bank run blog

As the dust settles in the government takeover of the Northern Rock Bank in the UK the company reported today that it expects to “not return to profit for at least the next three years” according to the Guardain. Although that is the case, Ron Sandler, chairman of Northern Rock told the Guardian he believes that the “Newcastle-based bank can be returned to private ownership in a slimmed-down form,” cuts that would include a loss of 2,000 jobs. The Guardian describes the personal assurance of the bank’s new leadership,

“It has committed itself to a “competitive framework”, under which it promises not to use its government support to unfair advantage.”

see full article here

The Independent reported today that Mervyn King, the Governor of the Bank of England, echoing US bank regulators recent cries for safe and friendly control over banking institutions, called for;

“radical” thinking about financial regulation and, implicitly, a leading role for the Bank of England, perhaps regaining control over the “prudential” regulation of banks while the Financial Services Authority concentrates on “conduct of business.”

The Independent reported that King said, “It is hard to imagine taking steps either to prevent, or to deal with, the consequences of a financial crisis without the active involvement of the central bank.” Perhaps chastened by a new awareness of the dangers of illiquidity, King speculated, “In the longer term, it seems extremely likely that banks and other ‘near’ banks will be called upon to hold more capital and a greater quantity of liquid assets than hitherto.”

see article;
Independent : Sharp rise in inflation will exceed target, warns King

The top two executives of failed mortgage lenders Countrywide are unlikely to face foreclosure, according to a CNN report :

“Countrywide CEO Angelo Mozilo is set to receive $10 million in stock, and President David Sambol will get about $9 million, according to documents Bank of America filed this week with the Securities and Exchange Commission.Countrywide CEO Angelo Mozilo is set to receive $10 million in stock, and President David Sambol will get about $9 million, according to documents Bank of America filed this week with the Securities and Exchange Commission.

Sambol will receive another $28 million in cash and stock to stay with the combined company, the document states.”

An Associated Press article on the same subject timidly touches on the social and political backlash that such stories are beginning to generate :

“The payments, described as “performance-based” stock rights and grants, are required by agreements the executives struck with Countrywide less than a year before the sub-prime meltdown forced the mortgage lender to sell itself, according to the filing.

Some lawmakers were incensed by the payouts.”

CNN : SEC: Countrywide execs to get millions in stock

Associated Press : Filing: Countrywide CEO to Get $10M

The Bush administration will be publicly announcing its regulatory overhaul on Monday, in what is being interpreted as a pre-emptive strike against more sweeping reforms under discussion in Congress. The Associated Press reports that the Federal Reserve board will become a financial FEMA :

“A plan set for release Monday would give new powers to the Federal Reserve so that the central bank serves as the system’s overarching protector of stability.

The proposal would abolish agencies such as the Office of Thrift Supervision and the Commodity Futures Trading Commission, shifting their responsibilities to other federal institutions.

When Treasury Secretary Henry Paulson outlines the ideas in a speech, the changes will represent the most sweeping overhaul of financial regulation since the Great Depression of the 1930s.”

Meanwhile, securities traders are trusting one of their own to make sure that the oversight doesn’t go overboard :

“Many on Wall Street have viewed increased government regulation of investment houses, including an expanded role for the Fed as a regulator, as a tricky balancing act. The fear among analysts is that too much regulation could hamper the companies’ ability to drive profits, and in turn shift an increasing amount of business to financial centers overseas.

But the trade group representing the securities industry did react positively to news of the administration’s plan, which is expected to be detailed Monday in a speech by Treasury Secretary Henry Paulson, a former Goldman Sachs Group Inc. chief executive.”

Associated Press : Administration Pushes Regulatory Changes

Associated Press : Washington, Wall St. Tangle on Oversight

Details are emerging at this hour about a sweeping regulatory initiative by the Bush administration that will essentially turn the Federal Reserve Board into a market stabilization bureau, consolidating powers that currently reside in an array of federal agencies. For reasons that will probably only become clear later, the Treasury Department plan is being leaked on Friday evening. The New York Times is reporting :

“The Treasury plan would let Fed officials examine the practices and even the internal bookkeeping of brokerage firms, hedge funds, commodity-trading exchanges and any other institution that might pose a risk to the overall financial system.

That would be a significant expansion of the central bank’s regulatory mission.

When Fed officials agreed this month to rescue Bear Stearns, once the nation’s fifth-largest investment bank, they pointedly noted that the Fed never had the authority to monitor its financial condition or order it to bolster its protections against a collapse.”

Associated Press : Financial Regulation Overhaul

New York Times : Treasury’s Plan Would Give Fed Wide New Power

In an interview this week New York University Professor of Economics Nouriel Roubini discussed recent market upheavals that he has been accurately predicting for years. The prescient Roubini does not agree with the prevailing view that the Bear Stearns bailout, combined with aggressive Fed intervention in the securities market, will help to contain what he sees as an insolvency crisis :

“I put it in the context of a shadow financial system that is composed of not just broker-dealers, but hedge funds, money market funds, SIVs, conduits and so on that are all subject to a liquidity risk in addition to the credit risk. So, to me, this is just the beginning of a generalized run on these.”

Roubini is also among the few who question the wisdom of the measures taken by the Fed in response to the institutional run on the investment banks :

“It’s the beginning of a radical change in monetary policy. It’s not just the $30 billion that the Fed confirmed to Bear Stearns via JPMorgan — there were two other major options that went in the same direction. One was the decision [two weeks ago] to provide $200 billion so that all primary dealers, including non-bank financial institutions, would be able to swap their illiquid and toxic MBS [paper] for safe Treasuries. The other was the Fed giving any primary dealer, including non-banks, access to the Fed discount window on the same terms as banking institutions. This is a radical change; we haven’t seen anything like this since the Great Depression.

These are financial institutions that are not regulated or supervised by the Fed. The Fed has no idea of whether they are just illiquid or insolvent, which creates a massive moral hazard problem. It’s a radical shift in the way the Fed operates — and a dangerous way, I would argue.”

Nouriel Roubini’s Global Economic Monitor : Interview in Investment News…A Deep Recession and a Severe Financial Crisis Ahead

MarketWatch reported this afternoon that renewed speculation about the solvency of investment bank Lehman Bros. pummeled its shares despite protestations from company spokesmen that an institutional run similar to the one that took down Bear Stearns is not imminent :

“Shares of Lehman Bros. Holdings fell sharply Thursday as anxiety about its financial position troubled investors, but the company said it as in good shape and blamed short sellers for the fears.”

The story also included a new warning about Merrill Lynch :

“Meredith Whitney, an analyst at Oppenheimer & Co., reckons that Merrill will announce $6 billion in write-downs. Her previous estimate was $2 billion. She is now predicting a first-quarter loss of $3 a share vs. a prior estimate of a 45 cents a share profit.”

full story

An unusual volume of puts on Lehman in early trading was the first sign of new trouble for the firm’s stock, which has already seen substantial losses in the first quarter, according to Bloomberg :

“Lehman Brothers Holdings Inc. shares fell the most in a week after options traders speculating the bank is facing funding shortages increased bearish bets on the stock. The company said the speculation is unfounded.

Lehman declined 8.9 percent to $38.71 in New York. The shares have lost 41 percent this year amid more than $200 billion of industry wide losses in mortgage-related securities. The number of bearish put options traded on Lehman’s stock exceeded calls by 3-to-1 and put volume in the first three hours of the day topped the daily average of the past 20 sessions.”

full story

In remarks before the US Chamber of Commerce yesterday, Treasury Secretary Henry Paulson did his best to remind his audience that the government will continue to make capital available to the banking and financial sectors, urging lenders to make loans. But recent reports indicate that although institutions are more than happy to participate in an array of government programs introduced since the credit crisis started in August, they are generally confining the fresh capital to their own balance sheets. The Financial Times reported yesterday afternoon :

“Central banks’ efforts to ease strains in the money markets are failing to stop financial institutions from hoarding cash, stoking fears that the recent respite in equity markets may not signal the end of the credit crisis.”

An article in the Guardian identifies the reason that the banks are seeking, but not reinvesting, fresh capital :

“Although central banks have been aggressive in offsetting the squeeze, pumping hundreds of billions of dollars and euros into the global banking system, banks seem to be hoarding that cash to meet capital adequacy rules at quarter-end rather than lending it out to what they fear may be risky counterparties.”

Bloomberg investigates the effect this is having on the consumer economy :

“Marjorie Killian is eager to buy a home in San Diego and is pre-approved for a mortgage. She won’t make an offer on a property until she can get a fixed rate of 5.5 percent, she said.

Killian is just the kind of buyer that Federal Reserve Chairman Ben Bernanke needs to entice to revive the U.S. housing market and halt its drag on the economy. Lenders aren’t helping the central bank even after they’ve been given seven interest rate cuts and a new program designed to jumpstart borrowing.”

Liz Moyer, writing in Forbes, predicts that the banks are not close to changing their behavior :

“Thought Q4 was bad for banking? Wait for Q1’s results, when firms will be begging investors for fresh capital again after another projected $50 billion of write-downs.”

Financial Times : Hoarding by banks stokes fear over crisis

Guardian : Looming quarter-end intensifies money market strain

Bloomberg : Banks Fail to Lower Mortgage Rates as Bernanke Cuts

Forbes : Begging Bankers

The BBC reports today that the price of oil rose to $107 a barrel “after one of Iraq’s main export pipelines was blown up. A company official said damage would cut Basra’s exports by a third, adding to supply fears and increasing concern about stability in the region.”

The BBC quotes a Barclays Capital analyst;

“We see events in Iraq as having taking a dangerous turn with the stability of the southern oil system now starting to become a potential concern.”

Yesterday’s government report that warned of reduced oil reserves led to a $4 dollar-a-barrel increase and today, “The price of New York light sweet crude oil rose to $107.70 after the explosion and was trading at $106.86 in late afternoon trade in Europe.”

see article:
BBC: Oil hits $107 on pipeline blast

Sen. Jack Reed, chairman of the Senate securities, insurance and investment subcommittee, recently raised questions about the actions the Fed has taken, in the Bear Stearns bailout and other emergency dicta. Although Reed did not specifically criticize the Fed, Reuters reported today that Reed summed up his concerns about the central bank’s actions;

“I think there should be a moment of soul-searching among all the regulators about what they have done in the last several months and years and how they can improve dramatically their regulation.”

The Senator said that there is a “critical need” to modernize the banking regulatory structure that “requires not only reviewing the authority of individual regulators, but also reviewing the way they undertake regulation.” Reed called for senate hearings saying, “This is a very serious situation, there is still a huge uncertainty in the marketplace. As a result, we don’t have the luxury of sitting around and waiting until things settle down. We have to get to work.”

Reuters: Senator urges finance regulations review