Monday, September 29, 2008

The bailout happened and you all missed it

In my last article, written yesterday, the 28th of September, I wrote that the deadline for the bailout was Tuesday, so that the bailout needed to pass today, on Monday.

Unfortunately I was proven right.

Now, many of you are giving high-fives, slapping each other on the back and writing to your favorite blogs, left and right wing, about how happy you are that you, the people of America, have called in, written in, emailed in, and made your views heard.

And you think that the bailout did not pass.

After all, the TV "news", the radio "news", the newspapers, the internet sources - all proclaim that The Bailout Has Been Defeated.

I call bullshit.

While you were following the saga of the bailout, the vote of 'No' by the House of Representatives, an important story slipped through the cracks - by design.

No one is reporting on this.

No one will advertise this.

No one really understand this, as it slipped under the radar.

But the bailout is in full effect now.

Bloomberg.com, dateline September 29, 2008 (today):

Title: Fed Pumps Further $630 Billion Into Financial System

The Federal Reserve will pump an additional $630 billion into the global financial system, flooding banks with cash to alleviate the worst banking crisis since the Great Depression.

The Fed increased its existing currency swaps with foreign central banks by $330 billion to $620 billion to make more dollars available worldwide. The Term Auction Facility, the Fed's emergency loan program, will expand by $300 billion to $450 billion. The European Central Bank, the Bank of England and the Bank of Japan are among the participating authorities.


So what does this mean?

What the hell is 'Term auction facility'?

Wikipedia:

Term Auction Facility is an instrument of monetary policy, introduced by the Federal Reserve to increase liquidity in United States financial markets. Although first instated as a temporary policy, as of 21 December 2007, the Fed will continue to hold bi-weekly auctions through the TAF.


This program, known in the US as the Term Auction Facility, enables the Fed to auction a set amount of funds to depository institutions, against a wide range of collateral.


And going to the Wikipedia page on the FED, in the section entitled 'Term auction facility' we find:

The Term Auction Facility is a program in which the Federal Reserve auctions term funds to depository institutions. The creation of this facility was announced by the Federal Reserve on December 12, 2007 and was done in conjunction with the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank to address elevated pressures in short-term funding markets. The reason it was created is because banks were not lending funds to one another and banks in need of funds were refusing to go to the discount window. Banks were not lending money to each other because there was a fear that the loans would not be paid back. Banks refused to go to the discount window because it is usually associated with the stigma of bank failure. Under the Term Auction Facility, the identity of the banks in need of funds is protected in order to avoid the stigma of bank failure.


Gee, I wonder what all this means.

Banks will be able to get cold hard cash - $630 billion - in exchange for "collateral", while remaining anonymous thanks to the rules of TAF. Collateral in this case being a loose term meaning absolutely anything.

For example, take the accounting term "goodwill".

Goodwill is a bullshit category which a company uses to put in the positive column of the ledger, representing the customer loyalty and brand name recognition, among other things.

It is an intangible asset - meaning it's a number pulled out of thin air, a made up number (and you thought accounting was almost a science, and a conservative and a stodgy one at that - news flash, accounting is VERY creative in this country).

Naked Capitalism has an article on a very recent national accounting rule change regarding goodwill, dateline September 17, 2008 (quoting NYTimes article - fuck the subscription):

With little notice, regulators at four agencies that oversee the nation’s banks and savings associations on Monday and Tuesday proposed a significant change in accounting rules to bolster banks and encourage widespread industry consolidation by making them more attractive to prospective purchasers. The regulators and the Bush administration have decided to resort to further loosening of the accounting rules to try to get the industry through problems that some experts have attributed in large part to years of deregulation.......

The action by the four banking agencies provides more favorable accounting treatment of so-called goodwill, an intangible asset that reflects the difference between the market value and selling price of a bank. The move is similar to a step taken in the midst of the savings-and-loan crisis that helped many institutions in the short run. Over the longer term, that decision increased the overall costs of the bailout after the government took away the goodwill benefits


See, what happened is the rules for reporting goodwill as an asset just got looser and easier.

Article then quotes Adam Levitin at Credit Slips:

Goodwill is a very problematic asset--it doesn't have much (if any) liquidation value and can't be sold by itself. No one will lend against goodwill. If capital requirements are really about ensuring that there is a solid fundamental core of assets backing lending operations, counting goodwill is quite questionable. The most troubling part of this is that we've been here before--in the S&L crisis, when the Federal Home Loan Bank Board (now OTS) permitted thrifts to count goodwill toward regulatory capital. The results weren't pretty, as counting goodwill toward capital masked institutional insolvency and permitted thrifts to get even more leveraged relative to real assets.


I have to wonder - as a bank or an investment "bank" - can you count goodwill as a collateral when you are going for the billions the FED made available in the Term auction facility?

Ah, the joys of creative accounting.

But wait that's not all.

Lets take a peek at the federalreserve.gov page, Press Release Release Date: September 29, 2008:

Actions by the Federal Reserve include: (1) an increase in the size of the 84-day maturity Term Auction Facility (TAF) auctions to $75 billion per auction from $25 billion beginning with the October 6 auction, (2) two forward TAF auctions totaling $150 billion that will be conducted in November to provide term funding over year-end, and (3) an increase in swap authorization limits with the Bank of Canada, Bank of England, Bank of Japan, Danmarks Nationalbank (National Bank of Denmark), European Central Bank (ECB), Norges Bank (Bank of Norway), Reserve Bank of Australia, Sveriges Riksbank (Bank of Sweden), and Swiss National Bank to a total of $620 billion, from $290 billion previously.


There is that TAF acronym again.

This basically means that the FED will pump money into the world economy, to the tune of $620 billion.

I am not a financial whiz by any stretch of the imagination, but I do know by now that money does not grow on trees.

If I understand this correctly, the FED is afraid that banks will not lend each other and others money (as happened before during the S&L scandal, which made the Bush family very rich indeed) and so instead of printing $290 billion, they will now make available $620 billion.

Where is that money going to come from?

The trees, obviously.


A plea.
I am looking to educate myself on this topic.

If you are a finance expert, if you are a CPA, your input would be appreciated either on my blog, on DIGG or through the email.

2 comments:

Anonymous said...

I have no idea what is going on but I know for sure people will be screwed as usual.
Congress is off for next 2 days.
Some holiday I guess...

Greg Bacon said...

Please give until it hurts to the No Banker Left Behind Act

How can anyone with a heart expect someone to squeak by on only 3.7 BILLION a year?

Wall Street Winners Get Billion-Dollar Paydays

By JENNY ANDERSON April 16, 2008

Hedge fund managers, those masters of a secretive, sometimes volatile financial universe, are making money on a scale that once seemed unimaginable, even in Wall Street’s rarefied realms.

One manager, John Paulson, made $3.7 billion last year. He reaped that bounty, probably the richest in Wall Street history, by betting against certain mortgages and complex financial products that held them.

Mr. Paulson, the founder of Paulson & Company, was not the only big winner. The hedge fund managers James H. Simons and George Soros each earned almost $3 billion last year, according to an annual ranking of top hedge fund earners by Institutional Investor’s Alpha magazine, which comes out Wednesday.

Hedge fund managers have redefined notions of wealth in recent years. And the richest among them are redefining those notions once again.

Their unprecedented and growing affluence underscores the gaping inequality between the millions of Americans facing stagnating wages and rising home foreclosures and an agile financial elite that seems to thrive in good times and bad. Such profits may also prompt more calls for regulation of the industry.

Even on Wall Street, where money is the ultimate measure of success, the size of the winnings makes some uneasy. “There is nothing wrong with it — it’s not illegal,” said William H. Gross, the chief investment officer of the bond fund Pimco. “But it’s ugly.”

The richest hedge fund managers keep getting richer — fast. To make it into the top 25 of Alpha’s list, the industry standard for hedge fund pay, a manager needed to earn at least $360 million last year, more than 18 times the amount in 2002. The median American family, by contrast, earned $60,500 last year.

Combined, the top 50 hedge fund managers last year earned $29 billion.
That figure represents the managers’ own pay and excludes the compensation of their employees. Five of the top 10, including Mr. Simons and Mr. Soros, were also at the top of the list for 2006. To compile its ranking, Alpha examined the funds’ returns and the fees that they charge investors, and then calculated the managers’ pay.

Top hedge fund managers made money in many ways last year, from investing in overseas stock markets to betting that prices of commodities like oil, wheat and copper would rise. Some, like Mr. Paulson, profited handsomely from the turmoil in the mortgage market ripping through the economy.

As early as 2005, Mr. Paulson began betting that complex mortgage investments known as collateralized debt obligations would decline in value, much as Wall Street traders bet that shares will drop in price. In that case, known as shorting, they borrow shares and sell them, wait for the price to fall, buy the shares back at a lower price and return them, pocketing the profit.

http://www.nytimes.com/2008/04/16/business/16wall.html?n=Top/News/Business/Markets