Monday, February 01, 2010

Volcker, SIGTARP, Wells Fargo and $100MM Bonuses

Paul Volcker wrote a lengthy Op-Ed in the NY Times this weekend without really saying anything.  He didn't lay out rules for how he wants to reform the banks, rather, he reiterated obvious statements that we in the blogosphere have been railing about for 18 months, like "To help facilitate that process, the concept of a “living will” has been set forth by a number of governments. Stockholders and management would not be protected. Creditors would be at risk, and would suffer to the extent that the ultimate liquidation value of the firm would fall short of its debts."   I mean, I agree with that concept, but it's a "no shit sherlock" kind of reform.  Volcker also made some comments about eliminating "too big to fail" so that we can afford one of capitalism's necessary features:  FAILURE.

The quarterly SIGTARP (Special Inspector General to the TARP) report is out.    Calculated Risk points out how SIGTARP noted that "the Federal Government’s concerted efforts to support home prices risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market."  The charts showing the extent to which the government has taken over the housing market are STAGGERING - check them at Calculated Risk or in the SIGTARP report.

There is also mention of the PPIP in the SIGTARP report:

"Section 5 also provides an update on the issue of imposing conflict-of-interest walls in PPIP, including a discussion of a series of suspect trades that has already occurred within one of the Public-Private Investment Funds (“PPIFs”) in which a portfolio manager directed the sale of a security from a non-PPIF fund under his management to a dealer after the security had been downgraded and then, minutes later, purchased from that dealer the same security at a slightly higher price for the PPIF. SIGTARP is reviewing these trades."

Well, what can I say other than "I told you so."  It seemed obvious from the start that the only way the PPIP could work is if it were scammed.  Aside from that, it's exactly the kind of transfer of risk everyone is now up in arms about - transferring risk from the banks to the taxpayer.

A story I found especially interesting this morning was Bloomberg's "Wells Fargo Shuns Carry Trade, Braces for Risk of Higher Rates."  Now, banks borrow money and re-invest it at a higher rate.  One problem is that the time frame for the borrowing and the lending (the investment is lending) is not usually matched.  So if banks can borrow at very low short term rates right now, they might NOT want to re-invest those proceeds at low locked in long term rates.  Even if your funding and investment terms are matched, you STILL might not want to get locked into low long term rates. In fact, it seems many banks are investing at relatively low long term rates in an effort to earn easy income and rebuild their balance sheets.  WFC, however, is facing the same dilemma I face in my bank account - I don't want to get locked into a 10 year CD at 5%, because I think there might be better opportunities for investing my money in the next few years.  Thus, I sit here in cash earning nearly 0%, and am liquid as a result.  Wells Fargo, as explained in the article, is doing the same thing -

WFC "reduced investments in mostly fixed-income securities by $34 billion in 2009’s second half, company filings show. JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc. boosted their holdings by an average of $35.5 billion.  By scaling back on the so-called carry trade, in which banks borrow in overnight lending markets at rates near zero and invest in higher-yielding securities, San Francisco-based Wells Fargo aims to protect against losses when rates rise. The three other lenders increased investments on the theory that profit will outpace any future losses.  “The bias is for higher rates,” Chief Executive Officer John Stumpf, 56, said on the company’s fourth-quarter earnings call. “We’re willing to wait for that to happen. We think that’s the better trade.” 

Finally,  the Times Online posted a story anticipating that Goldman Sachs's CEO, Lloyd Blankfein, will receive a bonus of $100mm this year.  Sadly, the internet quickly accepted this as fact, and began ranting about it (Felix Salmon excepted).  Look - if Blankfein gets paid $100mm this year, it's rantable - but I don't believe there's any chance that happens.  I think GS has shown that they are at least aware of public perception when they actually shrunk their bonus pool after a bountiful fourth quarter.  There is simply no way that Blankfein is crazy/ignorant enough to have a number like $100mm associated with his name this year. 

What is really going on here is tabloid journalism from Times Online, worded so that their statement will be accurate no matter what happens: "Goldman Sachs, the world’s richest investment bank, could be about to pay its chief executive a bumper bonus of up to $100 million in defiance of moves by President Obama to take action against such payouts."   I'm surprised they stopped at $100 million - the article would have been just as accurate had they written "up to $500 million."  Note the use of the words "up to."



James said...

Exactly the kind of journalism that is bankrupting what was once one of the finest papers in the disappointing. Also it only encourages the ignorant, jingoistic comments that prove that so many of us Brits lack the common sense needed to make head or tail of most things.

Great post - as ever - as always.


Anonymous said...

Re: Wells, I suspect they don't use/have proprietary fixed income traders (run out of their treasury function) like JP or BofA do to take advantage of the steep yield curve/cheap funding and generate relatively attractive returns relative to risk. That should mean much lower earnings volatility for them, but if you believe this is a good environment for fixed income traders at large institutions with attractive funding rates (and with good contacts at the fed), than it is means the other banks are probably helping their shareholders more. Re: a poker player, do you think it could be a good play for GS to plant that rumour themselves to preempt anything else.

Kid Dynamite said...

on GS - someone elsewhere mentioned that GS could have planted the rumor so that when Blankfein gets $50MM is doesn't seem like much - that's pretty cynical, and i tend to doubt it.

on Wells - i think they are actually being prudent and not locking themselves into funding mismatches. at the same time, they aren't investing their assets for the same reason I'm not - they want liquidity when rates move, and don't want to be locked up at 4.5%. of course, perhaps one reason they are acting like this (while it's normal for ME to act like this, it's probably NOT normal for a huge bank to act like this) is because they don't have abundant capital anymore! that's just speculation

oc Bear said...

Could there actually be justice for a lack of due dilligence?

Slim said...

Minor correction: you're not earning nearly 0% on your cash, you're losing at least a few % to monetary inflation. If in USD, most likely twice that.

Jim said...


Re the CD, your money is not really tied up so long. A typical penalty for early withdrawal is 6 months' interest. If you sign up for a CD with a rate of at least 3%, and leave your money in for at least 9 months, then even with the penalty you come out ahead of a money market fund or bank account.