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Friday, January 16, 2009

Good Bank, Bad Bank: The Rich Win Again

So let’s see if I understand this brilliant brain fart correctly…

Citigroup (C) and Bank of America (BAC) reported earnings so dismal it gave momentum to the whole “Bad Bank” plan. The plan would split the walking dead into a “Good Bank” and a “Bad Bank”. Investors of course would only be exposed to the “Good Bank”. The government would purge the banks of all the illiquid toxic assets and place those in the “Bad Bank”. Taxpayers would own the bad bank.

Translation: People with money, so the wealthier component of society would continue to have a stake in the “Good Bank” via investments in common, preferred, or bonds. They would be exposed to all the upside potential. The people with the least amount of money, the average taxpayer who doesn’t have the money to even buy a handful of shares, would get all the downside risk. They will fund the losses via higher taxes without the benefit of being long the “Good Banks” as an offset. The middle class gets raped again… as expected. Amazing.

The rich own the “Good Banks” voluntarily and the poor own the “Bad Banks” by dictate. The rich win again. What a fun game.

Citigroup Reports $8.3 Billion Loss, Split Into Two Businesses: “Citigroup Inc. posted an $8.29 billion fourth-quarter loss, completing its worst year, as the credit crisis eroded mortgage-bond prices and customers missed more loan payments. The stock rose after the company announced plans to split in two.

The net loss of $1.72 a share compared with a loss of $9.8 billion, or $1.99, a year earlier, the New York-based company said in a statement today. Excluding a $3.9 billion gain from the sale of a German consumer bank and other results from discontinued operations, the bank’s loss was $2.44 a share. On that basis, the loss was more than twice as wide as the $1.08 average estimate of analysts in a Bloomberg survey.

As Citigroup plunged 77 percent last year in New York trading, the bank was forced to accept $45 billion of U.S. government rescue funds. Chief Executive Officer Vikram Pandit agreed this week to cede control of the Smith Barney brokerage to Morgan Stanley. He also said today he plans to eventually sell the CitiFinancial consumer-lending unit and Tokyo-based Nikko Asset Management Co., after moving them into a new unit called Citi Holdings.

“It looks like a kitchen-sink quarter,” said Peter Sorrentino, who helps manage $16 billion at Huntington Asset Advisors Inc. in Cincinnati, including Citigroup shares. “Sweep it all in there and get this behind us.”

Citigroup climbed to $4.26 in New York from $3.83, after plunging 23 percent yesterday on concern the bank may have to seek more aid from the government.

Spokesman Mike Hanretta declined to comment on whether the bank is in discussions over an additional infusion.”

Bank of America Posts Quarterly Loss After Bailout (Update2): “Bank of America Corp., the largest U.S. bank by assets, posted its first loss since 1991 and cut the dividend to a penny after receiving emergency government funds to support the acquisition of Merrill Lynch & Co.

The fourth-quarter loss of $1.79 billion, or 48 cents a share, compared with net income of $268 million, or 5 cents, a year earlier, the Charlotte, North Carolina-based company said in a statement today. Results didn't include a $15.3 billion loss at Merrill, acquired this month.

The losses, coupled with the government lifeline of $138 billion, raise doubts about the future of Chief Executive Officer Kenneth D. Lewis, who engineered takeovers of unprofitable New York-based brokerage Merrill and ailing mortgage lender Countrywide Financial Corp. during the worst market slump since the Great Depression. Bank of America plummeted 75 percent in New York trading through yesterday since the Merrill deal was announced in September.

“This thing is unraveling so fast Lewis may know his job is lost,” said Paul Miller, an analyst at Friedman Billings Ramsey Group Inc. in Arlington, Virginia, who has an “underperform” rating on Bank of America. The management team has “lost credibility,” he said before results were announced.

“You will see the benefits” when the economy improves, Lewis told investors during a conference call today. The bank doesn't comment on “uninformed gossip,” spokesman Robert Stickler said.

U.S. ‘Bad Bank’ Plan Gets Momentum to Revive Lending (Update2): “Renewed questions about U.S. banks’ viability are pushing regulators toward a new plan that would remove toxic assets from bank balance sheets, in what may become the biggest effort yet to unfreeze lending.

President-elect Barack Obama’s advisers see an increasingly grave banking crisis and are considering proposals far more sweeping than any steps that have been taken so far, according to people who’ve discussed the outlook with them.

“They need to do something dramatic,” said Harvard University Professor Kenneth Rogoff, a former chief economist at the International Monetary Fund, and member of the Group of Thirty counselors on financial matters, a panel that includes Treasury Secretary-designate Timothy Geithner and Lawrence Summers, incoming director of the National Economic Council.

Federal Reserve officials are focusing on the option of setting up a so-called bad bank that would acquire hundreds of billions of dollars of troubled securities now held by lenders. That may allow banks to reduce write-offs, free up capital and begin to increase lending. Paul Miller, a bank analyst at Friedman Billings Ramsey & Co. in Arlington, Virginia, estimates that financial institutions need as much as $1.2 trillion in new aid.

Other steps that may be under consideration include providing further guarantees for toxic assets that remain on the banks’ books, as officials did for Citigroup Inc. in November and with a $118 billion backstop for Bank of America Corp. today, or purchasing selected investments. Federal Deposit Insurance Corp. Chairman Sheila Bair yesterday played down the alternative of nationalizing lenders.”


Anonymous said...

"Played down the alternative", indeed.
Nationalize them. The Banking sector is too important to leave in the hands of gangsters/fraudsters/crooks.

CharlieNoSpam said...

The news reported recently of CitiBank’s acceptance of a proposal to allow bankruptcy judges the ability to modify payments; the problem is that this is just one lender, and it requires a case by case review by bankruptcy judges.
A proposal called the Mortgage Equity Protection Plan is for a program that is more streamlined (using the internet), not needing all the paperwork or expense of a conventional bankruptcy, not needing to have each case reviewed by a bankruptcy judge; it takes advantage of current low fixed rates and gives all the loan servicers (& lenders) the incentive to address current and future defaults. (I assume you are familiar with the problem that Loan Servicers face in renegotiating mortgages, on behalf of their investors of Mortgage backed securities).
Most importantly, the plan would almost instantaneously end the massive numbers of homes entering the foreclosure market for the next 5 years. From a populist point of view, it would sell well, as it would be directed to helping homeowners, instead of giving it to banks (hoping they will start lending again). Meanwhile the investors who are being paid from this program, can invest again in FNMA (government backed) mortgage securities. Investors have an incentive to put their money back into this market, because the plan would solve the problem of decreasing prices, and FNMA offers better returns than Treasury notes. Another reason that this will appeal to politicians and pundits, is that these investors will not be using the money to pay executive bonuses or buy other banks,
The plan also solves the problems that we will face in 2010 when HEL loans need to be refinanced. Dr. Susan Wachter of Wharton has written extensively about this. See the attached for more specifics.
The Mortgage Equity Protection Program meets another goal of fiscal responsibility (i.e. getting the Treasury repaid).
This plan comes from my years of experience in the Real Estate industry and my work at Mortgage Reporting Service, a consumer service that published mortgage rates for all the lenders in the Philadelphia area in the 1980’s.
I am concerned that if we don’t stop the drop in home prices now, they are going to crater to absurd levels!
This information can be found at I would be interested in your feedback

PS. You may wish to include this information on your website or blog. I would also be interested in cross linking with your blog.

corporatebully said...

RBC Bank President Gordon Nixon - Salary $11.73 Million


I'm a commercial fisherman fighting the Royal Bank of Canada (RBC Bank) over a $100,000 loan mistake. I lost my home, fishing vessel and equipment. Help me fight this corporate bully by closing your RBC Bank account.

There was no monthly interest payment date or amount of interest payable per month on my loan agreement. Date of first installment payment (Principal + interest) is approximately 1 year from the signing of my contract.
Demand loan agreements signed by other fishermen around the same time disclosed monthly interest payment dates and interest amounts payable per month.The lending policy for fishermen did change at RBC from one payment (principal + interest) per year for fishing loans to principal paid yearly with interest paid monthly. This lending practice was in place when I approached RBC.
Only problem is the loans officer was a replacement who wasn't familiar with these type of loans. She never informed me verbally or in writing about this new criteria.

Phone or e-mail:
RBC President, Gordon Nixon, Toronto (416)974-6415
RBC Vice President, Sales, Anne Lockie, Toronto (416)974-6821
RBC President, Atlantic Provinces, Greg Grice (902)421-8112 mail
RBC Manager, Cape Breton/Eastern Nova Scotia, Jerry Rankin (902)567-8600
RBC Vice President, Atlantic Provinces, Brian Conway (902)491-4302 mail
RBC Vice President, Halifax Region, Tammy Holland (902)421-8112 mail
RBC Senior Manager, Media & Public Relations, Beja Rodeck (416)974-5506 mail
RBC Ombudsman, Wendy Knight, Toronto, Ontario 1-800-769-2542 mail
Ombudsman for Banking Services & Investments, JoAnne Olafson, Toronto, 1-888-451-4519 mail

"Fighting the Royal Bank of Canada (RBC Bank) one customer at a time"

Anonymous said...