly listed European affiliate that would give it an Amsterdam listing.

Citigroup Has a Plan to Fatten Salaries - The plan is a test for the Obama administration, which wants to limit compensation at companies that have received federal bailouts. These bozos simply refuse to understand what in damnation is going on.

Baucus Grabs Pacesetter Role on Health Bill

Treasury’s Got Bill Gross on Speed Dial

Appearing on TV and bending the ear of the White House, Bill Gross of Pimco has emerged as one of the nation's most influential financiers.





Months ago, before the election, he wrote an open letter to then-candidate Obama (whom he predicted would become president, proving his prescience and instinct yet again), outlining what he saw as the right course to take in tackling the job of fixing the national economy. [See especially post of 1 July2008, and others, including one of 20 January 2009]
Every day, Bill Gross, the world’s most successful bond fund manager, withdraws into a conference room at lunchtime with his lieutenants to discuss his firm’s investments. The blinds are drawn to keep out the sunshine, and he forbids any fiddling with BlackBerrys or cellphones. He wants everyone disconnected from the outside world and focused on what matters most to him: mining riches for his clients at Pimco, the swiftly growing money management firm.

How I wish I had that power, even if for a few minutes, to have people shut off their electronic devices and rely on their own brain.

Such nationalization [as advocated by Nouriel Roubini and Paul Krugman, to temporarily nationalize zombie banks], Mr. Gross insists, would be an unmitigated disaster. “There are two grand plans,” he said this spring at a meeting of his firm’s investment committee. “One is the Krugman-Roubini plan. They think the banks have so much garbage they are beyond hope. The other side is the administration’s side. That’s the one we’re on. If the other side should ever gain credence, then we’ll have something to worry about.”

Timothy F. Geithner, the treasury secretary, wants investors like Pimco to work with the government to buy some bank debt.





Mr. Gross is hardly a disinterested observer. Pimco, owned by the German insurer Allianz, is jockeying to be picked by Mr. Geithner to relieve the likes of Bank of America, Citigroup and other banks of an estimated $1 trillion in soured mortgage debt so they can start lending freely again. Mr. Gross calls the plan a “win-win-win” for the banks, taxpayers and Pimco investors.

Disinterested observer, if they exist, woul dnot understand things as well as Bill Gross --and, just what the heck IS a disinterested observer?
The government is planning to announce soon which money managers will participate. A spokesman for the Treasury Department would not say whether Pimco would be one of them.

Well, I'd put a few bucks on Bill gross being chosen.
IN many ways, it is perfectly logical for the White House to turn to someone like Mr. Gross at such a time. Few investors understand the mortgage market better. As co-chief investment officer, he personally manages Pimco’s flagship, the Total Return fund, which has $158 billion in assets. As of the end of May, he had invested 61 percent of the fund’s money in mortgage bonds.

61% of 158 billion is more than 90 billion bucks ($96.38, in fact); a lot of money, anyway it's counted.

Investors Circle Ailing Banks, Fed Sets Limits

Don Ipock for The New York Times - First National, with its boarded-up second story and $17 million in assets, is worth about a third of what its owner, a New York investor, paid for an Upper East Side town house in 2006. It is an unlikely launching pad for a new American banking empire.










No one seems to want to own a business in this dusty, windswept corner of rural America, population 370, with its crumbling sidewalks and boarded-up storefronts.

Except, that is, for J. Christopher Flowers, a media-shy New York billionaire who last year bought the First National Bank of Cainesville, one of the United States’ smallest national banks. Mr. Flowers, a private equity manager, has no particular love for rural Missouri; in fact, he has never set foot in Cainsville. Rather, he wants to use the national bank charter he picked up in this farm town to go on a nationwide buying spree.

Vultures do serve a purpose. He is going in where no one else wants to go, because there are opportunities to make money, without question.

With that charter in hand, Mr. Flowers plans to take over a handful of large struggling banks, casualties of the economic crisis. In some cases, he hopes, the federal government will help.

Yet he is counting on the government's help, not exactly the swashbuckling entrepreneur going in alone, taking risks, betting on his own savvy.

But Mr. Flowers, whose investments in banks overseas have made him one of the richest men in America, has run into a major obstacle in the United States: the Federal Reserve, and its very notion of what a bank should be.

Good question.

Stress test stress

Not looking too good for a couple chief execs ...

Days could be numbered for BofA and Citi CEOs

Reuters - ‎38 minutes ago‎

By Jonathan Stempel - Analysis NEW YORK (Reuters) - The chief executives of Bank of America Corp and Citigroup Inc may be shown the door if the US government decides the $90 billion of capital it has already injected isn't enough to restore the banks' ...

US Stocks Rise as Consumer Confidence Offsets Swine Flu Bloomberg

BofA, Citi Fall On Report They May Need To Raise More Capital Wall Street Journal

and

BofA Needs a New Chief

Wall Street Journal - ‎23 minutes ago‎

By PETER EAVIS A group of dissident shareholders wants to oust Ken Lewis as chairman of Bank of America at Wednesday's annual meeting.

Bank of America Chief Lewis Loses Support of Calpers Bloomberg

Calpers Is Voting Against Lewis and BofA Board New York Times

I.M.F. Puts Bank Losses From Global Financial Crisis at $4.1 Trillion

This number does not begin to cover over-all losses and monies pumped into economies to stimulate recovery.

I.M.F. Says Recovery Will Be Slow and Sluggish

Regulate Me, Please

April 16, 2009 - Op-Ed Contributor

Regulate Me, Please

By Tom Wilson

THERE are plenty of people singling out causes for the collapse of the financial markets, and conveniently, the source of the problem is usually someone else. But accountability lies with all of us — the insurance industry, regulators, banks and credit rating agencies. The insurance companies that wrote credit default swaps were happy not to be regulated. Insurance regulators didn’t expand their oversight to ensure the solvency of these companies. Banking regulators, banks and credit rating agencies did not properly assess the strength of issuers and readily accepted these complex derivatives.

My company, Allstate, serves more than 17 million American households. While we played only a small role in unregulated insurance markets, we have a duty to help stabilize the financial system. It was, after all, an insurance product that contributed to the risk that almost brought down the global economy.

Insurance is defined as coverage by contract in which one party agrees to indemnify or reimburse another for loss. The credit default swaps written by American International Group are clearly insurance since they are a contractual obligation by A.I.G. to pay should there be a default on a security. It should be no surprise that a big insurer like A.I.G. would be a major issuer of credit default swaps. What is surprising is the claim that insurance did not contribute to the recent market failures, and therefore insurers don’t need to consider how to prevent them from happening again.

Unlike banks or investment houses, insurance companies are not regulated by the federal government. Instead, they are regulated by individual states, which lack the expertise to properly oversee rapid innovation or systemic risks. Business leaders must work with the government to create a new regulatory structure. All companies that create risk for the financial markets need to be in “the pool” of federal regulation, including companies like Allstate. A good start would be for Congress to eliminate the hodgepodge of state regulatory systems by establishing a federal regulator for national insurance companies.

Such a sophisticated federal insurance regulator would oversee the financial stability of large companies. We should also consider expanding private insurance to protect personal savings from systemic risks. And we need to establish a federal agency that would be empowered to deal with any large failing financial institutions, outside of bankruptcy. We must all accept responsibility for our current situation, and work together to broaden the scope of federal regulation to protect both consumers and financial markets.

Business and government leaders must avoid the trap of diminished expectations and continue to demand the best of ourselves and our fellow Americans. Millions of hard-working families are counting on us to get this right.

Tom Wilson is the chief executive of Allstate.

To Cut Costs, States Relax Prison Policies

The Deerfield Correctional Facility in Ionia, Mich., was closing, so inmates were put on a bus to be transported to another prison, in Muskegon.













Corrections officers at Deerfield carrying chains for the final 33 of 1,200 prisoners being transferred to another prison.













Begs the question: if financial difficulties change prison policies, are such policies valid in the first place?



March 25, 2009
To Cut Costs, States Relax Prison Policies
By JENNIFER STEINHAUER

CARSON CITY, Nev. — For nearly three decades, most states have dealt with lawbreakers in two ways: lock more of them up for longer periods, and build more prisons to hold them. Now many governments, out of money and buried under mounting prison costs, are reversing those policies and practices.

Some states, like Colorado and Kansas, are closing prisons. Others, like New Jersey, have replaced jail time with community programs or other sanctions for people who violate parole. Kentucky lawmakers passed a bill this month that enhances the credits some inmates can earn toward release.

Michigan is doing a little of all of this, in addition to freeing some offenders who have yet to serve their maximum sentence. And last Wednesday, Gov. Bill Richardson of New Mexico, a Democrat, signed legislation to repeal the state’s death penalty, which aside from ethical concerns was seen as costly.

Being tough on crime and sentencing has long been the clear path toward job retention for state lawmakers — Republicans and Democrats alike. But the economic crisis is forcing them to take a more pragmatic approach as prisoners are increasingly seen less as indistinct wrongdoers and more as expenses that must be reined in.

“When state budgets are flush,” said Barry Krisberg, president of the National Council on Crime and Delinquency, “prisons are something that governors and legislators all support, and they don’t want to touch sentencing reform. But when dollars are as tight as they are now, you have to make really tough choices. And so now things are in play.”

Recessions tend to prompt changes to corrections policies. After the recession at the start of this decade, numerous states enacted laws eliminating some long mandatory minimum sentences; several began to offer early release and treatment options to some drug offenders. Those changes, though, were far less reaching than what is happening now and did little to curb exploding corrections budgets.

In the past 20 years, correction department budgets have quadrupled and are outpacing every major spending area outside health care, according to a recent report by the Pew Center on the States. With 7.3 million Americans in prison, on parole or under probation, states spent $47 billion in 2008, the study said.

Faced with such costs, even states known for being particularly tough on crime are revisiting their policies and laws.

“In Kentucky, our prison budget is approaching half a billion dollars,” said J. Michael Brown, secretary of the State Justice and Public Safety Cabinet. “And as dollars get scarce, it forces a tremendous amount of scrutiny.”

The annual cost to keep someone in prison varies by state, and the type of institution, but the typical cost cited by states is about $35,000, said Peggy Burke of the Center for Effective Public Policy, a nonprofit group that works with local governments on criminal justice matters.

The most pervasive cost-saving trend among corrections departments has been to look closely at parole systems, in which it is no longer cost-effective to monitor released inmates, largely because too many violate their terms, often on technicalities, and end up back in prison. In California, among the few states to mandate parole for all convicts, parole violators — not new offenders — account for the largest percentage of inmates entering the system.

New Jersey recently began a program for some offenders on parole with technical violations, like failing to report to a parole officer or changing their address without the officer’s approval. Rather than being returned to jail, those former inmates are sent to a center for a clinical assessment of their risks and needs. With that change, the state is on track to save $16.2 million this fiscal year.

Other states are shortening paroles, or even sentences, to save money.

In Kentucky, Gov. Steven L. Beshear, a Democrat, is about to sign a bill that makes permanent a pilot program that offers qualifying inmates credit for time served on parole against sentence dates, in part to avoid a pattern of inmates’ choosing to stay in prison rather than risking later parole violations. The trial program saved the state $12 million last year. The state has also adopted a program that gives treatment rather than jail time to select drug offenders.

In California, where Gov. Arnold Schwarzenegger, a Republican, has called for $400 million to be cut from the state’s corrections budget, officials are seeking to remove low-level drug offenders from the parole supervision system and to provide them treatment options instead.

Like other states making such changes, California is led by a governor who long opposed such shifts in prison policies. But Mr. Schwarzenegger, as well as other leaders and lawmakers who are far more conservative, has come around to a view held by advocates of sentencing and prison reform that longer sentences do little to reduce recidivism among certain nonviolent criminals.

“In California we are out of room and we’re out of money,” said the state’s corrections secretary, Matthew Cate. “It may be time to take some of these steps that we should have taken long ago.”

Several states are also looking at sentencing itself. In New York, for example, Gov. David A. Paterson, a Democrat, has proposed an overhaul of the so-called Rockefeller drug laws that impose lengthy mandatory sentences on many nonviolent drug offenders.

Some states are simply consolidating operations and closing prisons, which is controversial among lawmakers and often riles a community. Colorado, Kansas, Michigan and New Jersey have all shut down or announced the closing of at least one prison. Others are proposing to do so.

Here in Carson City, home to one of the oldest state prisons in the country, the state estimates it would save $18 million a year by closing the prison. But the idea has rattled employees, some of whom have followed their parents’ career paths, and the community, which considers the prison a provider of jobs and an important piece of Nevada history.

“We are the oldest prison west of the Mississippi,” the warden, Greg Smith, said during a tour last week. “And the staff here takes a lot of pride in that.”

The 220-year-old prison is older than the state of Nevada, and the buildings, according to officials, sit on land filled with saber-toothed tiger prints. It first housed men who gave “firewater” to Indians and is where the state’s license plates are made. But the prison’s aging facilities have raised questions about its efficiency compared with modern counterparts.

The lament is similar in Michigan, where three prisons are set to be closed and more are being studied.

“As the economy has worsened, prisons are the modern-day factory in our rural areas,” said Russ Marlan, a spokesman for the Michigan Corrections Department. “We built these prisons in the 1980s, and people were adamantly opposed to having them in their communities. Now we go and try to take them out, and they don’t want them gone.”

Meanwhile, some states that revised parole and sentencing in boom times are fighting a different battle: to hold on to the financing that made those changes possible.

In Kansas, for instance, where drug treatment has replaced incarceration for some offenders and mentally ill offenders have received housing assistance, the prison population fell in recent years, largely because recidivism also declined, said Roger Werholtz, secretary of the Kansas Corrections Department. Now many of those programs have fallen victim to budget cuts.

President Campaigns for Budget

President Obama, escaping the mounting uproar in Washington over executive bonuses at the American International Group, came here Wednesday for a raucous town-hall-style meeting where he promised that his $3.6 trillion budget and recovery plan would put the country’s economy back on track.

He's salesman-in-chief. In full campaign mode.

“Washington is all in a tizzy over who’s at fault,” Mr. Obama said. “Some say it’s the Democrats’ fault, the Republicans’ fault. Listen, I’ll take responsibility. I’m the president.”

Dodd said the Treasury struck a clause from the bill, resulting in the AIG bonuses. Finger-pointing is a national sport in Washington, indeed in politics. At least the President is assuming responsibility. It doesn't solve anything, but it is helpful.

Obama’s Real Test

Thomas Friedman weighs in on AIG and Obama.

When you hear a sitting U.S. senator call for bankers to commit suicide, you know that the anger level in the country is reaching a “Bonfire of the Vanities,” get-out-the-pitchforks danger level. It is dangerous for so many reasons, but most of all because this real anger about A.I.G. could overwhelm the still really difficult but critically important things we must do in the next few weeks to defuse this financial crisis.

That's a very good, important point: This is by no means over; there is a lot more heavy lifting to be done yet.

Let me be specific: If you didn’t like reading about A.I.G. brokers getting millions in bonuses after their company — 80 percent of which is owned by U.S. taxpayers — racked up the biggest quarterly loss in the history of the Milky Way Galaxy, you’re really not going to like the bank bailout plan to be rolled out soon by the Obama team. That plan will begin by using up the $250 billion or so left in TARP funds to start removing the toxic assets from the banks. But ultimately, to get the scale of bank repair we need, it will likely require some $750 billion more.

I can hear the Republicans howling already.

I live in Montgomery County, Md. The schoolteachers here, who make on average $67,000 a year, recently voted to voluntarily give up their 5 percent pay raise that was contractually agreed to for next year, saving our school system $89 million — so programs and teachers would not have to be terminated. If public schoolteachers can take one for schoolchildren and fellow teachers, A.I.G. brokers can take one for the country.

Don't hold your breath, Tom.

Unfortunately, all the money we have already spent on A.I.G. and the banks was just to prevent total system failure. It was just to keep the body alive. That’s why healing the system will likely require the rest of the TARP funds, plus the $750 billion the administration warned Congress in the new budget that it could need.

Another one trillion. That'll go down well on Main Street, huh?

The only person with the clout to sell something this big is President Obama. The bankers and Congress will have to help; every citizen will have to swallow hard. But ultimately, Mr. Obama will have to persuade people that this is the least unfair and most effective solution. It will be his first big leadership test. It is coming soon, and it is coming to a theater — and a bank — near you.

It will be some hell of a fight.

Headlines and Stories

Pope in Africa reaffirms "no condoms" against AIDS Putz. That is almost criminal.

"It (AIDS) cannot be overcome by the distribution of condoms. On the contrary, they increase the problem," he said in response to a question about the Church's widely contested position against the use of condoms.

The disease has killed more than 25 million people since the early 1980s, mostly in sub-Saharan Africa, and some 22.5 million Africans are living with HIV.

Recession-weary Americans outraged by AIG bonuses The excuse is that they were contract stipulations that couldn't be abrogated. But the auto workers had to renegotiate their contracts in order for GM and Chrysler to get government money. False outrage by politicians diverts the true question: how come the white collar types got their money? Didn't Geithner know? And if he didn't, why not?

Army puts Madagascar opposition leader in charge

The Associated Press - ‎55 minutes ago‎

ANTANANARIVO, Madagascar (AP) - Military leaders in Madagascar say they have handed over control of this Indian Ocean island nation to the president's rival.

Opposition given Madagascar reins Aljazeera.net

Economic Meltdown No Laughing Matter

Jon Stewart on the "Daily Show" with his guest Jim Cramer who hosts the "Mad Money" show on CNBC. They have been feuding about the economy this week.


Click for video.







It wasn’t a “Brawl Street,” or a thrilla in vanilla. It wasn’t a “Daily Show” friendly feud or even much of a discussion. Mostly, the much-hyped Thursday night showdown between Jon Stewart and Jim Cramer, the mercurial host of “Mad Money” on CNBC, felt like a Senate subcommittee hearing.

Cramer is a buffoon. He has rubber chickens, bells, and makes his show seem a game show. It trivializes what should be fairly serious business. Not that investing needs to be dry and boring, but it is not a game.

Mr. Stewart treated his guest like a C.E.O. subpoenaed to testify before Congress — his point was not to hear Mr. Cramer out, but to act out a cathartic ritual of indignation and castigation.

Well deserved, by CEOS and Cramer.

“Listen, you knew what the banks were doing, yet were touting it for months and months, the entire network was,” the Democratic Senator from Comedy Central said. “For now to pretend that this was some sort of crazy, once-in-a-lifetime tsunami that nobody could have seen coming is disingenuous at best and criminal at worst.”

Exactly.

And while it’s never much fun to watch a comedian lose his sense of humor, in an economic crisis, it’s even sadder to see supposed financial clairvoyants acting like clowns.

Ditto.

Part of his frustration may stem from the fact that while Mr. Stewart clearly won the debate, Mr. Cramer and CNBC stood to profit from the encounter. In today’s television news market, the cable network and its stars are like the financiers they cover — media short-sellers trading shamelessly on publicity, good or bad, so long as it drives up ratings. There isn’t enough regulation on Wall Street, and there’s hardly any accountability on cable news: it’s a 24-hour star system where opinions — and showmanship — matter more than facts.

Fair and Balanced? Gimme-a-break.

The “Daily Show” has shown clip after clip from last year that show Mr. Cramer assuring his “Mad Money” viewers that Bear Stearns was not in trouble — shortly before the heavily leveraged investment firm imploded. He has apologized to his viewers several times since then. (“I have always thought they were honest,” he said on Thursday. “That was my mistake.”)

Oops, sorry.

Once he had Mr. Cramer at his desk, Mr. Stewart showed fresh, and even more embarrassing clips from a 2006 interview with the Web site he founded, TheStreet.com, in which he too candidly explained how hedge fund market manipulation really works.

And the “Daily Show” host pointedly questioned the hyped-up theatricality and dubious claims of CNBC shows like “Mad Money” and “Fast Money.” When Mr. Cramer explained, “There is market for it and you give it to them,” Mr. Stewart stared at him in disbelief, exclaiming. “There’s a market for cocaine and hookers!”

Mr. Stewart kept getting the last word, but Mr. Cramer may yet have the last laugh.

It is all about ratings.

They might be finally gettin' it

“It’s kind of like we all went overboard,” said Ms. Taylor, 33. “And we’re trying to get back to where we should have been.”

Kind of like.

It is a sign of the times when Sacha Taylor, a fixture on the charity circuit in this gala-happy city, digs out a 10-year-old dress to wear to a recent society party.

Behind the Curtain at G.E.

So this is what it has come to. General Electric appears to be in trouble.

I bought it at $22.50, soon after Warren Buffett bought preferred shares. GE is now at 7 bucks a share. The bears are pummeling it, warning of defaults, of it losing its AAA rating, that GE Capital is going to hit the wall.

Earlier in the week Jeffrey Immelt, the chief executive, released his annual letter to shareholders, pointing out that the company had $18 billion in profit last year. Investors shrugged.

Last year doesn't count.

“It has too much debt and not enough tangible common equity,” holds a bear, Charles Ortel. Tangible common equity — equity minus good will and other intangibles — is the once obscure, now critical barometer of a bank’s capital.

last night I saw a commercial for GMAC Bank. Bank? It's a finance company, yet it has become a bank. GE Capital appears to have similarly morphed into a bank.

“The last time G.E. cut its dividend was during the Great Depression,” Jerry Useem, who used to cover G.E. for Fortune magazine, pointed out. He was quiet for a minute. Then he added, “If G.E. is in trouble, God help us all.”