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Posts Tagged ‘Citigroup’

Dodd-Frank Bill Failure

Posted by Steve Markowitz on July 28, 2012

During the late summer of 2008, the financial markets were unraveling.  Lehman Brothers failed, which precipitated general panic in the markets and the potential failure of other large financial institutions.  When the panic hit jumbo worldwide insurer AIG based out of New York, the government blinked with an over hundred billion dollar bailout.  This bailout was justified with the logic that should AIG fail, it would wreck havoc on the entire world’ s financial markets.  Thus, we had the concept of “too big to fail”.

It is impossible in hindsight to determine if AIG were allowed to fail we would have had the threatened financial Armageddon.  However, it is inarguable that the AIG bailout, as well as that of other firms, benefited some individuals and corporations at the expense of others.  Since the bailouts, we have had the weakest recovery from a recession of modern times.  It is likely that the bailouts and ongoing poor shape of the economy are connected.

The panic and financial markets’ turmoil played huge roles in the election of Barack Obama to the presidency, as well as giving Democrats large majorities in both houses of Congress.  With the mandate, Democrats set out to implement changes in our financial system that would purportedly eliminate future financial crisis.  The result was the infamous Dodd–Frank Bill with far-reaching implications to the financial world.

Ex-Citigroup CEO, Sandy Weil, was responsible for making Citigroup a large mega bank through mergers and acquisitions.  This week Weil came out against allowing these large banks to continue in their current state and recommended that they be broken up, separating their brokerage businesses from regular commercial banking functions.  In explaining his position Weil indicated that this back to the future approach would eliminate future risk to taxpayers of bailouts since no bank would be then too big to fail.

After Sandy Weil went public with his position, CNBC reporter Maria Bartiromo interviewed Congressman Barney Frank, Democrat from Massachusetts who was one of the co-authors of the Dodd-Frank Bill.  She correctly raised weaknesses of the Bill including the fact that more than two years after its passage, important rules relating to the Bill are yet to be written.  Instead of addressing the Bartiromo’s questions, Frank became defensive and obnoxious, as evidenced in the video.

Barney Frank is the same Congressman that refused to place more controls on Fannie Mae and Freddie Mac during the bubble years.  He was famously quoted then saying that these government-backed corporations were financially solid and needed no further government oversight.  After the bubble popped these corporations needed billions in taxpayer bailouts and will likely require more.  Add to this Frank’s performance in the video below and it is easy to understand why Washington’s interference in the economy typically makes bad situations worse.


Posted in Banks, Barney Frank | Tagged: , , , , , , , | Leave a Comment »

Moody’s Cuts 15 Banks’ Ratings

Posted by Steve Markowitz on June 21, 2012

This morning’s financial news from Europe included an item that Spanish banks would require nearly $80 billion (US) to shore up their capital bases.  However, that was just the start of a bad day that saw the Dow Jones Industrial Average have its largest one-day drop of the year, 250 points.

After US equities markets closed, the news got worse with Moody’s Investors Service issuing downgrades to 15 large banks credit ratings with the largest hits being taken by giants Citigroup and Bank of America.  The two notch downgrade to these banks place then just two levels above the junk category.  In addition, Moody’s downgraded to a lesser extent the ratings of 13 other banks including Morgan Stanley, JPMorgan Chase, Goldman Sachs, Credit Suisse, Deutsche Bank, UBS, HSBC, Barclays, BNP Paribas, Credit Agricole, Societe Generale, Royal Bank of Canada, and Royal Bank of Scotland.  In other words, Moody’s is expressing concerns about a large portion of the West’s banking system.

In announcing the downgrades, Moody’s explained that: “The risks of this industry became apparent in the financial crisis.  These new ratings capture those risks.”  The downgrades are more than a black eye to these banks as the move could further damage them should customers decide to move investments to higher-rated banks creating a negative feedback loop.  In addition, the downgrades may raise the cost of borrowing for the banks further straining their already financial conditions.

As this Blog has proffered since the early days of financial crisis, a problem of excess debt cannot be solved by still more debt.  However, this is precisely the strategy that Western governments including that of the United States have taken since the 2008 meltdown.  Moody’s downgrades of today were therefore predictable.  It is also very predictable that more downgrades are to come.

Progressive governments worldwide have overspent for years on nonproductive programs including massive entitlements.  The reckless spending was financed by borrowing from future revenue potentials, a Ponzi scheme perpetuated by various bubbles fed by government interventions including artificially low interest rates.  Instead of allowing the growing economic imbalances to rebalance themselves in the market, governments continued and continue treating symptoms with still larger interventions creating even greater market imbalances.  The results of this ill advised strategy include the crises now occurring in European banks, European sovereign debt problems, today’s US and worldwide bank downgrades and the exploding US debt.

While the world jumps from crisis to crisis in increasing frequency, it is not possible to determine when it will hit a tipping point.  Generally, market inequities and imbalances can continue longer than logic would deem possible, especially when governments work together at interventions.  However, in the long run, the laws of the market, i.e. supply and demand, are infallible and will have their day.

Posted in Banks | Tagged: , , , , , , , | 3 Comments »

US Banks’ Earnings Significantly Up

Posted by Steve Markowitz on November 22, 2011

Federal Deposit Insurance Corporation (FDIC) released a report on U.S. banks earnings that indicates overall profit levels are the highest they have been in four years.  While the  government may trumpet this as a sign that their interventions and bailouts have succeeded, a broader look says otherwise.  Here are some of the figures released:

  • The banking industry earned $35 billion in the last quarter, up from $24 billion in last year’s Q3.
  • The FDIC currently considers about 11% of U.S. banks as financially problematic, marginally down for the same period last year.
  • The very large banks made the bulk of the earnings increase.
  • These very large banks accounted for about $30 billion of the industry’s $35 billion in earnings for the third quarter.

The FDIC’s fugues are telling and indicate that the very large banks like Bank of America, Citigroup, JPMorgan Chase and Wells Fargo, the very banks bailed out by the U.S. taxpayers, are now making most of the banking profits.  In addition, these banks are not making the profits by lending money in the quantity needed, but rather by taking nearly interest free money from the government and then loaning that money back to the government at a huge profit.  Ludicrous.

It has become evident through hindsight that the bailouts of the large banks benefited the banks themselves, not the overall economy.  A question remaining is whether the bailouts were the result of mistaken policy or the government’s purposeful attempt to assist fellow elitists in the banking industry.

Posted in Bailouts, Banks | Tagged: , , , , , , , | Leave a Comment »

Moody’s Again Threatening U.S. Credit Rating

Posted by Steve Markowitz on June 5, 2011

Moody’s Investors Service (Moody’s) last week indicated it may reconsider America’s debt rating next month, which currently stands at a pristine Aaa rating, for a possible downgrade.  Their stated concern is America’s huge $14 trillion dollar federal debt and the Country’s need to barrow more via raising the current debt ceiling.

Treasury Secretary Tim Geithner gave an optimistic view of negotiations between the White House and Congress on increasing the ceiling stating:  “I am confident two things are going to happen this summer.  We’re going to avoid a default crisis, and we’re going to reach agreement on a long-term fiscal plan.”  While Geithner’s view is likely pervasive in Washington, let us not forget that this same financial genius didn’t even know how to properly calculate his personal Federal tax bill.

Moody’s has had challenges properly evaluating debt in the past.  Only a few days before the cataclysmic financial meltdown of 2008, this firm rated many bonds based on the housing market (i.e. mortgages) as Aaa quality.  While Moody’s is currently focusing on the potential for political gridlock in Washington, the real problem is the exploding U.S federal debt, not negotiations to raise the debt ceiling, as the chart shows.

Adding insult to injury, last week another division of Moody’s made negative comments relating American’s biggest banks ratings.  Their concern is that the new financial regulations included in the Dodd-Frank FinReg bill may make it more difficult for the government to rescue of the large banks, should there be a future systemic meltdown in the financials system.

The backs mentioned in Moody’s warning are Bank of America, Wells Fargo, Citigroup, Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of New York Mellon and State Street Corporation.

Investors and politicians would do well to look beyond Moody’s warnings that focus and rely on governmental bailouts for the banks to receive high ratings.  Governments change the rules with political winds.  In addition, banks that were deemed too big to fail in 2008 are even larger today.  That offers their managers comfort, real or not, that the government will not allow them to fail in the future.  That belief will lead to riskier behavior on the banks part and more danger in the future for investors.

Posted in Bailouts, Banks, Debt, Deficits | Tagged: , , , , , , , , , , , , , , , | Leave a Comment »

US Pay Czar to Set Salaries

Posted by Steve Markowitz on October 12, 2009

The Obama Administration has extensively used what is referred to as “Czars” to help manage various aspects of the government.  The advantage for the President of the Czars is that they do not have to be approved by Congress or report to congressional committees.  This is a convenient way for the President to appoint people into positions of power without having congressional oversight.

450px-Kenneth_FeinbergOne of the positions amongst the approximately three dozen Czars that Obama has appointed is the “Pay Czar”.  Currently, this position is held by Kenneth Feinberg whose job is to oversee the compensation packages for the most highly paid executives at seven firms.  These companies are AIG, Bank of America, Citigroup, General Motors, GMAC Financial, Chrysler, and Chrysler Financial, firms that received government bailout money.

The fact that compensation needs to monitored for high paid executives at companies that that would have failed without the government bailouts indicates the lunacy of our current economy.  Had the government not given these companies money we would not be arguing how much to pay their executives.  That would have been monitored by the most efficient mechanism available; the market controlled by supply and demand.  These failed companies would have either gone out of business or would have cut the pay of all employees, including the executives, until they again become successful. Read the rest of this entry »

Posted in Compensation, Czars | Tagged: , , , , , , , , , , , | 2 Comments »