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  • Lehman CEO *** Fuld's Testimony at the FCIC

    The Financial Crisis Inquiry Commission began two days of what it is calling "Too big to fail" hearings yesterday, and the star was *** Fuld , CEO of Lehman Brothers when the firm collapsed two years ago. Fuld would not take blame, or place any blame on Lehman for the investment bank's failures, telling the commission that " Lehman’s demise was caused by uncontrollable market forces and the incorrect perception and accompanying rumors that Lehman did not have sufficient capital to support its investments." And he pointed a finger at the Fed: In retrospect, one can now see that as 2007 progressed, the weakening in the U.S. housing market was worse than predicted and spread to other sectors of the financial system. Those adverse market conditions accelerated in March 2008 after Bear Stearns nearly failed. I believed then, and still do now, that had the Fed opened the financing window to investment banks just before the Bear Stearns problem, that decision might have provided the necessary liquidity to keep Bear Stearns operational and, more importantly, might have lessened the need for additional government intervention. Still, having acted, the intervention of the federal government set a precedent in the marketplace that impacted liquidity, capital formation and the expectations of creditors and stockholders for at least the next six months. At the same time, the federal government and the individual regulators involved were criticized for using taxpayers’ money to rescue a financial company, which then set another precedent of how “not” to handle the next problem. With Bear Stearns gone, L ehman, as the next smallest investment bank, became the focus of the marketplace and was subject to increasingly negative and inaccurate market rumors. Jacob Goldstein of NPR's Planet Money did a word count and found that out of the 1680 words in Fuld's opening testimony, " Fuld devotes exactly 15 words to what Lehman did wrong. " Ben Bernanke and FDIC Chair Sheila Bair testify before the FCIC today. You can find transcripts of all of yesterday's testimony here , and watch a video of the hearing here .

  • COP June Report: The AIG Rescue

    The Congressional Oversight Panel 's June Report is now out, and in it the members of the panel are critical of the federal government's rescue of AIG in September, 2008. First, the panel argues that the Hank Paulson led Treasury Department did not do its due diligence in examining all the options it had before it committed $85 billion of taxpayer funds to keep the insurance giant from collapsing. But their bigger criticism comes with the actual rescue plan, which COP members say shifted the burden of AIG's failings from its creditors to all taxpayers and "distorted the marketplace by transforming highly risky derivative bets into fully guaranteed payment obligations." From the report: In the ordinary course of business, the costs of AIG‟s inability to meet its derivative obligations would have been borne entirely by AIG‟s shareholders and creditors under the well-established rules of bankruptcy. But rather than sharing the pain among AIG‟s creditors – an outcome that would have maintained the market discipline associated with credit risks – the government instead shifted those costs in full onto taxpayers out of a belief that demanding sacrifice from creditors would have destabilized the markets. The result was that the government backed up the entire derivatives market, as if these trades deserved the same taxpayer backstop as savings deposits and checking accounts. One consequence of this approach was that every counterparty received exactly the same deal: a complete rescue at taxpayer expense. Among the beneficiaries of this rescue were parties whom taxpayers might have been willing to support, such as pension funds for retired workers and individual insurance policy holders. But the across-the-board rescue also benefitted far less sympathetic players, such as sophisticated investors who had profited handsomely from playing a risky game and who had no reason to expect that they would be paid in full in the event of AIG‟s failure. Other beneficiaries included foreign banks that were dependent on contracts with AIG to maintain required regulatory capital reserves. Some of those same banks were also counterparties to other AIG CDSs. Here is COP chair Elizabeth Warren discussing the key findings of the June report: Read the full report here .

  • GM Posts First Quarter Profit

    After going all of 2008 and 2009 without a single profitable quarter, General Motors has some very good earnings data. One year after filing for bankruptcy, GM posted a first quarter profit of $865 million. Detroit News reporter Robert Snell writes that much of that profit was generated in North American sales, as GM has faced some difficult times in Europe and other overseas markets. The strong quarter could also mean good news on the jobs front, as production is on the rise. Snell: The positive financial results released Monday coincided with a dramatic increase in production. GM built 668,000 vehicles from January through March, 80 percent more than a year earlier. Operating income was $1.2 billion during the first quarter, when GM posted revenue of $31.5 billion, a 40 percent increase. GM also generated $1 billion in free cash flow during the quarter. GM's last quarterly profit came in the second quarter of 2007, when it earned $891 million. The company's stint in bankruptcy court last summer helped lower GM's break-even point as the automaker shed brands, factories and slashed thousands of jobs. One quarter does not a turnaround make. As Wall Street Journal Detroit Bureau Chief Neal Boudette points out, the profit is still well under half of what Ford earned during the quarter. Still, Boudette says this is news is a very positive sign:

  • COP May Report: Where is the Credit for Small Business Owners?

    In their May report, members of the Congressional Oversight Panel (COP) check up on Treasury Secretary Timothy Geithner's progress in directing TARP funds toward opening credit for small businesses. So far, they do not see a lot of improvement. From the report: Unfortunately, small business credit remains severely constricted. Data from the Federal Reserve shows that lending plummeted during the 2008 financial crisis and remained sharply restricted throughout 2009. Although Wall Street banks had been increasing their share of small business lending over the last decade, between 2008 and 2009 their small business loan portfolios fell by 9.0 percent, more than double the 4.1 percent decline in their entire lending portfolios. Some borrowers looked to community banks to pick up the slack, but smaller banks remain strained by their exposure to commercial real estate and other liabilities. Unable to find credit, many small businesses have had to shut their doors, and some of the survivors are still struggling to find adequate financing. Treasury has launched several TARP initiatives aimed at restoring health to the financial system, but it is not clear that these programs have had a noticeable effect on small business credit availability. The largest TARP program, the Capital Purchase Program (CPP), provided hundreds of billions of dollars in new capital to banks, but Treasury did not require recipients to use the money to improve credit access. In fact, after receiving the money, most recipients decreased their lending. The Term Asset-Backed Securities Loan Facility helped to restore liquidity to the securitized lending market, but because relatively few small business loans are securitized, the program had little impact on small business lending. Although the Public-Private Investment Partnership program remains in its early stages, it has not targeted and will likely not target the smaller financial institutions that often serve small businesses. Here is COP chair Elizabeth Warren discussing the key findings of the May report: For the full report, click here .

  • Lessons for the US from Europe's Debt Crisis

    EU leaders are taking what Business Week calls "unprecedented" measures --spending $962 Trillion in the process--to keep sovereign debt in Euro zone countries from inflicting more damage to the European economy. So there is little doubt they have taken the Greek crisis seriously. But there remain a wide range of opinion among Europe's citizens on how much they and their nations should be on the hook for fixing other nations' debt issues. Economists Carmen Reinhart and Kenneth Rogoff argue that the Greek crisis provides valuable lessons for people outside of Europe. In the Washington Post , they outline 5 Myths about the European debt crisis : 1. This is a new type of crisis. 2. Small economies such as Greece can't launch major financial turmoil. 3. Fiscal austerity will solve Europe's debt difficulties. 4. The euro is to blame for Greece's financial woes. 5. It can't happen here. Read their breakdown of these myths here .

  • Greece: Bailout, Protests Raise Questions About EU

    Protesters clashed with riot police yesterday in Greece, and three people were reportedly killed in a bank fire in Athens. The protests over the Greek government's acceptance of the austerity measures required as a condition of an EU/IMF bailout of the Greek economy, have grown larger each day. The whole Greek episode has brought many to consider the very nature of the Eurozone. Evan Newmark , Mean Street columnist for the Wall Street Journal , argued yesterday that Greece and the EU would be better off if they parted ways and Greece reinstated the drachma. Newmark made the comments as part of this panel discussion: For a bit of perspective, Ernst Weizacker, Co-chair for the UN Panel Sustainable Resource Management, reminds us that Greece makes up a very small percentage of the EU economy. That leads him to conclude that talks of the Greek "contagion" are overblown: Watch the complete Weizacker interview at Big Think, here .

  • IMF Managing Director Commends Greece's 'Ambitious Policy Package'

    The Greek government's plan for repairing its debt-ridden economy got the okay from the European Central Bank and the International Monetary Fund this weekend. As a result, Greece will be the recipient of a $146 billion financing package . While this has not exactly been cause for celebration in Greece or throughout the EU, IMF Managing Director Dominique Strauss-Kahn praised Greece's "ambitious policy package" yesterday. In an official IMF statement, he said the government recognized that reform needed to be based on the two strong "pillars" of "fiscal policy and pro-growth measures": A combination of spending cuts and revenue increases amounting to 11 percent of GDP—on top of the measures already taken earlier this year—are designed to achieve a turnaround in the public debt-to-GDP ratio beginning in 2013 and will reduce the fiscal deficit to below 3 percent of GDP by 2014. Measures for 2010 involve a reduction of public sector wages and pension outlays —which are unavoidable given that those two elements alone constitute some 75 percent of total (non-interest) public spending in Greece. “Pro-growth measures will be aimed at modernizing the economy and boosting its competitiveness so that it can emerge from the crisis as quickly as possible. Steps include strengthening income and labor markets policies; better managing and investing in state enterprises and improving the business environment. Reforms to fight waste and corruption—eliminating non-transparent procurement practices, for example--are also being undertaken. You can find several helpful resources for understanding the IMF's work with the Greek government here .

  • COP March Oversight Report Finds Flaws with GMAC Bailout

    In its March report, the Congressional Oversight Panel takes the Treasury Department to task for a "missed opportunities to to increase accountability and better protect taxpayers money," as it "rescued" GMAC. Treasury did not, for example, condition access to TARP money on the same sweeping changes that it required from GM and Chrysler: it did not wipe out GMAC’s equity holders; nor did it require GMAC to create a viable plan for returning to profitability; nor did it require a detailed, public explanation of how the company would use taxpayer funds to increase consumer lending. Moreover, the Panel remains unconvinced that bankruptcy was not a viable option in 2008. In connection with the Chrysler and GM bankruptcies, Treasury might have been able to orchestrate a strategic bankruptcy for GMAC. This bankruptcy could have preserved GMAC’s automotive lending functions while winding down its other, less significant operations, dealing with the ongoing liabilities of the mortgage lending operations, and putting the company on sounder economic footing. The Panel is also concerned that Treasury has not given due consideration to the possibility of merging GMAC back into GM, a step which would restore GM’s financing operations to the model generally shared by other automotive manufacturers, thus strengthening GM and eliminating other money-losing operations. COP Chair Elizabeth Warren dsicusses the report's findings: You can read the full report here .

  • Paulson on Pushing For TARP Against Reluctant Politicians

    Former Treasury Secretary Henry Paulson has a new book out in which he gives his first-hand account of what transpired during the near economic collapse of 2008. And with the release of On The Brink , Paulson is becoming a public figure again. He is getting a lot of screen time with CNBC this week, after giving Steve Liesman an interview over the weekend. Here is an excerpt of that interview, in which Paulson discusses pushing for TARP with certain political figures: Read the transcript for Liesman's interview with Paulson here .

  • COP January Report: Time For a Clear Plan to Unwind TARP

    In December, Treasury Secretary Timothy Geithner announced that his department is extending the Troubled Assets Relief Program through October 3, 2010. So with less than ten months to go, part of the Treasury's responsibility will be to manage the end of TARP. But as the Congressional Oversight Panel's January report points out, the impact of TARP will be felt for long after October. And in their January report, the COP members call on Treasury to be more transparent in the department's effort to "unwind its stake in the financial markets": As Treasury enters the next stage of its administration of the TARP, it must learn from the mistakes it has made in the past – in particular, its failure to follow the money used to bail out large financial institutions. Because Treasury never required the institutions that received the first infusions of TARP funding to account for their use of these funds, taxpayers have not had a clear understanding of how their money has been used. As Treasury embarks on new programs, it must require that future recipients provide much greater disclosure of their use of TARP dollars. Finally, and perhaps most significantly, the TARP has raised the long-term challenge of how best to eliminate implicit guarantees. Belief remains widespread in the marketplace that, if the economy once again approaches the brink of collapse, the federal government will inevitably rush in to rescue financial institutions deemed too big to fail. This belief distorts prices, giving large financial institutions an advantage in raising capital that mid-sized and smaller banks – those not too big to fail – do not enjoy. These implicit guarantees also encourage major financial institutions to take unreasonable risks out of the belief that, no matter what happens, taxpayers will not allow their failure. So long as markets continue to believe that an implicit guarantee exists, moral hazard will continue to distort prices and endanger the nation’s economy, even after the last TARP program has been closed and the last TARP dollar has been repaid. Here is COP Chair Elizabeth Warren discussing the January report: Read the full report here .

  • COP September Report: US Automakers, Government Ownership, and Potential Conflicts

    In its September report, the Congressional Oversight Panel (COP) looks into the impact of the use of TARP funds to keep US automakers Chrysler and GM from going under. The panel looked first at whether Treasury broke any rules in bailing out the companies, and found that the government's behavior was "largely in line with the practices of other large bankruptcies," and that no bankruptcy laws were broken. But there are now added concerns about how the intersection of politics and business puts the government in a tricky situation as part owner of the automakers. And COP, predictably, is calling for more transparency: American taxpayers now own 10 percent and 61 percent of the new Chrysler and GM companies respectively. Treasury's support for the automotive industry differed significantly from its assistance to the banking industry. The bulk of the funds were available only after the companies had filed for bankruptcy, wiping out their old shareholders, cutting their labor costs, reducing their debt obligations and replacing some top management. The government's role raises serious oversight issues, particularly Treasury's conflict between competing objectives. The Panel recommends that, to mitigate the potential conflicts and political issues inherent in owning Chrysler and GM shares, Treasury should take exceptional care to explain its decision making and provide a full, transparent picture of its actions. The Panel also recommends that Treasury consider placing its GM and Chrysler shares in an independent trust that would be insulated from political pressure and government interference. You can read the full report here . Also, COP chair Elizabeth Warren speaks about the September report in this video:

  • New Push to Control Executive Pay; Grading Past Efforts

    According to the New York Times , the Obama Administration is going to require banks and corporations that receieved federal bailout money to clear any changes in its pay for top management with Kenneth Feinberg --the administration's new "pay czar." The proposal is part of a broad set of regulations on executive compensation expected to be announced by the administration as early as this week. Some of the rules are required by legislation enacted in the wake of the worst financial crisis since the Great Depression , and they would apply only to companies that received taxpayer money. Others, which are being described as broad principles, would set standards that the government would like the entire financial industry to observe as banks and other companies compensate their highest-paid executives, though it is not clear how stringent regulators will make them. This is not the first time the federal government has tried to regulate executive pay. Joann Lublin , management news editor for the Wall Street Journal , recounts some past efforts, and says "the record is not a very good one":

  • The Pitfalls of Bankruptcy for GM

    Chrysler filed for bankruptcy yesterday . It was a key step in the Obama Administration's efforts to save the automaker by pushing it into an alliance with Fiat. Now General Motors is on the clock. GM has until June 1 to work out a restructuring plan that meets the approval of the federal government, or it too might be filing for bakruptcy . William Holstein is the author of Why GM Matters: Inside the Race to Transform and American Icon , and he thinks bankruptcy would be a disaster for GM and the nation. Holstein says bankruptcy works when you get a number of people to the same table and work out a deal. But in the case of automakers, particularly GM, there are too many parties (all the autoparts manufacturers) to bring together. And, as he told an audience at Columbia Business School, he thinks the government's intervention in General Motors might actually prevent the automaker from making an effective transformation. Watch the full presentation here .

  • Where the Returned TARP Money Goes

    There has been much discussion of the bank bailout funds this week--and some of it is good news for those who want financial insitutions to start giving back. Goldman Sachs and JP Morgan want to repay their TARP money. And earlier this week Treasury Secretary Geithner says he expects $25 billion of the TARP funds to be repaid by the end of the year. So where does that money go? According to The Explainer -- Slate 's Christopher Beam --the money goes back into the program: If a bank wants to return its TARP money, it gets siphoned back—by wire, usually—into the original pool. In his testimony, Geithner said there's $110 billion left of the original $700 billion allocated by the TARP program. So once the expected $25 billion is returned, the remaining stash should reach $135 billion. The return of the money seems like a good thing all around. But The Explainer points out there is a downside: Of course, there are risks to letting the banks return money. One is that they'll need it again, which would create a public relations snafu. Then there's a systemic risk problem: If one bank appears stronger than others, the weaker ones might get hurt as investors yank their money, and short sellers bet against them. That's why Geithner is insisting on completing the stress test—which measures the banks' strength—before deciding which big companies get to return their money. Read The Explainer's full explanation here . And track the returned money at Slate's Tarp-O-Meter here .

  • Special Inspector General for TARP Calls for More Transparency, Opens Investigations

    SIGTARP Neil Barofsky Treasury Secretary Timothy Geithner will appear before the Congressional Oversight Panel --the five member group set up by Congress to evaluate the Treasury's implementation of TARP funds--later today. Geithner will not only be answering questions raised in COP's latest report , but will also have to address the findings of one Neil Barofsky . Barofsky is better known as SIGTARP: the special inspector general for the Troubled Asset Relief Program. This morning Barofsky released a 250-page report full of concerns over the federal government's bailout actions to date. In the report, he calls for more transparency fromt he government on where the money is going, and pushes for recipients to report clearly how they are using the funds: SIGTARP continues to recommend that Treasury require all TARP recipients to report on the actual use of TARP funds in the manner previously suggested. This recommendation is particularly important with respect to the potential expansion of the Capital Purchase Program (“CPP”) to include large insurance companies. The American people have a right to know how their tax dollars are being used, particularly as billions of dollars are going to institutions for which banking is certainly not part of the institution’s core business and may be little more than a way to gain access to the low-cost capital provided under TARP. Similarly, in light of the controversy surrounding AIG’s use of Government assistance, both through the paying of bonuses and in its dealings with counterparties, failure to impose this requirement with respect to the injection of yet another $30 billion into AIG would not only be a failure of oversight, but could call into further question the credibility of the Government’s efforts with respect to the assistance provided to AIG. This recommendation applies not only to capital investment and lending programs involving banks and other financial institutions, but also to programs in which TARP funds are used to purchase troubled assets, including details of each transaction in the Public-Private Investment Program (“PPIP”) as well as all transactions concerning the surrender of collateral (including the identity of the surrendering borrowers) in the Term Asset-Backed Securities Loan Facility (“TALF”). Barofsky also reports that he has opened 20 criminal investigations and six audits into the potentially wasteful spending (misdirected funds) of TARP dollars. The New York Times provides the full report here .
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