http://online.wsj.com/article/BT-CO-20100413-712034.html
APRIL 13, 2010
Ex-WaMu CEO Complains Of 'Too Clubby To Fail'
Patrick Yoest
WASHINGTON (Dow Jones)--Former Washington Mutual chief executive Kerry Killinger on Tuesday blamed federal regulators and an insular Wall Street culture for the demise of the bank, saying firms that were "too clubby to fail" were protected during the financial crisis in 2008.
Killinger, who is testifying before the Senate Homeland Security and Governmental Affairs Committee's investigating panel, in prepared testimony complained of "unfair treatment" of Washington Mutual, the largest bank failure in U.S. history in 2008, when it was seized and sold to J.P. Morgan Chase & Co. (JPM).
Killinger argued that the seizure "was unnecessary" and said the company "should have been given a chance to work through the crisis." Regulators didn't give Washington Mutual benefits afforded to other banks in crisis, Killinger said, pointing to injections of capital through the Treasury Department's Troubled Asset Relief Program, Federal Deposit Insurance Corp. guarantees and Federal Reserve injections of liquidity.
Similarly, Killinger said, Washington Mutual was excluded from "hundreds of meetings and telephone calls between Wall Street executives and policy leaders that ultimately determined winners and losers in this financial crisis."
"For those that were part of the inner circle and were 'too clubby to fail,' the benefits were obvious," Killinger said. "For those outside the club, the penalty was severe."
The Permanent Subcommittee on Investigations, part of the Senate Homeland Security and Governmental Affairs Committee, is focusing its hearing Tuesday on Washington Mutual. According to the panel's findings, "higher risk loans"--including negative amortization loans--gradually came to dominate the company's balance sheet from 2003 to 2008 because the loans were more profitable.
E-mails unearthed by the panel show that company executives were concerned that subprime and other risky loans, which were increasingly delinquent, became harder to securitize and sell within the United States. A February 2007 e-mail to company executives David Schneider and David Beck expressed concerns about a "meltdown in the subprime market that is creating a 'flight to quality,'" but noted that Asian investors were still interested in buying the securities.
One type of mortgage that was encountering particularly high delinquency rates, according to the e-mails, were option ARMs. Those mortgages gave homebuyers numerous ways to pay off their home debt, but often resulted in "payment shock" when required payments and interest rates increased rapidly.
"There is still strong interest around the world in USA residential mortgages," said the e-mail, sent by Washington Mutual executive Cheryl Feltgen. "This seems to me to be a great time to sell as many Option ARMs as we possibly can."
Former risk personnel at Washington Mutual on Tuesday testified the company emphasized its abilities to draw up loans for high-risk customers, despite their warnings. James G. Vanasek, the company's chief credit officer and chief risk officer from 2001 to 2005, testified that he "on many occasions" tried to alter the company's lending practices and stem high-risk and subprime loans.
Vanasek said those warnings were met with resistance from managers at the company who were authorizing mortgage loans and that "loan originators constantly threatened to quit and go to" the troubled Countrywide Financial, which was purchased in 2008 by Bank of America Corp. (BAC).
Arguments between line managers and risk personnel were not tackled by Killinger, Vanasek said.
"We had no way to resolve that because the chairman would not engage in conflict resolution," Vanasek said. "He was very conflict-averse."
Vanasek is not the only former Washington Mutual executive to express regret about the company's collapse. Stephen Rotella, a former Washington Mutual chief operating officer who joined the company in 2005, said in prepared testimony that he tried to put the brakes on the growth of its subprime lending, but that in hindsight, "I would have tried to move even faster than we did in all the areas over which I had control."
Killinger's compensation likely will be a topic of conversation, as an investigation memo points to "millions of dollars paid to Washington Mutual senior executives even as their higher risk lending strategy began to lose money and increase the risk in bank's own investment portfolio."
In 2008, the year in which Killinger was asked to leave the bank, he received $21 million in total compensation, and he received nearly $100 million in compensation between 2003 and 2008.
-By Patrick Yoest, Dow Jones Newswires; 202-862-3554; patrick.yoest@dowjones.com
Showing posts with label Washington Mutual. Show all posts
Showing posts with label Washington Mutual. Show all posts
Saturday, April 24, 2010
Wednesday, January 21, 2009
Bank crisis reignites
http://www.independent.co.uk/news/business/news/bank-crisis-reignites-as-us-giants-post-massive-losses-1418310.html
Bank crisis reignites as US giants post massive losses
Bank of America needs $20bn bailout while Citigroup forced to unveil break-up. Barclays Bank shares plummet 25 per cent as turmoil spreads to Europe
By Sean Farrell, Financial Editor
Saturday, 17 January 2009
Hopes that the global banking crisis was past its worst were dashed yesterday when Bank of America was forced to accept $138bn (£94bn) of government support and Citigroup unveiled new losses of $8.3bn.
The US announcements led another day of turmoil in the international financial sector, with Barclays' shares plunging 25 per cent in the last hour of trading on the London Stock Exchange.
Bank of America, the biggest US lender by assets, posted a $1.79bn loss for the last three months of 2008 – its first quarterly loss since 1991 – and slashed its dividend to one cent. The bank was forced to seek government support to prop up its acquisition of Merrill Lynch, which suffered a record $15.3bn quarterly loss.
The federal government will inject $20bn into Bank of America in return for preferred stock paying a coupon of 8 per cent. The government will also guarantee $118bn of assets to ease the strain of absorbing Merrill's battered balance sheet.
Citigroup, another stricken US banking giant, posted a bigger-than-expected fourth-quarter loss and said it would split itself in two to shelter its key businesses from risky operations.
Bank of America was relatively unscathed by the financial crisis before the acquisition-hungry bank agreed to buy Washington Mutual and Merrill last year in what it believed were cheap deals. Merrill suffered massive losses in December, prompting Bank of America to consider calling the deal off, but the government insisted it must go through and offered assistance.
"The loss materialised late in the quarter and presented us with a decision," Ken Lewis, the chief executive of Bank of America, said. "We went to our regulators and told them we could not close the deal without their assistance. We believe those actions [by the government] were in the best interests of Bank of America and the financial system by limiting the downside."
The losses and government bailout will put extra pressure on Mr Lewis, who said in late 2007 that he had had "all the fun I can stand" in investment banking but then changed course by acquiring Merrill in the wake of the Lehman Brothers bankruptcy.
Bank of America wrote off $5.5bn of loans in the final quarter and took a bad-debt provision of $8.5bn, with "market-disruption" hits of $4.6bn. Merrill's losses included $1.9bn of writedowns on leveraged loans, $1.2bn on investment securities and $1.1bn on commercial property.
Citi's chief executive, Vikram Pandit, announced plans to break up the empire created by Sandy Weill by separating the conglomerate's core commercial banking business from its brokerage and asset management divisions. The bank announced its fifth straight quarterly loss, with Mr Pandit blaming the results on "unprecedented dislocation in capital markets and a weak economy".
Investors had hoped that Government bailouts at the end of last year had stabilised the banking sector after more than a year of massive writedowns on toxic debts. But the World Economic Forum warned last week that more asset falls, both in credit markets and ordinary loans to customers, would make this year just as painful for lenders as they pay the price of the global debt binge.
Some analysts in the US now believe that Citi and possibly Bank of America may have to be nationalised to draw a line under their woes. Ireland announced the nationalisation of Anglo Irish Bank late on Thursday to stop a run on its deposits and shares.
Bank of America shares shed 13.7 per cent in New York yesterday, and have lost nearly half their value this year. Citi shares fell 8.6 per cent.
Jitters about the banking industry spread to Britain's lenders yesterday afternoon as speculation mounted about the Government's plans for supporting the sector. New guarantees on mortgage bonds and other securities could be announced as early as next week, but the market was hoping the authorities would set up a "bad bank" to take illiquid assets off lenders' books. That idea is said to have dropped down the Government's list of priorities because of the complexity involved in valuing the assets.
A meeting between the banks and the Treasury, scheduled for last night, was called off, suggesting that the Government is taking longer to come up with its plans than expected. But bank executives were said to be on alert for weekend meetings with the Treasury.
Barclays was the biggest faller in the FTSE 100, losing a quarter of its value in late trading as rumours swirled that the bank, which has resisted taking state funding, had applied to the Treasury for a capital injection, or that one of its top directors had quit. The slump in the shares, which closed near a 15-year low, forced Barclays to issue a statement after the market closed saying it knew of no reason for the drop.
The bank's plunge coincided with the lifting of the Financial Services Authority's ban on short-selling financial stocks. Barclays, without the explicit backing of the Government, would have been more vulnerable to rumours spread by short sellers hoping to drive the bank's shares down.
Industry sources suggested that even without the end of the shorting ban the sector may have been hit by a combination of bad news from the US and uncertainty about the Government's plans, prompting investors to close long positions in anticipation of a potentially dilutive new bailout plan.
Bank crisis reignites as US giants post massive losses
Bank of America needs $20bn bailout while Citigroup forced to unveil break-up. Barclays Bank shares plummet 25 per cent as turmoil spreads to Europe
By Sean Farrell, Financial Editor
Saturday, 17 January 2009
Hopes that the global banking crisis was past its worst were dashed yesterday when Bank of America was forced to accept $138bn (£94bn) of government support and Citigroup unveiled new losses of $8.3bn.
The US announcements led another day of turmoil in the international financial sector, with Barclays' shares plunging 25 per cent in the last hour of trading on the London Stock Exchange.
Bank of America, the biggest US lender by assets, posted a $1.79bn loss for the last three months of 2008 – its first quarterly loss since 1991 – and slashed its dividend to one cent. The bank was forced to seek government support to prop up its acquisition of Merrill Lynch, which suffered a record $15.3bn quarterly loss.
The federal government will inject $20bn into Bank of America in return for preferred stock paying a coupon of 8 per cent. The government will also guarantee $118bn of assets to ease the strain of absorbing Merrill's battered balance sheet.
Citigroup, another stricken US banking giant, posted a bigger-than-expected fourth-quarter loss and said it would split itself in two to shelter its key businesses from risky operations.
Bank of America was relatively unscathed by the financial crisis before the acquisition-hungry bank agreed to buy Washington Mutual and Merrill last year in what it believed were cheap deals. Merrill suffered massive losses in December, prompting Bank of America to consider calling the deal off, but the government insisted it must go through and offered assistance.
"The loss materialised late in the quarter and presented us with a decision," Ken Lewis, the chief executive of Bank of America, said. "We went to our regulators and told them we could not close the deal without their assistance. We believe those actions [by the government] were in the best interests of Bank of America and the financial system by limiting the downside."
The losses and government bailout will put extra pressure on Mr Lewis, who said in late 2007 that he had had "all the fun I can stand" in investment banking but then changed course by acquiring Merrill in the wake of the Lehman Brothers bankruptcy.
Bank of America wrote off $5.5bn of loans in the final quarter and took a bad-debt provision of $8.5bn, with "market-disruption" hits of $4.6bn. Merrill's losses included $1.9bn of writedowns on leveraged loans, $1.2bn on investment securities and $1.1bn on commercial property.
Citi's chief executive, Vikram Pandit, announced plans to break up the empire created by Sandy Weill by separating the conglomerate's core commercial banking business from its brokerage and asset management divisions. The bank announced its fifth straight quarterly loss, with Mr Pandit blaming the results on "unprecedented dislocation in capital markets and a weak economy".
Investors had hoped that Government bailouts at the end of last year had stabilised the banking sector after more than a year of massive writedowns on toxic debts. But the World Economic Forum warned last week that more asset falls, both in credit markets and ordinary loans to customers, would make this year just as painful for lenders as they pay the price of the global debt binge.
Some analysts in the US now believe that Citi and possibly Bank of America may have to be nationalised to draw a line under their woes. Ireland announced the nationalisation of Anglo Irish Bank late on Thursday to stop a run on its deposits and shares.
Bank of America shares shed 13.7 per cent in New York yesterday, and have lost nearly half their value this year. Citi shares fell 8.6 per cent.
Jitters about the banking industry spread to Britain's lenders yesterday afternoon as speculation mounted about the Government's plans for supporting the sector. New guarantees on mortgage bonds and other securities could be announced as early as next week, but the market was hoping the authorities would set up a "bad bank" to take illiquid assets off lenders' books. That idea is said to have dropped down the Government's list of priorities because of the complexity involved in valuing the assets.
A meeting between the banks and the Treasury, scheduled for last night, was called off, suggesting that the Government is taking longer to come up with its plans than expected. But bank executives were said to be on alert for weekend meetings with the Treasury.
Barclays was the biggest faller in the FTSE 100, losing a quarter of its value in late trading as rumours swirled that the bank, which has resisted taking state funding, had applied to the Treasury for a capital injection, or that one of its top directors had quit. The slump in the shares, which closed near a 15-year low, forced Barclays to issue a statement after the market closed saying it knew of no reason for the drop.
The bank's plunge coincided with the lifting of the Financial Services Authority's ban on short-selling financial stocks. Barclays, without the explicit backing of the Government, would have been more vulnerable to rumours spread by short sellers hoping to drive the bank's shares down.
Industry sources suggested that even without the end of the shorting ban the sector may have been hit by a combination of bad news from the US and uncertainty about the Government's plans, prompting investors to close long positions in anticipation of a potentially dilutive new bailout plan.
Monday, November 3, 2008
House of Cards
http://www.mediachannel.org/wordpress/2008/10/29/house-of-cards/
House of Cards
By Danny Schechter
10-29-8
The New York Times recently reported on page one that credit cards may be the next to go in the financial crisis. Danny Schechter published this similar warning last June in City Beat, a weekly newspaper in Los Angeles.
You thought the housing crisis was bad? You ain’t seen nothing yet.
The Mess
Nationwide, two million homes sit vacant. Home sales are at a nine-year low. Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. We still don’t know the full extent of the colossal subprime rip-off, but a recent Bank of America study did some guesstimating on the scale of the consequences of the “credit crisis.” The meltdown in the U.S. subprime real estate market, the bank said, had led to a global loss of $7.7 trillion dollars in stock market value since October.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy. You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
How bad is it?
• Financial analysts say that in the U.S. alone more than $850 billion in unpaid credit card balances is at stake and fast approaching $1 trillion, roughly the same amount as in the subprime market.
• CNN reports that worldwide, consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.
• The unpaid debt portion of this is continuing to pile up, with U.S. consumers last year adding $68 billion against their credit lines, boosting credit card debt by 7.8 percent, the largest increase in seven years, just when the last recession was beginning.
• Even as they spent, consumers have been going into default at a stunning rate. The percentage of people delinquent on their credit cards is soaring, and credit card companies are now writing off somewhere near 5 percent of payments.
• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.
• Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.
•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.
• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.
What this adds up to, and what Obama didn’t say, is that we are actually face to face with the results of the most massive failure of our political and economic system since the Depression. Since Ronald Reagan, we have been living in an era in which neither the meltdown of the savings and loan banks in the 1980s nor the Enron-like scandals of the Bush years has stopped the relentless advancement and protection by both parties of the ability of financial institutions to make a buck at any cost to the social good and economic fabric. Which is what you get, of course, when both parties are so dependent on massive financial contributions to get their candidates into office and when the corporate media, heavy with advertising from the FIRE sector – Finance, Insurance and Real Estate – doesn’t warn the public or investigate the egregious fudging, misrepresentation and outright fraud that underpins the subprime and looming credit card crisis.
Priceless!
The credit card industry (Visa, MasterCard, American Express, etc.) and the 10 banks that dominate the industry as the primary card issuers spend an estimated $2 billion a year in endless marketing worldwide. We are all bombarded with their solicitations and sales tie-ins and gimmicks. They know that they might only have a 2-3 percent return rate, but that more than pays the enormous costs. They have thus succeeded in supplying 1.5 billion cards to 158 million U.S. card holders. That averages to 10 cards per person. In the last few years, retailers, banks, a wide range of companies, sports teams, unions and even universities have launched specialized card programs. Like the car companies that discovered that they made more money on car loans than automobiles, the benefits of what’s been called “financialization” is obvious to more business sectors.
Credit card advertising for new card holders is especially effective now as inflation drives costs up and consumers have less to spend. “Charging it” on yet another new credit card is for many the only option to meet their budgets or maintain their lifestyles, especially as gas prices rise. It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion.
The relentless, continuing push by the credit card banks doesn’t target potential customers alone. Constant focus group studies and other research techniques are still being used to persuade retailers to encourage more credit card transactions. Increasingly, businesses simplify their use by “swiping” and other gimmicks, no signed receipt needed.
“More and more sectors of the American economy recognize that their financial success is based on the success of the credit card industry,” explains Robert Manning, the author of the definitive Credit Card Nation and a leading expert who has been sounding the alarm about the consequences of credit card debt.
“Everything is very clearly thought out and premeditated. Whether it’s having conferences and think tank sessions about how to encourage people to accept more debt [or] to work with merchants – for example, to persuade merchants with empirical information that … if they use a credit card that they’ll buy 20-25 percent more.”
Manning notes that saving and thrift was historically a positive value in the U.S. As recently as the l980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their ?homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.
Manning, who teaches at Rochester Institute of Technology, has taken on the issue with original research and financial literacy courses for students. He found that many of his students already had credit cards before they arrived on campus, some for years.
As we all know, the companies don’t tell about the downside when they are seducing customers. They offer low introductory or teaser rates, in the same way that mortgage brokers enticed sub-prime customers. They offer rewards, frequent flyer miles and other prizes. Students are especially targeted because they have little real-world financial experience. The U.S. Public Interest Research Group, which is campaigning against student debt, says the average is $4,000 per student, but it easily climbs after four years to $15,000 to $20,000.
All of this, in our globalized world, is not unique. Clear across the world and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank workers’ union Finsec are joining forces to try and keep students out of high-interest debt. The amount students owe on credit cards has increased by 32 percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit card debt has increased at a higher rate than low to no interest overdrafts.
Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted at other parents, www.consumeraffairs.com, so they can tell their stories. She wrote recently about what she calls the “plastic prison.”
“My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.
“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with “Small Wonder” Delaware of the credit card kingdom).
“Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status: Confirmed. No Annual Fee!’
“‘16 Card Designs’ (but none that tally the total whenever you use it). You could get a response in as little as 60 SECONDS when you apply online.
“Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate elite, prestigious profession or skilled craftsman’s guild. Does this matter? Apparently not.”
“The key for the banks,” Manning says, “is to get them dependent upon consumer credit, shape their attitudes towards savings, consumption and debt and to then multiply the number of financial products that they’re buying from that particular bank so the credit card will lead to the student loan, to the car loan, eventually to a home mortgage and then maybe some insurance products and investment opportunity.
The banks, he says, want students in a condition of dependency. “Young people today that see credit as a social entitlement have no understanding of what it is going to entail to repay those loans back. Once they’re used to living on borrowed money, then the banks realize that they’ll be following that pattern possibly for the rest of their lives. By the time they graduate they’re so indebted, and they’re so dependent upon the use of credit and debt, that it’s already presaged their future. They can’t possibly pursue the kinds of careers that they anticipated.”
Defaults on student loans are climbing. Many students used those loans to pay off credit cards. Military recruiters are now promising to pay off debts to entice enlistments. Other government agencies are also offering funds as part of their head-hunting.
Rise Up
“Many of you have probably forgotten that the American Revolution was largely driven by the great American planners, that were heavily in debt to European banks and they had very onerous terms,” Manning said in a lecture I attended when I was making my film In Debt We Trust. “And they recognized that they could not financially prosper under such outrageous financial demands.”
On the day I visted Manning’s lecture in an alcove literally right next door to the lecture room in the student center, local branches of banks like Chase and HSBC were signing up students for checking accounts and credit cards. Freshmen lined up at the tables to set up accounts. The banks had permission from the same school administration that hires Manning to counsel students to avoid getting into debt.
I listened in at the pitches.
BANK REP: “You don’t need anything for deposit, and we’re giving out free backpacks.”
BANK REP: “You get zero percent on the purchases for the first six months and then it goes to the standard intrest rate.”
QUESTION: “What’s the interest rate?”
BANK OF AMERICA REP: “The interest rate is variable … to be honest with you, off-hand, I don’t know the interest rate off-hand. Sorry.”
A student is counting out twenties as his first deposit.
BANK REP: “I just need your signature. Right here, please.”
ANOTHER BANK REP: “And it’s free while they’re a student.”
What will happen when they do have to pay it back includes nonstop calls to them and their parents. Credit card collection agencies know how to harass, threaten and then sweet-talk cardholders who are late. They even have a term for people squeezed by debt: “sweatbox.” They also know that the longer the debt goes unpaid, the larger the potential profit for companies, as interest builds up at rates of up to 30 percent. Credit card promoters call people who only pay minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”
Recently the companies unilaterally hiked late fees and penalties that compound the debt. A few missing payments can earn you an interest rate hike to 29 to 30 percent. If you are late with a payment on some other debt not related to your credit card, you can readily find your interest fee doubled on your credit card. Some companies make more on fees and penalties than on interest payments. The companies racked up more than $17 billion in 2006, the last year for which records are available.
Like many of the homeowners who accepted subprime mortgages, and like you with your credit cards, youths and adults alike signed dense agreements that are largely unreadable. The credit card banks constantly update these with those small print notices with which you get assaulted in the mail, these drafted by risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In part of the unread text, the companies give themselves the right to unilaterally change the deal even after it is signed. Other small print insures that consumers cannot sue them over differences. All grievances have to be arbitrated in a process the companies created and control.
Even the Federal Reserve Bank condemns some of these practices, noting: “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.”
The Failure Trifecta
Track the subprime and credit card mess back, and you will find its origins in free market policies since Reagan that deregulated banking and much of the oversight that managed for years to keep the greed-meisters on Wall Street in check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to pay attention to predatory lenders and sub-prime schemers allowed them to prosper.
Add to these failures a complicit Congress, with Democrats and Republicans alike dependent on donations from the three leaders of the FIRE economy. To assure their freedom to run their businesses their own damn way, the banks in the 1990s persuaded Congress to deregulate the practices of financial service companies. Pro-business Court decisions have allowed them to base their operations in low-tax states like South Dakota and Delaware and to end consumer protections against usury.
This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening the power of credit card companies were passed with bipartisan support, including that of Senator Dianne Feinstein. Add major media amnesia to this list and you get a trifecta of failure. The New York Times admitted that advocates warned them that a rise in predatory lending was destroying poor communities in 2001, but they sat on the story for nearly six years.
Neither the politicians nor the media told us that every major brand name banking firm and investment house had its fingers in the juicy pie of pedaling mortgage-backed securities worldwide without disclosing that many of these mortgages were deliberately offloaded on people whom they knew could not afford to pay them. As with the credit card industry, these mortgage borrowers were cleverly given “teaser rates” that would soon reset upwards. The banks then resold the mortgages as “asset-backed paper” even though the assets’ value was so questionable.
Meanwhile, media outlets took in hundreds of millions in ad revenues from deceptive lenders and credit card banks encouraging Americans to shop and charge till we drop. The Super Bowl broadcast ran all those cool but misleading ads by credit card companies and mortgage hustlers. It was, um, “priceless.”
Notes scholar Lionel Tiger: “Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn’t pay it back.
“They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money reality into new ‘products’ which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens.”
– Danny Schechter blogs for Mediachannel.org. His film In Debt We Trust spawned the action website StopTheSqueeze.org. He’s written a new book on the crisis called PLUNDER: An Investigation Into Our Economic Calamity. Dissector@mediachannel.org.
House of Cards
By Danny Schechter
10-29-8
The New York Times recently reported on page one that credit cards may be the next to go in the financial crisis. Danny Schechter published this similar warning last June in City Beat, a weekly newspaper in Los Angeles.
You thought the housing crisis was bad? You ain’t seen nothing yet.
The Mess
Nationwide, two million homes sit vacant. Home sales are at a nine-year low. Former Treasury Secretary Larry Summers says that housing finance has not been this bad since the Depression. We still don’t know the full extent of the colossal subprime rip-off, but a recent Bank of America study did some guesstimating on the scale of the consequences of the “credit crisis.” The meltdown in the U.S. subprime real estate market, the bank said, had led to a global loss of $7.7 trillion dollars in stock market value since October.
While many eyes are focusing on the housing meltdown and its hugely negative effect on an economy clearly moving into recession, few are paying attention to the next bubble expected to burst: credit cards. Combined with the subprime losses, such a credit card nightmare has the potential, experts say, of bringing down the entire financial system and global economy. You and your credit card have become key players in the highly unstable financial crunch. Mortgage lender cupidity and bank credit card greed wedded to financial institution deregulation supported by both political parties, have been made manifestly worse by Bush administration support-the-rich policies. It has brought us to a brink not seen since just before the Great Depression.
While campaigning in Edinburg, Texas, in February, Barack Obama met with students at the University of Texas-Pan American. “Just be careful about those credit cards, all right? Don’t eat out as much,” he said. After the foreclosure crisis, he warned, “the credit cards are next in line.”
The coupling of home equity debt and credit card debt has gone hand in glove for years. The homeowners at risk can no longer use their homes as ATM machines, thanks to their prior re-financings and equity loans, often used in the past to pay off their credit cards. Indeed, homeowners cashed out $1.2 trillion from their home equity from 2002 to 2007 to pay down credit card debts and to cover other costs of living, according to the public policy research organization Demos.
To compound the problem, fewer people are paying their credit card bills on time. And, to flip the old paradigm, more are using high-interest credit card cash to pay at least part of their mortgages instead of the other way around.
How bad is it?
• Financial analysts say that in the U.S. alone more than $850 billion in unpaid credit card balances is at stake and fast approaching $1 trillion, roughly the same amount as in the subprime market.
• CNN reports that worldwide, consumers have racked up more than $2.2 trillion in purchases and cash advances on major credit cards in just the last year.
• The unpaid debt portion of this is continuing to pile up, with U.S. consumers last year adding $68 billion against their credit lines, boosting credit card debt by 7.8 percent, the largest increase in seven years, just when the last recession was beginning.
• Even as they spent, consumers have been going into default at a stunning rate. The percentage of people delinquent on their credit cards is soaring, and credit card companies are now writing off somewhere near 5 percent of payments.
• By last fall, the major banks were setting aside billions for loan-loss reserves while anticipating an increase of 20 percent in non-payments over the next two to four quarters.
• Capital One, one of the biggest credit card banks, was forced to write off $1.9 billion in bad debt just in the last quarter of 2007.
•By October, according to a survey of only the leading credit card banks by the Associated Press, the value of credit card accounts at least 30 days late was up 26% from the previous year, to $17.3 billion. Serious delinquencies among some of the biggest lenders rose by 50 percent or more in the value of accounts that were at least 90 days delinquent.
• Making matters worse, or more widespread throughout the economy, just as with mortgage debt, credit card debt is put into pools that are then resold to investment houses, other banks and institutional investors. About 45 percent of the nation’s $900-plus billion in credit card debt has been packaged into these pools, and so many companies, not just a few, are at risk of being forced out of business by credit card debt write-offs.
What this adds up to, and what Obama didn’t say, is that we are actually face to face with the results of the most massive failure of our political and economic system since the Depression. Since Ronald Reagan, we have been living in an era in which neither the meltdown of the savings and loan banks in the 1980s nor the Enron-like scandals of the Bush years has stopped the relentless advancement and protection by both parties of the ability of financial institutions to make a buck at any cost to the social good and economic fabric. Which is what you get, of course, when both parties are so dependent on massive financial contributions to get their candidates into office and when the corporate media, heavy with advertising from the FIRE sector – Finance, Insurance and Real Estate – doesn’t warn the public or investigate the egregious fudging, misrepresentation and outright fraud that underpins the subprime and looming credit card crisis.
Priceless!
The credit card industry (Visa, MasterCard, American Express, etc.) and the 10 banks that dominate the industry as the primary card issuers spend an estimated $2 billion a year in endless marketing worldwide. We are all bombarded with their solicitations and sales tie-ins and gimmicks. They know that they might only have a 2-3 percent return rate, but that more than pays the enormous costs. They have thus succeeded in supplying 1.5 billion cards to 158 million U.S. card holders. That averages to 10 cards per person. In the last few years, retailers, banks, a wide range of companies, sports teams, unions and even universities have launched specialized card programs. Like the car companies that discovered that they made more money on car loans than automobiles, the benefits of what’s been called “financialization” is obvious to more business sectors.
Credit card advertising for new card holders is especially effective now as inflation drives costs up and consumers have less to spend. “Charging it” on yet another new credit card is for many the only option to meet their budgets or maintain their lifestyles, especially as gas prices rise. It’s become habit for many to spend more than they have. As a result, overall U.S. credit card debt grew by 435% from 2002 to year-end 2007, from $211 billion to approximately $915 billion.
The relentless, continuing push by the credit card banks doesn’t target potential customers alone. Constant focus group studies and other research techniques are still being used to persuade retailers to encourage more credit card transactions. Increasingly, businesses simplify their use by “swiping” and other gimmicks, no signed receipt needed.
“More and more sectors of the American economy recognize that their financial success is based on the success of the credit card industry,” explains Robert Manning, the author of the definitive Credit Card Nation and a leading expert who has been sounding the alarm about the consequences of credit card debt.
“Everything is very clearly thought out and premeditated. Whether it’s having conferences and think tank sessions about how to encourage people to accept more debt [or] to work with merchants – for example, to persuade merchants with empirical information that … if they use a credit card that they’ll buy 20-25 percent more.”
Manning notes that saving and thrift was historically a positive value in the U.S. As recently as the l980s, the national savings rate was 10 to 11 percent. Since 2005, Americans have saved less than 1 percent of their disposable incomes. In fact, the most recent figures from March show that the savings rate is negative, below zero. And also in March the government reported that for the first time since the Depression, Americans owe more on their ?homes than they have in equity. Essentially, on average, America is broke and its credit cards played a dominant role in getting there.
Manning, who teaches at Rochester Institute of Technology, has taken on the issue with original research and financial literacy courses for students. He found that many of his students already had credit cards before they arrived on campus, some for years.
As we all know, the companies don’t tell about the downside when they are seducing customers. They offer low introductory or teaser rates, in the same way that mortgage brokers enticed sub-prime customers. They offer rewards, frequent flyer miles and other prizes. Students are especially targeted because they have little real-world financial experience. The U.S. Public Interest Research Group, which is campaigning against student debt, says the average is $4,000 per student, but it easily climbs after four years to $15,000 to $20,000.
All of this, in our globalized world, is not unique. Clear across the world and down under, the New Zealand Union of Students’ Associations (NZUSA) and bank workers’ union Finsec are joining forces to try and keep students out of high-interest debt. The amount students owe on credit cards has increased by 32 percent since 2004, according to the NZUSA Income and Expenditure Survey. Credit card debt has increased at a higher rate than low to no interest overdrafts.
Here in the U.S., one mother, Joan E. Lisante, has set up a website targeted at other parents, www.consumeraffairs.com, so they can tell their stories. She wrote recently about what she calls the “plastic prison.”
“My 22-year-old son Jon, a college senior, got 52 credit card offers in the last year. I know this because, like a CIA operative, I intercepted the offers pouring into our mailbox.
“He got 19 from Capitol One, 13 from Providian, six from Washington Mutual, four from Chase, four from eBay and one each from an assortment of lenders ranging from PayPal to First Premier Bank in Sioux Falls, South Dakota (co-capital with “Small Wonder” Delaware of the credit card kingdom).
“Most begged Jon to rip open the envelope and wallow in instant gratification. Capital One, the most persistent suitor, shouted, ‘Offer Status: Confirmed. No Annual Fee!’
“‘16 Card Designs’ (but none that tally the total whenever you use it). You could get a response in as little as 60 SECONDS when you apply online.
“Now this kid has never held a job (yet) for more than one summer. He spent one summer working in the FEMA flood insurance call center, which shows how much expertise you need to work there. Although he is familiar with the inner workings of Blockbusters and Starbucks, Jon’s not yet a member of any corporate elite, prestigious profession or skilled craftsman’s guild. Does this matter? Apparently not.”
“The key for the banks,” Manning says, “is to get them dependent upon consumer credit, shape their attitudes towards savings, consumption and debt and to then multiply the number of financial products that they’re buying from that particular bank so the credit card will lead to the student loan, to the car loan, eventually to a home mortgage and then maybe some insurance products and investment opportunity.
The banks, he says, want students in a condition of dependency. “Young people today that see credit as a social entitlement have no understanding of what it is going to entail to repay those loans back. Once they’re used to living on borrowed money, then the banks realize that they’ll be following that pattern possibly for the rest of their lives. By the time they graduate they’re so indebted, and they’re so dependent upon the use of credit and debt, that it’s already presaged their future. They can’t possibly pursue the kinds of careers that they anticipated.”
Defaults on student loans are climbing. Many students used those loans to pay off credit cards. Military recruiters are now promising to pay off debts to entice enlistments. Other government agencies are also offering funds as part of their head-hunting.
Rise Up
“Many of you have probably forgotten that the American Revolution was largely driven by the great American planners, that were heavily in debt to European banks and they had very onerous terms,” Manning said in a lecture I attended when I was making my film In Debt We Trust. “And they recognized that they could not financially prosper under such outrageous financial demands.”
On the day I visted Manning’s lecture in an alcove literally right next door to the lecture room in the student center, local branches of banks like Chase and HSBC were signing up students for checking accounts and credit cards. Freshmen lined up at the tables to set up accounts. The banks had permission from the same school administration that hires Manning to counsel students to avoid getting into debt.
I listened in at the pitches.
BANK REP: “You don’t need anything for deposit, and we’re giving out free backpacks.”
BANK REP: “You get zero percent on the purchases for the first six months and then it goes to the standard intrest rate.”
QUESTION: “What’s the interest rate?”
BANK OF AMERICA REP: “The interest rate is variable … to be honest with you, off-hand, I don’t know the interest rate off-hand. Sorry.”
A student is counting out twenties as his first deposit.
BANK REP: “I just need your signature. Right here, please.”
ANOTHER BANK REP: “And it’s free while they’re a student.”
What will happen when they do have to pay it back includes nonstop calls to them and their parents. Credit card collection agencies know how to harass, threaten and then sweet-talk cardholders who are late. They even have a term for people squeezed by debt: “sweatbox.” They also know that the longer the debt goes unpaid, the larger the potential profit for companies, as interest builds up at rates of up to 30 percent. Credit card promoters call people who only pay minimums “revolvers.” Those of us who pay our bills in full? “Deadbeats.”
Recently the companies unilaterally hiked late fees and penalties that compound the debt. A few missing payments can earn you an interest rate hike to 29 to 30 percent. If you are late with a payment on some other debt not related to your credit card, you can readily find your interest fee doubled on your credit card. Some companies make more on fees and penalties than on interest payments. The companies racked up more than $17 billion in 2006, the last year for which records are available.
Like many of the homeowners who accepted subprime mortgages, and like you with your credit cards, youths and adults alike signed dense agreements that are largely unreadable. The credit card banks constantly update these with those small print notices with which you get assaulted in the mail, these drafted by risk-minimizing lawyers. Of course, it’s unlikely you bother to read these. In part of the unread text, the companies give themselves the right to unilaterally change the deal even after it is signed. Other small print insures that consumers cannot sue them over differences. All grievances have to be arbitrated in a process the companies created and control.
Even the Federal Reserve Bank condemns some of these practices, noting: “Although profitability for the large credit card banks has risen and fallen over the years, credit card earnings have been consistently higher than returns on all commercial bank activities.”
The Failure Trifecta
Track the subprime and credit card mess back, and you will find its origins in free market policies since Reagan that deregulated banking and much of the oversight that managed for years to keep the greed-meisters on Wall Street in check. The failure of media-lionized Alan Greenspan’s Federal Reserve Bank to pay attention to predatory lenders and sub-prime schemers allowed them to prosper.
Add to these failures a complicit Congress, with Democrats and Republicans alike dependent on donations from the three leaders of the FIRE economy. To assure their freedom to run their businesses their own damn way, the banks in the 1990s persuaded Congress to deregulate the practices of financial service companies. Pro-business Court decisions have allowed them to base their operations in low-tax states like South Dakota and Delaware and to end consumer protections against usury.
This decade, Bush’s tax cuts and his bankruptcy “reform” bill strengthening the power of credit card companies were passed with bipartisan support, including that of Senator Dianne Feinstein. Add major media amnesia to this list and you get a trifecta of failure. The New York Times admitted that advocates warned them that a rise in predatory lending was destroying poor communities in 2001, but they sat on the story for nearly six years.
Neither the politicians nor the media told us that every major brand name banking firm and investment house had its fingers in the juicy pie of pedaling mortgage-backed securities worldwide without disclosing that many of these mortgages were deliberately offloaded on people whom they knew could not afford to pay them. As with the credit card industry, these mortgage borrowers were cleverly given “teaser rates” that would soon reset upwards. The banks then resold the mortgages as “asset-backed paper” even though the assets’ value was so questionable.
Meanwhile, media outlets took in hundreds of millions in ad revenues from deceptive lenders and credit card banks encouraging Americans to shop and charge till we drop. The Super Bowl broadcast ran all those cool but misleading ads by credit card companies and mortgage hustlers. It was, um, “priceless.”
Notes scholar Lionel Tiger: “Those who have been operating the managerial levers of the financial system have failed embarrassingly and massively to comprehend the processes for which they are responsible. They have loaned money avidly and recklessly to people who couldn’t pay it back.
“They fudged data to get loans approved and recalculated. Then they sausaged fragile figments of money reality into new ‘products’ which could be sold around the world to investors eager to enjoy the surprising returns which often accompany theft, managerial incompetence and fraud. When it comes to responsibility for all this, there appears to be no one here but us spring chickens.”
– Danny Schechter blogs for Mediachannel.org. His film In Debt We Trust spawned the action website StopTheSqueeze.org. He’s written a new book on the crisis called PLUNDER: An Investigation Into Our Economic Calamity. Dissector@mediachannel.org.
Thursday, October 30, 2008
So When Will Banks Give Loans?
http://www.nytimes.com/2008/10/25/business/25nocera.html
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 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.
The “dirty little secret” of the US bank bailout
http://wsws.org/articles/2008/oct2008/pers-o27.shtml
The “dirty little secret” of the US bank bailout
27 October 2008
In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."
As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.
Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.
Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."
Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "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."
As Nocera notes: "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."
Later in the conference call the same executive states, "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."
"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... 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."
Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.
Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.
Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.
What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.
All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.
In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."
One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.
While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.
As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.
The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.
While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.
Barry Grey
The “dirty little secret” of the US bank bailout
27 October 2008
In an unusually frank article published in Saturday's New York Times, the newspaper's economic columnist, Joe Nocera, reveals what he calls "the dirty little secret of the banking industry"--namely, that "it has no intention of using the [government bailout] money to make new loans."
As Nocera explains, the plan announced October 13 by Treasury Secretary Henry Paulson to hand over $250 billion in taxpayer money to the biggest banks, in exchange for non-voting stock, was never really intended to get them to resume lending to businesses and consumers--the ostensible purpose of the bailout. Its essential aim was to engineer a rapid consolidation of the American banking system by subsidizing a wave of takeovers of smaller financial firms by the most powerful banks.
Nocera cites an employee-only conference call held October 17 by a top executive of JPMorgan Chase, the beneficiary of $25 billion in public funds. Nocera explains that he obtained the call-in number and was able to listen to a recording of the proceedings, unbeknownst to the executive, whom he declines to name.
Asked by one of the participants whether the $25 billion in federal funding will "change our strategic lending policy," the executive replies: "What we do think, it will help us to be a little bit more active on the acquisition side or opportunistic side for some banks who are still struggling."
Referring to JPMorgan's recent government-backed acquisition of two large competitors, the executive continues: "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."
As Nocera notes: "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."
Later in the conference call the same executive states, "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."
"It is starting to appear," the Times columnist writes, "as if one of the Treasury's key rationales for the recapitalization program--namely, that it will cause banks to start lending again--is a fig leaf.... 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."
Early this month, he explains, "in a nearly unnoticed move," Paulson, the former CEO of Goldman Sachs, put in place a new tax break worth billions of dollars that is designed to encourage bank mergers. It allows the acquiring bank to immediately deduct any losses on the books of the acquired bank.
Paulson and other Treasury officials have made public statements calling on the banks that receive public funds to use them to increase their lending activities. That, however, is for public consumption. The bailout program imposes no lending requirements on the banks in return for government cash.
Already, the credit crisis has been used to engineer the takeover of Bear Stearns and Washington Mutual by JPMorgan, Merrill Lynch by Bank of America, Wachovia by Wells Fargo and, last Friday, National City by PNC.
What the Wall Street Journal on Saturday called the "strong-arm sale" of National City provides a taste of what is to come. The Treasury Department sealed the fate of the Cleveland-based bank by deciding not to include it among the regional banks that will receive government handouts. It then gave Pittsburgh-based PNC $7.7 billion from the bailout fund to help defray the costs of a takeover of National City. PNC will also benefit greatly from the tax write-off on mergers enacted by Treasury.
All of the claims that were made to justify the bank bailout have been exposed as lies. President Bush, Federal Reserve Chairman Ben Bernanke and Paulson were joined by the Democratic congressional leadership and Barack Obama in warning that the bailout had to be passed, and passed immediately, despite massive popular opposition. Those who opposed the plan were denounced for jeopardizing the well being of the American people.
In a nationally televised speech delivered September 24, in advance of the congressional vote on the bailout plan, Bush said it would "help American consumers and businessmen get credit to meet their daily needs and create jobs." If the bailout was not passed, he warned, "More banks could fail, including some in your community. The stock market would drop even more, which would reduce the value of your retirement account.... More businesses would close their doors, and millions of Americans could lose their jobs ... ultimately, our country could experience a long and painful recession."
One month later, the bailout has been enacted, and all of the dire developments--banks and businesses disappearing, the stock market plunging, unemployment skyrocketing--which the American people were told it would prevent are unfolding with accelerating speed.
While Obama talks about the need for all Americans to "come together" in a spirit of "shared sacrifice"--meaning drastic cuts in Medicare, Medicaid, Social Security and other social programs--and the cost of the bailout is cited to justify fiscal austerity, the bankers proceed to ruthlessly prosecute their class interests.
As the World Socialist Web Site warned when it was first proposed in mid-September, the "economic rescue" plan has been revealed to be a scheme to plunder society for the benefit of the financial aristocracy. The American ruling elite, utilizing its domination of the state and the two-party political system, is exploiting a crisis of its own making to carry through an economic agenda, long in preparation, that could not be imposed under normal conditions.
The result will be greater economic hardship for ordinary Americans. The big banks will have even greater market power to set interest rates and control access to credit for workers, students and small businesses.
While no serious measures are being proposed, either by the Bush administration, the Republican presidential candidate or his Democratic opponent, to prevent a social catastrophe from overtaking working people, the government is organizing a restructuring of the financial system that will enable a handful of mega-banks to increase their power over society.
Barry Grey
Tuesday, September 23, 2008
Is Washington Mutual the Next to Fall?
http://www.businessweek.com/bwdaily/dnflash/content/sep2008/db20080916_498821.htm
September 16, 2008
Is Washington Mutual the Next to Fall?
The Seattle-based S&L, much exposed by the housing bust, has seen its stock plummet. But a new CEO is working to shore up confidence
by Christopher Palmeri
Washington Mutual (WM), a company that once considered itself the Starbucks (SBUX) of banking, now has a stock price lower than that of a latte.
Shares of the Seattle company, the nation's largest savings and loan, fell 27% on Sept. 15, to $2 a share, following news that other struggling financial-services giants Lehman Brothers (LEH) and Merrill Lynch (MER) had succumbed to the mortgage meltdown. WaMu shares rose 16% on Sept. 16 to close at 2.32 as investors responded to rumors that banking giant JPMorgan Chase (JPM) may make an offer for the company.
The question on many investors' minds is whether WaMu is more like IndyMac, the big bank taken over by the Federal Deposit Insurance Corp. in July, or Wachovia (WB), a troubled institution that under new CEO Robert Steel appears to have won back some investor confidence.
The man in the spotlight at WaMu is Alan Fishman, a banking industry veteran who took the job as chief executive on Sept. 8. Fishman replaced Kerry Killinger, a 25-year veteran of the bank, who built WaMu from a small thrift to a national player in mortgages, only to see that business collapse with the housing bust. A WaMu failure could cost taxpayers some $24 billion, figures Richard Bove, an analyst with the brokerage firm Ladenburg Thalmann (LTS).
Pep Talk
In a 12-minute conference call with investors on Sept. 8, Fishman offered little in the way of new strategy, opting instead for just some words of inspiration for the troops. "I know I need to hit the ground running, and I'm prepared to do that," he said.
Run he did. In Fishman's first week on the job, WaMu announced it was cooperating with the federal Office of Thrift Supervision to provide more information about its operations and business plans. When credit rating agency Moody's (MCO) downgraded the bank to junk-bond status citing its limited financial flexibility, WaMu pre-announced its earnings for the third quarter in an effort to soothe investors. The bank noted that it had $50 billion in "liquidity" available and capital ratios "significantly above the levels of well-capitalized institutions."
Even so, Fishman has a tough road ahead. WaMu has $239 billion in real estate loans, according to analyst Bove. Some $53 billion of those are the dreaded adjustable-rate loans in which the payments are optional and losses are as high as 35%. In July, Bove put WaMu on a list of several dozen shaky institutions. He figured any bank with nonperforming loans greater than 40% of its reserves and equity was in trouble. WaMu's was right at that 40% threshold.
Bove's loss estimates are close to that of other analysts. Fred Cannon, a bank analyst at Keefe, Bruyette & Woods, put out a research note on Sept. 15 that estimated WaMu losses could hit $28 billion this year and next. If that were the case, the bank would need to raise a further $5 billion in capital, Cannon said.
Where that money would come from is uncertain. The bank has already raised some $10 billion in the past year, including $7.2 billion in April from a group of private equity investors led by TPG.
White Knight?
Many analysts feel Fishman's best bet is to find a merger partner, but there are fewer of those around these days. Bank of America's (BAC) acquisitive Chief Executive Kenneth Lewis said on Sept. 15 that he had no interest in WaMu. The most likely candidate remains JPMorgan Chase, which allegedly made a $8-per-share offer earlier this year. Says Nancy Bush, a banking industry analyst with her own firm, NAB Research: "They better hope somebody buys them fast."
Words of support came oddly enough from Moody's analysts after announcing their downgrade last week. David Fanger, a senior vice-president at the firm, said that WaMu, by its nature as a federally insured institution, had some capital-raising advantages over investment banks. Its two main sources of funding are consumer deposits, which are largely stable even in tough times, and loans from the Federal Home Loan Banks system. In the S&L crisis of the late 1980s and early '90s, financial institutions received similarly poor credit ratings and were able to survive. Some were later acquired by WaMu during its aggressive expansion over the past two decades.
WaMu has lately been luring retail depositors with interest rates on 13-month certificates of deposits offering 4.5%, at the very high end of the industry. The firm has some strong retail banking positions, including top market-share positions in Southern California, Miami, and Seattle. In his conference call on Sept. 8, Fishman dismissed a question about selling bank branches to raise money as "way early." He also said he didn't immediately foresee a need for the bank to raise additional capital. Said Fishman: "The opportunity to create a great national retail franchise has never been better."
Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.
September 16, 2008
Is Washington Mutual the Next to Fall?
The Seattle-based S&L, much exposed by the housing bust, has seen its stock plummet. But a new CEO is working to shore up confidence
by Christopher Palmeri
Washington Mutual (WM), a company that once considered itself the Starbucks (SBUX) of banking, now has a stock price lower than that of a latte.
Shares of the Seattle company, the nation's largest savings and loan, fell 27% on Sept. 15, to $2 a share, following news that other struggling financial-services giants Lehman Brothers (LEH) and Merrill Lynch (MER) had succumbed to the mortgage meltdown. WaMu shares rose 16% on Sept. 16 to close at 2.32 as investors responded to rumors that banking giant JPMorgan Chase (JPM) may make an offer for the company.
The question on many investors' minds is whether WaMu is more like IndyMac, the big bank taken over by the Federal Deposit Insurance Corp. in July, or Wachovia (WB), a troubled institution that under new CEO Robert Steel appears to have won back some investor confidence.
The man in the spotlight at WaMu is Alan Fishman, a banking industry veteran who took the job as chief executive on Sept. 8. Fishman replaced Kerry Killinger, a 25-year veteran of the bank, who built WaMu from a small thrift to a national player in mortgages, only to see that business collapse with the housing bust. A WaMu failure could cost taxpayers some $24 billion, figures Richard Bove, an analyst with the brokerage firm Ladenburg Thalmann (LTS).
Pep Talk
In a 12-minute conference call with investors on Sept. 8, Fishman offered little in the way of new strategy, opting instead for just some words of inspiration for the troops. "I know I need to hit the ground running, and I'm prepared to do that," he said.
Run he did. In Fishman's first week on the job, WaMu announced it was cooperating with the federal Office of Thrift Supervision to provide more information about its operations and business plans. When credit rating agency Moody's (MCO) downgraded the bank to junk-bond status citing its limited financial flexibility, WaMu pre-announced its earnings for the third quarter in an effort to soothe investors. The bank noted that it had $50 billion in "liquidity" available and capital ratios "significantly above the levels of well-capitalized institutions."
Even so, Fishman has a tough road ahead. WaMu has $239 billion in real estate loans, according to analyst Bove. Some $53 billion of those are the dreaded adjustable-rate loans in which the payments are optional and losses are as high as 35%. In July, Bove put WaMu on a list of several dozen shaky institutions. He figured any bank with nonperforming loans greater than 40% of its reserves and equity was in trouble. WaMu's was right at that 40% threshold.
Bove's loss estimates are close to that of other analysts. Fred Cannon, a bank analyst at Keefe, Bruyette & Woods, put out a research note on Sept. 15 that estimated WaMu losses could hit $28 billion this year and next. If that were the case, the bank would need to raise a further $5 billion in capital, Cannon said.
Where that money would come from is uncertain. The bank has already raised some $10 billion in the past year, including $7.2 billion in April from a group of private equity investors led by TPG.
White Knight?
Many analysts feel Fishman's best bet is to find a merger partner, but there are fewer of those around these days. Bank of America's (BAC) acquisitive Chief Executive Kenneth Lewis said on Sept. 15 that he had no interest in WaMu. The most likely candidate remains JPMorgan Chase, which allegedly made a $8-per-share offer earlier this year. Says Nancy Bush, a banking industry analyst with her own firm, NAB Research: "They better hope somebody buys them fast."
Words of support came oddly enough from Moody's analysts after announcing their downgrade last week. David Fanger, a senior vice-president at the firm, said that WaMu, by its nature as a federally insured institution, had some capital-raising advantages over investment banks. Its two main sources of funding are consumer deposits, which are largely stable even in tough times, and loans from the Federal Home Loan Banks system. In the S&L crisis of the late 1980s and early '90s, financial institutions received similarly poor credit ratings and were able to survive. Some were later acquired by WaMu during its aggressive expansion over the past two decades.
WaMu has lately been luring retail depositors with interest rates on 13-month certificates of deposits offering 4.5%, at the very high end of the industry. The firm has some strong retail banking positions, including top market-share positions in Southern California, Miami, and Seattle. In his conference call on Sept. 8, Fishman dismissed a question about selling bank branches to raise money as "way early." He also said he didn't immediately foresee a need for the bank to raise additional capital. Said Fishman: "The opportunity to create a great national retail franchise has never been better."
Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.
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