This article first appeared on Minyanville.
As details emerge about how the private sector can tap into President Obama’s new spending programs, companies are scrambling to line up at the government teat.
And lobbyists are wringing their slippery paws with delight.
Of the $787 billion to be doled out as part of Obama’s economic stimulus package, $77.6 billion is earmarked for clean-energy projects. In the San Francisco Bay area, the country’s venture-capital hub, green startups are pouring money into lobbying efforts to get their share. According to Bloomberg, hiring a Washington insider is now essential for new companies.
The lobbyists work both sides of the trade, so to speak. On the one hand, they help companies write grants and figure out which government programs they're qualified for; on the other, they sidle up to federal employees and convince them to design grants to suit their clients.
This shift in focus -- from private money to public -- reflects the old accounting axiom: Follow the cash. With private capital hard to come by, government funding is fast becoming the only game in town.
Companies that lack the resources or will to pander to federal and state initiatives will be at a severe disadvantage to those willing to navigate maze-like government bureaucracy.
Case in point: The recently announced Public-Private Investment Program, or PPIP.
Investors able to get cheap government leverage can bid more aggressively for distressed assets, pushing up prices. Meanwhile, those without access to federal programs can't afford the new, higher levels - and are summarily pushed out of the market.
This works out well for big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C), all of whom are eager to unload their "toxic assets" at favorable prices. Then again, that's the way the system was designed.
As the government takes an ever-growing role in our economic affairs, companies must become ever more nimble in order to tap into this program or that to optimize capital.
The President's new initiatives are ironically (or sadly) creating more work for the very insiders he promised to boot out of Washington. Lobbyists, it appears, aren't just here to stay - they're in higher demand than ever before.
Showing posts with label Federal. Show all posts
Showing posts with label Federal. Show all posts
Sunday, March 29, 2009
Monday, January 5, 2009
Treasury Bails Out GMAC
This post first appeared on Minyanville.
The US taxpayer is now in the business of making subprime car loans.
Yesterday, the Treasury department announced it bought $5 billion of preferred equity in GMAC, the finance arm of General Motors (GM). The new cash -- along with a $1 billion loan to GM -- is aimed at boosting the availability of auto loans to credit-strapped consumers.
Cerebrus Capital Management, the private equity firm that owns Chrysler, holds 51% of GMAC, while GM owns a 49% stake. Cerebrus has now double-dipped into the Treasury Department’s coffers, having been bailed out for 2 massive bets gone awry.
According to the Wall Street Journal, GMAC responded to the capital injection by lowering the minimum credit score needed for retail financing to 621, down from 700. Seeking an immediate impact from its second round of federal money, GM also announced it would offer 0% financing on certain car models through next Monday.
Taxpayer support of GMAC comes on the heels of news the Federal Reserve approved the finance company’s plans to become a chartered bank, giving it access to Federal Reserve borrowing. The Fed had originally required that GMAC raise $30 billion in capital to become a bank, which it had failed to do as of Friday. But accompanying the news of the Treasury’s investment yesterday was an announcement by GMAC that it had managed to scrounge up the requisite capital.
GMAC didn’t just have its hands in auto loans - it was a major player in the subprime mortgage boom. As big industrial companies reached for fat margins in the housing market, they got burned when the mortgage market collapsed last year. General Electric (GE), which purchased subprime lender WMC Mortgage from Apollo Management in 2004, was forced to shutter the lender in 2007 as losses overwhelmed its operations.
Ford (F), GM, GE and other industrials which Toddo often refers to as “financials in drag” are reeling from their exposure to the turmoil in the credit markets. In addition to higher borrowing costs, these firms relied heavily on their finance arms to drive revenues by offering customers loans to buy their products. Now that cheap financing is all but nonexistent, these and other firms reliant on credit-flush consumers are struggling to unload their wares.
Meanwhile, Washington is spraying money around the economy in the hopes it will land in the wallets of would-be consumers. But banks, hoarding cash to offset bad debt, are reticent to start lending again. Until they do, the billions of dollars being poured into the financial system are simply plugging existing leaks.
Thus far, it has. But there are ony so many holes the government can fill at once.
The US taxpayer is now in the business of making subprime car loans.
Yesterday, the Treasury department announced it bought $5 billion of preferred equity in GMAC, the finance arm of General Motors (GM). The new cash -- along with a $1 billion loan to GM -- is aimed at boosting the availability of auto loans to credit-strapped consumers.
Cerebrus Capital Management, the private equity firm that owns Chrysler, holds 51% of GMAC, while GM owns a 49% stake. Cerebrus has now double-dipped into the Treasury Department’s coffers, having been bailed out for 2 massive bets gone awry.
According to the Wall Street Journal, GMAC responded to the capital injection by lowering the minimum credit score needed for retail financing to 621, down from 700. Seeking an immediate impact from its second round of federal money, GM also announced it would offer 0% financing on certain car models through next Monday.
Taxpayer support of GMAC comes on the heels of news the Federal Reserve approved the finance company’s plans to become a chartered bank, giving it access to Federal Reserve borrowing. The Fed had originally required that GMAC raise $30 billion in capital to become a bank, which it had failed to do as of Friday. But accompanying the news of the Treasury’s investment yesterday was an announcement by GMAC that it had managed to scrounge up the requisite capital.
GMAC didn’t just have its hands in auto loans - it was a major player in the subprime mortgage boom. As big industrial companies reached for fat margins in the housing market, they got burned when the mortgage market collapsed last year. General Electric (GE), which purchased subprime lender WMC Mortgage from Apollo Management in 2004, was forced to shutter the lender in 2007 as losses overwhelmed its operations.
Ford (F), GM, GE and other industrials which Toddo often refers to as “financials in drag” are reeling from their exposure to the turmoil in the credit markets. In addition to higher borrowing costs, these firms relied heavily on their finance arms to drive revenues by offering customers loans to buy their products. Now that cheap financing is all but nonexistent, these and other firms reliant on credit-flush consumers are struggling to unload their wares.
Meanwhile, Washington is spraying money around the economy in the hopes it will land in the wallets of would-be consumers. But banks, hoarding cash to offset bad debt, are reticent to start lending again. Until they do, the billions of dollars being poured into the financial system are simply plugging existing leaks.
Thus far, it has. But there are ony so many holes the government can fill at once.
Wednesday, December 17, 2008
Fed Slashes Interest Rates; Nothing Happens
This post first appeared on Minyanville.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
You can't say they didn't try.
Nevertheless, the Federal Reserve's drastic moves aimed at jumpstarting lending, highlighted by dropping interest rates to nil yesterday, just aren't working. To be sure, conditions are better than they were just months ago during the height of the financial panic, but a normally functioning credit market is likely still months away.
Bloomberg reports banks are still hoarding cash and shunning loans from their counterparts around the world, preferring instead to borrow from the Fed directly. The interbank lending markets are basically nonexistent.
The spread between LIBOR -- the London Interbank Offer Rate, which measures what big banks like JPMorgan (JPM), Bank of America (BAC) and Citigroup (C) charge one another for loans -- and Treasury bills still 6 times wider than it was last June.
Companies, specifcally ones with less-than-stellar credit ratings, are paying record amounts to borrow from skittish bond investors. In fact, never before have buyers of corporate debt demanded more yield on their investments, according to data compiled by Bloomberg.
As Minyanville's Kevin Depew is apt to say, back on Main Street, everyday Americans "are getting shot from both sides."
Each time the Fed lowers interest rates, savers earn less on the money they sock away in the bank. This, combined with our ballooning national debt and struggling economy, are torpedoing the dollar, which has a punitive effect on those responsible enough to shy away from immediately parting with every penny they earn.
Washington is sending a clear message that the only way out of this mess is precisely what got us here in the first place: More spending. By providing paltry returns on savings and continuing to debase the currency, regulators and lawmakers alike are punishing responsible, conservative economic actions.
The trouble -- and why these fantastic efforts to rain money down on our broken economy will ultimately fail -- is that years of robust spending were driven by free and easy access to credit. Artificially low interest rates, loose lending guidelines, and a social mood that fostered spend-happy trips to the mall are a thing of the past.
Try though they may, bureaucrats cannot squeeze blood from the proverbial turnip. They spent the past 20 years hammering away at it, until finally the poor root couldn't take any more. It rolled over, returning to its shallow hole in the earth, to wait for brighter days.
The American consumer has followed suit.
Tuesday, November 25, 2008
What's Another $200 Billion?
This post first appeared on Minyanville.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
The burden of pulling the US out its economic tailspin is being placed squarely on those responsible for it in the first place: Spend-happy consumers and a financial system too eager to lend.
The Federal Reserve announced today plans to lend up to $200 billion to financial institutions interested in buying new securities backed by credit cards, auto loans and student loans. The Treasury Department will pony up $20 billion of Troubled Asset Relief Program (TARP) money to help support the new initiative, the latest in the government’s attempt to help struggling American consumers tap the credit markets.
The facility will be managed by the New York Federal Reserve, which is chaired by Timothy Geithner, likely the next Treasury secretary.
Fed Chairman Bernanke and current Treasury Secretary Paulson hope the lending program will encourage new issuance of asset -backed securities, which, prior to the credit crunch, were the primary source of funding for consumer loans.
Banks and other issuers of credit cards and auto loans prefer to bundle these loans into packages, selling slices to investors with various risk preferences. This allows the banks to offload a portion of the default risk and make better use of their limited cash.
According to the Treasury Department, last year this type of financing accounted for $240 billion in new issuances, but is down precipitously this year as credit markets have seized up. As a result, banks like JP Morgan (JPM), Bank of America (BAC) and Citigroup (C) are being forced to keep more of the loans on their balance sheets. Since massive losses on bad debt have shrunken their capital bases, lenders are reticent to hand out new loans.
In a separate announcement, the Fed said it will also buy up to $100 billion in debt issued by Fannie Mae (FNM) and Freddie Mac (FRE) - and $500 billion in securities backed by the 2 government-sponsored enterprises, or GSEs. The action is aimed at reducing mortgage rates that have remained stubbornly high, even as the Fed has pumped billions into the mortgage market.
Despite massive intervention into the credit markets, myriad new lending facilities and hundreds of billions in new equity, banks are still being stingy. New loans are hard to get and expensive to boot.
As well they should be.
Americans are up to their eyeballs in debt. The government understands, however, that as long as credit cards stay maxed out, economic activity will continue to contract. Without savings to fall back on, purchasing decisions that aren't absolutely essential are being delayed indefinitely.
Giving consumers easier access to credit is a bit like handing a drug addict a pill, asking him to use responsibly and wandering off, leaving him to his own devices. The immediate problem may have been avoied, but the inevitabe crash is just that - inevitable.
Tuesday, November 4, 2008
Credit Dries Up, Banks Clamp Down
This post first appeared on Minyanville.
The American consumer desperately needs another lender of last resort.
It took the worst housing slump in decades, a global financial crisis and the collapse of some of the biggest financial institutions in the country, but banks finally seem to be getting the picture. Maybe less credit, not more, is what we need.
Yesterday, the Federal Reserve released its quarterly survey of lending standards. Unsurprisingly, banks are getting stingier with their money. According to the New York Times:
- 85% of domestic banks reported tightening commercial and industrial loans
- 60% are tightening standards on credit card loans
- 65% are clamping down on all types of consumer debt
- 20% are cutting limits for existing, prime credit card holders
The overarching theme was consistent: Banks “continued to tighten their lending standards and terms on all major loan categories over the previous 3 months.”
Big card-issuers American Express (AXP) and Capital One (COF) confirmed this trend last week, announcing they’re clamping down on existing customers and giving new prospects the full probe prior to issuing cards.
Furthermore, banks are raising interest rates to compensate for the additional risk they now face as consumers grapple with a slowing economy, job losses and tumbling home prices. Likewise, mortgage rates remain stubbornly elevated, evidence of concern about ongoing mortgage risk.
Debt-laden consumers are quickly running out of options. The Wall Street Journal reported yesterday that utility companies, like Pennsylvania's PPL (PPL), are seeing surging delinquencies. PPL said shutoffs increased 78% in the first 3 quarters of the year. The company is also more aggressively cutting consumers off, a policy it says will “prevent people from getting further into debt.”
As the Treasury department doles out its $700 billion in bailout money, consumers and investors alike should watch closely to see just how much of it is funneled into new lending.
Meanwhile, belts will continue to tighten around the country as Americans explore the long-forgotten concept that less may actually be more.
Tuesday, September 9, 2008
Fed Pushes Fannie, Freddie Shareholders in Front of Train
This post first appeared on Minyanville.
The effects of this weekend’s dramatic power grab in Washington are rippling through the financial markets - and the pundits are arguing about who was right and who was wrong about the Fannie Mae (FNM) and Freddie Mac (FRE) bailout. In the meantime, federal regulators are quietly doing damage control.
Small banks will see large chunks of capital wiped out from equity losses in Fannie and Freddie - but they can now get in line for the government dole.
In seizing the embattled mortgage giants, the Treasury Department shoved common shareholders in front of the train, reaffirming they’d bear the brunt of future losses. As with the Bear Stearns takeover, the Federal Reserve and the Treasury dealt with the moral hazards of risky investments by simply punishing common shareholders and bailing out debtholders.
The countless financial institutions holding Fannie and Freddie preferred stock must now act as the second line of defense for the money of our trading partners, allies and certain well-connected institutional bond investors.
Preferred shareholders have no voting rights, but they stand in front of common shareholders in terms of dividend payments and the right to recover their investments in the event of liquidation. There had been speculation that Washington would go easy on preferred holders and protect their dividends, and, by extension, the value of preferred shares. Since most holders of these assets were other financial institutions, the logic went, the Treasury wouldn't put undue stress on an already troubled group.
The Treasury’s bailout plan doesn't protect preferred shareholders, as evidenced by the steep drop in the value of those shares today. However, various financial regulators are prepared to step in and assist small banks with significant exposure to Fannie or Freddie via investments in preferred shares.
FDIC chairman Sheila Bair tried to diffuse the situation by claiming that “Across the industry, banks do not have significant exposure to GSE equity securities.” But since the FDIC also neglected to include collapsed mortgage thrift IndyMac on its list of potentially troubled financial institutions just weeks before it went bust, her assertion shouldn’t carry much weight.
Sovereign Bank (SOV) isn’t likely to be comforted by Bair’s soothing words either, as losses on the bank’s Fannie and Freddie preferred stock could erase almost a year’s worth of earnings, according to analysts at Credit Insights. JPMorgan (JPM) is also likely lose money on similar holdings, although even if it’s entire $1.2 billion investment is wiped out, the hit would represent less than 1% of its tangible capital.
Capitalist ideals go right out the window during times of crisis. Unprecedented financial calamities result in unprecedented government intervention.
It's anybody's guess as to how long it will be before markets are allowed to find a true bottom, to experience true price discovery and thus establish a true foundation for recovery. Until then, investors should try to relish being a part of some of the most historic financial events in the past 80 years, while preserving capital for the inevitable opportunities that lie on the ever-elusive other side of the abyss.
The effects of this weekend’s dramatic power grab in Washington are rippling through the financial markets - and the pundits are arguing about who was right and who was wrong about the Fannie Mae (FNM) and Freddie Mac (FRE) bailout. In the meantime, federal regulators are quietly doing damage control.
Small banks will see large chunks of capital wiped out from equity losses in Fannie and Freddie - but they can now get in line for the government dole.
In seizing the embattled mortgage giants, the Treasury Department shoved common shareholders in front of the train, reaffirming they’d bear the brunt of future losses. As with the Bear Stearns takeover, the Federal Reserve and the Treasury dealt with the moral hazards of risky investments by simply punishing common shareholders and bailing out debtholders.
The countless financial institutions holding Fannie and Freddie preferred stock must now act as the second line of defense for the money of our trading partners, allies and certain well-connected institutional bond investors.
Preferred shareholders have no voting rights, but they stand in front of common shareholders in terms of dividend payments and the right to recover their investments in the event of liquidation. There had been speculation that Washington would go easy on preferred holders and protect their dividends, and, by extension, the value of preferred shares. Since most holders of these assets were other financial institutions, the logic went, the Treasury wouldn't put undue stress on an already troubled group.
The Treasury’s bailout plan doesn't protect preferred shareholders, as evidenced by the steep drop in the value of those shares today. However, various financial regulators are prepared to step in and assist small banks with significant exposure to Fannie or Freddie via investments in preferred shares.
FDIC chairman Sheila Bair tried to diffuse the situation by claiming that “Across the industry, banks do not have significant exposure to GSE equity securities.” But since the FDIC also neglected to include collapsed mortgage thrift IndyMac on its list of potentially troubled financial institutions just weeks before it went bust, her assertion shouldn’t carry much weight.
Sovereign Bank (SOV) isn’t likely to be comforted by Bair’s soothing words either, as losses on the bank’s Fannie and Freddie preferred stock could erase almost a year’s worth of earnings, according to analysts at Credit Insights. JPMorgan (JPM) is also likely lose money on similar holdings, although even if it’s entire $1.2 billion investment is wiped out, the hit would represent less than 1% of its tangible capital.
Capitalist ideals go right out the window during times of crisis. Unprecedented financial calamities result in unprecedented government intervention.
It's anybody's guess as to how long it will be before markets are allowed to find a true bottom, to experience true price discovery and thus establish a true foundation for recovery. Until then, investors should try to relish being a part of some of the most historic financial events in the past 80 years, while preserving capital for the inevitable opportunities that lie on the ever-elusive other side of the abyss.
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