In the beginning, TARP was announced and it would cost $700 billion.
Then banks began repaying, and the cost was lowered to $341 billion in August 2009.
Then some warrants and preferred stock, and the cost was reannounced at $117 billion.
April 23rd, TARP losses were re-estimated to be as low as $85 billion.
At this pace, the U.S. Government will soon be announcing profits from TARP.
Friday, April 23, 2010
How to Recognize Biased Blogs
This post started with the idea that I would track down documentation on the cause of ING Groep's severe losses in 2008 and 2009. I thought I had seen somewhere that most of the Mortgage-Backed Securities (MBS) ING had bought in the U.S. were required by U.S. law because of ING's deposit base. Well, aside from the important idea that a bank should make money on money that it borrows, the Community Reinvestment Act (CRA) was established to encourage banks and thrifts to make loans in disadvantaged areas. I'm still researching that, but I discovered an interesting blog along the way.
Here is the blog:
http://www.bankinnovation.net/profiles/blogs/kill-ing-direct
The ambiguous title "Kill ING Direct?" is the first clue that the blog may have an opinion mixed in with its commentary. Is it seeking permission? A clarification of a command? A quick read through the article shows a bias. The magic phrase?
"That it deserves to exist is."
Right at the top of the article is the implied normative question: Whether or not the bank deserves to exist. In my usage of English, "deserve" implies something other than "earned." Certainly, if a bank fails to make earnings, it will soon be gone. But that isn't how Americans use the word. It implies a moral judgment, something more than a simple weighing the business value of the enterprise.
Hornblass, were you offended by ING Direct? What is the problem here, earnings aside? ING savings accounts suck money from low-service checking accounts at major banks, but what is wrong with that? Savers get more control, more interest, better visibility into their earnings, and the ING user interface is a leader the industry. Banks with slow Javascript, bad and ugly page layout, limited features, and limitations on the number of accounts deserve to lose the business.
It does make me wonder who will wind up with ING Direct after ING Groep sells it before the 2013 deadline. Also, since the Dutch government ordered that only ING Direct USA be sold, is that payback for the losses imposed by U.S. policy on ING Groep and its shareholders?
Here is the blog:
http://www.bankinnovation.net/profiles/blogs/kill-ing-direct
The ambiguous title "Kill ING Direct?" is the first clue that the blog may have an opinion mixed in with its commentary. Is it seeking permission? A clarification of a command? A quick read through the article shows a bias. The magic phrase?
"That it deserves to exist is."
Right at the top of the article is the implied normative question: Whether or not the bank deserves to exist. In my usage of English, "deserve" implies something other than "earned." Certainly, if a bank fails to make earnings, it will soon be gone. But that isn't how Americans use the word. It implies a moral judgment, something more than a simple weighing the business value of the enterprise.
Hornblass, were you offended by ING Direct? What is the problem here, earnings aside? ING savings accounts suck money from low-service checking accounts at major banks, but what is wrong with that? Savers get more control, more interest, better visibility into their earnings, and the ING user interface is a leader the industry. Banks with slow Javascript, bad and ugly page layout, limited features, and limitations on the number of accounts deserve to lose the business.
It does make me wonder who will wind up with ING Direct after ING Groep sells it before the 2013 deadline. Also, since the Dutch government ordered that only ING Direct USA be sold, is that payback for the losses imposed by U.S. policy on ING Groep and its shareholders?
The High Shrill Voice of the SEC
As this past week wore on and comments and observations from attorneys and analysts were weighed, it became increasingly evident that the SEC's civil fraud case against Goldman Sachs, announced one short week ago on April 16, was founded on slim evidence and had little chance of succeeding in court, even though it had a high-pitched emotional resonance. Mario Bartiromo found it wanting. Republicans charged that the suit was politically motivated, timed to correspond to debate over financial reform. The SEC itself decided to investigate ("UPDATE 1-Watchdog to probe SEC's Goldman lawsuit" http://www.reuters.com/article/idUSN2323274820100423?type=marketsNews).
But most damning is that Warren Buffett expressed his confidence in Goldman.
"Warren Buffett Has 'Great Confidence' in Goldman Sachs Says Berkshire Director"
http://www.cnbc.com/id/36742080
Looking at the charges and the assumptions behind them, you could make a strong case that the only way for Goldman Sachs to avoid being charged was that Goldman would have had to prove to its client in advance that Goldman would lose money on the deal.
Although the ACA portion of the suit is in tatters after a week's worth of reports, the IKB side of the argument will survive, reports the Washington Post.
"SEC confident on IKB part of Goldman Sachs lawsuit" http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305223.html
But most damning is that Warren Buffett expressed his confidence in Goldman.
"Warren Buffett Has 'Great Confidence' in Goldman Sachs Says Berkshire Director"
http://www.cnbc.com/id/36742080
Looking at the charges and the assumptions behind them, you could make a strong case that the only way for Goldman Sachs to avoid being charged was that Goldman would have had to prove to its client in advance that Goldman would lose money on the deal.
Although the ACA portion of the suit is in tatters after a week's worth of reports, the IKB side of the argument will survive, reports the Washington Post.
"SEC confident on IKB part of Goldman Sachs lawsuit" http://www.washingtonpost.com/wp-dyn/content/article/2010/04/23/AR2010042305223.html
7 Illinois Banks Shut
The Federal Deposit Insurance Corp. took over seven banks Friday April 23, all in Illiniois, with four in Chicago. That brings the total number of closures in Illinois to 32 since the start of 2007. Georgia still leads the death count, with 38 failed banks since 2007.
The closures on Friday, in Chicago, with assets shown in millions:
New Century Bank, $485.6M
Citizens Bank&Trust Company, $77.3M
Broadway Bank, $1,200.0
M Lincoln Park Savings Bank, $199.9M
Elsewhere in Illinois:
Amcore Bank of Rockford, $3,800.0M
Peotone Bank and Trust Company, $130.2M
Wheatland Bank of Naperville, $437.2M
Bank failures remain concentrated in four states: California, Florida, Georgia, and Illinois. Minnesota is a distant fifth. Total closures by state, for January 2007 to date:
State Total
AL 4
AR 1
AZ 6
CA 26
CO 3
FL 25
GA 38
IA 1
ID 1
IL 32
IN 1
KS 4
KY 1
LA 1
MA 1
MD 3
MI 6
MN 11
MO 6
NC 2
NE 1
NJ 2
NM 1
NV 7
NY 3
OH 4
OK 1
OR 4
PA 2
SC 1
SD 1
TX 8
UT 5
VA 1
WA 8
WI 1
WV 1
WY 1
Total for all states, January 1, 2007 through April 23, 2010: 225 banks failed.
To get your own copy of the list of failed banks, in a CSV file suitable for analysis in your favorite spreadsheet software application, go to http://www.fdic.gov/bank/individual/failed/banklist.html.
The closures on Friday, in Chicago, with assets shown in millions:
New Century Bank, $485.6M
Citizens Bank&Trust Company, $77.3M
Broadway Bank, $1,200.0
M Lincoln Park Savings Bank, $199.9M
Elsewhere in Illinois:
Amcore Bank of Rockford, $3,800.0M
Peotone Bank and Trust Company, $130.2M
Wheatland Bank of Naperville, $437.2M
Bank failures remain concentrated in four states: California, Florida, Georgia, and Illinois. Minnesota is a distant fifth. Total closures by state, for January 2007 to date:
State Total
AL 4
AR 1
AZ 6
CA 26
CO 3
FL 25
GA 38
IA 1
ID 1
IL 32
IN 1
KS 4
KY 1
LA 1
MA 1
MD 3
MI 6
MN 11
MO 6
NC 2
NE 1
NJ 2
NM 1
NV 7
NY 3
OH 4
OK 1
OR 4
PA 2
SC 1
SD 1
TX 8
UT 5
VA 1
WA 8
WI 1
WV 1
WY 1
Total for all states, January 1, 2007 through April 23, 2010: 225 banks failed.
To get your own copy of the list of failed banks, in a CSV file suitable for analysis in your favorite spreadsheet software application, go to http://www.fdic.gov/bank/individual/failed/banklist.html.
Optimal Fed path: sell MBS inventory gradually
The Fed is divided over whether to sell off its mortgage backed securities inventory. Selling it too soon, or not at all, would have an impact on liquidity and short-term interest rates. Narayana Kocherlakota, president of the Minneapolis Fed, has the best recommendation, and it should be followed: sell $15 billion-25 billion of MBS each month. If performed regularly, this rate of divestment would take the Fed’s inventory to zero in about five years, and reduce the Fed's leverage and balance sheet, putting back into a position to intervene again should it need to.
Monday, April 12, 2010
Burger King (BKC) Target is $25
After a recent breakout from a trading range of $17 to $19, BKC moved to $21, paused, then jumped to almost $22 today. The catalyst? Likely expectations of improving margins and earnings as consumers return after the harsh winter. There is chatter indicating that some items may move up from the $1 value menu.
Now, if they can just get rid of that freaky "King" character, maybe sales would improve even more.
Now, if they can just get rid of that freaky "King" character, maybe sales would improve even more.
High tech hiring runs afoul of RICO?
The Wall Street Journal has reported (4/10/10) that the Justice Department is investigating whether high tech companies collude to hold down the salaries of engineers. Since certain companies do share salary data by pooling their information, the net effect is to curtail competitive bidding for talent.
Commentary on the article was instructive. I think one point that was missed is that with tax increases coming, the U.S. needs to mint more high-income earners, and engineers are typically paid less than legal and financial professionals, so boosting engineering pay would raise new income tax revenues and result in more students choosing to enter engineering programs in college.
Commentary on the article was instructive. I think one point that was missed is that with tax increases coming, the U.S. needs to mint more high-income earners, and engineers are typically paid less than legal and financial professionals, so boosting engineering pay would raise new income tax revenues and result in more students choosing to enter engineering programs in college.
The Unintended Consequences of Unintended Consequences Articles
This is commentary on commentary. Actually, it should be "commentary on reporting," but the Forbes April 26 article "Careful What You Wish For" isn't really an article, it is opinion.
The idea behind the article is that current Congressional work on restricting banks' and financial companies' abilities to issue abusive debt to consumers will have unforeseen consequences that will impact the consumers in ways that the Government doesn't expect. This is a fine thesis, one that probably is even correct in the large, but the author fails to make his point in ways that really count.
The article has a whiny tone, the kind a liberal would expect a right-leaning article on consumer finance to have. Policy based on behavioral economics research is ridiculed as an "assumption." Phrases like "regulatory overreach," "furious new round of maneuvering," and "variety of dastardly practices" lay down a challenge to the reader, as though designed to stir a rebellion.
The article does admit that that "consumers do dumb things." But ultimately, this admission is drowned out by all the contention so that the article fails to score the direct hits that should have easy to come by. So since Forbes couldn't pull it off, here's my list:
- Some consumer financing products have drug-like qualities, with extremely high costs and the ability to addict some consumers to financing they don't understand.
- Some financial deals are made so complex that it is nearly impossible for even an educated consumer to find the implied interest rate. A perfect example are balance transfer offers at 5.99% with a 4% fee that have only a 6 month term. Most consumers don't realize that this "money saving offer" has an implied APR of 15.31%.
- When high-risk consumers are protected from high interest rates, banks will simply refuse to lend to them at all. Depending on your perspective, this could be exactly what should happen, or it could be a problem. After all, if a consumer always makes their borrowing decisions based on immediate gratification, then they are a terrible credit risk and perhaps they shouldn't be given credit at all. It isn't cruel; it's good parenting.
- Restrictions on pay day loans will cause an increase in illegal loan-sharking. If an instant-gratification-addicted consumer can't get a payday loan because they are illegal, they may turn to the black market for their financing. Prohibiting fringe behavior will drive it underground, where the dangers of non-payment are physical, not just fiscal.
- High interest rates are necessary where risk of default is very high. And some people are just really bad credit risks. They don't have the money, they don't intend to pay it back, or they just don't want to pay it. So credit grantors have lost more than $313 billion in the last decade, according to Forbes. Which means that the consumers "won" and the purportedly smarter banks got taken! So maybe financial regulation will protect the banks from themselves more than they protect consumers from themselves!
- The logical extension to protecting all of these bad banks and bad consumers from each other is that financial regulation will chill the credit market. I'm not sure that is a bad thing. It may be exactly what this country needs: A blast of ice water in the face that cools the prevalent idea that borrowing more than you make is a good idea. Perhaps forcing everyone to live a little closer to their actual production rate will pay huge dividends in moral values, savings rates, and set a better example for our children.
All in all, I think there were some valuable points to be made that were simply dropped on the floor. There is also a minor goof in the mortgage example in "Financial Foolishness" box.
The idea behind the article is that current Congressional work on restricting banks' and financial companies' abilities to issue abusive debt to consumers will have unforeseen consequences that will impact the consumers in ways that the Government doesn't expect. This is a fine thesis, one that probably is even correct in the large, but the author fails to make his point in ways that really count.
The article has a whiny tone, the kind a liberal would expect a right-leaning article on consumer finance to have. Policy based on behavioral economics research is ridiculed as an "assumption." Phrases like "regulatory overreach," "furious new round of maneuvering," and "variety of dastardly practices" lay down a challenge to the reader, as though designed to stir a rebellion.
The article does admit that that "consumers do dumb things." But ultimately, this admission is drowned out by all the contention so that the article fails to score the direct hits that should have easy to come by. So since Forbes couldn't pull it off, here's my list:
- Some consumer financing products have drug-like qualities, with extremely high costs and the ability to addict some consumers to financing they don't understand.
- Some financial deals are made so complex that it is nearly impossible for even an educated consumer to find the implied interest rate. A perfect example are balance transfer offers at 5.99% with a 4% fee that have only a 6 month term. Most consumers don't realize that this "money saving offer" has an implied APR of 15.31%.
- When high-risk consumers are protected from high interest rates, banks will simply refuse to lend to them at all. Depending on your perspective, this could be exactly what should happen, or it could be a problem. After all, if a consumer always makes their borrowing decisions based on immediate gratification, then they are a terrible credit risk and perhaps they shouldn't be given credit at all. It isn't cruel; it's good parenting.
- Restrictions on pay day loans will cause an increase in illegal loan-sharking. If an instant-gratification-addicted consumer can't get a payday loan because they are illegal, they may turn to the black market for their financing. Prohibiting fringe behavior will drive it underground, where the dangers of non-payment are physical, not just fiscal.
- High interest rates are necessary where risk of default is very high. And some people are just really bad credit risks. They don't have the money, they don't intend to pay it back, or they just don't want to pay it. So credit grantors have lost more than $313 billion in the last decade, according to Forbes. Which means that the consumers "won" and the purportedly smarter banks got taken! So maybe financial regulation will protect the banks from themselves more than they protect consumers from themselves!
- The logical extension to protecting all of these bad banks and bad consumers from each other is that financial regulation will chill the credit market. I'm not sure that is a bad thing. It may be exactly what this country needs: A blast of ice water in the face that cools the prevalent idea that borrowing more than you make is a good idea. Perhaps forcing everyone to live a little closer to their actual production rate will pay huge dividends in moral values, savings rates, and set a better example for our children.
All in all, I think there were some valuable points to be made that were simply dropped on the floor. There is also a minor goof in the mortgage example in "Financial Foolishness" box.
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