Posted by rogerhollander in Economic Crisis.
Tags: beithner bank plan, citigroup, fdic.taxpayer, geithner, Goldman Sachs, joshua holland, jpmorgan chase, moral hazard, Morgan Stanley, roger hollander, spencer bachus, tarp, toxic assets, treasury department, troubled assets, zombie banks
Posted by Joshua Holland, AlterNet at 1:17 PM on April 3, 2009.
Banks ”colluding to swap assets at inflated prices using taxpayers’ dollars.”
Recall the Geithner Bank Plan in a nutshell: private investors will partner with the government to buy those “toxic” assets off of struggling “zombie banks.” The buyers would put about 7 percent of the purchase price down, and the Treasury Department would match that with another 7 or so percent. Then the FDIC would offer government-backed loans for the remainder.
If the assets were to recover their value and turn a profit down the road, the investors would split the profits with the government. But if they don’t – if their values continue to tank, and it’s entirely likely many will — then you and I and everyone else we know who pays taxes will be on the hook for the lion’s share of the losses.
In other words, we’re letting bargain-hunters pick up the “troubled assets” that are burdening a number of financial institutions for pennies on the dollar, and limiting their downside risk if it doesn’t turn out well. It’s a pretty sweet deal for those investors. And, as I wrote when Geithner first announced the plan, it’s also pretty much the definition of “moral hazard.”
That background is important in order to understand just how incredibly infuriating this report from The Financial Times is:
US banks that have received government aid, including Citigroup, Goldman Sachs, Morgan Stanley and JPMorgan Chase, are considering buying toxic assets to be sold by rivals under the Treasury’s $1,000bn (£680bn) plan to revive the financial system.
The plans proved controversial, with critics charging that the government’s public-private partnership – which provide generous loans to investors – are intended to help banks sell, rather than acquire, troubled securities and loans.
Participating in the plan as a buyer could be complicated for Citi, which has suffered billions of dollars in writedowns on mortgage-backed assets and is about to cede a 36 per cent stake to the government.
Citi declined to comment. People close to the company said it was considering whether to take part in the plan as a seller, buyer or manager of the assets, but no decision had yet been taken.
Goldman and Morgan Stanley have large fund management units and have pledged to increase investments in distressed assets.
This week, John Mack, Morgan Stanley’s chief executive, told staff the bank was considering how to become “one of the firms that can buy these assets and package them where your clients will have access to them”.
Goldman and JPMorgan did not comment, but bankers said they were considering buying toxic assets.
Get it? We first pumped tens of billions of dollars into these institutions via the TARP, set up another program to aid them further by offering investors the opportunity to purchase the “shitpile” on their books with sweet federal subsidies, and they then turn around and now they’re essentially going to buy the assets back with taxpayer-backed loans.
Critics say that would leave the same amount of toxic assets in the system as before, but with the government now liable for most of the losses through its provision of non-recourse loans.
Administration officials reject the criticism because banking is part of a financial system, in which the owners of bank equity — such as pension funds — are the same entities that will be investing in toxic assets anyway. Seen this way, the plan simply helps to rearrange the location of these assets in the system in a way that is more transparent and acceptable to markets.
What mumbo-jumbo — “banking is part of the financial system.” Thanks, but there’s a difference between pension funds and the financial institutions who have taken boatloads of public cash because they were deemed “too big to fail.”
But the obviousness of Big Finance’s rip-off may get in the way of its success. The Financial Times warns, “public opinion may not tolerate the idea of banks selling each other their bad assets …”
And let’s give a Republican who’s trying to capitalize on that sentiment some rare credit around here …
Spencer Bachus, the top Republican on the House financial services committee, vowed after being told of the plans by the FT to introduce legislation to stop financial institutions ”gaming the system to reap taxpayer-subsidized windfalls”.
Mr Bachus added it would mark ”a new level of absurdity” if financial institutions were ”colluding to swap assets at inflated prices using taxpayers’ dollars.”
Shocking but true: Spencer Bachus is 100 percent right.
PS: Make sure to catch this piece in today’s WaPo about Giethner’s own role in creating the financial meltdown.
Joshua Holland is an editor and senior writer at AlterNet.
Posted by rogerhollander in Economic Crisis.
Tags: AIG, AIG bailout, aig bonuses, aig counterparties, aig scandal, bank of america, barclays, bernanke, deutsche bank, eliot spitzer, geithner, Goldman, Goldman Sachs, Henry Paulson, jpmorgan chase, lloyd balnkfein, Merrill Lynch, Morgan Stanley, roger hollander, tarp, taxpayers, treasury department, ubs
The Real AIG ScandalIt’s not the bonuses. It’s that AIG’s counterparties are getting paid back in full.
Posted Tuesday, March 17, 2009, at 10:41 AM ET
AIG’s Manhattan, N.Y., office
Everybody is rushing to condemn AIG’s bonuses, but this simple scandal is obscuring the real disgrace at the insurance giant: Why are AIG’s counterparties getting paid back in full, to the tune of tens of billions of taxpayer dollars?
For the answer to this question, we need to go back to the very first decision to bail out AIG, made, we are told, by then-Treasury Secretary Henry Paulson, then-New York Fed official Timothy Geithner, Goldman Sachs CEO Lloyd Blankfein, and Fed Chairman Ben Bernanke last fall. Post-Lehman’s collapse, they feared a systemic failure could be triggered by AIG’s inability to pay the counterparties to all the sophisticated instruments AIG had sold. And who were AIG’s trading partners? No shock here: Goldman, Bank of America, Merrill Lynch, UBS, JPMorgan Chase, Morgan Stanley, Deutsche Bank, Barclays, and on it goes. So now we know for sure what we already surmised: The AIG bailout has been a way to hide an enormous second round of cash to the same group that had received TARP money already.
It all appears, once again, to be the same insiders protecting themselves against sharing the pain and risk of their own bad adventure. The payments to AIG’s counterparties are justified with an appeal to the sanctity of contract. If AIG’s contracts turned out to be shaky, the theory goes, then the whole edifice of the financial system would collapse.
But wait a moment, aren’t we in the midst of reopening contracts all over the place to share the burden of this crisis? From raising taxes—income taxes to sales taxes—to properly reopening labor contracts, we are all being asked to pitch in and carry our share of the burden. Workers around the country are being asked to take pay cuts and accept shorter work weeks so that colleagues won’t be laid off. Why can’t Wall Street royalty shoulder some of the burden? Why did Goldman have to get back 100 cents on the dollar? Didn’t we already give Goldman a $25 billion capital infusion, and aren’t they sitting on more than $100 billion in cash? Haven’t we been told recently that they are beginning to come back to fiscal stability? If that is so, couldn’t they have accepted a discount, and couldn’t they have agreed to certain conditions before the AIG dollars—that is, our dollars—flowed?
The appearance that this was all an inside job is overwhelming. AIG was nothing more than a conduit for huge capital flows to the same old suspects, with no reason or explanation.
So here are several questions that should be answered, in public, under oath, to clear the air:
What was the precise conversation among Bernanke, Geithner, Paulson, and Blankfein that preceded the initial $80 billion grant?
Was it already known who the counterparties were and what the exposure was for each of the counterparties?
What did Goldman, and all the other counterparties, know about AIG’s financial condition at the time they executed the swaps or other contracts? Had they done adequate due diligence to see whether they were buying real protection? And why shouldn’t they bear a percentage of the risk of failure of their own counterparty?
What is the deeper relationship between Goldman and AIG? Didn’t they almost merge a few years ago but did not because Goldman couldn’t get its arms around the black box that is AIG? If that is true, why should Goldman get bailed out? After all, they should have known as well as anybody that a big part of AIG’s business model was not to pay on insurance it had issued.
Why weren’t the counterparties immediately and fully disclosed?
Failure to answer these questions will feed the populist rage that is metastasizing very quickly. And it will raise basic questions about the competence of those who are supposedly guiding this economic policy.
Posted by rogerhollander in Economic Crisis.
Tags: arizona state, bank of america, credit cards, debt, debt trap, jonahtan glater, jpmorgan chase, michigan state, new mexico state, predatory loans, roger hollander, student credit, student loan, university of orgeon, visa, Wells Fargo
JONATHAN D. GLATER
EAST LANSING, Mich. — When Ryan T. Muneio was tailgating with his parents at a Michigan State
football game this fall, he noticed a big tent emblazoned with a Bank of America
logo. Inside, bank representatives were offering free T-shirts and other merchandise to those who applied for credit cards and other banking products.
“They did a good job,” Mr. Muneio, 21 and a junior at Michigan State, said of the tactic. “It was good advertising.”
Bank of America’s relationship with the university extends well beyond marketing at sports events. The bank has an $8.4 million, seven-year contract with Michigan State giving it access to students’ names and addresses and use of the university’s logo. The more students who take the banks’ credit cards, the more money the university gets. Under certain circumstances, Michigan State even stands to receive more money if students carry a balance on these cards.
Hundreds of colleges have contracts with lenders. But at a time of rising concern about student debt — and overall consumer debt — the arrangements have sounded alarm bells, and some student groups are starting to push back.
The relationships are reminiscent of those uncovered two years ago between student loan companies and universities. In those, some lenders offered universities an incentive to steer potential borrowers their way.
Here at Michigan State, the editors of the student newspaper wrote this fall that “it doesn’t take a giant leap for someone to ask why the university should encourage responsible spending when it receives a cut of every purchase.”
At Arizona State University, students set up a table on campus last spring to warn of the danger of debt and urge students to support limits on on-campus marketing.
The contracts, whose terms vary but usually involve payments to colleges or alumni associations that agree to provide lists of students’ names, have come under harsh criticism in Washington.
“That is absolutely outrageous, the sharing of students’ information with the banks,” Representative Carolyn B. Maloney, Democrat of New York, who oversaw a June hearing on campus credit card marketing, said in a recent interview. “That should be outlawed.”
College campuses are one place that young Americans are introduced to credit and the possibility of spending beyond their means, a problem now confronting the nation as a whole. For banks, the relationships are a golden marketing opportunity. For colleges, they are a revenue source at a time of declining public funding. And for students, they help pay the bills and allow more shopping.
But debt incurred in college becomes a serious burden at graduation, especially in a recession in which jobs are scarce. A survey of more than 1,500 college students by US PIRG in Washington found that two-thirds had at least one credit card. Seniors with balances had an average debt of $2,623 on their cards.
University officials say that their agreements with card issuers comply with the law and bring in valuable revenue.
“It provides money for scholarships and other programs,” said Terry R. Livermore, manager of licensing programs at Michigan State. He said that the program was aimed primarily at alumni and the university would not include sharing student information in future credit card contracts. “The students are such a minuscule portion of this program.”
Jennifer Holsman, executive director of the alumni association at Arizona State, said the association tried to teach students about responsible uses of credit. “We work closely with Bank of America to provide educational seminars to students in terms of being able to get information about how to pay off credit cards, how not to keep balances,” she said.
Credit card issuers say that they try to educate students to use cards responsibly and that the cards they offer on campus have more restrictive terms than cards offered to alumni.
“The available credit for undergraduates is capped at $2,500,” said Betty Riess, a spokeswoman for Bank of America. “We want to take a fair and responsible approach to lending because we want to build the foundation for a longer-term banking relationship.”
Ms. Riess said the bank had agreements with about 700 colleges and alumni associations, making it one of the biggest, if not the biggest, card issuer on campuses. She said that only 2 percent of the open accounts under those agreements belonged to students, but also said it was not possible to determine what percentage of program revenue resulted from fees and charges on those student cards.
Stephanie Jacobson, a spokeswoman for JPMorgan Chase, wrote in an e-mail message that the bank had fewer than 25 contracts with colleges or alumni associations and that while some of the contracts gave it the right to ask for and use lists of student names and addresses, the bank had not done so since 2007.
That may be because football games present a marketing opportunity that requires no address information. Abigail D. Molina, a second-year law student at the University of Oregon, applied in 2007 for a Chase Visa offered at a tent outside a football game. In exchange, she received a blanket.
“I mostly wanted the blanket,” Ms. Molina said. She added that this was her second university credit card. In 1994, when she was an undergraduate at the university, she applied for a card at a booth on campus and then accumulated about $30,000 in debt, almost all of it on the card. In 2001 she filed for bankruptcy. Looking back, she said it was “shockingly easy” to get the card, even as a first-year student.
Mr. Muneio, the Michigan State student, said he did not apply for a Bank of America card because he already had two Visa cards. “The last thing I need is another account to keep track of.”
Many students are unaware of the contracts that universities have with credit card issuers and do not question the presence of marketers on campus or applications in their mailboxes, despite recent protests on a few campuses.
Sometimes, the contracts have confidentiality provisions. Universities may try to distance themselves, stating that the contracts are only between alumni associations and banks. But the universities provide alumni groups with lists of current students’ names, addresses and telephone numbers, which the groups pass on to banks.
The New York Times obtained information about and, in some cases, copies of contracts between lenders, public colleges and their alumni associations using open records requests. Because private colleges are not subject to open records laws, they are not included.
While most universities contacted for this article did not provide detailed financial information on the contracts — the University of Pittsburgh, for example, confirmed only that it had an agreement — two did share numbers.
The alumni association of the University of Michigan is guaranteed $25.5 million over the term of its 11-year agreement with Bank of America. Under the agreement, the association agreed to provide lists of names and addresses of students, alumni, faculty, staff, donors and holders of season tickets to athletic events.
Much of the money goes toward scholarships, said Jerry Sigler, vice president and chief financial officer of the alumni association. He was unsure what students were told about the program.
“Students are generally told how they can opt out of having their information publicly displayed in directories or provided in response to requests like this,” Mr. Sigler added. “But it’s not to my knowledge specific to the credit card program.”
Michigan State University gets $1.2 million a year but is guaranteed at least $8.4 million over seven years, according to its agreement. The contract calls for a $1 royalty to the university for every new card account that remains open for at least 90 days, $3 for every card whose holder pays an annual fee, and a payment of a half percent of the amount of all retail purchases using the cards.
For cards that do not have an annual fee, the bank pays $3 if the holder has a balance at the end of the 12th month after opening an account, a provision that appears to give the university an incentive to get cardholders into debt.
A few schools have adopted policies that prohibit sharing student contact information.
Ball State University’s alumni association, which has a contract with JPMorgan Chase, does not provide information on students, said Ed Shipley, executive director of the association. “Who we market to is our alumni because that’s our purpose,” he said. However, the bank is permitted to set up marketing tables at athletic events.
The University of Oregon, whose alumni association also has a marketing agreement with Chase, stopped providing student addresses as concern grew about student debt, according to Julie Brown, a university spokeswoman. The university still permits marketing booths at athletic events.
Some research suggests that students may be using credit cards less frequently, in favor of debit cards linked to their bank accounts. A survey last spring by Student Monitor, a Ridgewood, N.J., company that tracks trends on campus, found that 59 percent of undergraduate students had debit cards, up from 51 percent in 2000.
But universities have arrangements with banks that offer debit cards too, perhaps raising some of the same issues that the credit card deals do.
At New Mexico State University, for example, students are given the option of opening a bank account with Wells Fargo if they want to convert their campus identification into a debit card.
The accounts are not mandatory, said Angela Throneberry, assistant vice president for auxiliary services at the university. But, she said, “There’s some revenue sharing that happens as part of this.”