10.26.08
Talking Business
Credit Crisis Indicators:
October 25, 2008
Talking Business
So When Will Banks Give Loans?
By JOE NOCERA
“Chase recently received $25 billion in federal funding. What effect
will that have on the business side and will it change our strategic
lending policy?”
It was Oct. 17, just four days after JPMorgan Chase’s chief executive,
Jamie Dimon, agreed to take a $25 billion capital injection courtesy
of the United States government, when a JPMorgan employee asked that
question. It came toward the end of an employee-only conference call
that had been largely devoted to meshing certain divisions of JPMorgan
with its new acquisition, Washington Mutual.
Which, of course, it also got thanks to the federal government.
Christmas came early at JPMorgan Chase.
The JPMorgan executive who was moderating the employee conference call
didn’t hesitate to answer a question that was pretty politically
sensitive given the events of the previous few weeks.
Given the way, that is, that Treasury Secretary Henry M. Paulson Jr.
had decided to use the first installment of the $700 billion bailout
money to recapitalize banks instead of buying up their toxic
securities, which he had then sold to Congress and the American people
as the best and fastest way to get the banks to start making loans
again, and help prevent this recession from getting much, much worse.
In point of fact, the dirty little secret of the banking industry is
that it has no intention of using the money to make new loans. But
this executive was the first insider who’s been indiscreet enough to
say it within earshot of a journalist.
(He didn’t mean to, of course, but I obtained the call-in number and
listened to a recording.)
“Twenty-five billion dollars is obviously going to help the folks who
are struggling more than Chase,” he began. “What we do think it will
help us do is perhaps be a little bit more active on the acquisition
side or opportunistic side for some banks who are still struggling.
And I would not assume that we are done on the acquisition side just
because of the Washington Mutual and Bear Stearns mergers. I think
there are going to be some great opportunities for us to grow in this
environment, and I think we have an opportunity to use that $25
billion in that way and obviously depending on whether recession turns
into depression or what happens in the future, you know, we have that
as a backstop.”
Read that answer as many times as you want — you are not going to find
a single word in there about making loans to help the American
economy. On the contrary: at another point in the conference call, the
same executive (who I’m not naming because he didn’t know I would be
listening in) explained that “loan dollars are down significantly.” He
added, “We would think that loan volume will continue to go down as we
continue to tighten credit to fully reflect the high cost of pricing
on the loan side.” In other words JPMorgan has no intention of turning
on the lending spigot.
It is starting to appear as if one of Treasury’s key rationales for
the recapitalization program — namely, that it will cause banks to
start lending again — is a fig leaf, Treasury’s version of the weapons
of mass destruction.
In fact, Treasury wants banks to acquire each other and is using its
power to inject capital to force a new and wrenching round of bank
consolidation. As Mark Landler reported in The New York Times earlier
this week, “the government wants not only to stabilize the industry,
but also to reshape it.” Now they tell us.
Indeed, Mr. Landler’s story noted that Treasury would even funnel some
of the bailout money to help banks buy other banks. And, in an almost
unnoticed move, it recently put in place a new tax break, worth
billions to the banking industry, that has only one purpose: to
encourage bank mergers. As a tax expert, Robert Willens, put it: “It
couldn’t be clearer if they had taken out an ad.”
Friday delivered the first piece of evidence that this is, indeed, the
plan. PNC announced that it was purchasing National City, an
acquisition that will be greatly aided by the new tax break, which
will allow it to immediately deduct any losses on National City’s
books.
As part of the deal, it is also tapping the bailout fund for $7.7
billion, giving the government preferred stock in return. At least
some of that $7.7 billion would have gone to NatCity if the government
had deemed it worth saving. In other words, the government is giving
PNC money that might otherwise have gone to NatCity as a reward for
taking over NatCity.
I don’t know about you, but I’m starting to feel as if we’ve been sold
a bill of goods.
•
The markets had another brutal day Friday. The Asian markets got
crushed. Germany and England were down more than 5 percent. In the
hours before the United States markets opened, all the signals
suggested it was going to be the worst day yet in the crisis. The Dow
dropped more than 400 points at the opening, but thankfully it never
got any worse.
There are lots of reasons the markets remain unstable — fears of a
global recession, companies offering poor profit projections for the
rest of the year, and the continuing uncertainties brought on by the
credit crisis. But another reason, I now believe, is that investors no
longer trust Treasury. First it says it has to have $700 billion to
buy back toxic mortgage-backed securities. Then, as Mr. Paulson
divulged to The Times this week, it turns out that even before the
bill passed the House, he told his staff to start drawing up a plan
for capital injections. Fearing Congress’s reaction, he didn’t tell
the Hill about his change of heart.
Now, he’s shifted gears again, and is directing Treasury to use the
money to force bank acquisitions. Sneaking in the tax break isn’t
exactly confidence-inspiring, either. (And let’s not even get into the
less-than-credible, after-the-fact rationalizations for letting Lehman
default, which stands as the single worst mistake the government has
made in the crisis.)
On Thursday, at a hearing of the Senate Banking Committee, the
chairman, Christopher J. Dodd, a Connecticut Democrat, pushed Neel
Kashkari, the young Treasury official who is Mr. Paulson’s point man
on the bailout plan, on the subject of banks’ continuing reluctance to
make loans. How, Senator Dodd asked, was Treasury going to ensure that
banks used their new government capital to make loans — “besides
rhetorically begging them?”
“We share your view,” Mr. Kashkari replied. “We want our banks to be
lending in our communities.”
Senator Dodd: “Are you insisting upon it?”
Mr. Kashkari: “We are insisting upon it in all our actions.”
But they are doing no such thing. Unlike the British government, which
is mandating lending requirements in return for capital injections,
our government seems afraid to do anything except plead. And those
pleas, in this environment, are falling on deaf ears.
Yes, there are times when a troubled bank needs to be acquired by a
stronger bank. Given that the federal government insures deposits, it
has an abiding interest in seeing that such mergers take place as
smoothly as possible. Nobody is saying those kinds of deals shouldn’t
take place.
But Citigroup, at this point, probably falls into the category of
troubled bank, and nobody seems to be arguing that it should be taken
over. It is in the “too big to fail” category, and the government will
ensure that it gets back on its feet, no matter how much money it
takes. One reason Mr. Paulson forced all of the nine biggest banks to
take government money was to mask the fact that some of them are much
weaker than others.
We have long been a country that has treasured its diversity of banks;
up until the 1980s, in fact, there were no national banks at all. If
Treasury is using the bailout bill to turn the banking system into the
oligopoly of giant national institutions, it is hard to see how that
will help anybody. Except, of course, the giant banks that are
declared the winners by Treasury.
JPMorgan is going to be one of the winners — and deservedly so.
Mr. Dimon managed the company so well during the housing bubble that
it is saddled with very few of the problems that have crippled
competitors like Citi. The government handed it Bear Stearns and
Washington Mutual because it was strong enough to swallow both
institutions without so much as a burp.
Of all the banking executives in that room with Mr. Paulson a few
weeks ago, none needed the government’s money less than Mr. Dimon. A
company spokesman told me, “We accepted the money for the good of the
entire financial system.” He added that JP Morgan would use the money
“to do good for customers and shareholders. We are disciplined to try
to make loans that people can repay.”
Nobody is saying it should make loans that people can’t repay. What I
am saying is that Mr. Dimon took the $25 billion on the condition that
his institution would start making loans. There are plenty of small
and medium-size businesses that are choking because they have no
access to capital — and are perfectly capable of repaying the money.
How about a loan program for them, Mr. Dimon?
Late Thursday afternoon, I caught up with Senator Dodd, and asked him
what he was going to do if the loan situation didn’t improve. “All I
can tell you is that we are going to have the bankers up here,
probably in another couple of weeks and we are going to have a very
blunt conversation,” he replied.
He continued: “If it turns out that they are hoarding, you’ll have a
revolution on your hands. People will be so livid and furious that
their tax money is going to line their pockets instead of doing the
right thing. There will be hell to pay.”
Let’s hope so.
October 21, 2008
U.S. Is Said to Be Urging New Mergers in Banking
By MARK LANDLER
WASHINGTON — In a step that could accelerate a shakeout of the
nation’s banks, the Treasury Department hopes to spur a new round of
mergers by steering some of the money in its $250 billion rescue
package to banks that are willing to buy weaker rivals, according to
government officials.
As the Treasury embarks on its unprecedented recapitalization, it is
becoming clear that the government wants not only to stabilize the
industry, but also to reshape it. Two senior officials said the
selection criteria would include banks that need more capital to
finance acquisitions.
“Treasury doesn’t want to prop up weak banks,” said an official who
spoke on condition of anonymity, because of the sensitivity of the
matter. “One purpose of this plan is to drive consolidation.”
With bankers traumatized by the credit crisis and the loss of investor
confidence, officials said, there are plenty of banks open to selling
themselves. The hurdle is a lack of well-capitalized buyers.
Stable national players like Bank of America, JPMorgan Chase, and
Wells Fargo are already digesting acquisitions. A second group of
so-called super-regional banks are well positioned to take over their
competitors, officials said, but have been reluctant to undertake or
unable to complete deals.
By offering capital at a favorable rate, the government may encourage
them to expand. In this category, industry analysts point to regional
leaders, like KeyCorp of Cleveland; Fifth Third Bancorp of Cincinnati;
BB&T of Winston-Salem, N.C.; and SunTrust Banks of Atlanta.
With $125 billion left over after investing in the nine largest banks,
the Treasury secretary, Henry M. Paulson Jr., said there was enough
capital to invest in every qualified bank.
“We have received indications of interest from a broad group of banks
of all sizes,” he said at a news conference. “This program is not
being implemented on a first-come, first-served basis.”
Mr. Paulson did not address the issue of bank mergers in his remarks,
but officials say it has been widely discussed within the Treasury,
the Federal Reserve and the Federal Deposit Insurance Corporation,
which has been burdened in recent months by having to support
teetering banks like Wachovia.
Providing capital to help facilitate a merger, officials say, is also
a way to track how the capital is used. Some analysts have questioned
how much control the government can exert over its investment, when it
is injected into banks in return for nonvoting preferred shares.
“We think there will be pressure behind the scenes by Treasury to push
together companies that should have merged months or years ago,” said
Gerard Cassidy, a banking analyst at RBC Capital Markets in Portland,
Me. “If you can create stronger companies, that is a positive.”
In selecting banks, Mr. Paulson said the Treasury would also rely on
advice from the quartet of regulators who oversee the banking
industry: the Fed, the F.D.I.C., the comptroller of the currency and
the Office of Thrift Supervision.
But Mr. Paulson made clear that the final decision of who gets federal
money rests with the Treasury. And he reiterated that the government
expected the banks that got money to lend it out rather than hoard it
— putting in a special plea for homeowners with troubled mortgages.
“We expect all participating banks to continue to strengthen their
efforts to help struggling homeowners,” he said. “Foreclosures not
only hurt the families who lose their homes, they hurt neighborhoods,
communities and our economy as a whole.”
The Treasury’s bank rescue comes amid a rising clamor in Washington
that the government should focus on helping mortgage holders directly.
But officials say it is unlikely that the Bush administration will
present a new plan for homeowners between now and the election.
“There’s no inexpensive, easy way to address the terms of people’s
mortgages,” said Robert J. Shapiro, an economic consultant who is
chairman of the globalization initiative of NDN, a left-leaning
research group in Washington. “I think that’s why they haven’t
addressed it.”
Most likely, he said, the campaigns of Senator John McCain and Senator
Barack Obama will hone their own proposals. Then, if Congress
reconvenes after the election in a lame-duck session, the new
president-elect will try to push through a bill with new measures.
Under the terms of the $700 billion rescue plan approved by Congress
early this month, the Treasury has authority to purchase whole
mortgages. Treasury officials also note that Mr. Paulson has pressed
banks and loan servicers to show flexibility in modifying loans to
avoid foreclosures.
Still, Treasury’s recent efforts have been almost wholly focused on
stabilizing the banks — first by proposing to buy distressed assets
from the banks, and later by injecting capital directly into them.
There were some signs in the credit markets Monday that those efforts
were paying off.
On Monday, Mr. Paulson described a process for banks to apply for
government investments that is little more complicated than the
one-page term sheet he handed to the chief executives of the nation’s
nine largest banks at a meeting last week at the Treasury Department.
The institutions, he said, must fill out a standardized two-page form
and submit it to their primary regulator by Nov. 14. The Treasury will
receive the applications, with a recommendation, from the regulator.
Once it decides whether to inject capital, it will announce its
investment within 48 hours. It will not disclose banks that withdraw
or are turned down.
The Treasury’s program is open to large and small banks, as well as
thrifts. Officials said they had received inquiries from other
financial institutions, including insurance companies, but the plan
did not provide for them.
Given the potential weakness of insurers, some analysts said the
government should consider expanding the eligibility for capital
injections. These analysts said $250 billion would not be enough.
“They should see themselves as having $700 billion to recapitalize the
industry in creative ways,” said Simon Johnson, a former chief
economist at the International Monetary Fund.
While the Treasury’s offer of capital is attractive, analysts
cautioned that cash alone might not be enough to reshape the industry.
Recent deals, they note, have featured distressed banks sold at
fire-sale prices.
“There are a lot of obstacles to mergers in the banking industry,” Mr.
Cassidy of RBC Capital Markets said. “I don’t know how the government
could persuade banks to do deals at below book value.”
October 25, 2008
Some Currencies Plunge as Stocks Sink Worldwide
By MARK LANDLER and VIKAS BAJAJ
WASHINGTON — Fear that the financial crisis is infecting once-healthy
economies created another white-knuckle day for investors Friday,
causing stocks to tumble from Tokyo to New York.
Uncertainty also roiled currency markets as investors continued to
turn to the security of the United States dollar and the Japanese yen
and drove down currencies of developing countries like Brazil, Ukraine
and South Korea and even of developed countries like Britain.
In the United States, where the crisis began, investors were less
alarmed than elsewhere. A rout in Asian and European stock markets
sent the Dow Jones industrial average swooning by more than 500 points
in early trading in New York, but trading recovered enough ground
through the day to leave the Dow down 312.30 points, or 3.6 percent.
Just a year ago, a drop of that size would have been considered a
black day in the markets, but in these days of routine triple-digit
declines, it offered a modicum of relief to traumatized investors.
Still, there were chilling new developments that attested to the wide
scope of the crisis, despite efforts by heads of state, central
bankers and corporate leaders to stop the bleeding. Cash flowed into
the dollar and the Japanese yen, the two most sought-after safe havens
in a storm-tossed world, as it fled from emerging markets.
Hedge funds and other investors are pulling money out of these
countries on an immense scale, analysts said, and putting it into
dollars and yen. There were few safe harbors, as commodities also
tumbled. Fears of a spreading global recession caused oil prices to
fall 5 percent, to $64.15, even after OPEC, the oil cartel, announced
it was cutting output. Government-backed mortgage bonds and debt
issued by top-rated corporations were also dragged down in the
undertow.
“This is a panic in the way of the fine 19th-century panics, where we
all run around like headless chickens,” said R. Jeremy Grantham,
chairman of the Boston-based investment firm GMO, who had predicted
stocks would tumble. “I have been in the business for 40 years, and I
have never seen anything like this.”
So great are the concerns among policy makers about the turmoil in
currency markets that it has prompted talk of a coordinated
intervention by the leading industrial countries in coming days, to
quell the soaring dollar and put a floor under emerging-market
currencies.
Such a move — in which the Federal Reserve and other central banks
would sell dollars and yen and buy other currencies — has been used
extremely sparingly by the United States in recent years.
“The risk is huge, but it is appropriate at this point, because if the
emerging markets go into default, the consequences would be
catastrophic,” said Kenneth S. Rogoff, an economist at Harvard.
When a developing country’s currency loses value rapidly, it impedes
the ability to pay back loans from Western banks. That could cause a
rash of corporate or even government defaults — a feature of previous
financial crises in Asia and Latin America.
In the United States, the rescue effort may also grow. The Treasury
Department, officials said, is weighing whether to expand its program
of capital injections to encompass insurance companies, many of which
own savings and loans, and is under pressure to include the financing
arms of the auto companies. The government injections are currently
reserved for banks.
The Treasury secretary, Henry M. Paulson Jr., appears to be drawing
the line at investing in hedge funds, which, officials note, do not
supply credit to the economy and are in the business of taking on
large risks.
Indeed, hedge funds accounted for some of the turmoil on Friday. They
are being forced to sell their stocks, bonds and other instruments to
pay off their investors and lenders. Beyond that, investors are
increasingly convinced that the global economy is headed for a long,
painful recession.
“There has been tremendous activity in the currency markets, the
commodity market and the stock market that reveal the fingerprints of
forced selling,” said Marc D. Stern, chief investment officer of
Bessemer Trust, an investment firm based in New York.
The flight to safety is hurting once-mighty currencies like Britain’s
pound. On Friday, worries about how the financial crisis would affect
Britain’s economy caused the pound to lose 8 cents against the dollar,
falling to $1.53.
While a strong dollar might be a boon for American tourists abroad, it
creates a host of problems for economies.
And the downdraft of the pound and the euro — which fell to $1.26
against the dollar on Friday, its lowest level in two years — is less
serious for the economic well-being of Britain and Europe than the
deterioration of currencies like the Mexican peso or the Russian
ruble.
Even if the Federal Reserve, the Bank of Japan and other central banks
intervened in the foreign-exchange markets, it was not clear that it
would reverse the pressure on these currencies.
“I don’t see this as a crisis breaker,” said Simon Johnson, a former
chief economist at the International Monetary Fund. “But it would help
emerging-market companies, and give everyone a chance to catch their
breath.”
The last time the Federal Reserve intervened in currency markets was
in September 2000, when it teamed up with the European Central Bank
and the Bank of Japan to shore up the faltering euro. Before that, the
United States and Japan teamed up to buy yen during the Asian crisis
in June 1998.
With President Bush convening a meeting of the Group of 20 nations in
Washington on Nov. 15, analysts said there would be pressure on the
United States and other Western countries to show they were trying to
cushion the blow of the crisis on developing countries.
The International Monetary Fund is trying to arrange a large credit
line to help developing countries desperate for dollars. On Friday,
Iceland announced it had reached a tentative deal for a $2 billion
emergency loan from the fund — making it the first country to seek aid
from the fund during this crisis, and the first Western country to do
so since 1976.
The bad news started early Friday in Tokyo and Seoul, where big
companies like Toyota, Sony and Samsung disappointed investors with
their earnings. It continued as trading opened in Europe, with Britain
reporting that its economy shrank in the third quarter.
By the time investors awoke in New York, stock futures had fallen so
far that trading in them had been halted. Investors were on notice
that the market could fall at least 6 percent, perhaps much more.
As trading started, the Dow dropped 450 points, or about 5 percent,
and the floor appeared calm. Some traders said they took solace in the
fact that the decline had not been greater — and far from the
1,100-point drop that would force a trading halt on the Big Board.
“It was frightening, absolutely frightening,” Warren Meyers, a floor
trader for Walter J. Dowd Inc., said early on Friday. “Every day we
are walking on shaking ground.”
Stocks seesawed for much of the rest of the day. A report that
existing home sales jumped 5.5 percent in September as banks unloaded
foreclosed homes did little to help the market.
But at about 2 p.m., stocks started rallying, and by 3 p.m., the Dow
was down by just 100 points for the day. It was unclear what was
fueling the rally, though investors seemed cheered by reports that the
Treasury was weighing investments in insurance companies.
The Dow, however, was not able to build on those gains and fell
sharply at the end of trading, dropping 183 points in 10 minutes.
The Treasury’s benchmark 10-year note fell 3/32, to 102 18/32, and the
yield, which moves in the opposite direction from the price, was at
3.69 percent, up from 3.67 percent late Thursday.
As is often the case when stocks fall steeply, the market is starting
to entice some investors, many of whom say they have never seen prices
so low, to buy. Among them is Mr. Grantham, the GMO chairman.
After years of warning that stocks were unreasonably overpriced, he
said he now believed they were below their fair value and had been
slowly acquiring holdings in blue-chip companies.
“It’s a very nerve-racking time to be a value investor,” Mr. Grantham
said. “You put a little bit into the market, and the next day you
think, ‘What an idiot, what an idiot.’ ”
Edmund L. Andrews contributed reporting in Washington, and Michael M.
Grynbaum in New York.
October 26, 2008
Spending Stalls and Businesses Slash U.S. Jobs
By LOUIS UCHITELLE
As the financial crisis crimps demand for American goods and services,
the workers who produce them are losing their jobs by the tens of
thousands.
Layoffs have arrived in force, like a wrenching second act in the
unfolding crisis. In just the last two weeks, the list of companies
announcing their intention to cut workers has read like a Who’s Who of
corporate America: Merck, Yahoo, General Electric, Xerox, Pratt &
Whitney, Goldman Sachs, Whirlpool, Bank of America, Alcoa, Coca-Cola,
the Detroit automakers and nearly all the airlines.
When October’s job losses are announced on Nov. 7, three days after
the presidential election, many economists expect the number to exceed
200,000. The current unemployment rate of 6.1 percent is likely to
rise, perhaps significantly.
“My view is that it will be near 8 or 8.5 percent by the end of next
year,” said Nigel Gault, chief domestic economist at Global Insight,
offering a forecast others share. That would be the highest
unemployment rate since the deep recession of the early 1980s.