W(h)ither Geithner and his TALFPosted: April 23, 2009
Neil Irwin of WAPO reported today that the TALF is not having the results trumpeted by the Obama administration. This is leading, again, to speculation about the relevancy of most of these plans and, of course, job security of Treasury Secretary Timothy Geithner.
In its first two months, the government’s signature initiative to support consumer lending has fallen well short of expectations, deploying only a fraction of the amount officials had hoped to extend to stimulate auto loans, student loans and credit card lending.
The slow rollout of the program has frustrated staff at government agencies working on the effort and diminished hopes that they could engineer a rapid return to healthy lending levels, according to interviews with government and industry sources. The initiative also serves as a window into the complexities of designing a giant rescue of the financial system.
The TALF is the private-public partnership that couples the funds of private investors, like hedge funds, and the FED. The hedge funds invest small amounts that are matched by much larger amounts that would presumably come from the Treasury and Tax Payers if they wind up being nonprofitable. The combined funds will supposedly purchase non-toxic, virgin, high rated rated securities to fund everything from student loans and car loans to inventory and capital loans for business. As of yet, they really have failed to do so.
Officials envisioned TALF supporting tens of billions of dollars a month in new lending, saying it could eventually total $1 trillion. But in March, when it was launched, it backed only $4.7 billion in auto loans and credit cards. For April, it logged only $1.7 billion.
Sources involved in the program said private investors have been reluctant to work with the government, which they view as an unreliable business partner. Separately, the brokerage houses that are crucial intermediaries are being exceptionally cautious in the contracts they draw up with participants in the program, in part out of wariness that any mistakes could draw the ire of Congress or the media.
In congressional testimony on Tuesday, Treasury Secretary Timothy F. Geithner said that overall progress is “pretty good” for a program in its early days. Still, he acknowledged that participation was “lower than expected” because of “concern about the conditions that come with the assistance in the program . . . and uncertainty about whether they may change in the future.”
Meanwhile, on the bank front, stupid accounting tricks abound! Which begs the question is any one stupid enough to believe the numbers? Every large financial institution appears to be jumping on the band wagon of conveniently forgetting the month of December. What does this say about the state of public accounting today and Wall Street’s gulliblity?
A little look from Clusterstock and Joe Weisenthal.
But basically, when you look at the reports from the first week of earnings season, there’s not much to get excited about.
Goldman Sachs (GS) reported a blowout profit, but it was all due to results in the one fixed income and credit unit.
JPMorgan (JPM) also had a great quarter with respect to trading, as was helped in large part by its government-assisted purchases of Bear Stearns and Washington Mutual.
And then today you had Citigroup (C), which had to torture its numbers in order to get a profit, though EPS was still negative.
In each of these instances, there was little to like about the core business of banking. Lending, asset management, credit cards, mortgages, etc., continue to look sickly. It’s great that the banks found fat spreads in the trading operations, but if you’re looking for signs that American banking has normalized or stabilized, you didn’t see much this week.
So again, we’re giving them money to act like bankers, but they’re not doing their core businesses. The WSJ reports that banks can’t play stupid accounting tricks any more. This is especially true if consumers continue to be unable to repay loans as unemployment worsens. Even the markets are beginning to come off their glimmers-of-hope-green-shoot high.
Stocks suffered an across-the-board decline on Monday as investors questioned whether banks can continue to post strong results amid signs that borrowers are still falling behind on their debts.
The Dow Jones Industrial Average fell 289.60 points, or 3.6%, to 7841.73. It was the blue-chip measure’s steepest one-day point loss since March 2 and its worst percentage decline since March 5. The slide broke a three-day winning streak for blue chips.
The Dow was hurt by a 24% slide in Bank of America. The bank said that its first-quarter net income more than tripled, with the company’s recent Merrill Lynch acquisition contributing more than $3 billion to its bottom line, but net charge-offs rose and losses in its credit-card business ballooned.
See, the basic business of the bank is to pool funds from savers and lend them to borrowers. This has to be done at a profitable interest rate spread and underwriting practices should recognize the ability of the borrower to repay. We still have those toxic borrowers and toxic assets sitting out there some where just waiting to be sold off, repriced, or defaulted on. The Obama administration, with its alphabet soap bailout plans, is creeping towards nonresolution.
This is not making any major headlines, but it’s basically the nationalization that many economists have supported. Once the government-owned preferred shares convert to common stock, you’ve basically nationalized the bank.
The Obama administration may also convert some of the preferred shares that it’s obtained via bank bailouts into common stock once a round of stress testing is done next month, according to reports.
Such a move would give the administration added flexibility to provide further aid to the banks without allocating additional money, but would dilute existing shareholders of the firms’ common stock.
Here’s an on-the-money quote from an industry analyst.
“The bank earnings so far just seem to be smoke and mirrors and the other companies aren’t reporting quality earnings. It’s just reducing expenses and dipping into reserves,” said Harry Rady, chief executive officer of Rady Asset Management.
Jack Ablin, chief investment officer at Harris Private Bank in Chicago warned clients on Monday that stock and bond markets are sending conflicting signals about the prospects for an economic recovery and stabilization of the financial system.
Mr. Ablin said he’s concerned that the spread between yields on BBB-rated corporate debt and 10-year Treasurys has remained above five full percentage points since November, not budging even as the stock market posted a furious rally from its March lows.
That means bond investors are still charging companies a hefty premium to borrow, reflecting deep skepticism that risk has dissipated enough to justify lower borrowing costs. That message is at odds with that of the most bullish stock investors, who believe the crisis that struck last fall is now waning.
“Unfortunately, history tells us that it’s the bond investors who are usually right in situations like this,” said Mr. Ablin, who’s maintaining a hold-steady approach on stocks for now.
Regarding the recent spate of first-quarter profits at banks, he said: “There’s a lot of cynicism out there about these income statements. They’re one-time gains, clearly.”
So, it appears we still have quite a few issues with the banking system, despite the administration’s attempt to paint a rosier picture. I’ve said this before, but the bond market is always the more reliable gauge of market estimates because bond holders tend to have much more at stake and they are essentially lenders that monitor the entities themselves. Bond analysts spend time looking at the company’s basics– balance sheets, income statements, and collateral. This makes them more reality-based and less momentum-based.
So, while we’ve had a reprieve with a bear market rally and we’ve had the precipitous decline in some series moderate, we’re hardly at the trough of this recession. If the lending markets don’t loosen up soon, some body better go back to the drawing board. Just today, U.S. existing home sales were reported as falling 3% in March. So, the good news is not coming from the housing market.
Sales of existing homes and condominiums fell 3% in March to a seasonally adjusted annual rate of 4.57 million units, with distressed sales now accounting for half of all sales, a trade group reported Thursday.
Sales are down 7.1% in the past year, the National Association of Realtors said in its monthly report. The sales pace in March was the third lowest of this cycle.
“We are still waiting for that sustained increase in home sales to kick in, which will help stabilize prices,” wrote Jennifer Lee, an economist for BMO Capital. “Until then, the recovery is still elusive.”
Again, Geithner is under the gun. Here’s a Salon article entitled “Geithner fails to impress” on his testimony before Elizabeth Warren and her committee on accountability of TARP.
I’ve watched or pored over the transcripts of almost all of Geithner’s testimony before Congress, and it’s getting harder and harder to make a case in defense of his brief tenure. Tuesday’s hearing, before the Congressional Oversight Panel empowered by Congress to watch over the TARP program, ranks as one of his least satisfying performances so far. Results of the stress tests are due soon, his Public-Private Investment Program is getting assailed from all sides, the banks are releasing profit numbers that are clearly the result of dodgy accounting techniques, and still, Geithner refuses to defend his actions with any argument more compelling than that, in the administration’s judgment, their chosen strategy is the least costly way to ensure the stability and health of the overall financial system. It’s a shtick that is wearing thin.
The only interesting moment came when, in response to a question from Warren on whether “liquidation of failing financial institutions” or “reorganization” of failing banks were “on the table” for the Obama administration, Geithner said that “we will look at all actions we think are necessary” to balance the two main priorities of protecting the taxpayer and ensuring a “better functioning financial system.”
Every one still considers Geithner’s words incredible. At this point, you have to wonder if Obama will continue to hold to Geithner the way Dubya held on to Rumsfeld. Is there the worry over the appearance of Obama’s judgement and his flailing appointee or is it about who else could they find that would actually want the job? Stay tuned. It’s unlikely that any more of the underlying economic variables look rosy soon. But then, even mildly down looks better than preciptiously down.