Treasury Seeks Power To Seize Failing Companies

Despite the repeated failings of Treasury Secretary Tim Geithner to produce a coherent policy for months on how to deal with the credit markets and the Obama Administration's inability to find qualified people to even nominate for the Treasury Department to assist Geithner in his duties, the Treasury Department is now demanding the authority to seize companies that are failing?

The Obama administration is renewing calls for Congress to provide new authority to take over financial institutions in distress, expanding its existing powers to include insurance companies and other less-regulated market players.

“The United States government does not have the legal means today to manage the orderly restructuring of a large, complex non-bank financial institution that poses a threat to the stability of our financial system,” the Treasury secretary, Timothy F. Geithner said in a statement prepared for delivery before the House Financial Services Committee.

The proposal could help deflect some criticism of the government’s handling of A.I.G., which is not a bank but an insurance company, including allowing the company to pay big bonuses to executives after receiving government financing as part of the bailout of financial institutions.

Had the Treasury Department had the expanded authority last fall, administration officials have said, the government could have seized A.I.G. and more efficiently wound down its operations in a less-costly manner. At the hearing, Ben S. Bernanke, the chairman of the Fed, said that he had wanted to sue A.I.G. to prevent the bonus payments but was talked out of it by lawyers who warned that if the lawsuit failed, the government might have to pay double or triple damages in addition to the bonus.

Wait a second? You mean to tell everyone that AIG should have been shut down, not fed hundreds of billions, including billions as a conduit to avoid the TARP limitations? If AIG should have been shut down, why did it getting the bailout in the first place (although the AIG lobbyists and those politicians receiving lobbyist dollars goes a long way to explaining that)? Why not demand that it liquidate its assets via bankruptcy? Why isn't the new CEO, which the government demanded, not taking the necessary steps to liquidate the company and instead operating AIG as though it will eventually recover?

Why is the government demanding that AIG come under government control for the liquidation process when bankruptcy courts handle such liquidations on a regular basis? The size may be large, but this isn't the first large entity to face bankruptcy before.

There is absolutely no reason for Congress to extend this power to Treasury when there are already mechanisms in place to provide for the orderly liquidation of companies that are failing. This is a ticking fiscal time bomb and the Obama Administration is demanding it obtain the power to decide which companies live or die, even though there are repeated examples of how the government has failed to adequately figure out what these companies are worth.

Does everyone have such a short memory to forget that the government sought to push Wachovia into Citigroup's open arms despite Wells Fargo valuing Wachovia billions more than the government did? Does anyone remember that days after the feds tried that maneuver, Citigroup revealed that it was in serious financial trouble and required a bailout of its own?

Does anyone remember that the government forced the marriage of Washington Mutual to JP Morgan Chase for a bargain basement $1.9 billion and that WaMu is now suing the feds because they believe that had the government allowed WaMu to properly and orderly liquidate its assets, the value would be billions higher?

Yet, we're told that this is absolutely necessary?

I think not.

It's only absolutely necessary if one wants to further eviscerate the financial markets and further dependency on the government for all aspects of capital creation.

UPDATE:
Hot Air has much more on this naked power grab and move towards nationalization of industries. The key graf:

However, people do not deposit cash in hedge funds or insurance companies. They invest in them, and assume certain risks when they do. The Obama administration wants to socialize the risk by placing the government as a guarantor of sorts for the investors, but that will make people less likely to invest rather than more likely. Part of the lure of investing comes from the potential reward of greater growth of funds than what can be found in bank accounts and bonds. Limiting risk means limiting gains, and we can expect investors to shield themselves further than they may have in the past under those circumstances, while government spends more money in regulatory activity and the economy sags from lack of capital investment.

Ameripundit, Stop the ACLU, Sister Toldjah, and AJ Strata also weigh in.

Also, where exactly in the US Constitution does Congress or the Administration have the right to seize companies, even ones that show signs of being at risk of defaulting or going bankrupt? One can claim that Congressional power under Article 1, Sec. 18, Clause 18 (the catchall provision that Congress relies upon to regulate interstate commerce) might apply, but the Treasury Department is part of the Executive Branch. Somehow, if Congress and the Administration want this to happen, they'll find a way to pass it regardless of whether it should pass Constitutional muster. After all, they're all too happy to find that the Constitution is a living and breathing document that means whatever it is they want it to say.

Then again, the real toxic assets that ought to be treated as such are the very members of Congress that spewed this mess in the first place with their ill-advised policies.

UPDATE:
Meanwhile, another Nobel Prize winning economist, Joseph Stiglitz has slammed Obama's toxic bailout plan.

"The Geithner plan is very badly flawed," Stiglitz told Reuters in an interview during a Credit Suisse Asian Investment Conference in Hong Kong.

U.S. Treasury Secretary Timothy Geithner's plan to wipe up to US$1 trillion in bad debt off banks' balance sheets, unveiled on Monday, offered "perverse incentives," Stiglitz said.

The U.S. government is basically using the taxpayer to guarantee against downside risk on the value of these assets, while giving the upside, or potential profits, to private investors, he said.

"Quite frankly, this amounts to robbery of the American people. I don't think it's going to work because I think there'll be a lot of anger about putting the losses so much on the shoulder of the American taxpayer."

The other Nobel Prize winning economist to come out against the plan so far? Paul Krugman.

UPDATE:
James Pethokoukis provides several reasons why the left isn't jumping on board the Obama bailout plan. Many are angry at who Obama has chosen to include in the bailouts, including hedge funds and private entities, while others think that the plan doesn't go nearly far enough, that the mess will be repeated down the road, and would rather that the industries and businesses be nationalized altogether. Of course, other economists point out that if the latest plan doesn't work, nationalization may be forthcoming in any event.

Washington Mutual Sues Feds Over Firesale

Washington Mutual's holding company is suing the FDIC over its seizure and subsequent sale to JPMorgan Chase at a bargain basement $1.9 billion. The company argues that the actual value of the company was worth far more than that had the company been properly liquidated.

I tend to agree.

It isn't the first time that the government screwed up in this arena. They tried to force the sale of Wachovia to Citigroup. Wells Fargo proffered a far higher bid ($2.2 billion versus the Wells Fargo $15.1 billion) for the company and the government sought to block the acquisition and lost. Weeks later, we came to learn that Citigroup was in dire fiscal shape and needed a bailout of its own (that came with executive compensation strings attached unlike the AIG bailout that got Congressional approval and broke out the phony outrage this past week).

The government has consistently gotten the value of these companies wrong, and attempted to force transactions that would have been bad for the taxpayer. They clearly underestimated the severity of problems at Citigroup and severely undervalued the price of Wachovia.

Taken together, and one sees clear problems with further interference in the markets by the government. They are bound to make the situation worse, not better by meddling in the markets and interfering with the market valuations of these companies.

Populist Claptrap Has Real World Consequences

Let's limit executive compensation (not retroactively and limited only to those companies that received substantial federal assistance - leaving the door open to a huge grey area of companies that received some aid but which will continue their compensation packages unaffected by the demands to limit them).

Let's keelhaul companies that received federal funds who then engage in corporate events around the nation, including in Las Vegas or Miami.

That's the chant coming from DC these days and many of those calls cut across the political spectrum.

Is anyone actually paying attention to what happens when those executives get high levels of compensation or companies spend on conventions in places like Las Vegas? Wells Fargo was going to have a corporate event in Vegas, but they've canceled it in the face of public pressure. Did anyone care that it would hurt the Vegas economy, which is already one of the hardest hit regions in the country as the real estate market there imploded? Hardly. The money spent by Wells Fargo employees in Vegas goes to restaurants, hotels, and all other ancillary services in Vegas - an economic stimulus that will now be absent courtesy of the "public outcry". How many millions of dollars of lost tax revenue will occur because Wells Fargo employees aren't renting cars or hotel rooms or spending their money on trinkets or food in Vegas to say nothing of lower casino revenues because there will be that many fewer people spending money in the casinos?

Airlines are suffering because business travel is being scaled back, which means fewer flights, and which in turn means that there's increased pressure to cut workforce that is being idled by lower demand.

Executive pay limits will sharply harm the New York metro economy warns Kathryn Wylde of the Partnership for New York:

Wylde says the Obama salary cap will lead to a critical brain drain – China and the United Arab Emirates have already come to poach Wall Street talent. She also says lower salaries in the financial industry will mean dramatically lower tax revenues for the city and state.

"We also depend heavily on the financial services industry to fund our economy and our tax rolls," said Wylde. "Last year 20 percent of our income taxes in the states – 12 percent in New York City came from Wall Street."

Limiting compensation means other countries will benefit from talent poached domestically, to say nothing of the actual loss of jobs around the city from people who benefit from those executives and those who receive bonuses from the financial services industry. The City and State are already billions in the hole because those financial services companies imploded and sharply limited bonuses as their companies went belly up or started conserving money to have more cash on hand.

At the same time, Congress has no such caps on its own compensation. It can vote itself a raise, even though it is completely undeserving of one. Congress regularly increases its own pay, despite having a rating lower than that of former President Bush. Yet, you have members of Congress demanding caps on compensation.

How about capping Congressional compensation at $75,000 as a sign that Congress can tighten its belt just like the rest of us who are struggling to make ends meet without getting crunched by a crushing tax burden? It's not like Congress is going to starve; there are more than a few millionaires and multimillionaires among the bunch, not counting those who evaded taxes and squirreled away money that no one knows about - Charlie Rangel, I'm talking about you.

How about we enact a law demanding that every politico and nominee is subjected to an IRS audit annually just to be sure who's reporting what and these pretentious politicos can call for tax hikes even as we learn that they're evading their tax obligations often for years at a time (Tom Daschle, I'm talking to you; Treasury Secretary Tim Geithner, you too!)

Rep. Barney Frank is complaining that President Bush did little to limit executive compensation, which tells you all you need to know about the disdain Frank and his fellow leftists have for the market setting compensation rates. He'd much rather have the government pick and choose the compensation. Frank is also seeking to impose the executive compensation restrictions retroactively.

People may be cheering about the idea that executive compensation will be limited, but why is the government any better at arbitrarily and capriciously setting compensation than it is at managing our roads, infrastructure, schools, or anything else that it has its hands on? It isn't. It is just another peg towards government intrusion into your pocketbooks and your liberty.

Citigroup Gets a Bailout

$20 billion to bail out the company.

Under the deal, the government will have the right to slash the huge pay packages and bonuses that Citi's executives had long enjoyed, and cap stockholder dividends at only 1 cent per share.

The sweeping plan is designed to stem a crisis of confidence in the once-mighty financial institution, whose stock lost 60 percent of its value last week on worries about its fiscal health.

"With these transactions, the US government is taking the actions necessary to strengthen the financial system and protect US taxpayers and the US economy," the three agencies said in a statement.

"We will continue to use all of our resources to preserve the strength of our banking institutions, and promote the process of repair and recovery, and to manage risks."

The $20 billion cash injection comes in the form of a purchase of Citigroup preferred stock by the Treasury Department.

The funds to buy the shares will come out of the $700 billion financial rescue package already in place.

The new capital infusion follows an earlier one - of $25 billion - in which the government also received an ownership stake in Citigroup.

Let's not forget that the feds thought that Citigroup was in a better position to buy Wachovia than rival Wells Fargo. Now, they're busy bailing out Citigroup.

I understand that there are good reasons that bailouts are necessary to maintain the stability of the banking system since it represents the foundation of the economy with providing credit to all other sectors for r&d, growth, business operations, etc.

If banks go under, especially those that are large, it makes it more difficult for businesses to operate and a credit squeeze will send smaller companies and those that have already tight credit over the brink into bankruptcy.

The automakers are a case where bad business decisions have saddled the domestics with huge losses and bailing them out will not address the underlying problems.

The problem is that the banks made bad business decisions that should not be rewarded with bailouts either. This mess is due largely to subprime borrowing and the repackaging of paper that hid the true risk of that paper. They have no one to blame but themselves, and Congress, for this mess.

Turnabout at Citigroup

It was only a few short weeks ago when the federal government was pushing for Citigroup to take over the failing Wachovia, claiming that it was the superior option to Wells Fargo offer to buy the bank.

Well, imagine my surprise when we now hear that the federal government may have to bail out Citigroup because the company is teetering on the brink of going belly up.

Citigroup has more than $2 trillion of assets, dwarfing companies such as American International Group Inc. that got U.S. support this year. Treasury Secretary Henry Paulson and Federal Reserve Chairman Ben S. Bernanke may favor a rescue to avoid the chaotic aftermath of Lehman Brothers Holdings Inc.’s bankruptcy in September.

“There is no question that Citi is in the category of ‘too big to fail,’” said Michael Holland, chairman and founder of Holland & Co. in New York, which oversees $4 billion. “There is a commitment from this administration and the next to do what it takes to save Citi.”

While Citigroup executives say the company has adequate capital and liquidity to ride out the crisis, its tumbling share price may shake the confidence of creditors, clients and rating agencies. A similar scenario played out at Lehman, when Chief Executive Officer Richard Fuld declared the firm was “on the right track” five days before the firm went bankrupt.

“The market may be implying some sort of regulatory intervention,” Jason Goldberg, a former Lehman analyst who now works at Barclays Capital in New York, wrote in a note to clients today. “In situations where the government has stepped in, the equity holders have not fared well.”

Citigroup CEO Vikram Pandit told employees today that he doesn’t plan to break up the company, aiming to reassure workers as the stock resumed its skid. Citigroup shares dropped 94 cents, or 20 percent, to $3.77 at 4:08 p.m. in New York, giving the company a market value of about $21 billion. The stock pared its loss after the close of official trading, fetching $4.07 as of 4:35 p.m.

Pandit and Chief Financial Officer Gary Crittenden, speaking on a worldwide conference call this morning, also said they don’t expect to sell the Smith Barney brokerage unit, according to two people who listened to the call and declined to be identified because it wasn’t open to the public.

How is that possible? How could the federal government have been so wrong about Citigroup's viability when they were pushing Citigroup to buy Wachovia, which was in even more dire straits a few weeks back? Did they know and figured that they would bail them out eventually anyways? Did they not know? Answering yes to either of those questions raises serious questions about the whole idea of bailing out entities and what the government really knows about the situation, let alone what kind of guidance it is receiving from the Treasury Department and the Federal Reserve.

It's a smart idea to keep in mind that there really aren't any entities that are truly too big to fail. While real estate assets may not be worth what the paper says they are, they still have value, which can be unwound through actual market sales. Papering over the failure of Citigroup with a bailout doesn't actually establish value for the toxic paper, it only delays the reckoning, and while that's good for politicians, it's bad for taxpayers and everyone else since the markets simply don't know what anything is worth and delays and changes of tactics by the government on how to deal with the crisis inserts still more uncertainty and volatility to the markets.

Ahistoric

The definition of ahistoric is quite befitting the current financial crisis on Wall Street. I'm not even talking about how nations dealt with the Great Depression or even the recession of the late 1970s and early 1980s, or even the recession that took place at the start of the 1990s.

No, I'm talking about the failure to recall history from a few weeks ago.

Citigroup is now on the brink of going under, especially as its share price hovers near $5 per share. Below that amount, and you might see institutional investors selling in bulk.

Yet, it wasn't more than a few weeks ago that the federal government was pushing Citibank to take over Wachovia, another failing bank. The feds were doing so despite a far better offer from the solvent Wells Fargo bank.

At that time, I was questioning everyone's numbers. After all, why would the feds be pushing Citigroup over Wells Fargo to take over a failing multibillion dollar bank unless they thought that Citigroup was in a better position to do so.

Well, it now appears that the feds had no clue what they were doing and were simply running with whatever was available on hand. Citigroup's financial position could not have changed so suddenly in the matter of a month that it is now in the same position that Wachovia was just a few months ago. In other words, the feds seriously miscalculated on the Citigroup solvency, and had they pushed ahead with their plan to have Citigroup take over Wachovia, we might be seeing an even worse situation.

The moral of that story? The federal government doesn't know what to do any more than investors, but the market does seem to have a better grasp than the feds do. A federal intervention to force the sale of Wachovia would have had disastrous consequences.

Meanwhile, you're now watching the market volatility jump all over the map as the automakers have their hands out for a bailout in the same scenario that played out before the mother of all bailouts was approved. When the markets saw that Congress was going to pass the bailout, the markets all rose on the news, but when they had second thoughts and the House rejected the initial bailout proposal, the markets tanked in a big way.

We're now witnessing the exact same scenario play out over the auto bailout. I happen to oppose both bailouts as they remove risk from the market, and reward bad business decisions. That's precisely what providing billions of dollars to automakers who have made decades worth of bad business decisions will mean. It will only allow these companies to limp along for a few more months or even a few years before they come back and ask for more. There are fundamental problems with the domestic automakers, and reorganization is the best way to handle the situation, not a massive bailout. It's one thing to provide bridge loan guarantees so that the companies can have financing during reorganization, but it's quite another to give them the money, even with preconditions on its usage (again requiring them to follow government advice which may result in more harm than good by distorting the markets still further).

The moral here is that the government doesn't have the answers, and throwing money at the symptoms isn't going to be beneficial for long term economic recovery. The structural and underlying problems with the automotive industry have to be addressed, but doing so would mean serious problems for a Democratic party controlled Congress, which relies heavily on unions for support.

UPDATE:
Citi's slide continues. The share price is below $5, and trading as low as $3.91 this afternoon. Not a good sign at all.

Judge Blocks Wells Fargo Takeover of Wachovia

You knew this was coming the moment that Citigroup claimed that that it had exclusivity to deal with Wachovia once it was announced that Wells Fargo put together a sweetened deal that eclipsed Citi's bid.

New York State Supreme Court Justice Charles Ramos issued the order late Saturday, saying that Citigroup and Wachovia must appear before him on Friday, Citigroup said, adding that the order was granted over the objection of Wachovia.

In a deal struck last Monday with the assistance of the Federal Deposit Insurance Corporation (FDIC), Citigroup had offered to take over the Wachovia's retail banking operations for $2.2 billion.

But four days later, Wells Fargo said it was buying all of Wachovia - including its asset-management business - for approximately $15.1 billion in stock.

The battle also has implications for taxpayers.

The Citigroup offer had come with a backstop from the Federal Deposit Insurance Corporation (FDIC), would cover any losses on Wachovia's $300 billion loan portfolio beyond the first $42 billion. The Wells offer does not ask for FDIC assistance.

Wachovia spokeswoman Christy Phillips-Brown said in a statement the company believes its agreement with Wells Fargo is "proper, valid and ... in the best interest of shareholders, employees and the American taxpayers," the Associated Press reported. She said Citigroup is free to make a better offer to Wachovia under that agreement.

As of Friday, Citigroup still had support of industry regulators. "The FDIC stands behind its previously announced agreement with Citigroup," Federal Deposit Insurance Corporation Chairman Sheila Bair said in a statement, adding that it would pursue a resolution with all three companies.

This mess will end up costing both banks millions of dollars in fees to address the case, but in the end, I think Wells Fargo will win out but have to pay millions to Citigroup in the process to acquire Wachovia, even though the FDIC is backing Citigroup's offer.

Depositors at any of the banks involved aren't going to see any differences and the FDIC insurance limits were increased to $250,000 by the bailout bill, which may help forstall further runs on banks (though the first bank run of the year came when Sen. Charles Schumer initiated one when publicly questioning the solvency of IndyMac).

The Battle For Wachovia

First, it appeared as though Citibank would win the rights to take over Wachovia. Now, we learn that Wells Fargo has made a more lucrative bid for Wells Fargo. Wells Fargo is looking to buy Wachovia for $15.1 billion.

Citibank isn't liking this one bit, and claims that they had an exclusivity arrangement with Wachovia.

The Wells Fargo offer sent markets higher, since it shows confidence in the market to sort things out, but Citibank isn't likely to let this issue rest.

UPDATE:
The FDIC is now announcing that they are backing Citigroup in their bid to buy Wachovia. This is going to head to court, which is the last thing that the financial markets need right now. It also begs the question as to why FDIC is pushing Citi over Wells Fargo and how and why Wells Fargo thought that Wachovia was worth more than Citi was proposing. If Wachovia is as bad off as claimed, why the higher bid? Someone's accounting is off here - and it could be any of the following: Citi, FDIC or Wells Fargo.

I don't like the idea of having the FDIC dictate who gets Wachovia, seeing how they pushed WaMu to be bailed out by JPMorgan Chase.

UPDATE:
MSNBC has more on the bank brawl.