Banking on Fraud
April 20, 2009 11:23 PM Subscribe
Neil Barofsky, who helped prosecute the REFCO case, and who was appointed by the previous administration in late November to serve as Special Inspector General for TARP (more on him here and here), has released a report that claims TARP and related bailout programs are inherently vulnerable to fraud--and that there are at least 20 bailout/fraud investigations currently underway. The report comes on the heels of rumors that bailout money may convert to equity stakes: a move that may signal a change in current policy (but don't mention the n-word) .
bailout money may convert to equity stakes
We went in with no oversight and that's not going to change any time soon. Nationalism aside, "converting" bailout money is just admission that we'll never see this money ever again.
posted by Blazecock Pileon at 11:49 PM on April 20, 2009
We went in with no oversight and that's not going to change any time soon. Nationalism aside, "converting" bailout money is just admission that we'll never see this money ever again.
posted by Blazecock Pileon at 11:49 PM on April 20, 2009
Blazecock Pileon: I assume you mean Nationalization? Nationalism is a different beast entirely.
The tone of that last article is infuriating. "If you imply that you may stop giving us big handfuls of money, or even imply that you may want to have some say in how we use this huge pile of money you are giving us, the Economy will collapse".
posted by idiopath at 11:57 PM on April 20, 2009
The tone of that last article is infuriating. "If you imply that you may stop giving us big handfuls of money, or even imply that you may want to have some say in how we use this huge pile of money you are giving us, the Economy will collapse".
posted by idiopath at 11:57 PM on April 20, 2009
The Best Way To Rob A Bank Is To Own One
posted by ornate insect at 11:58 PM on April 20, 2009 [1 favorite]
posted by ornate insect at 11:58 PM on April 20, 2009 [1 favorite]
Blazecock Pileon: I assume you mean Nationalization? Nationalism is a different beast entirely.
You're right, it was a typing error.
posted by Blazecock Pileon at 12:16 AM on April 21, 2009
You're right, it was a typing error.
posted by Blazecock Pileon at 12:16 AM on April 21, 2009
Yeah, that last article makes me want to kick someone in the nuts. "Just when you think the political class may have learned something in months of trying to fix the banking system…" 'Cause lawd knows we were doing so well with these fantastically successful cash giveaway programs.
I've been hoping this was the plan all along. Throw just enough cash to stop the bleeding, then when no one is looking… THE N WORD GIVETH, THE N WORD TAKETH AWAY, SUCKA!
How's "First Federal Group" sound? Much more comforting than some lil' ol' Citi.
posted by Civil_Disobedient at 12:33 AM on April 21, 2009
I've been hoping this was the plan all along. Throw just enough cash to stop the bleeding, then when no one is looking… THE N WORD GIVETH, THE N WORD TAKETH AWAY, SUCKA!
How's "First Federal Group" sound? Much more comforting than some lil' ol' Citi.
posted by Civil_Disobedient at 12:33 AM on April 21, 2009
Nationalism aside, "converting" bailout money is just admission that we'll never see this money ever again.
What about the banks that aren't allowed to pay it back? That just seems so weird.
posted by codswallop at 12:50 AM on April 21, 2009
What about the banks that aren't allowed to pay it back? That just seems so weird.
posted by codswallop at 12:50 AM on April 21, 2009
Nationalization is the 93,435th rail in American Politics.
posted by srboisvert at 1:12 AM on April 21, 2009
posted by srboisvert at 1:12 AM on April 21, 2009
It seems frankly stupid to imagine these banks will actually make loans. We should capitalize small untainted banks if we want banking to get done.
posted by jeffburdges at 1:47 AM on April 21, 2009
posted by jeffburdges at 1:47 AM on April 21, 2009
What about the banks that aren't allowed to pay it back? That just seems so weird.
A lot of banks were forced to take bailout money, basically because Citigroup was so horrendously fucked. The government didn't want to single out Citi, so they gave banks that didn't need it money too.
posted by atrazine at 3:31 AM on April 21, 2009
A lot of banks were forced to take bailout money, basically because Citigroup was so horrendously fucked. The government didn't want to single out Citi, so they gave banks that didn't need it money too.
posted by atrazine at 3:31 AM on April 21, 2009
The government didn't want to single out Citi, so they gave banks that didn't need it money too.
True, but it wasn't the only reason. We have not yet seen the worst of this crisis, and as banks charge-off more loans, their capital ratios will dwindle to very low levels, which can spark additional counterparty bank runs ala Bear Stearns or Wachovia.
Banks are also losing hundreds of millions of dollars per quarter by paying the Treasury the TARP dividend. Banks could use that cash to bolster their capital position (and still be protecting the taxpayer by eventually paying the injection back). The question is: was TARP meant to be profitable, or simply a government reinforcement of the country's banks? If it was meant to be profitable, converting to common equity will be a mistake. If it was meant to be a reinforcement, the plan is going just as expected. I suspect the latter.
posted by SeizeTheDay at 4:16 AM on April 21, 2009 [2 favorites]
True, but it wasn't the only reason. We have not yet seen the worst of this crisis, and as banks charge-off more loans, their capital ratios will dwindle to very low levels, which can spark additional counterparty bank runs ala Bear Stearns or Wachovia.
Banks are also losing hundreds of millions of dollars per quarter by paying the Treasury the TARP dividend. Banks could use that cash to bolster their capital position (and still be protecting the taxpayer by eventually paying the injection back). The question is: was TARP meant to be profitable, or simply a government reinforcement of the country's banks? If it was meant to be profitable, converting to common equity will be a mistake. If it was meant to be a reinforcement, the plan is going just as expected. I suspect the latter.
posted by SeizeTheDay at 4:16 AM on April 21, 2009 [2 favorites]
A lot of banks were forced to take bailout money, basically because Citigroup was so horrendously fucked. The government didn't want to single out Citi, so they gave banks that didn't need it money too.
Citi wasn't the only fucked bank, by far. Bank of America, (after it took over JP Morgan) was in pretty dire shape too, as far as I know.
By the way, these are publicly traded companies, but apparently a lot of banks are trying to pay back the fed by taking more expensive loans just so that they can pay their CEOs and other executives more money! How is that a good deal for shareholders? They lose it on both ends that way: lose money in loan payments to private companies, and they lose it in higher executive pay.
And the other thing with paying back TARP money: The banks are still trading on an implicit guarantee that they'll be bailed out again and they're still going to have their 'toxic' assets taken off their books by PPIP. If I were in the government, I would tell any bank wanting to pay back TARP prematurely that they're "out of the club" No additional bailouts and no purchasing of toxic assets either. They're on their own. (Oh, and I'd also make 'em pay back any money to AIG they got on their credit default swaps)
posted by delmoi at 4:59 AM on April 21, 2009 [1 favorite]
Citi wasn't the only fucked bank, by far. Bank of America, (after it took over JP Morgan) was in pretty dire shape too, as far as I know.
By the way, these are publicly traded companies, but apparently a lot of banks are trying to pay back the fed by taking more expensive loans just so that they can pay their CEOs and other executives more money! How is that a good deal for shareholders? They lose it on both ends that way: lose money in loan payments to private companies, and they lose it in higher executive pay.
And the other thing with paying back TARP money: The banks are still trading on an implicit guarantee that they'll be bailed out again and they're still going to have their 'toxic' assets taken off their books by PPIP. If I were in the government, I would tell any bank wanting to pay back TARP prematurely that they're "out of the club" No additional bailouts and no purchasing of toxic assets either. They're on their own. (Oh, and I'd also make 'em pay back any money to AIG they got on their credit default swaps)
posted by delmoi at 4:59 AM on April 21, 2009 [1 favorite]
BofA didn't take over JPM, probably the best run of all the major banks. You are thinking Merrill Lynch.
posted by sfts2 at 8:08 AM on April 21, 2009
posted by sfts2 at 8:08 AM on April 21, 2009
We have not yet seen the worst of this crisis, and as banks charge-off more loans, their capital ratios will dwindle to very low levels
I don't really disagree with you but I should point out that 1)I think you mean increase provisions, not charge-off more loans, and 2) quite a few banks (globally) are seeing their capital ratios move higher this quarter. I leave it to the reader to determine the three or four meaningful financial levers that a bank can pull to bolster its capital ratios without raising equity.
I would tell any bank wanting to pay back TARP prematurely that they're "out of the club" No additional bailouts and no purchasing of toxic assets either.
Have you looked at the balance sheets of and the marks taken by the banks that want to pay back the TARP? For the most part there are not a whole lot of "toxic assets" left.
posted by Kwantsar at 8:46 AM on April 21, 2009
I don't really disagree with you but I should point out that 1)I think you mean increase provisions, not charge-off more loans, and 2) quite a few banks (globally) are seeing their capital ratios move higher this quarter. I leave it to the reader to determine the three or four meaningful financial levers that a bank can pull to bolster its capital ratios without raising equity.
I would tell any bank wanting to pay back TARP prematurely that they're "out of the club" No additional bailouts and no purchasing of toxic assets either.
Have you looked at the balance sheets of and the marks taken by the banks that want to pay back the TARP? For the most part there are not a whole lot of "toxic assets" left.
posted by Kwantsar at 8:46 AM on April 21, 2009
Provisions are the accounting reserve used by banks for all loans (good and bad). Provisions can, and have been, managed by bank managers to increase or decrease profit to match analyst expectations (among other reasons). Charge-offs can be managed by keeping a residential or commercial loan in limbo (I.e. Not taking the loss), but eventually the bank has to take the hit. That's why charge-offs are the more accurate barometer of bad loans. Provision is an decent barometer to determine a bank's capital position.
As to your comment regarding capital positions, investment banks have moved to a calculation that gives them full discretion. The major brokers are lying about their Tier 1 and the future will bear that out.
And as far as toxic assets ate concerned, most assets on their books right now are pre-lehman, which means that everyone's balance sheet is worth at least 20% less than prior to September. No major bank or broker can survive a asset bubble. They can only ride it out hoping that profit from their service business shores up their balance sheet. And if you ask any banker right now, they'll tell you that everyone is transacting less, which make banks poorer.
posted by SeizeTheDay at 9:34 AM on April 21, 2009
As to your comment regarding capital positions, investment banks have moved to a calculation that gives them full discretion. The major brokers are lying about their Tier 1 and the future will bear that out.
And as far as toxic assets ate concerned, most assets on their books right now are pre-lehman, which means that everyone's balance sheet is worth at least 20% less than prior to September. No major bank or broker can survive a asset bubble. They can only ride it out hoping that profit from their service business shores up their balance sheet. And if you ask any banker right now, they'll tell you that everyone is transacting less, which make banks poorer.
posted by SeizeTheDay at 9:34 AM on April 21, 2009
It seems like in order to get really healthy, we need a concerted government and public effort to crack down on the host of absurd practices that the finance sector has built up over the last few decades. Does anyone know if the are any movements afoot to do things like:
1) Ban derivatives trading.
2) Cap interest rates for any kind of loan (including credit cards, payday lending, etc.) at, say, 10%.
3) Prosecute firms that deliberately encourage consumers to overextend themselves.
4) Ban direct mail or other "push" advertising for credit cards and require consumers to meet with a bank representative to obtain a credit card (much like in a traditional mortgage).
5) Limit the size of banks and financial institutions with better monopoly laws.
When I write this stuff down it seems really sane and obvious, but then when I think about it versus how things are, it sounds like some kind of crazy leftist pipe dream.
But I mean really ... whatever happened to an economy based on actual goods and services with value? Aren't all these financial markets just extracting and/or inventing wealth rather than creating it?
Someone please inform me ... I'm a computer programmer, not an economist.
posted by freecellwizard at 12:01 PM on April 21, 2009 [1 favorite]
1) Ban derivatives trading.
2) Cap interest rates for any kind of loan (including credit cards, payday lending, etc.) at, say, 10%.
3) Prosecute firms that deliberately encourage consumers to overextend themselves.
4) Ban direct mail or other "push" advertising for credit cards and require consumers to meet with a bank representative to obtain a credit card (much like in a traditional mortgage).
5) Limit the size of banks and financial institutions with better monopoly laws.
When I write this stuff down it seems really sane and obvious, but then when I think about it versus how things are, it sounds like some kind of crazy leftist pipe dream.
But I mean really ... whatever happened to an economy based on actual goods and services with value? Aren't all these financial markets just extracting and/or inventing wealth rather than creating it?
Someone please inform me ... I'm a computer programmer, not an economist.
posted by freecellwizard at 12:01 PM on April 21, 2009 [1 favorite]
2) Cap interest rates for any kind of loan (including credit cards, payday lending, etc.) at, say, 10%.
Credit only for the rich and well off (and not even for most small businesses).
3) Prosecute firms that deliberately encourage consumers to overextend themselves.
Can you define "encourage to overextend"? What does it mean to overextend? Did the US government in the 90s not deliberately encourage home ownership? Could that be overextension?
5) Limit the size of banks and financial institutions with better monopoly laws.
No new laws are required. With 20k laws on the books, "too big to fail" is the fault of enforcement, not lack of laws.
posted by rr at 1:32 PM on April 21, 2009
Troubled Asset Relief Program Oversight Panel, 4/21/09, featuring Timothy Geithner, Elizabeth Warren, and others
posted by ornate insect at 3:25 PM on April 21, 2009
posted by ornate insect at 3:25 PM on April 21, 2009
freecellwizard said:
Cap interest rates for any kind of loan (including credit cards, payday lending, etc.) at, say, 10%.
You can thank the federal gov't for ridiculously high usury caps. If you are a national bank, you can bypass state usury laws. More info. In Texas, at least, the result was that up until recently people who barely speak English were routinely signing ten-page contracts charging them 22% over six years for used cars - a lawyer friend told me that the effective usury ceiling for TX is 23%. (The intent of the 1980 federal law was apparently to keep banks from being sideswiped by inflation, which was at 12-13% at the time.)
Prosecute firms that deliberately encourage consumers to overextend themselves.
Here's an interesting data point for you: trom the BOA 1st quarter 2009 earnings conference call transcript, "...our community reinvestment act portfolio...totals about 7% of the residential book, but about 24% of the losses."
rr said: With 20k laws on the books, "too big to fail" is the fault of enforcement, not lack of laws.
And less than 20k laws would be helpful too. Sometimes I wonder how much time and effort it took the banks to become SOX compliant.
posted by txvtchick at 7:07 PM on April 21, 2009
Cap interest rates for any kind of loan (including credit cards, payday lending, etc.) at, say, 10%.
You can thank the federal gov't for ridiculously high usury caps. If you are a national bank, you can bypass state usury laws. More info. In Texas, at least, the result was that up until recently people who barely speak English were routinely signing ten-page contracts charging them 22% over six years for used cars - a lawyer friend told me that the effective usury ceiling for TX is 23%. (The intent of the 1980 federal law was apparently to keep banks from being sideswiped by inflation, which was at 12-13% at the time.)
Prosecute firms that deliberately encourage consumers to overextend themselves.
Here's an interesting data point for you: trom the BOA 1st quarter 2009 earnings conference call transcript, "...our community reinvestment act portfolio...totals about 7% of the residential book, but about 24% of the losses."
rr said: With 20k laws on the books, "too big to fail" is the fault of enforcement, not lack of laws.
And less than 20k laws would be helpful too. Sometimes I wonder how much time and effort it took the banks to become SOX compliant.
posted by txvtchick at 7:07 PM on April 21, 2009
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posted by ornate insect at 11:34 PM on April 20, 2009