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Linus Wilson
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Dr. Linus Wilson is an associate professor of finance at the University of Louisiana at Lafayette. He received his doctor of philosophy in financial economics from the University of Oxford in England in 2007. He has conducted extensive research into the Troubled Asset Relief Program (TARP). He... More
My company:
Oxriver Capital
My blog:
Academic Research
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  • FDIC Nominee Hoenig Silent about Billions in Bailout Loan Guarantees

    Tom Hoenig, the dissident voice of the Federal Reserve who pushed for a tougher inflation stance at the central bank, comes up for his confirmation hearing as Vice Chairman of the Federal Deposit Insurance Corporation (FDIC) on Thursday, November 17, 2011, in the Senate Banking Committee at 10 A.M.  This appointment could be construed as the latest attempt by the White House in its attempts to stack the Fed with inflation doves.

                Unfortunately, this is a common tactic of the White House.  Quiet a dissident voice with the promise of another appointment.  The last part of Harvard Law Professor Elizabeth Warren’s tenure as overseer of the Troubled Asset Relief Program (TARP) was punctuated with pulled punches about the administration’s handling of the $700 billion bailout.  Ms. Warren was named the effective head of the newly created Consumer Financial Protection Bureau by the President without Senate confirmation.  Now she is running to represent Massachusetts in the U.S. Senate presumably with White House support.

                At a time when the House Financial Services Committee wants to put the salaries of the some of the biggest recipients of Federal bailouts, Fannie Mae and Freddie Mac, on government pay scales, Mr. Hoenig is earning over $20,000 a month in retirement as the President of the Kansas City Fed because he was exempted from federal pay scales.  The Fed has figuratively printed money to pay generous salaries to the Presidents of its branch banks who count as their alumni Mr. Geithner and Mr. Hoenig.  Yet, Mr. Geithner and Mr. Hoenig were Presidents of regional Federal Reserve banks while the Federal Reserve passed out over $17 trillion in bailout loans of cash and securities to a group of about 20 investment banks and brokerage houses called primary dealers.  Some of these same primary dealers set Mr. Geithner’s salary.  (That was not a misprint.  These banks got over $17,000,000,000,000 in bailout loans from the Federal Reserve, which over 20 times more than the $700,000,000,000 initially authorized under the Troubled Asset Relief Program (TARP) bailout.)  The least these investment banks could do was pad Mr. Geithner’s retirement fund.

                It is argued by some that Mr. Hoenig will help end too big to fail (TBTF) at the FDIC.  This seems unlikely.  First, the Federal Reserve is the supervisor of the bank holding companies some of which are the TBTF banks.  If Mr. Hoenig wanted to end TBTF, he wasn’t very successful as one of the most powerful regulators of these institutions.  The FDIC is generally the primary supervisor of community banks and has limited jurisdiction over the TBTF banks. 

    Moreover, Mr. Hoenig has never publically questioned the FDIC’s hundred’s of billions in bailout loan guarantees to primarily Wall Street’s elite.  Unfortunately, the FDIC program known as the Temporary Liquidity Guarantee Program (TLGP) has made hundreds of billions of dollars if not trillions of dollars in loan guarantees.  Yet, the FDIC has not disclosed the recipients of these guarantees.  That allows the FDIC to hide losses from this bailout program.  For example, no news outlet has reported on the losses to the TLGP from the failure of Integra Bank, which received $50 million in loan guarantees, because the FDIC has not distributed a list of these bailout recipients.  The FDIC is now writing checks to make those Integra Bank bondholders with taxpayer guarantees whole.  This program could be sitting on billions in losses, but taxpayers would never know.  If Mr. Hoenig wants to prove himself as an opponent of too big to fail, he should say publicly—and back those words with actions—that he believes that the FDIC should disclose the names of all the recipients of TLGP bailout loan guarantees since the program began in October 2008.

    Nov 16 9:26 AM | Link | Comment!
  • New Bloomberg Data Reveals that the Fed Saved Wall Street

    Bloomberg after many years of legal rangling to force the Federal Reserve to disclose its secret financial crisis loans to Wall Street's big banks came out with a breathtaking look at the extent that Morgan Stanley (NYSE:MS), Goldman Sachs (NYSE:GS), Citigroup (NYSE:C), and Bank of America (NYSE:BAC) depended on the central bank to stay in business.  Morgan Stanley even borrowed more than a $100 billion from the Fed in one day!  While the contoversial $700 billion Troubled Asset Relief Program (TARP) has recieved the greatest scrutiny, the Fed's emergency lending programs which were extended to investment banks, foreign firms, and non-financial firms have gone largely unoticed.  

    As Bloomberg points out, the Federal Reserve's emergency lending programs were much bigger at $1.2 trillion than both the amount of money authorized or spent by TARP, $700 billion and $475 billion, respectively.  While TARP was debated in the halls of Congress long after the bill was defeated and then passed, very little scrutiny of these emergency lending programs has made it into the politcal or public discourse.  My new joint work “Does Receiving TARP Funds Make it Easier to Roll Your Commercial Paper Onto the Fed?” written with Yan Wendy Wu of Wilfrid Laurier University indicates that TARP recipients were more likely to partipate in one of the Fed's largest emergency lending programs.  (To download the paper, click on the "One-click download" link above the abstract.)  My new joint work shows that TARP recipients were twice as likely to sell their commercial paper to the Fed though its $738 billion program to buy company’s short-term debt. 

    On Table 7 of my joint work, there is a list of the 81 different firms that sold their short-term debt to the Fed.  
    Most of those fi rms were based outside the U.S., 45 firms out of 81.  Many firms like BMW were not even financial firms.  15 firms from the TARP sold their commercial paper to the Fed.  The TARP recipients that did participate in the Fed program had weaker capital ratios and profitability ratios in 2008 than the TARP recipients that did not sell their commercial paper to the Fed. 

    According to Hank Paulson’s memoir, Ben Bernanke, the Federal Reserve Chairman, and Secretary Paulson debated housing the Commercial Paper Funding Facility (CPFF) in the TARP, but Paulson favored the program being run by the Fed because he thought it would take up too much of the TARP’s purchasing power.  It appears that Secretary Paulson was right.  At its peak, the U.S. Treasury was only authorized to spend up to $700 billion.  The $738 billion spent on the commercial paper funding facility exceeds the maximum Congressional authorization for the TARP program. 

    The Fed programs are much less controversial than the TARP, but the Federal Reserve’s emergency lending programs were a bigger bailout than the TARP turned out to be.  Unfortunately, the world's financial sector now believes that it does not have to worry about its liquidity or solvency because the Fed has become the lender of first and last resort to all comers.


    Aug 24 11:53 AM | Link | Comment!
  • Maxine Waters' Case for the Son of TARP

    The WSJ reports that Congresswomen Maxine Waters (D-CA) was charged by a House Ethics Panel with violating House Rules.  At issue is whether she abused her office to obtain bailout funds for a bank, OneUnited based in Boston, MA.  That bank received $12.1 million in Troubled Asset Relief Program (TARP) funds. While her husband owned a large stake in OneUnited, Ms. Waters was allegedly calling and meeting with then U.S Treasury Secretary Hank Paulson and urging that the U.S. Treasury bail out the insolvent lender.

    OneUnited gambled the bank's capital by owning $51.8 million in Fannie Mae (FNM) and Freddie Mac (FRE) preferred stock prior to their government takeover.  After Fannie Mae and Freddie Mac were seized by the government, that stock plummeted in value.  See exhibit 13 on page 67 (86) of the ethics complaint, which says that stock dropped to about $4.8 million in value.  OneUnited Bank was left with NEGATIVE $7.0 million in equity, according to to this spreadsheet, which was mailed by OneUnited bank officials to the U.S. Treasury.

    My joint research with Wendy Yan Wu, "Escaping TARP" shows that the average TARP recipient had a tier 1 capital ratio of 11.02 percent.  Before it lost the bank's capital on the Fannie and Freddie preferred stock, OneUnited was near the regulatory minimum of a 5 percent tier 1 capital ratio.  After the mortgage giants were seized to prevent their failure, OneUnited's tier 1 capital ratio was about -1 percent.  In other words, OneUnited was a zombie bank.  The stock owned by Ms. Waters' husband would have been worthless without a government rescue and forbearance from regulators.

    Yet, despite knowing that OneUnited had negative equity, and thus did not meet even the minimum capital requirements to be open for business, the U.S. Treasury invested $12.1 million of taxpayers' dollars in this zombie bank on December 19, 2008.  Ms. Waters' alleged use of her position to enrich herself at taxpayer expense is troubling.  So is the U.S. Treasury's ultimate investment in OneUnited Bank based in House Financial Services Committee Chairman's, Barney Frank's (D-MA), district.  My paper "TARP's Deadbeat Banks" shows that OneUnited has missed five straight dividends.  If it misses its sixth dividend, the U.S. Treasury will have the right to appoint two new directors to the banks' board.  Taxpayers representatives probably will soon be holding a board seat at OneUnited like Ms. Waters husband once held.

    Ms. Waters' and Mr. Frank's are among those who are attempting to pass legislation to invest up to $30 billion in banks like OneUnited.  An amendment pushed by U.S. Senator George LeMieux (R-FL) says that banks on the Federal Deposit Insurance Corporation's (FDIC's) problem bank list can get access to taxpayer funds, if they get matching amounts of private capital in the amended "Son of TARP" bill.  CIT Group raised private capital prior to receiving TARP funds, and it failed nevertheless.  Should we give Mr. LeMieux, Ms. Waters, and Mr. Frank another $30 billion slush fund to play with?

    Disclosure: I only have long positions in broad-based index funds. I do not own individual securities issued by the companies mentioned.
    Aug 03 11:57 PM | Link | Comment!
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