Archive for June 16th, 2009
Last week, General Motors began the fourth largest bankruptcy proceedings in history, joining the many other large and venerable companies that have sunk to the bottom during this economic crisis. In fact, eight of the 20 largest bankruptcies have happened during the last two years of crisis. Our latest Transparency is a look at the biggest sinking ships in business history.
A collaboration between GOOD and Always With Honor.
Transparency: The 20 Largest Bankruptcies in History – Good Magazine
June 16th, 2009
A number you won’t hear much about on CNBC: Capital One’s official annualized U.S. credit card net charge-off rate hit 9.41% for May, however as footnote (1) advises, the real charge-off rate was actually 9.91%, a record for the company. Companies will fudge anything and everything for even 30 days worth of green shoots – in the meantime Ken Lewis will upgrade the stock and issue 3 equity follow-ons while State Street orchestrates a short squeeze. From the footnote:
A change in bankruptcy processing resulted in an improvement in the U.S. Card charge-off rate that is reflected in the May results. The impact was approximately 50 basis points. While our internal guidelines require bankrupt accounts to be charged off within 30 days, our practice had been to charge off customer accounts within 2 to 3 days of receiving notification of bankruptcy. Due in part to an increase in the volume of bankruptcies, we have extended our processing window to improve the efficiency and accuracy of bankruptcy-related charge-off recognition. The new process remains within Capital One’s internal guidelines, as well as FFIEC guidelines that bankrupt accounts must be charged-off within 60 days of notification.
Just a reminder that a mere 3 months ago the charge off rate was just over 8% – a 20% deterioration in 12 weeks and accelerating.
9.91%–The Ominous Charge-Off Rate of Capital One – Zero Hedge
June 16th, 2009
It’s one thing for President Obama to face off against Fox News, the right-wing radio empire and Republican congressional leaders whose names are unfamiliar to much of the public. It’s quite another to confront organized business.
That’s why last week’s announcement by the U.S. Chamber of Commerce of a new “Campaign for Free Enterprise” could be one of the year’s most consequential political developments. Now the real resistance to Obama begins.
As long as the global economy was crumbling, business held back and even welcomed the infusion of hundreds of billions of government dollars to prop up the system. Business leaders, like everyone else, were frightened to death. They welcomed Big Government’s exertions to keep the banks alive and gin up consumer purchasing power.
It is an odd tribute to the short-term success of Obama’s recovery effort that the business lobbies now feel free to return to the old-time religion of bashing government and singing the praises of the unfettered marketplace. You might expect the corporate guys to show a little gratitude to the government that bailed them out. But that’s never been their way. They’d rather pretend that the past nine months were a bad dream.
Thus the Chamber’s new offensive. In his statement announcing its campaign, chamber President Thomas J. Donohue tried to brush past the recent unpleasantness as quickly as possible.
Obama and the Politics of Short Memories – E.J. Dionne, Washington Post
June 16th, 2009
Writing in the Washington Post this morning, Tim Geithner and Larry Summers outline a five point plan for dealing with the underlying problems in our financial system, entitled A New Financial Foundation.
The authors are not completely clear on what they think caused the current crisis, but you can back out some points from their reasoning – and the implicit view seems quite at odds with reality.
- Their view: Regulation is overly focused on safety and soundness of individual banks. Reality: There was a complete failure of safety and soundness supervision. This must be fundamental to any financial system – without this, you’ll get mush every time.
- Their view: “A few large institutions can put the entire system at risk,” so we need a system regulator. Reality: you need to control the behavior of large institutions, more than a few of which got us into this mess. If you can’t come up with a proposal to prevent them from taking system-damaging risk (and there is nothing in today’s article about this), then break them up. The article mentions penalties for being large - higher capital and liquidity requirements for larger banks; we’ll see the details in/after Geithner’s speech tomorrow, but I am not holding my breath for anything meaningful.
- Their view: All large firms will be subject to consolidated supervision by the Federal Reserve and there will be a council of supervisors. Reality: we have plenty of layers, up to “tertiary” regulators (and beyond, in some senses) and there is already enough opportunity for regulatory arbitrage. What prevents the biggest banks from capturing or manipulating regulators? There is no mention in today’s document of the extent to which everyone, including the authors, believed in the big banks’ risk management abilities last time – and continue to rely on the advice of their people today.
- Their view: The originator “of a securitization” will be required to “retain a financial interest in its performance.” Reality: It was a big unpleasant shock when everyone realized that Lehman, Bear Stearns, and others had retained a large exposure to dubious financial products, some of which they had issued. We are back to the Greenspan fallacy here – if financial firms have an incentive not to screw up on a massive scale, they won’t.
- Their view: “[T]he administration will offer a stronger framework for consumer and investor protection across the board.” This sounds incredibly vague and may be the worst news today. It looks like they are backing away from the idea of a Financial Products Safety Commission, for example as proposed by Elizabeth Warren.
And of course the complete omissions from this document are breathtaking. No mention of executive compensation or the structure of compenstion within the financial sector. Not even a hint that the complete breakdown of corporate governance at major banks contributed to execessive risk taking. And no notion of regulatory capture-by-crazy-ideas of any kind.
June 16th, 2009
