AIG is just one piece of the derivatives mess. Nonetheless AIG alone is so complex no one can figure it out. In response, the Fed Calls Emergency Consultants To Untangle AIG.
“I don’t think the Fed has seen anything like this,” former New York Fed general counsel and AIG executive Ernest Patrikis said in an interview. “AIG just got so complex in terms of private corporate matters that you just need that outside expertise.” Patrikis is now with the law firm of White & Case in New York.
In addition to hiring consultants, the Fed and the Treasury have retained Wall Street firms to help manage more than $2 trillion in bailout and emergency-loan programs.
Pacific Investment Management Co. runs a $259 billion program to backstop the commercial-paper market. BlackRock Inc., Goldman Sachs Asset Management, Pimco and Wellington Management Co. are managing the Fed’s purchases of up to $500 billion of mortgage-backed securities. JPMorgan Chase & Co. oversees a separate program under which the Fed may lend up to $540 billion to support money market mutual funds.
Last month, the House passed conditions for releasing the remaining $350 billion of financial-rescue funds, including a requirement that the Fed give details of the contracts and selection process for the mortgage-backed securities purchase program’s managers. The Senate isn’t planning to take up the legislation.
BlackRock is also managing and selling assets acquired in the Fed’s $29 billion rescue of Bear Stearns Cos., as well as securities called collateralized debt obligations the central bank purchased in the bailout of AIG, the largest U.S. insurer by assets.
Such contracts show how the Fed’s in-house staff has been overwhelmed by new responsibilities that the central bank has taken on in handling the crisis.
“Once the government starts getting into the business of restructuring companies, there are competency deficits,” said Phillip Phan, professor of management at the Johns Hopkins Carey Business School in Baltimore. “It’s inevitable they’ll go back to Wall Street for advice.”
Still, he said, “the man in the street would say, ‘We’re paying to fix somebody else’s mistake by paying the very people who are part of the system that produced the mistake.’”
Babcock Shareholders Wiped Out
In the land down under, Babcock Shareholders Wiped Out as Banks Force Sales.
Babcock & Brown Ltd. will be forced by creditors to sell all its assets to repay debt, wiping out shareholders after its strategy of buying ports and property on credit imploded as the global financial crisis deepened.
Chief Executive Officer Michael Larkin will lead the sale process and hand the proceeds to banks over the next two to three years, Sydney-based Babcock said in a statement today. The listed company, which had a peak market value of $7.8 billion, may be placed in administration and removed from the exchange, it said.
“There was too much greed and arrogance and not enough transparency,” said Tim Morris, an analyst at Sydney-based investment advisory Wise-Owl.com, the only researcher to rate Babcock’s shares a “sell” at the start of 2008. “The core of the problem was when they started repackaging assets and the only people making money was themselves. When you start burning people, it’s only a matter of time before the fire catches up with you.”
Babcock, an owner of property, ports and power stations around the world, becomes the biggest Australian casualty of the global credit crisis, topping a list that includes Allco Finance Group Ltd. and Centro Properties Group. Like Centro, Babcock averted liquidation because falling asset prices and scarce buyers makes this an unattractive option for creditors.
Babcock’s holdings “across all asset classes” will be sold, with all proceeds over the amount needed to continue operating the business used to reduce debt, the company said. Creditors have agreed to a restructure of existing debt facilities, with all interest payments and approximately A$2.12 billion of principal repayments to be on a “Pay If You Can” basis.
Babcock shares, down 99 percent in 2008, have been suspended since Jan. 7 at the company’s request and last traded at 32.5 cents. The shares peaked at A$34.78 in June 2007, when the company had a market value of about A$12 billion. There will be “no value” for equity holders and “negligible or no value” for note holders after its survival plan, Babcock said in a statement on Jan. 23.
Geithner’s Bank Rescue May Emphasize Guarantees Over ‘Bad Bank’
Geithner still does not know what he is going to do, primarily because his mission makes no sense, and the options under consideration make negative sense. Please consider, Geithner’s Bank Rescue May Emphasize Guarantees Over ‘Bad Bank’.
U.S. Treasury Secretary Timothy Geithner’s strategy to aid the nation’s banks will likely emphasize guarantees of toxic assets over proposals to create a so-called aggregator bank that would remove them from balance sheets, according to people familiar with the plan.
The government guarantees, which might be modeled on those already given to Citigroup Inc. and Bank of America Corp., may be coupled with the purchase of preferred shares in the banks that would be later convertible into common stock, some of the people said. The aggregator bank or ‘bad bank,’ has lost favor, in part because the potential costs involved, they added.
“Our agenda is to begin to shape the architecture of a financial recovery plan that’ll help get credit flowing again,” Geithner said before a meeting yesterday with Federal Reserve Chairman Ben S. Bernanke and other members of the President’s Working Group on Financial Markets. Geithner will announce the plan on Feb. 9
The Obama administration has its work cut out for it. U.S. banks have already racked up $745 billion in credit losses and have warned of more to come. Shares of Bank of America, the country’s largest bank, touched a 24-year low yesterday amid concern it would be taken over by the government. The stock recovered to end the day 3 percent higher at $4.84.
Another advocate of dramatic action is Harvard University economist Jeremy Stein, tapped to join the White House’s National Economic Council under director Lawrence Summers.
Stein, in a September op-ed piece in the New York Times, advocated that the government act as a “deep-pocketed private investor that sees a bargain buying opportunity — Warren Buffett on steroids” to snap up the toxic assets. He’s also called for the government to conduct tough audits of the banks and to force those who are found insolvent to close or merge.
Stein, like Bernanke, and Geithner are all in the late stages of FIV. Stein wants to snap up toxic assets while forcing banks that are insolvent to close. Of course, all the big banks are insolvent, unless the toxic assets are snapped up. And since when can the government ever act like a private investor?
Stein’s ridiculous thinking makes him a perfect addition to the team of bizarros running the asylum.
In the meantime Geithner and the Fed have so many strategies going in so many places they are overwhelmed. While attempting to untangle AIG, they are simultaneously creating a tangled mess in everything else they touch.
Mike “Mish” Shedlock
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