bank run blog

In the wake of yesterday’s downbeat report for the second quarter, the FDIC is acting to tap new lines of liquidity, signaling that federal regulators are expecting the failures of significant institutions. FDIC chief Sheila Bair announced the move in an interview with the Wall Street Journal. According to Reuters :

“Federal Deposit Insurance Corp (FDIC) might have to borrow money from the Treasury Department to see it through an expected wave of bank failures, the Wall Street Journal reported.

The borrowing could be needed to cover short-term cash-flow pressures caused by reimbursing depositors immediately after the failure of a bank, the paper said.”

The expected shortage of cash has prompted the FDIC to consider proposals to revamp its fee structure :

“’I would not rule out the possibility that at some point we may need to tap into (short-term) lines of credit with the Treasury for working capital, not to cover our losses,’ Chairman Sheila Bair said in an interview with the paper.

Bair said such a scenario was unlikely in the ‘near term.’ With a rise in the number of troubled banks, the FDIC’s Deposit Insurance Fund used to repay insured deposits at failed banks has been drained.

In a bid to replenish the $45.2 billion fund, Bair had said on Tuesday that the FDIC will consider a plan in October to raise the premium rates banks pay into the fund, a move that will further squeeze the industry.

The agency also plans to charge banks that engage in risky lending practices significantly higher premiums than other U.S. banks, Bair said.”

In a related story, the Office of Thrift Supervision published its quarterly report, following on yesterday’s release by the FDIC. The Associated Press reports :

“U.S. thrifts lost $5.4 billion in the second quarter and set aside a record amount to cover losses from bad mortgages and other loans.

Data from the U.S. Office of Thrift Supervision released Wednesday show federally-insured savings and loan institutions posted their second-largest quarterly loss ever in the April-June period, after the $8.8 billion loss in the fourth quarter of last year. Heavily focused on mortgage lending, thrifts have been stung by mounting home-loan defaults.

The $5.4 billion quarterly loss compared with net profits of $3.8 billion in the year-ago period, and a loss of $627 million in the first quarter.

The 829 thrifts also set aside a record $14 billion to cover losses from bad mortgages and other loans.”

Reuters : FDIC may borrow money from Treasury: report

Associated Press : US thrifts 2Q loss of $5.4B is second largest ever

In a quarterly report described by Chairman Sheila Bair as “pretty dismal”, the Federal Deposit Insurance Corporation revealed that earnings for US banks dropped 86 percent year over year. The FDIC raised the number of banks on its watch list to 117. The Associated Press reports :

“The number of troubled U.S. banks leaped to the highest level in about five years and bank profits plunged by 86 percent in the second quarter, as slumps in the housing and credit markets continued.

Federal Deposit Insurance Corp. data released Tuesday show 117 banks and thrifts were considered to be in trouble in the second quarter, up from 90 in the prior quarter and the biggest tally since mid-2003.

The FDIC also said that federally-insured banks and savings institutions earned $5 billion in the April-June period, down from $36.8 billion a year earlier. The roughly 8,500 banks and thrifts also set aside a record $50.2 billion to cover losses from soured mortgages and other loans in the second quarter.”

According to CNN, bad loans and failed investments have forced banks to set aside more and more capital to cover losses :

“Facing additional deterioration in the housing market and further weakness in the broader economy, FDIC-insured banks set aside $50.2 billion during the quarter, more than four times the quarterly total of $11.4 billion from a year ago.

At the same time, nonperforming assets and net charge-offs, or loans banks don’t think are collectable, continued to rise, totaling $26.4 billion in the second quarter, almost three times the $8.9 billion during the second quarter of 2007.”

Associated Press : FDIC: troubled banks highest in 5 years; bank profits dropped by 86 percent in second quarter

CNN Money : Problem bank list keeps growing

The private mercenary organization Blackwater has come under scrutiny for misrepresenting the size of its company in order to acquire federal contracts set aside for small businesses. The falsifications came to light in an audit performed by the Office of the Inspector General for the Small Business Administration that also found that Blackwater benefited from assessments made by the SBA that favored broad definitions of what it means to be an employee of Blackwater. Blackwater eventually received more than 130 SBA contracts worth over $100 million. Blackwater has received over $1.2 billion worth of government contracts since 2000.

The Inspector’s audit found that Blackwater gave conflicting information in its proposals and applications for federal loans and applied for contracts under the business names of companies that it owned in the effort to disguise the fact that the contracts would in reality be awarded to Blackwater.

The auditors also found that the Small Business Association accepted Back-water’s interpretation of which of its employees were “private contractors” allowing the company to assert that ithas far fewer employees than are actually paid by Blackwater. The auditors found, for example, that Blackwater said in its SBA applications that the number of employees of an affiliate, Presidential Airlines, was just over 700 and Blackwater reported to Dunn and Bradstreet that the company had more than 1500 employees. Presidential went on to receive a $107 million dollar SBA contract. The SBA’s policy is to not offer contracts to companies with over 1000 employees.

The falsifications, misrepresentations and favorable SBA rulings were uncovered by Congressional investigators who reported that Blackwater used its special designations of employees as “private contractors” to evade paying “millions in federal tax payments.” Chairman of the House Committee on Oversight and Government Reform, Henry Waxman (D-CA), concluded that the designation of employees as contractors also enabled the Blackwater to secure the SBA contracts unfairly.

The Inspector General said that the findings indicated that Blackwater might have used the same fakery to secure additional contracts from other federal agencies.

cross posted at

redstateupdate.net

A report released last week by the Government Accountability Office reveals that two-thirds of US corporations claimed zero federal income tax liability between 1998 and 2005. The report, which was compiled at the request of Democratic Senators Carl Levin of Michigan and Byron Dorgan of North Dakota, also finds that 68 percent of foreign-controlled corporations with US operations paid no taxes over the same period. The GAO concluded that together the companies reported trillions in US revenues during the years studied.

“It’s shameful that so many corporations make big profits and pay nothing to support our country,” said Dorgan, who called the report “a shocking indictment of the current tax system.” Levin highlighted the sophisticated accounting practices that enable companies to legally reduce their tax liabilities through the transfer of funds, saying, “corporations are using tax trickery to send their profits overseas and avoid paying their fair share in the United States.” The report comes in the wake of the Bush administration announcement that the US budget deficit for next year will reach a record $486 billion.

In 2005, the most recent year for which figures are available, 66.7 percent of US corporations, more than 1.2 million companies, paid no federal income tax. Additionally, more than 38,000 foreign corporations also avoided US corporate tax in the same year. The companies avoiding income tax reported a combined $2.5 trillion in sales. The GAO also found that 72 percent of foreign corporations and 57 percent of US companies paid zero income taxes for at least one year between 1998 and 2005. More than 42 percent of US corporations and half of all foreign companies avoided all taxes for two or more years during that period.

The GAO report did not name specific companies. Corporations typically claim zero liability when they report an operating loss, or by the application of tax credits or other government incentives, which may include tax deferments. Critics of US corporate tax policy accuse large corporations of aggressively avoiding tax liability through elaborate transfer pricing structures that shift profits and losses to the most advantageous tax jurisdictions.

cross posted at

redstateupdate.net

In what some analysts are already calling a “stealth bailout”, it looks as though the Fed and the Treasury have secretly and improperly intervened on behalf of beleaguered Lehman Brothers Holdings. This morning the Wall Street Journal is reporting :

“In an apparent attempt to prevent a repeat of the cascading rumors that helped sink Bear Stearns Cos., the Federal Reserve last month quietly called one major bank to see if it had pulled a credit line from Lehman Brothers Holdings Inc., people familiar with the matter said.

Responding to a July rumor that Credit Suisse Group planned to pull a line of credit to Lehman, Federal Reserve officials called to see if it was in fact true, according to these people. Credit Suisse told Fed officials there was no truth to the rumor and it had no intention of pulling the line of credit, the people said.”

full story

Reuters notes that the contact with the Swiss bank came at roughly the same time as SEC subpoenas were issued in July :

“Fed officials contacted Credit Suisse last month, but it is unclear whether the move occurred before or after the U.S. Securities and Exchange Commission subpoenaed dozens of hedge funds and financial firms about four Lehman-related rumors, the paper said.”

full story

The settlements continue at an astonishing pace in New York, with the latest rumor being that six more Wall Street firms are about to agree to a deal. CNBC is reporting :

“Wall Street banks and brokerages are near a global settlement with regulators over allegations that they misled investors over the sale of auction-rate securities, CNBC has learned.

A settlement, which could be announced as early as today, would involve such giants as Merrill Lynch, Wachovia, Morgan Stanley, JP Morgan Chase, Goldman Sachs and Lehman Brothers.”

As with the deals reached last week, the fines are significant, but they are dwarfed by the size of the repurchases :

“The settlement would mirror those already reached with Citigroup and UBS, according to the office of New York Attorney General Andrew Cuomo.

Combined, the banks agreed to pay $250 million in fines and will repurchase about $27 billion of the debt from their clients.”

full story

In what is becoming a major news story, state regulators are achieving huge settlements with top financial institutions eager to avoid criminal fraud prosecutions. The scale and terms of the deals are unheard of in state actions against the financial sector, and federal regulators have been inexplicably sidelined throughout. There is certain to be more to this than is currently being reported.

Today’s most significant development was the expansion of the New York attorney general’s probe to include three more Wall Street giants. According to the Associated Press :

“New York Attorney General Andrew Cuomo said Monday he is expanding his investigation into the collapse of the auction-rate securities market to include JPMorgan Chase & Co., Morgan Stanley and Wachovia Corp.

Last week, Cuomo’s office and the Securities and Exchange Commission reached settlements that forced Swiss bank UBS to repurchase $18.6 billion in the securities, while Citigroup agreed to buy back $7 billion of the securities. UBS will also pay a fine of $150 million, while Citigroup will pay a $100 million fine.

‘This is an industrywide problem,’ Cuomo said in an interview. ‘This is not about one or two institutions. We are now working with the other players in the industry.’

Cuomo sent letters to JPMorgan, Morgan Stanley and Wachovia telling them that his office is reviewing the banks’ behavior in the sale of auction-rate securities. The attorney general will determine if the banks knowingly misrepresented the safety of the securities when selling them to investors.”

full story

The Washington Post notes that with numerous state investigations proceeding simultaneously, making it all go away is becoming an increasingly expensive proposition :

“Meanwhile the office of Missouri Secretary of State Robin Carnahan on Monday announced that talks with Wachovia Securities, a St Louis-based venture jointly owned by Wachovia and Prudential Financial continue.

Cuomo’s letters to the three banks and the Missouri talks show that Wall Street has only begun to pay for its actions that left tens of thousands of investors stuck with ‘cash-like’ securities that were impossible to cash out.”

full story

A quick review of the business sections of newspapers around the country this morning reveals numerous features about the stability of commercial banks and the reliability of the Federal Deposit Insurance Corporation. Not reprints of pieces generated by an international news service like the AP or Reuters, these articles were assigned by local editors to in-house staff for publication in Sunday editions. It is apparent that the FDIC has bombarded newsrooms nationally with press releases to get this kind of “local” coverage :

San Diego Union-Tribune : Using different accounts can increase deposit insurance

Newsday : Tips to get the most FDIC coverage for your assets

Seattle Times : You can extend FDIC insurance past $100,000

Minneapolis Star-Tribune : In shaky times, FDIC offers some comfort

UBS is the second major financial institution to “voluntarily” agree to pay billions of dollars to buy back worthless paper they pushed on investors, in a bid to settle fraud allegations and avoid further prosecution. The Associated Press has the story of the UBS settlement :

“Swiss banking giant UBS AG agreed Friday to buy back nearly $20 billion in auction-rate securities from investors, a day after Citigroup Inc. reached a similar settlement with regulators for $7 billion as part of a wide-ranging investigation into the collapse of the market for the bond-like investments.

UBS will repurchase all $18.6 billion of the securities it sold and pay a fine of $150 million as part of an investigation led by New York Attorney General Andrew Cuomo into whether banks misled customers about the safety of the securities.”

The two huge deals concluded by state officials from New York and Massachusetts are being seen as a template for scores of similar settlements to come :

“The settlements with UBS and Citigroup provide parameters to other banks on how to resolve situations surrounding their sales of auction-rate securities, Cuomo said.

Bank of America Corp. and Bank of New York Mellon Corp. have both disclosed they received requests for information about the sale of auction-rate securities, and Merrill Lynch & Co. has said it will voluntarily repurchase $12 billion of the securities from clients.

Cuomo noted Merrill’s repurchase program falls short of the steps agreed to by UBS and Citigroup, and his office will continue to investigate the bank.

Both UBS and Citigroup will take charges tied to the repurchase of the securities because they will be forced to price them at their current market value and not at the par value being paid to repurchase them.”

full story

The Boston Globe reports that the UBS deal almost fell apart when the bankers realized the extent of their liability :

“After spending most of the week in a 25th-floor conference room a block from Wall Street, lawyers for UBS Financial Services Inc. got up and walked out of negotiations with regulators Thursday afternoon.

New York Attorney General Andrew M. Cuomo was asking for too large a fine, according to people involved in the case, and it looked like a deal to settle fraud charges over the Swiss bank’s sales of auction-rate securities was dead.”

The most interesting aspect of this story, which now involves all four major Wall Street investment banks, as well as many of the largest commercial banks in the world, is captured in the following passage from much further down in the Globe article (paragraph 15 of 20) :

“The Securities and Exchange Commission was a party to both the UBS and Citigroup settlements. But the nation’s top securities regulator did not levy fines against either firm at this time; it said it might down the road, if the banks don’t carry out promises. Galvin, who oversees the Massachusetts Securities Division, said the SEC has appeared more concerned about the welfare of the banks than of investors.

‘They’ve been fretting about the stability of these companies,’ Galvin said. ‘They’ve been saying, “We don’t want another Bear Stearns on our hands.”’”

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Regulators of every description are shocked; shocked to find that respectable Wall Street firms have been engaging in securities fraud. As the depression enters its second year, expect to see many more of these exhibitions by government entities embarrassed by their own culpability and individual public officials hoping to reap political gains. The Associated Press reports :

Citigroup Inc. will buy back more than $7 billion in auction-rate securities and pay $100 million in fines as part of settlements with federal and state regulators, who said the bank marketed the investments as safe despite liquidity risks.

Citigroup will buy back the securities from tens of thousands of investors nationwide under separate accords announced Thursday with the Securities and Exchange Commission, New York Attorney General Andrew Cuomo and other state regulators. The buybacks must be completed by November.

The nation’s largest financial institution also will pay a $50 million civil penalty to New York state and a separate $50 million civil penalty to the North American Securities Administrators Association, which represents securities regulators in the 50 states and the District of Columbia.

The SEC also will consider levying a fine on Citigroup, the agency’s enforcement director Linda Thomsen, said at a news conference.

In addition, New York-based Citigroup agreed to make its best efforts to liquidate by the end of next year all of the roughly $12 billion of auction-rate securities it sold to retirement plans and other institutional investors.

full story

In a related story, CNN is reporting this evening Merrill, Under Pressure, Offers To Buy Back $12 Billion In ARSs :

“Merrill’s move follows Citigroup Inc. (C), which earlier Thursday said it will buy back billions of dollars in illiquid auction-rate securities from retail customers, charities and small businesses as part of an agreement to end probes into how the securities were sold and marketed before the $330-billion auction- rate market seized up earlier this year.

Merrill Lynch and other banks have come under increased scrutiny over their efforts to sell the securities even as the market was beginning to look shaky. Last week, the Massachusetts Secretary of the Commonwealth charged Merrill Lynch with fraud in pushing the sale of auction-rate securities while ‘misstating the stability of the auction market itself.’ The complaint also alleged Merrill co- opted its research department to help sell the securities and seeks to order the brokerage to ‘make good’ on the sales of now-frozen securities and make restitution to investors who sold at less than par.”

full story

Reuters has the latest developments in what will be an ongoing regulatory surge for public consumption, in an article headlined, States in auction-rate probes of 12 firms :

“A multi-state task force is probing a total of 12 Wall Street firms, including Citigroup, over how they handled clients’ investments in auction rate paper, the Texas state securities commissioner said on Thursday.”

full story