Archive for September 29th, 2008

Next to go..Wachovia

September 29, 2008

FDIC’s latest press releasesays Wachovia has been bought by Citi.

Citigroup Inc. will acquire the banking operations of Wachovia Corporation; Charlotte, North Carolina, in a transaction facilitated by the Federal Deposit Insurance Corporation and concurred with by the Board of Governors of the Federal Reserve and the Secretary of the Treasury in consultation with the President. All depositors are fully protected and there is expected to be no cost to the Deposit Insurance Fund. Wachovia did not fail; rather, it is to be acquired by Citigroup Inc. on an open bank basis with assistance from the FDIC.

Wacovia did not fail?? Then why was it acquired by CIti? Some optimism this.

Citigroup Inc. will acquire the bulk of Wachovia’s assets and liabilities, including five depository institutions and assume senior and subordinated debt of Wachovia Corp. Wachovia Corporation will continue to own AG Edwards and Evergreen. The FDIC has entered into a loss sharing arrangement on a pre-identified pool of loans. Under the agreement, Citigroup Inc. will absorb up to $42 billion of losses on a $312 billion pool of loans. The FDIC will absorb losses beyond that. Citigroup has granted the FDIC $12 billion in preferred stock and warrants to compensate the FDIC for bearing this risk.

Lots of corporate finance and financial structuring going around. I postedon similar transactions to bailout MMMF. Does anybody even understand what is going on? Who is keeping an account of all these exhange of assets and liabilities?

Emergency Economic Stabilization Act of 2008

September 29, 2008

There are just so may discussions over the +ves and -ves of the Treasury plan to purchase USD 700 bn of distressed assets from US Banking system. Krugmandoes not like it, Mankiw is ok with it (see this as well). Robert Shimer doesnt like it and so do Douglas Diamond, Steve Kaplan, Anil Kashyap, Raghuram Rajan, and Richard Thaler. Mankiw also points to numerous other views and Bush’s reason. Rodrik points to another suggestion from Harvard Law Professor Lucian Bebchuk.

Amidst all these discussions, the draft of the plan is out. It is pretty nicely titled as Emergency Economic Stabilization Act of 2008. It has both summary and a skeletal draft of the Act. The summary says, apart from the USD 700 bail out the US Congress is trying to ensure that the funds result in some benefits for taxpayers. Plus there is a penalty if executives are given a golden parachute. They are also setting up an overseer of this plan.

Reading the draft gives some more interesting stuff:

Section 112. Coordination With Foreign Authorities and Central Banks.
Requires the Secretary to coordinate with foreign authorities and
central banks to establish programs similar to TARP.

I didn’t really get this. Have some economies asked for such a plan. Or is US Congress expecting such demand to come and is acting in advance? Time will tell. Then after a ban on short-selling (see this as well), they are considering suspensions on mark to market as well:

Section 132. Authority to Suspend Mark-to-Market Accounting.
Restates the Securities and Exchange Commission’s authority to suspend the application of Statement Number 157 of the Financial Accounting Standards Board if the SEC determines that it is in the public interest and protects investors.

Section 133. Study on Mark-to-Market Accounting.
Requires the SEC, in consultation with the Federal Reserve and the Treasury, to conduct a study on mark-to-market accounting standards as provided in FAS 157, including its effects on balance sheets, impact on the quality of financial information, and other matters, and to report to Congress within 90 days on its findings.

Actually, I had made this suggestion partly in a report written on 5 Feb 2008:

In order to solve the valuation issues, may be the central bankers of the G-20 countries together with FASB, IFRS and BIS should work out a solution whereby the valuation should be frozen as on a particular date for these instruments and a lock-in period given for such valuations. The Central bankers should lend against these securities for a sufficiently longer period that will enable the affected banks to tide over their liquidity problems and start inter-bank and corporate lendings. This will in turn enable the bankers to have sufficient capital adequacy and will not force the bankers to shed their assets or restrict them from fresh lending.

The problem with mark to market was visual long back and why it took so much time to evaluate is a question mark. The problem has largely been lookig for market solutions when the market itself has collpased.

Now this is just the draft. Let us wait for the final release.

Addendum:

Why housing meltdown occured in US?

September 29, 2008

I came across this very useful paper from BIS economist Luci Ellis. The basic premise of the paper is that prices had appreciated significantly in most economies, then why did the crisis start at first in US?  Though the housing prices had started correcting in many regions like UK, Spain the main questions till remains. Why US and not some other economy. The author answers this question very neatly. The abstract says it all: 

The crisis enveloping global financial markets since August 2007 was triggered by actual and prospective credit losses on US mortgages. Was the United States just unlucky to have been the first to experience a housing crisis? Or was it inherently more susceptible to one?

I examine the limited international evidence available, to ask how the boom-bust cycle in the US housing market differed from elsewhere and what the underlying institutional drivers of these differences were.

Compared with other countries, the United States seems to have: built up a larger overhang of excess housing supply; experienced a greater easing in mortgage lending standards; and ended up with a household sector more vulnerable to falling housing prices. Some of these outcomes seem to have been driven by tax, legal and regulatory systems that encouraged households to increase their leverage and permitted lenders to enable that development. Given the institutional background, it may have been that the US housing boom was always more likely to end badly than the booms elsewhere.

Assorted Links

September 29, 2008

1. The draft of the Treasury plan is out. Krugman reacts

2. Mankiw points to capital flight from US. He also points to Rob Shimer’s views on the crisis and bailout

3. TTR points despite all this Lehman mess, their employees still get a bonus. This is simply crazy.

4. Rodrik on AIG

5. PSD Blog on subprime lessons for emerging economies

6. Econbrowser has a primer on Ted spreads. It also updates the recent GDP trends


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