US May See 150-200 More Bank Failures: Bove
| 24 Aug 2009 | 01:07 PM ET
A prominent banking analyst said Sunday that 150 to 200 more U.S. banks will fail in the current banking crisis, and the industry’s payments to keep the Federal Deposit Insurance Corp afloat could eat up 25 percent of pretax income in 2010.
Richard Bove of Rochdale Securities said this will likely force the FDIC, which insures deposits, to turn increasingly to non-U.S. banks and private equity funds to shore up the banking system.
“The difficulty at the moment is finding enough healthy banks to buy the failing banks,” Bove wrote.
The FDIC is expected on August 26 to vote on relaxed guidelines for private equity firms to invest in failed banks, after critics said previously proposed rules were too harsh and would actually dissuade firms from making investments.
Bove said “perhaps another 150 to 200 banks will fail,” on top of 81 so far in 2009, adding stress to the FDIC’s deposit insurance fund.
Three large failures this year — BankUnited Financial in May, and Colonial BancGroup, Guaranty Financial Group in August — collectively cost the fund roughly $10.7 billion.
The fund had $13 billion at the end of March.
Regulators closed Guaranty’s banking unit on Friday and sold assets of the Texas-based lender to Banco Bilbao Vizcaya Argentaria. The FDIC agreed to share in losses with the Spanish bank.
Bove said the FDIC will likely levy special assessments against banks in the fourth quarter of this year and second quarter of 2010.
He said these assessments could total $11 billion in 2010, on top of the same amount of regular assessments. “FDIC premiums could be 25 percent of the industry’s pretax income,” he wrote.
Jun 17, 7:13 PM (ET)
By JIM KUHNHENN and MARTIN CRUTSINGER
WASHINGTON (AP) – From simple home loans to Wall Street’s most exotic schemes, the government would impose and enforce sweeping new “rules of the road” for the nation’s battered financial system under an overhaul proposed Wednesday by President Barack Obama.
Aimed at preventing a repeat of the worst economic crisis in seven decades, the changes would begin to reverse a determined campaign pressed in the 1980s by President Ronald Reagan to cut back on federal regulations.
Obama’s plan would do little to streamline the alphabet soup of agencies that oversee the financial sector. But it calls for fundamental shifts in authority that would eliminate one regulatory agency, create another and both enhance and undercut the authority of the powerful Federal Reserve.
The new agency, a consumer protection office, would specifically take over oversight of mortgages, requiring that lenders give customers the option of “plain vanilla” plans with straightforward and affordable terms. Lenders who repackage loans and sell them to investors as securities would be required to retain 5 percent of the credit risk – a figure some analysts believe is too low.
In all, the Obama’s broad proposal cheered consumer advocates and dismayed the banking industry with its proposed creation of a regulator to protect consumers in all their banking transactions, from mortgages to credit cards. Large insurers protested the administration’s decision not to impose a standard, federal regulation on the insurance industry, leaving it to the separate states as at present. Mutual funds succeeded in staying under the jurisdiction of the Securities and Exchange Commission instead of the new consumer protection agency.
Obama cast his proposals as an attempt to find a middle ground between the benefits and excesses of capitalism.
“We are called upon to put in place those reforms that allow our best qualities to flourish – while keeping those worst traits in check,” Obama said.
The president’s plan lands in the lap of a Congress already preoccupied by historic health care legislation, consideration of a new Supreme Court justice and other major issues. Still, Obama has set an ambitious schedule, pushing lawmakers to adopt a new regulatory regime by year’s end.
“We’ll have it done this year,” pledged Sen. Chris Dodd, D-Conn., chairman of the Senate Banking Committee.
“Absolutely,” agreed Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee.
But fissures quickly developed.
Dodd, who had been at Obama’s side in the East Room of the White House for the announcement, raised questions about one of the plan’s key features – giving the Federal Reserve authority to oversee the largest and most interconnected players in the financial world.
“There’s not a lot of confidence in the Fed at this point,” Dodd said.
Obama’s proposal would require the Federal Reserve, which now can independently use emergency powers to bail out failing banks, to first obtain Treasury Department approval before extending credit to institutions in “unusual and exigent circumstances,” a change designed to mollify critics who say the Fed should be more accountable in exercising its powers as a lender of last resort.
But the proposal also would do away with a restriction imposed on the Fed in 1999 when Congress lifted Depression-era restrictions that allowed banks to get into securities and insurance businesses. The Fed, as the regulator for the larger financial holding companies, had been prohibited from examining or imposing restrictions on those firms’ subsidiaries. Obama’s proposal specifically lifts that restriction, giving the Fed the ability to duplicate and even overrule other regulators. At the same time, the new consumer agency would take away some of the Fed’s authority.
Fed defenders argue that none of the major institutional collapses – AIG, Bear Stearns, Lehman Bros., Merrill Lynch or Countrywide – were supervised by the Federal Reserve. Critics argue the Fed failed to crack down on dubious mortgage practices that were at the heart of the crisis.
Administration officials concede their plan responds to the current crisis- in national security terms, it prepares them to fight the last war. But they also insist that a central tenet of their plan is a requirement that from now on financial institutions will have to keep more money in reserve – the best hedge against another meltdown.
That may appear to be a no-brainer: If banks and other large institutions have more money, they won’t be vulnerable if their risky bets go bad.
However, banking regulators have been arguing for years over implementation of an international standard for bank capital. Geithner said Wednesday hoped to move on enhanced capital standards “in parallel with the rest of the world.”
Obama’s overall plan, laid out in an 88-page white paper, was the result of extensive consultations with members of Congress, regulators and industry groups and represented a compromise from bolder ideas the administration ended up abandoning because of heavy opposition.
The plan had its share of winners and losers, both inside and outside government.
Sheila Bair, the chair of the Federal Deposit Insurance Corp., lost her campaign to have a regulatory council, not the Fed, regulate large firms whose failure could undermine the entire system. SEC Chairman Mary Schapiro also had expressed support for Bair’s push for a more powerful risk council.
The regulatory overhaul ended up eliminating only one agency, the Office of Thrift Supervision, generally considered a weak link among current banking regulators. The OTS oversaw the American International Group, whose business insuring exotic securities blew up last fall, prompting a $182 billion federal bailout.
The failure to merge all four current banking agencies into one super regulator could open the door for big banks to continue to exploit weak links in the current system. Sen. Charles Schumer of New York, a leading Democratic voice on Wall Street issues, praised the administration’s plan but said he would consider further consolidation.
“We’re removing one major agency-shopping opportunity, but there’s a real potential for others,” said Patricia McCoy, a law professor at the University of Connecticut who has studied bank failures.
Associated Press writers Marcy Gordon, Anne Flaherty, Jeannine Aversa and Stevenson Jacobs contributed to this report.
It’s over — we’re officially, royally fucked. No empire can survive being rendered a permanent laughingstock, which is what happened as of a few weeks ago, when the buffoons who have been running things in this country finally went one step too far. It happened when Treasury Secretary Timothy Geithner was forced to admit that he was once again going to have to stuff billions of taxpayer dollars into a dying insurance giant called AIG, itself a profound symbol of our national decline — a corporation that got rich insuring the concrete and steel of American industry in the country’s heyday, only to destroy itself chasing phantom fortunes at the Wall Street card tables, like a dissolute nobleman gambling away the family estate in the waning days of the British Empire.
Dec. 17, 2008—
Banks that were rescued with billions of dollars in public funds have, in most cases, refused to provide specifics about how they have used or intend to use the money.
ABC News asked 16 of the banks that have received money from the Treasury Department’s $700 billion Trouble Asset Relief Program the same two questions: How has your financial institution used the money, and how much has your financial institution allocated to bonuses and incentives this year?
Goldman Sachs reported Tuesday that it paid $10.93 billion in compensation for the year, which includes salaries and bonuses, payroll taxes and benefits. That is down 46 percent from a year ago. Goldman Sachs received $10 billion from the Treasury.
“Bonuses across Goldman Sachs will be down significantly this year,” a bank representative told ABC News. The spokesman refused to disclose the size of the bonus pool or how much of the compensation fund of $10.93 billion was planned for bonuses.
“We do not break down the components of compensation; however, most of that number was not bonuses,” he said. Goldman Sachs added, “TARP money is not being paid to employee compensation. It’s been and will continue to be used to facilitate client activity in the capital markets.”
Goldman Sachs has pointed out that seven of its senior executives were forgoing bonuses this year. The company also reported Tuesday that it lost $2.1 billion in the last quarter.
“It looks like Goldman Sachs is treating this as business as usual,” said compensation expert James Reda. “They are taking our taxpayer money. They should be able to account for that money.
“What’s missing from this report is the exact amount of bonuses that were paid,” said Reda. He later added, “They’re hiding the ball.”
Fred Cannon, chief equity strategist with Keefe Bruyette and & Woods, an investment bank that specializes exclusively in financial services, said, “It is difficult to say what the TARP funds are directly used for. In terms of compensation, while TARP funds may not directly pay for compensation, the funds do provide additional overall cash to the companies.”
When pressed for what the TARP money was being used for, Goldman Sachs replied that it is spent to “facilitate client activity in the capital markets.”
Of the 16 banks that were contacted by ABC News and asked how they were spending the hundreds of billions of taxpayer dollars, only one bank pointed to a specific loan that it made with the cash. That was a $17 billion loan that Morgan Stanley made to Verizon Wireless.
Morgan Stanley, which received $10 billion from TARP, released its quarterly finances today. The bank announced a dramatic and larger-than-predicted $2.37 billion quarterly loss but an overall year-end profit of $1.59 billion. That was down 49 percent from last year. The bank’s stock price dropped 72 percent this year.
In response to an ABC News email request, Morgan Stanley public information officer Mark Lake confirmed that bonuses are down “approximately 50 percent.”
Besides the Verizon loan cited by Morgan Stanley, the banks declined to detail how they were using the federal funds.
“Tarp money doesn’t go into bonuses,” Lake said, in an email to ABC News.
Wells Fargo said that of the $25 billion it received, it “cannot provide any foward-looking guidance on lending for this quarter [and] Intend[s] to use the Capital Purchase Program funds to make more loans to credit-worthy customers.”
More typical was the generic response by the Bank of New York Mellon, which said of the fortune it had banked in public moneys: “Using the $3 billion to provide liquidity to the credit markets.”
The U.S. Treasury has spent or committed $335 billion of the $700 billion in the TARP fund in an attempt to get banks back in the lending business and to unfreeze the nation’s credit markets.
Last week Congress was angered to learn that giant insurance company American Insurance Group, which received $150 billion in TARP cash to stay afloat, was paying more than $100 million in “retention bonuses” to 168 employees.
That revelation prompted Rep. Elijah Cummings, D-Md., to complain, “It’s absolutely and incredibly wrong that we don’t have more transparency.”
While several banks said that its top executives would skip bonuses this year or its compensation pool was smaller this year than in past years, all indicated that some end-of-year compensation was in the works.
When asked how much the banks were paying out in bonuses and whether TARP funds would be used to finance them, most of the banks did not make such a declaration.
“Incentive compensation not yet allocated,” was as far as JP Morgan Chase, which received $25 billion from TARP, would go.
Bank of America, which got $15 billion from TARP, said only, “Have reduced the incentive targets by more than half. Final awards have not been determined.”
State Street Bank ruled out using TARP to reward its top officers.
“Will not use any of the proceeds from the TARP Capital Purchase Program to fund our bonus pool or executive compensation,” the bank insisted.
Cannon said the banks are being very conservative with their money.
After reviewing the statements the banks provided to ABC News he said, “The banks are expressing good intention in line with the good intention of the program. However, the answers from the bank belie the current challenge; the economy is deteriorating rapidly and making good loans, with strong underwriting into an economy that is falling apart is very difficult.”
ABC News’ MaryKate Burke contributed to this report.
Media Matters for America previously identified numerous myths and falsehoods advanced by the media in their coverage of the American Recovery and Reinvestment Act. As debate on the bill continues in Congress, other myths and falsehoods advanced by the media about the recovery package have risen to prominence. These myths and falsehoods include: the assertion that the bill will not stimulate the economy — including the false assertion that the Congressional Budget Office (CBO) said the bill will not stimulate the economy; that spending in the bill is not stimulus; that there is no reason for stimulus after an economic turnaround begins; that corporate tax rate cuts and capital gains tax rate cuts would provide substantial stimulus; and that undocumented immigrants without Social Security numbers could receive the “Making Work Pay” tax credit provided in the bill.
In a February 1 article, The Associated Press reported an assertion by Senate Minority Leader Mitch McConnell (R-KY) that the recovery bill will not stimulate the economy without noting that the CBO disagrees. ABC World News anchor Charles Gibson echoed this assertion during his February 3 interview with President Obama, stating: “And as you know, there’s a lot of people in the public, a lot of members of Congress who think this is pork-stuffed and that it really doesn’t stimulate.” Additionally, on the January 28 edition of his show, nationally syndicated radio host Rush Limbaugh allowed Rep. Eric Cantor (R-VA) to falsely claim of the bill: “Even the Congressional Budget Office, controlled by the Democrats now, says it is not a stimulative bill.” Fox News host Sean Hannity repeated this claim on the February 2 broadcast of Fox News’ Hannity, asserting that the CBO “say[s] it’s not a stimulus bill.”
In fact, in analyzing the House version of the bill, H.R. 1, and the proposed Senate version, the CBO stated that it expects both measures to “have a noticeable impact on economic growth and employment in the next few years.” Additionally, in his January 27 written testimony before the House Budget Committee, CBO director Douglas Elmendorf said that H.R. 1 would “provide massive fiscal stimulus that includes a combination of government spending increases and revenue reductions.” Elmendorf further stated: “In CBO’s judgment, H.R. 1 would provide a substantial boost to economic activity over the next several years relative to what would occur without any legislation.”
Several media figures, including CNN correspondent Carol Costello, CBS Evening News correspondent Sharyl Attkisson, and ABC World News anchor Charles Gibson, have all uncritically reported or aired the Republican claim that, in Gibson’s words, “it’s a spending bill and not a stimulus,” without noting that economists have said that government spending is stimulus. Indeed, in his January 27 testimony, Elmendorf explicitly refuted the suggestion that some of the spending provisions in the bill would not have a stimulative effect, stating: “[I]n our estimation — and I think the estimation of most economists — all of the increase in government spending and all of the reduction in tax revenue provides some stimulative effect. People are put to work, receive income, spend that on something else. That puts somebody else to work.” Additionally, Dean Baker, co-director of the Center for Economic and Policy Research, has said, “[S]pending is stimulus. Any spending will generate jobs. It is that simple.”
3. There is no reason for stimulus after a turnaround begins Continue reading Numerous Myths and Falsehoods Advanced by the Media in Their Coverage of the American Recovery and Reinvestment Act