Edward Harrison

On Releasing Citi from TARP and Banking by Accounting Subterfuge

Angry Banker,

in yesterday's article I did point that it would be strange for the government to tax the company because of a change in control by the very same government. But I also said the law is the law and it is inappropriate for this to be done in explicit disregard to Congress.

You still have the problem of Citi getting a tax break and others not getting it. And of a loss of our tax money. Not a lot of cut and dry answers.


On Dec 18 07:29 AM Angry Banker wrote:

> Thank you for writing a much more objective article this time vis-a-vis
> the tax issue. It appears that you have now seen that application
> of that tax rule to cancel the deferred tax assets would have been
> illogical considering the government was not "acquiring" Citigroup
> for the tax benefits.

On Releasing Citi from TARP and Banking by Accounting Subterfuge

bbro, I am not as worried about the jobless recovery. I am more concerned about exogenous shocks (banking crisis in Europe, large hedge fund collapse due to forex exposure, etc) and an increase in taxes or decrease in government spending.


On Dec 18 04:21 AM bbro wrote:

> Ed.....if we get positive job growth...Will you quit worrying so
> much about a relapse...or are there other factors that you worry
> about....

U.S. Forfeiting Billions in Future Taxes So Citi Can Exit TARP

This is how I see it: if Citi were in such bad shape, all of this could have been avoided if the government allowed Citi to fail and then seized the company as unsafe and unsound, wiping out the equity. All employment contracts could be rewritten. The goal would have been to carve out bad assets from Citi, split Citi up and sell off pieces. The money from the asset sales and the bad bank assets could then be used to pay off subordinated unsecured lenders. Senior lenders could have been made substantially whole.

This is not rocket science. But, there is an ideological aversion to this strategy in the Obama White House for whatever reason. All of the issues on tax, compensation and bailout would be moot if Citi had been seized, split up and re-privatized.

Big Surprise: Most Big Banks Lack Capital

As with your coment on another article, I am pointing out downside risk. My baseline scenario had assumed that the large banks will earn enough money to make up for any potential writedowns and build adequate risk capital over time.

I am now more concerned that a double dip would jeopardize this.


On Nov 24 04:51 AM bbro wrote:

> Here we go again....Mr Harrison doesn't specify what charge off rates
>
> he thinks will occur for that matter neither does S&P. He keeps
> quoting 1931...well chargeoffs were 1.2 %. Using the two worst years
>
> were 1933 and 1934 the chargeoff were 3.1% and 3.4%...The adverse
>
> stress test had 4.5% for 2 years. Tangible common equity is not the
>
> only proxy for judging health but it certainly is one of them. Preprovision
> earnings is very important in this environment. Why doesn't Mr. Harrison
> discuss that????

Why Mortgages Aren’t Modified and What a Ruling Stopping Foreclosures Means

One thing I should note is that the Appeals court decision specifically said this is NOT a ruling on whether MERS can represent the mortgagee:

"We do not attempt to comprehensively determine all of the rights or duties of MERS as a nominee mortgagee."

That means the decision had a more narrow focus as to whether MERS was a 'necessary party' in this particular case. The finding is that it was not. The Kanas Supreme court agreed that MERS was not 'contingently necessary.' They went further in concluding that the fact that MERS neither possessed the promissory note or had authority to assign it means it cannot file suit.

"indirect monetary benefits do not establish protection under the Fourteenth Amendment"

However, because this is NOT a comprehensive judgment as to MERS' role as nominee, clarification is needed. That's why I think this is going to the Supreme Court.

Why Mortgages Aren’t Modified and What a Ruling Stopping Foreclosures Means

The question this now brings up is what is MERS' legal right to act on behalf of mortgage holders to enforce foreclosure. If MERS is limited, as this verdict suggests it is, then any homeowner could contest a filing. This gives them the right to continue in the foreclosed property until other means to force foreclosure are found by some interested party.

Ultimately that is good for the homeowner and bad for the investors/banks holding the securities linked to these assets.

I would expect this case to be contested.

U.K. PM Brown Rejects Call to Break Up Big Banks

I find it irritating as well. The title on my blog was:

PM Brown rejects BoE Head King’s call for breaking up big banks
www.creditwritedowns.c...

Somehow this gets changed to something with England in it. Obviously someone doesn't know their geography (or history).

Apologies.


On Oct 22 09:40 AM CraigB wrote:

> Good article but I think you mean UK in the title rather than England.
> Minor point.. but mildly irritating for the non-English Brits amoungst
> us.

More on Greed, Regulation, Lehman, The Financial Industry

Good point about definition. I will take that up directly in a post on Goldman. My answer to that here is that I don't want the government to define what is excessive and what is not excessive in finance, sports, music, television or anywhere else.

This is one reason I take a 'neutral' stance on the greed issue. My definition of excess may be vastly different than someone else's. I will say in this post on Goldman that there are other ways to attack so-called excessive compensation.


On Oct 16 06:55 AM chap08 wrote:

> Edward, I agree with you and what Roger Bootle had to say in your
> previous post. I disagree with the Austrians. As Bootle said:
>
> "These people are dangerous. The idea of letting the financial system
> implode and then waiting for the market to bring spontaneous, healthy
> revival out of the wreckage might read well on the pages of a book,
> but in the real world it would bring human misery on a gigantic scale.
> In today's society, people simply will not tolerate it. If that is
> what the market system is about then they will have none of it; and
> rightly so."
>
> Of course "people ... having none of it" is what has happened a number
> of times in history. It's called socialist, or national socialist
> revolution. I'd prefer that didn't happen here. As you said "a perfectly
> free market is a fiction". It is a fiction from the pages of the
> same book that Bootle was talking about. Consequently, we need regulation.
>
>
> As for greed, I believe that you need to do more thinking. I happen
> to agree that "greed is not good" but the statement is NOT self evident.
> The problem lies in defining "excessive", as in "excessive wealth".
> What is excessive? What is too much? Does Warren Buffett have more
> wealth than he needs? Of course he does. So why don't people think
> of him as greedy? Is America greedy - do we have an excess of material
> wealth? Does the rest of the world get by on less? Do our system
> and society promote greed but call it something else? I'm not sure
> that there are definitive answers.

Why Is Goldman a Bank Holding Company?

On Aug 14th, Goldman became a Financial Holding Company, the designation now used by all too big to fail banks and that was created as a holding company type specifically to retroactively allow the Travelers-Citcorp merger in Gramm-Leach-Biley in 1999.

The reason behind Goldman's actions was to allow it to continue operating largely as a broker-dealer but to remain under the fed's regulatory umbrella. This is the same reason other financial services companies operate under this designation.

See the definition here:
www.ffiec.gov/nicpubwe...

How Globalization Led to Universal Banking in America

I have no idea what you are talking about. Take out the word socialism and this is exactly what I said.

"However, the U.S. started to inflate from the word go, with this inflation taking on greater measure in the 1960s under the ”guns and butter” policy of Lyndon Johnson.

The French, under the charge of the sometimes anti-American leader Charles de Gaulle, were the first to balk at the inflation and they started to convert their U.S. dollar holdings to gold. Other nations followed. This led to the closing of the gold window in 1971, which was the formal recognition that the U.S. dollar was a depreciated currency due to money printing of the U.S. government."


On Jul 13 12:03 PM Socialism cannot compete! wrote:

> Apparently sovereignty and the good of their nation means nothing
> to some people! False premises lead to false conclusions. And so
> we have the misguided notions proposed by the author. Perhaps he
> should consider that closing the gold window was not a response to
> outdated regulation causing inflationary pressure due to higher profit
> potential for banks abroad, but that the inflationary pressure was
> due to government spending way beyond its means as the U.S. morphed
> into a socialist entitlement state. Surprise, surprise -- that sounds
> like a theme we continue to revisit!

How Investment Banking Has Changed - And Why It Must Be Addressed

The days of the partnership where investment bank executives had their fortunes on the line meant a better alignment of principal and agent. Those days are long gone now and I don't think they can ever be brought back. Is over-regulating the solution? No. I have no more faith in regulators than does Paul Zimbardo. After all, it was their failures which helped lead us to this point.

Nevertheless, I do think regulatory reform is necessary. The first thing that needs to be done is enforce the laws that are already on the books. We don't need a whole new set of regulations as Obama is suggesting. This just puts the blame on Wall Street, when the lack of enforcement by regulators was a large part of the problem during the bubbles.

And bringing back Glass-Steagall is not a 'fix' to all that ails us. Universal banking works just fine in Canada.

While I applaud efforts to regulate OTC derivatives and hedge funds, I see no reason to rush ahead and start imposing new regulations until we have an adequate understanding of where failures lay in the past.

Credit Cards: Higher Loan Losses Mean Higher Interest Rates

That is exactly the point: we need Congress and the President to make the rules to stop abuses. If we allow any sort of corporate behavior, the we will get any kind of behavior, including predatory lending and usury.

We need our representatives to step up and take considered action. The more I see this under Obama, the more disappointed I become. Isn't he supposed to be change?

On Jul 02 04:36 AM Michael Young wrote:

And I am unsympathetic to the view "don't take a credit card unless you can cope with the debt". It's up to the sector and the government to regulate and control borrowing.

Credit Cards: Higher Loan Losses Mean Higher Interest Rates

I think you have the gist of it down pretty well. The question is whether Obama will stop this kind of thing because he says consumer protection is necessary. Don't hold your breath.


On Jul 01 04:49 PM effeff63 wrote:

We pick up the banks and dust them off after they trip and stumble over their own greed driven risk taking, and now we have to indemnify those same banks for the poor credit risks they choose to continue to pursue.

Mortgage Cramdowns: A Disaster in the Making

Tom,

I have great respect for your analytical abilities. And I also appreciate your skepticism about Congress. I have taken the pro-cramdown tack on my blog, however. Largely, I see cramdowns as a necessary evil? Why: price discovery.

Look, the housing market needs to bottom out. This will happen more quickly if prices are written down more quickly. Both homeowners and banks are resisting this because of the losses associated with these writedowns. One reason banks are not doing modifications now is they have no capital to deal with this.

In my view, a good quid pro quo would be TARP money only if and after you have done mods and/or cramdowns. As it stands now, we are just seeing banks get free money. And they will be coming back for more. What should the government response be when the banks have their hands out again?

I disagree here but, nevertheless, appreciate your analysis and other posts.

Thanks, Tom