Tag: FDIC

Cross posted at our new beta site Voices on the Square and in orange.

That’s right, and it was clear to everyone who opposed the pick of Tim Geithner from the start.  In his testimony yesterday on the NY Fed’s knowledge of the LIBOR scandal, Tim Geithner once again stated the falsity that the NY Fed was not a regulator (like he has before showing he’s either a liar or completely incompetent), when in fact he was one of the most important regulators, unknown to him, supposedly.

This was during the proceedings looking into the 100 cents on the dollar backdoor bailout of Goldman Sachs through AIG facilitated while he was President of the NY Fed.

COUNT 2: He wasn’t even a regulator! In Geithner’s own words during confirmation hearings in March: “First of all, I’ve never been a regulator…I’m not a regulator.” According to the New York fed bank’s Web site, that was your job!!

Quoting from the Fed’s website: “As part of our core mission, we supervise and regulate financial institutions in the Second District.” That district of course is the epicenter for bailed out banks and billion dollar bonuses.

It is not just the responsibility of Fed Board governors like Tim Geithner said in his testimony yesterday while trying to inflate the case for his so called “intervention” that wasn’t on LIBOR. This lack of knowledge and corruption bothers me and it also bothers me that so many don’t care, because there is an election. I feel like we are all being lulled to sleep every night by MSNBC and the partisan cable news 2012 election war syndrome.

Shortly after the President was elected, there were many naive Democrats who claimed Giethner was “a brilliant pick” merely because the President picked him which is always the criterion, sadly. I saw it as the beginning of the end of any chance of a functioning financial system that we were promised during the 2008 election by this President.  That’s why I got involved in 2008, and that’s why a lot of us are unmotivated to say the least.

You see, to be making excuses for Tim Geithner even now while not even understanding the responsibilities of the NY Fed is outright embarrassing and immoral for all the damage it causes.  

After the latest gambling losses by JP Morgan Chase with its “London Whale” deal, the FDIC is still trying to sell the fantasy that they can resolve the problems created by the megabanks. Yves Smith at naked capitalism takes on that myth that was propagated by acting FDIC Chairman, Martin Gruenberg to continue with business as usual:

The guts of the latest FDIC scheme is to resolve only the holding company and keep the healthy subsidiaries, including all foreign subsidiaries, going on a business-as-usual basis:

   …the most promising resolution strategy from our point view will be to place the parent company into receivership and to pass its assets, principally investments in its subsidiaries, to a newly created bridge holding company. This will allow subsidiaries that are equity solvent and contribute to the franchise value of the firm to remain open and avoid the disruption that would likely accompany their closings. Because these subsidiaries will remain open and operating as going-concern counterparties, we expect that qualified financial contracts will continue to function normally as the termination, netting and liquidation will be minimal.

The subsidiaries would be moved over to a new holding company; the equity in NewCo would become an asset of the holding company now in receivership. The old equityholders would likely be wiped out and the bondholders may wind up taking losses.

This all sounds wonderfully tidy and neat, right? Problem is it won’t work. [..]

Remember that in the US, banks (ex Morgan Stanley) have their derivatives booked in the depositary, which means any losses to depositors as a result of derivatives positions gone bad would be borne by taxpayers. And as we’ve written at excruciating length with respect to the Lehman bankruptcy, the magnitude of the losses cannot be explained by overvalued assets plus the costs resulting from the disorderly collapse. Derivatives positions blowing out (as well as counterparties taking advantage of options in how contracts can be closed out and valued) were a major contributor to the size of the Lehman black hole. [..]

It would have been much better for the authorities to make a full bore effort to discourage the use of products that have limited social value and contribute to the excessive integration of firms and markets. Credit default swaps and complex over-the-counter derivatives top our list. But despite the severity of the crisis, regulators and politicians were unwilling to challenge the primacy of the bankers, with the result that the FDIC continues to pretend that an inadequate approach like Dodd Frank resolutions will work. With distress in Europe rising and Morgan Stanley looking wobbly, we are likely to see sooner rather than later how much the failure to implement real reforms will cost us all.

If this sounds all too familiar, it’s because this is just a repeat of the old an stale propping up of TBTF that got the economy into this mess in the first place. In other words, the tax payers will foot the bill for the megabanks gambling losses once again. Obama needs a whole new council of economic advisors with people who have better ideas like Paul Krugman and Yves.

President Barack Obama has announced the appointment of Jeremiah Norton, a JP Morgan Chase & Co. executive, to the five-member board of the Federal Deposit Insurance Corp. once again putting an insider in  a position to protect the banks at the expense of tax payers. The announcement was made late Friday in the usual news dump but this is not new except that Norton is now the “official” nominee.

Jeremiah O. Norton, 34, who is an executive director in the bank’s JPMorgan Securities unit, previously served as a policy adviser in the U.S. Treasury Department during the administration of President George W. Bush. Before that, he was an aide to a Republican congressman, Edward Royce of California.

Norton joins two Democrats and a fellow Republican whose confirmations to FDIC leadership posts have been delayed by Senate Republicans who have complained that Obama used a recess appointment to install Richard Cordray, a former Ohio attorney general, as director of the Consumer Financial Protection Bureau without formal Senate approval. Cordray, in his role as consumer bureau director, also has a seat on the five-member FDIC board.

His name was mentioned back in late December in an article from the American Banker. In an article by bmaz at emptywheel

Oh, and in case you had any question on what side of the 1%/99% divide Barack Obama and his Administration are on, yet another answer was given today with the announcement of their proposed selection for the critical “independent” seat on the Federal Deposit Insurance Corporation (FDIC):

   The Obama administration is considering nominating Jeremiah Norton, an executive director for JPMorgan Chase’s investment bank, to sit on the FDIC’s board of directors.

Who is Jeremiah Norton? Well, as this quote states, he executive director of the investment banking shop and one of Obama’s buddy, Jamie Dimon’s, right hand men. Oh, and before that, Norton was former Goldman Sachs honcho Henry Paulson’s right hand man in the Bush Treasury Department and assisted Paulson in getting Goldman Sachs a backdoor bailout through AIG.

Norton was one of the chief architects of TARP who helped convince Paulson that the banks were “Too Big To Fail” and “helped craft the takeover of Fannie and Freddie” and he isn’t without opposition form the right:

Norton himself had initial doubts about the plan. “This is crazy,” he reportedly said at the time. But ultimately he and Jester sold Paulson on TARP, (Andrew Ross) Sorkin explains. “Based on the work of Jester, Norton, and assistant secretary for financial institutions David] Nason, [Paulson] wanted to forge ahead and invest $250 billion of the TARP funds into the banking system,” Sorkin wrote. Norton contributed similarly to the government takeover of Fannie and Freddie. “It was a difficult decision, the secretary didn’t want to be here, to go into the firms,” Norton [told C-SPAN in 2008. But, he concluded, “this action was necessary to prevent systemic risk that would harm the broader economy.”

Norton still might encounter some objections from the right, as both TARP and the government conservatorship of Fannie and Freddie have come under growing fire from the tea party wing of the GOP. What’s more, the Congressional Budget Office recently raised the cost of TARP in 2012, and the government control of Fannie and Freddie has extended well beyond the 15-month “timeout” that Norton, Paulson and others had originally envisioned.

This is the second time that the White House has taken the Senate GOP leadership’s advice on FDIC leadership, having already followed Senate Minority Leader Mitch McConnell’s (R-KY) recommendation to pick Thomas Hoenig for another key FDIC post whose nomination brings ant- TBTF positions to the table:

Hoenig is a vocal critic of large banks, technically known as “systemically important financial institutions,” or SIFI, under the recent Dodd-Frank regulatory reform of the financial system. Of course, they’re more popularly known as the “too big to fail” banks that are a focus of the Occupy Wall Street protests.

Under Dodd-Frank, the FDIC will be responsible for unwinding failing big banks.

In a June speech, Hoenig — who headed the Federal Reserve Bank of Kansas City — called those institutions “fundamentally inconsistent with capitalism.”

“They are inherently destabilizing to global markets and detrimental to world growth,” he said. “So long as the concept of a SIFI exists, and there are institutions so powerful and considered so important that they require special support and different rules, the future of capitalism is at risk and our market economy is in peril.” [..]

Hoenig’s criticism of Fed policy made him a favorite among Congressional Republicans. Last fall, as Republicans prepared to assume control of the House after their midterm win, Hoenig was invited to speak to Republican members of Congress behind closed doors.

He also testified earlier this year before the House subcommittee on monetary policy chaired by Ron Paul, a noted Fed critic and presidential candidate, who would like to abolish the central bank altogether.

Republicans’ previous praise for Hoenig may make it difficult for them to block his confirmation, even if they oppose his views on the Volcker rule and bank regulation, said Boston University law professor Cornelius Hurley, a former counsel to the Fed Board of Governors.

“A brilliant political step, Hoenig’s nomination puts Senate Republicans in a very difficult spot in voting on his vice-chairmanship,” said Hurley. “His experience and point of view on systemic risk may foretell a pivot away from the failing policies of (Treasury Secretary)Timothy Geithner and (and former Obama adviser) Larry Summers toward more meaningful structural reform of our financial system.”

Obama keeps trying to make “deals with the devil” that will only continue toprotect the banks and harm the economy.  

After Bank of America was downgraded by the ratings agencies and over the objections of the FDIC but with Federal Reserve Chairman Ben Bernanke’s blessing, the Bank of America transferred millions of dollars of its worst derivatives to its Merill Lynch unit where they would be insured:

The Federal Reserve and Federal Deposit Insurance Corp. disagree over the transfers, which are being requested by counterparties, said the people, who asked to remain anonymous because they weren’t authorized to speak publicly. The Fed has signaled that it favors moving the derivatives to give relief to the bank holding company, while the FDIC, which would have to pay off depositors in the event of a bank failure, is objecting, said the people. The bank doesn’t believe regulatory approval is needed, said people with knowledge of its position.

Three years after taxpayers rescued some of the biggest U.S. lenders, regulators are grappling with how to protect FDIC- insured bank accounts from risks generated by investment-banking operations. Bank of America, which got a $45 billion bailout during the financial crisis, had $1.04 trillion in deposits as of midyear, ranking it second among U.S. firms.

“The concern is that there is always an enormous temptation to dump the losers on the insured institution,” said William Black, professor of economics and law at the University of Missouri-Kansas City and a former bank regulator. “We should have fairly tight restrictions on that.”

So why is the FDIC concerned and the Federal Reserve giving its blessing? masaccio at FDL explains:

Of course, the Fed loves it. Bank holding companies can do no wrong as far as the Fed is concerned. The risk to taxpayers, and the moral hazard issues are utterly irrelevant to Ben Bernanke and his buddies. Of course, given the vast conflicts of interest at the Fed, this isn’t a surprise.

There are reasons to be worried about this. First, BAC moved the derivatives at the request of counterparties. The counterparties have a right under their derivative contracts to demand collateral from BAC, as they did after the company’s rating was reduced earlier this year. BAC estimates that would require an additional $3.3 billion in collateral. The downgrade was due to judgment by the ratings agencies that the government was less likely to bail out BAC if it got into trouble. Thus, the effect of the downgrade was to increase the direct risk to the FDIC, by forcing it in effect to guarantee the derivatives of Merrill Lynch. Nice opinion, ratings agencies. I wonder who paid them for it?

Second, if the FDIC has to liquidate BAC, it will have to borrow from the Treasury to pay depositors, and it will have to bill the largest banks for additional fees to pay off the Treasury loans to the extent of actual losses. We have no idea of the interlocking relations of these giants, so we have no idea whether the collapse of one would wreck others. Media reports say there are concerns about the relationships between European banks and US banks, so there is reason for concern about the relations among US giants. If one collapse could lead to others, where is the money coming from to repay the Treasury? []

Third, 82% of derivatives in notional amount are interest rate swaps. Interest rates are at historic lows. What happens when they go back up to normal levels? []

Fourth, BAC has a huge position in credit default swaps, with a notional value of $4.1 trillion. . . . . as we saw with AIG, when CDSs go sour, the counterparty has the right to demand collateral right up to the moment the entity fails. In this case, that collateral would be cash, and it would directly reduce the amount of cash in the Bank. That would be a disaster for the FDIC, which would have to pay off the depositor losses up to the insured limit.

As Yves Smith explains this has an air of criminal incompetence with the tax payers having to foot the bill in the end:

This move reflects either criminal incompetence or abject corruption by the Fed. Even though I’ve expressed my doubts as to whether Dodd Frank resolutions will work, dumping derivatives into depositaries pretty much guarantees a Dodd Frank resolution will fail. Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral. It’s well nigh impossible to have an orderly wind down in this scenario. You have a derivatives counterparty land grab and an abrupt insolvency. Lehman failed over a weekend after JP Morgan grabbed collateral.

But it’s even worse than that. During the savings & loan crisis, the FDIC did not have enough in deposit insurance receipts to pay for the Resolution Trust Corporation wind-down vehicle. It had to get more funding from Congress. This move paves the way for another TARP-style shakedown of taxpayers, this time to save depositors. No Congressman would dare vote against that. This move is Machiavellian, and just plain evil.

It is well past time to do something about regulation and oversight of the Federal Reserve.

Well, well, this is getting juicy. The FDIC has filed a lawsuit objecting to the $8.5 billion bail out of the Bank of America:

The FDIC, the receiver for failed banks, owns securities covered by the settlement and said it doesn’t have enough information to evaluate the accord, according to a filing yesterday in federal court in Manhattan.

Under the agreement, Bank of America would pay $8.5 billion to resolve claims from investors in Countrywide Financial Corp. mortgage bonds. The settlement was negotiated with a group of institutional investors, including BlackRock Inc. (BLK) and Pacific Investment Management Co. LLC, and would apply to investors outside that group.

Bank of New York Mellon Corp. (BK), the trustee for the mortgage-securitization trusts covered by the agreement, has asked a New York state judge to approve the settlement in November. An investor group is trying to move the case to federal court, which Bank of New York opposes.

Investors that would be bound by the settlement, including American International Group Inc., have criticized the deal and Bank of New York’s role representing investors in the mortgage bonds. New York Attorney General Eric Schneiderman and Delaware Attorney General Beau Biden have sought to intervene in the case and asked the court to reject it.

The Nevada Attorney General Catherine Cortez Masto has further upped the ante:

The attorney general of Nevada is accusing Bank of America of repeatedly violating a broad loan modification agreement it struck with state officials in October 2008 and is seeking to rip up the deal so that the state can proceed with a suit against the bank over allegations of deceptive lending, marketing and loan servicing practices.

In a complaint filed Tuesday in United States District Court in Reno, Catherine Cortez Masto, the Nevada attorney general, asked a judge for permission to end Nevada’s participation in the settlement agreement. This would allow her to sue the bank over what the complaint says were dubious practices uncovered by her office in an investigation that began in 2009.

In her filing, Ms. Masto contends that Bank of America raised interest rates on troubled borrowers when modifying their loans even though the bank had promised in the settlement to lower them. The bank also failed to provide loan modifications to qualified homeowners as required under the deal, improperly proceeded with foreclosures even as borrowers’ modification requests were pending and failed to meet the settlement’s 60-day requirement on granting new loan terms, instead allowing months and in some cases more than a year to go by with no resolution, the filing says.

The complaint says such practices violated an agreement Bank of America reached in the fall of 2008 with several states and later, in 2009, with Nevada, to settle lawsuits that accused its Countrywide unit of predatory lending. As the credit crisis grew, the settlement was heralded as a victory by state offices eager to help keep troubled borrowers in their homes and reduce their costs. Bank of America set aside $8.4 billion in the deal and agreed to help 400,000 troubled borrowers with loan modifications and other financial relief, such as lowering interest rates on mortgages.

I’ll bet you this has Obama and the remaining AG’s panties in a twist, since, according to rumors they were looking to settle this by Labor Day.

Here’s the link to the FDIC’s brief:

FDIC Objection to Bank of America Mortgage Settlement

Usually on Fridays, Atrios at Eschaton posts the lists of banks that have been taken into receivership by the FDIC.

Now the FDIC is going to hold the bank executives of these failed entities to count to the tune of one billion dollars. According to Bloomberg

The potential lawsuits would help the FDIC recover more than $1 billion it lost during the credit crisis, which has forced the FDIC to take over 294 lenders since 2008. So far the FDIC, which, according to Bloomberg, doesn’t sue unless it believes the defendant is able to pay up, has only filed one lawsuit related to the credit crisis, against IndyMac executives in July.

FDIC May Seek More Than $1 Billion From Failed-Bank Executives

The Federal Deposit Insurance Corp. has authorized lawsuits against more than 50 officers and directors of failed banks as the agency aims to recoup more than $1 billion in losses stemming from the credit crisis.

The lawsuits were authorized during closed sessions of the FDIC board and haven’t been made public. The agency, which has shuttered 294 lenders since the start of 2008, has held off court action while conducting settlement talks with executives whose actions may have led to bank collapses, Richard Osterman, the FDIC’s acting general counsel, said in an interview.

“We’re ready to go,” Osterman said. “We could walk into court tomorrow and file the lawsuits.”

The FDIC, which reviews losses for every bank failure, has brought only one case against officers or directors tied to recent collapses — a suit filed in July seeking $300 million in damages from four executives of IndyMac Bancorp Inc.

When a bank fails, the agency’s investigators take about 18 months to complete their autopsies, meaning most of the probes stemming from the financial crisis are ongoing, Osterman said.

If FDIC investigators determine litigation is possible early in their review process, they send letters to officers and directors alerting them that a suit may be coming to recoup a portion of the losses to the agency’s insurance fund.

FDIC Chairman Sheila Bair has said 2010 will be the peak year for failures, and the agency’s list of so-called problem lenders suggests banks will keep collapsing at an accelerated rate in coming months. The confidential list had 829 banks with $403 billion in assets at the end of the second quarter.

Unbelievable that anyone thinks that TARP was a success. If the FDIC can recover that one billion it will be only .05% of what was actually given the the banks and the financial industry by the Treasury and the Federal Reserve which may have been upwards of 2 TRILLION DOLLARS.