H. Rodgin Cohen's (Failed?) Quest To Backstop Every Bank... Ever (And Usurp Geithner's Throne)

Over the past two weeks many banks issued press releases and opened up the PR spigot to indicate just how stable they all are now that a few have managed to pay down their TARP commitments. This of course, is nothing but a complete farce, and simply yet another chapter in the "consumer confidence" game played by the administration and its financial underlings. In order to see just how much the banking system depends on the continued unlimited wallet of taxpayers and Geithner's printing presses, and how much certain law firms continue to depend on the somewhat less limited wallet of Wall Street, I present an October 31, 2008 letter recently obtained by Zero Hedge, in which Sullivan & Cromwell, Wall Street's #2 favorite law firm (or is that #1: I am sure Wachtell Lipton would have a few choice words with regard to that particular league table rating, although it may be hard pressed to match S&C's $241,975 in donations to the Democratic National Convention), goes to town to make sure that its well-deserving clients including Bank of America, Bank of New York Mellon, Citigroup, Goldman Sachs, JP Morgan Chase, Merrill Lynch, Morgan Stanley, State Street and Wells Fargo get to not only have the taxpayers' cake (in perpetuity), but eat more and more of it each day. Before I get into the meat of the letter, it just has to be a complete coincidence, that these are exactly the same 9 firms that a mere 2 weeks prior to this letter was sent out had a rather direct head to head with the President's Working Group, during which each one was apportioned $x billion in TARP after exactly zero due diligence, in order to plug the dike of complete financial collapse with almost a hundred billion fingers of taxpayer dollars. But, as they say, once you've had a taste of the free buffet, you only want more and more and more. True to form: the banks promptly showed up for another serving, and Sullivan & Cromwell was gladly there to charge taxpayers at the preferential rate of almost a thousand taxpayer dollars an hour, compliments of one H. Rodgin Cohen (more on him later).

Now it is no secret that when it comes to taxpayer guarantees and subsidies, the TARP is and has always been mere window dressing: as a backstop tranche, it only has to do with equity values, which as any rational observer of the financial system (this list of course excludes the likes of Dick Bove) knows full well, are at best equal to zero if all the FAS 115, 157, Level 3, Mark To Magic and other accounting sleight of hand gimmicks were to be removed.

The math is simple: bank assets have to equal bank liabilities + equity. The liabilities are there (and growing), yet the assets shrink every single day backstopped by such solid collateral as emptying midtown office space CMBS, bankrupt hotel and Harlem multi apartment whole loans, and 2nd liens in Ukrainian and Argentinean bison farms. If equities were marked appropriately, shareholders would likely have to be paid to own a share of Citi or BofA.

Then again, caught in a massively engineered short squeeze over the past 3 months, financial stocks ended up bottlerocketing straight up, not on fundamentals, or even on charts, but merely on two large stock loan issuers (themselves participants in the list of nine mentioned above) making it not only impossible to short fin stocks, but forcing anyone currently short to cover. And while TARP manipulation serves at best to fool some outlying marginal retail investors into a false sense of calm, the TLGP is where the real action is. And as of May, there was a lot of action: $345 billion worth of.

One last background item worth pointing out is that recently the FDIC realized its Deposit Insurance Fund was on the verge of depletion, sucked dry by those very banks that seem to fall like dominoes every Friday (or lately Thursday, with the total YTD now passing an unprecedented run rate of over 100 for the year). Recall that the FDIC's primary responsibility is to make sure that come hell or high water, deposits are secured and insured. Well: surprise, they aren't, which is why in March Sheila Bair announced several emergency steps to restore the rapidly dwindling reserves of the FDIC, most notably having to do with charging incremental assessments to both depository institutions and bank holding companies (well that, and also tapping a huge line of credit directly with the Treasury in case Citi were to finally admit that it is nationalized in all but name).

Enter H. Rodgin Cohen and Sullivan & Cromwell, on behalf of the Ben's Big 9 Bailout Beneficiaries (BB9BB). The letter sent to the FDIC pretty much made it clear that banks want not only to gestate in the warm cocoon provided by taxpayers' dollar bill plastered abdomens, but to have immediate recourse to essentially unlimited FDIC funding at practically no cost to them for ever and ever.

Some of the key demands made by the BB9BB - S&C cartel include:

1. The FDIC guarantee should be an unconditional guarantee of timely payments of principal and interest when due backed by the full faith and credit of the U.S. government.

Goodness, we wouldn't want to have conditions when providing the entire American financial systems with a taxpayer-funded blank check now would we. A blank check with even one footnote of small print is inappropriate when dealing with the instigators of the biggest financial catastrophe since the Depression. So no fine print please. Done and Done.

2. Because the FDIC's guarantee expires on June 30, 2012, there should be an
acceleration provision to June 30, 2012 in the event of default for guaranteed debt that matures after that date.

Wouldn't want forced short-squeezors, pardon, investors, to somehow think that there is such a think as risk in the banks' capital structures now, would we. In fact, this whole concept of risk, let's just do away with it entirely as the market trades merely on rolling buy-ins and follow on equity issuances. Done and Done.

3. If investors regard the guarantee as weak, they will look to institutions' underlying financial strength, thus lending to a tiered market where weaker institutions have insufficient access to liquidity.

What an abhorrent concept - judging a bank by its fundamental merits: the Horror, the Horror. How would the FDIC possibly allow a financial institution to be judged based on its "underlying financial strength": don't they realize that the BB9BB have made it all too clear that we now live in a communist regime where nobody can every fail based on their own "merits" and that everyone will be bailed out in perpetuity. How shallow: H. Rodgin Cohen, please explain to them how the system works. Done and Done.

4. Institutions should have the flexibility to issue senior unsecured debt not guaranteed by the FDIC, regardless of the stated maturity.

Yes Goldman, we realize you want to pay record bonuses even as unemployment hits 11% without starting a mass revolutionary uprising. Duly noted and Done and Done.

5. The Banking Organizations (BB9BB) agree with the FDIC that participating entities should have some mechanism to opt in or out of guarantees on a per issuance basis but believe that this option should not be limited to debt with stated maturities after June 30, 2012. [T]he Banking Organizations believe that this limitation will not achieve the FDIC's stated objectives [of not raping the taxpayer? of course, the BB9BB would like to interject here].

Hell, just make guarantees perpetual: it is not like the financial system will ever rebound. After all who are we fooling here? Well, aside from CNBC's primetime TV audience, wink, wink. Nonetheless, we advise readers to read the "cliff maturity" justification on or around June 30, 2012. This coincides nicely with the $1 trillion in CMBS that comes due about the same day. Should prove to be an amusing "day", "week", "month", "end of tenure" for whoever is president then. But who cares: that will occur at a time when the U.S. sovereign debt approaches something with a "quad" and ending in "rillion", and all the current BB9BB executives (long retired then) will have that 98th, 99th and 100th house in Cannes, Fiji and inside the crater of Mt. Etna. Done and Done.

6. We believe it would be appropriate to exclude public sector clients, banks and other financial institutions from because imposing a 75 basis point on deposit accounts for such institutions would eliminate the yield paid on these products and potentially encourage such institutions to move funds into higher yielding "unguaranteed" products, thus potentially reducing a participating entity's liquidity sources... Considering the current level of interest rates, the [BB9BB] believe that the 75 bp fee is too high with respect to the Federal Funds, and should be lowered. The high cost of insuring Federal Funds may lead institutions to other secured borrowing sources so that, in lieu of Federal Funds, financial institutions will, in order to mitigate their funding costs, increase their utilization of secured borrowings sources such as the Federal Reserve Discount Window, the Term Auction Facility and the FHLB advance program. Such an outcome would not achieve the FDIC's goal of improving short-term unsecured inter-bank funding markets [and, again, of not raping the U.S. taxpayer, which is so totally contrary to the lobbying effort contained herewith]

What irony: the BB9BB are demanding for unlimited guaranteed and unguaranteed backstops and someone dares to ask them to pay for it. If this isn't the most unhinged and inequitable concept the BB9BB have ever heard, then nothing is. H. Rodgin Cohen will set it all straight, and make sure that not only can banks borrow Fed Funds but taxpayers will have to pay them a portion of how much they borrow and at what rate. In fact the bank that recently ended up "borrowing" 7% Fund Funds was actually a lender, and H. Rodgin Cohen made sure that instead of paying 7%, they received that amount of money. Done and Done.

7. Under 370.6(e) there is a 150 basis point penalty fee and enforcement mechanisms for debt that is represented as being "guaranteed by the FDIC" but which exceeds the guaranteed amount. In order to enhance investor confidence in the Debt Guarantee Program, the Banking Organizations propose that investors be expressly allowed to rely on the borrower's representation with respect to the availability of the guarantee for a particular debt issuance.

You see, FDIC, it is simply unfair for investors and depositors to have an objective and unbiased representation. Especially since the BB9BB have every intention of abusing the guarantee/non-guarantee barrier at every possible occasion. However, this whole 150 bps penalty, well, that's just too rich for S&C's billionaire clients' blood. Let's cut a deal: the BB9BB will represent the debt in any way they want, and in turn, the FDIC will not only turn a blind eye to any and all (guaranteed) abuses that occur as a result, but also will not charge any penalty or enforce any actions against this outright abuse? Done and Done.

This and much more is contained in the attached missive, which was undoubtedly scribbled in short-hand by the BB9BB on the bent over back of one H. Rodgin Cohen. I recommend readers familiarize themselves with just how the world's most effective lobby power works when it hegemonic status quo is even remote threatened.

Which brings us to topic #2 for today, that of the mellifluously sounding H. Rodgin Cohen. Frequent readers may recall, that H. Rodgin Cohen, whose name rolls out like a haiku by a moderately drunk Basho, was supposed to become none other than Tim Geithner's right hand man, yet something odd happened on the greenback-bricked road which was supposed to guarantee H. Rodgin Cohen's unbridled immortality by having his portrait prominently featured on the $100 trillion bill. Just what was, as George Stephanopoulos noted, the "issue that arose in the final stages of the vetting process." While still on the topic of the haiku-esque H. Rodgin Cohen, many relevant questions brought up, and few answered, in this craftfully worded post by Tom Blumer of NewsBustes. I recommend readers familiarize themselves with the persona that nearly became TurboTaxTim in waiting. In the meantime, Zero Hedge will continue to present any and all lobby papers by Sullivan & Cromwell on behalf of the BB9BB, just in case H. Rodgin Cohen has decided to bypass the post of Secretary of the Treasury and apply straight for that of Overlord and Viceroy of all of Western Capitalism. With the backing of such "clients" as Goldman Sachs, he is essentially guaranteed to "win" that particular popular (or not)election.



hat tip Richard

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FDIC Starts Extending The Maturities Of Various Alphabet Soup Crutches

The FDIC announced a proposed extension of the first of many alphabet soups currently propping up the banking system. In this case, it is the Transaction Account Guarantee (TAG) component of the TLGP program. The proposed extension (the first of maaaaany) will push the maturity from December 31, 2009 to June 30, 2010. From the report:

Currently 7,107 IDIs participate in the TAG program, of which approximately 3,744, or 52.7 percent are small entities. Within the universe of small institutions, 1,072, or 28.6 percent did not have TAG eligible deposits as of the March 2009 Report of Condition and Income for banks and the Thrift Financial Report for thrifts (collectively, “March 2009 Call Reports”); thus, they were not required to pay the 10 basis point fee currently assessed for participation in the TAG program. Assuming these IDIs do not change circumstances and do not opt out as provided in Alternative B, there would be no impact on this group if the proposed fee increase contained in Alternative B were adopted. As to the remaining 2,672 small entities that had TAG eligible deposits as of the March 2009 Call Reports, they would have the opportunity to opt out of the extended TAG program if Alternative B were adopted. However, assuming these 2,672 small entities remain in the TAG program if Alternative B is adopted, the FDIC asserts that Alternative B described in the proposed rulemaking could have some impact on a substantial number of them that remain participants in the TAG program during the extension period.

As this one TLGP subcomponent is merely one of the tens if not hundreds of assorted financial backstop programs (main ones listed here), look for many such comparable notices coming out of the FDIC over the next month, as the agency realizes that the EOY 2009 maturity for the bulk of them is a joke, and the financial system will need many years with full government backing before it can do anything on its own.

In the meantime, GS stock will hit $1,000 as the employees of all competitors leave, unwilling to wait until 2020 when they get their first chance of collecting even a semi-respectable bonus.

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Perspectives On TARP Repayment

Today several financial companies were given permission to repay their TARP crutches. The market yawned. As expected, nowhere in Geithner's prepared statement was there even a brief mention of that "other" crutch, the TLGP subsidies that banks have used over the past 6 months. And as TARP is to bank equity, so the FDIC's TLGP is to debt (Zero Hedge has written extensively about the program in the past). The debt guarantee issue is a global phenomenon: not only focused on the US. In fact, the total crutches provided by developed countries to their banking systems currently amount to roughly half a trillion dollars, so when banks succeed in paying off about 10 times more than they did today, please let us know. Unfortunately, for that to happen to S&P will likely need an invisible hand boost well in the 3-4,000 range. That's a whole lot of share recall notices that State Street and BoNY would have to issue.

For readers curious for a brief version of this underrepresented problem, The Economist has a succinct summary:

Still, there is a long way to go. Paying off the first $68 billion is a healthy start, but western governments own roughly $450 billion in banks. If markets or the economy slump again, investors’ appetite for new shares will evaporate. Of the ten banks, eight had been pressed by the government to take funds in October, amid efforts to shore up the banking system. Although some individual institutions may try to claim that they took the money unwillingly, government intervention was necessary to prevent the entire system from collapsing as banks were found to own hundreds of billions of dollars of hard-to-value assets.

Even today all banks remain plugged into government life support systems. Central banks provide generous collateral rules for borrowing, in an effort to provide banks with liquidity. Some banks have managed to issue debt without government guarantees, but the system needs to refinance some $25.6 trillion of wholesale funding by 2011: without an implicit state back stop this would be impossible. And the value of banks’ assets is being sheltered by central banks’ asset purchasing programmes and in some cases flattered by more generous accounting rules. The truth is that the West has a thinly capitalised banking system that is being allowed to earn its way back to health. Save for defence and space exploration it is hard to think of a privately-run industry more dependent on the state.

It is probably worthy to keep this information in mind as pundits try to spin today's news as something constructive. But, as with everything else with the Obama administration, this has been merely one more tactic in the chess game of confidence.

And in keeping with the script, for some internal systemic perspectives, more of the "teleprompter" variety, below is an interview conducted by Fox Business Network with Dallas Fed president Dick Fisher. Of his points, perhaps this was the most relevant: "I’m not surprised that these institutions want to re-pay the TARP money. The question is, can they repay the TARP money without putting themselves in long-term vulnerable positions? And I think you could view it as a healthy sign of those institutions that are able to raise capital to pay back the TARP money and we will again see how many of these institutions are able to do so. You also don’t want to create a permanent dependence on TARP money." In other words: the government has priced the economic environment to perfection. A slip here or there, and the avalanche could easily resume, this time with a vengeance; however, next time good luck getting the public to agree with TARP 2 for those who said their were too confident and really needed those Barney Frank-unmediated bonuses.

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Is FDIC's Plan To Prop Up DIF In Jeopardy?

In a stark demonstration of how U.S. banks can potentially circumvent the FDIC's TLGP program and the agency's hopes of raising DIF reserves by charging new and higher fees, JP Morgan today successfully raised 2 billion euros in 5 year unsecured paper. The bonds priced at 375 over LIBOR. This was only the first debt issue for a U.S. bank outside of the TLGP program since the Lehman default in September, and a third for financial issuers, with the only other two examples being GS' 10 year bond pricing January 29 and a 30 year GECC bond pricing January 6, both due to term-paper demand. The JPM note, however, was not based on term demand as it only 1.25 years longer than the current overriding TLGP ultimate guarantee maturity of December 31, 2012.

As a reference point, JPM's 2.2% notes of June 2012 trade at LIBOR + 23.75. When one factors the 100 bps FDIC fee, the total cost to an issuer for identically comparable TLGP debt would come to 124 bps. The implication is that JPM is willing to pay 251 bps of additional interest to a) extend the maturity by less than 2 years and b) gradually shift away from having its new capital issues done under the TLGP, and thus the government's (with its populist constituency) umbrella.

As Zero Hedge had earlier speculated, the incremental costs associated with the TLGP program will make seeking alternative avenues to FDIC-backed issues much more attractive, especially in the eurodollar market. Furthermore, as next up on every bank's agenda is putting as much space between itself (as a private enterprise) and the government (just look at recent headlines disclosing the desire of banks such as GS and BAC to repay TARP as soon as possible), the refinancing of TLGP issues with unsecured paper will become the next prerogative, especially since the market seems to have forgotten that just a month ago the prevailing paradigm was that unsecured debt would see 25% haircuts.

This may have the unintended consequence of dramatically reducing the projected fees the FDIC had hoped to generate, as banks cease utilizing the TLGP for new capital raises. Ironically, by making the banking sector (seem) healthier, the administration has lost one of the major cash funding mechanisms for the replenishment of the Deposit Insurance Fund, putting the FDIC even more in bed with the Treasury, to whose dollar printing presses it will now have to look as the primary source of cash funding. Sphere: Related Content

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Sheila Bair: FDIC Reserves To Hit Zero

When I wrote about this issue a week ago, I thought I was going to be called out for prognosticating gloom and doom as usual...Well, no such luck, in fact quite the opposite. Sheila Bair came out with some very scary words for depositors everywhere:

“Without additional revenue beyond the regular assessments, current projections indicate that the [depositor investor] fund balance will approach zero,” Bair said.

In the words of Lewis Black, I will repeat that, because it bears repeating:

“Without additional revenue beyond the regular assessments, current projections indicate that the fund balance will approach zero."

This is actually one of the most terrifying news I have heard in forever, as it goes to the heart of depositor confidence problem, with a next step being the global bank run that Kanjorski was fuming about.

The reason for Bair's statement is to attempt to explain the need for the recently instituted fee increases for TLGP participants.

"Even though this increase comes at a difficult time, I strongly believe that keeping deposit insurance industry-funded will be better for you and your customers when this crisis is over."

“I’m optimistic that Congress will soon act on the borrowing authority increase,” Bair said. “This should give us the breathing room we need to reduce the special assessment, while covering all projected losses, with industry funds.”

Oh yes, let's not forget that Chris Dodd of such recent fame as the AIG bonus scandal, is trying to plough even more taxpayer money into a cause worthy of... saving taxpayer money... Still not too sure I understand how that works. But let the law of unintended consequences strike as it may.

Bair also had some very favorable things to say of the recent accounting changes proposed by the FASB which I wrote about yesterday (of course Bair will be a proponent of opacity: last thing depositors need to know is that DIF is negative among other things).

There is a minor light at the end of the tunnel.

Bair said she wants to “end too-big-to-fail” models that have shaped U.S. policy and wants financial firms to reduce systemic risk by “limiting size” and “complexity.” She said regulators “need to impose higher capital requirements” to ensure banks have enough capital to withstand worsening economic scenarios.

In the meantime, Bair is praying that nobody realizes that there is no money left to insure America's deposits, and that everyone absorbs the optimism spewing forth from the lips of CNBC's Steve Liessman like a wet sponge.

The only appropriate ending to this post are the following words:

"I cannot imagine any condition which would cause a ship to founder. I cannot conceive of any vital disaster happening to this vessel. Modern ship building has gone beyond that."

Captain Edward J. Smith, Commander of Titanic

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