Misery Index

October 2008, marked the first month since 1993 that card companies were unable to sell bonds back by customer payments, and this effected American Express.  On October 20th, American Express  reported a 24% decline in its latest quarterly profit.  Then on October 30th, American Express announced companywide "reengineering" initiatives.  These initiatives included elimination of 10% of its worldwide workforce, approximately 7,000 jobs, reducing  compensation expenses, cutting operating costs and scaling back investment spending.  Suspended was management level salary increases for 2009 and a hiring freeze for open positions.  The company said it expected this to produce benefits of nearly $1.8 billion in 2009.

Today, American Express applied to the Federal Reserve to become a bank holding company, and was approved, waiving the normal 30 day waiting period on the application, which was submitted on November 5th.  The approval puts American Express, the nation's largest credit card company in terms of purchases, on the same footing as former investment banks Goldman Sachs Group and Morgan Stanley, which received Fed authorization to become commercial banks.

This approval makes American Express eligible for an infusion of capital from the federal government as part of the $250 billion rescue plan for the banking system and gives the company access to the Fed's discount lending window.

American Express has total consolidated assets of about $127 billion, the Fed said.  The company already owns two bank units:  American Express Centurion Bank, which operated as an industrial loan company under FDIC supervision, and American Express Bank, which was regulated by the Office of Thrift Supervision.  Each has assets of about $25 billion and controls deposits of about $7.2 billion, the Fed said.  Centurion is being converted to a bank, the Fed order said.

"In light of the unusual and exigent circumstances affecting the financial markets, ... the Board has determined that emergency conditions exist that justify expeditious action on this proposal," the Fed said in a statement.

"Qualifying as a bank holding company will provide American Express maximum flexibility and stability in this challenging economic environment," American Express said in a release.

Said the chairman and chief executive of the credit card giant, Kenneth Chenault:  "Given the continued volatility in the financial markets, we want to be best positioned to take advantage of the various programs the federal Government has introduced, or may introduce, to support US financial institutions."

"The decision to become a bank-holding company does not fundamentally change American Express' core focus on the payments industry, nor will it require any significant divestitures," said Chenault.

In the filing, American Express said that its bank units have access to the Fed's discount window and the company already had enough cash to last more than a year.

The company's stock has tumbled 54 percent this year, the fourth-biggest decline in the DJIA.   The 52 week high for the stock has been $60.00 and the 52 week low for the stock has been $20.50.  The stock closed today at $23.98, down $1.33 or 5.2%.

American Express started off as a shipping company in 1850, shipping products across the US.  Their main customers were banks and they shipped various financial instruments like stock certificates and other notes.  They began selling money orders and traveler's checks in 1882 and issued its first credit card in 1958.

SOURCES:

• Federal Reserve Bank Press Release, Nov. 10, 2008
• Bloomberg
• CNN Money

Prosperity Bank of El Campo, Texas will acquire all the deposits of Franklin Bank, the FDIC announced.  All deposits have been transferred and are available immediately.

Franklin Bank's 46 offices will reopen as branches of Prosperity Bank under their normal hours, including those with Saturday hours.

As of September 30, Franklin Bank had total assets of $5.1 billion and total deposits of $3.7 billion, the FDIC said.  Prosperity Bank agreed to assume all the deposits, including brokered deposits, for a premium of 1.7 percent.  In addition to assuming all of the failed bank's deposits, Prosperity will purchase approximately $850 million in assets.  The FDIC will retain the remaining assets for later disposition.

The FDIC estimates that the cost of today's transaction to its Deposit Insurance Fund will be between $1.4 billion and $1.6 billion. 

Franklin's stock (FBTX) closed today at $0.26, down 33.33% from yesterday.  Overall the return for FBTX is -93.94% YTD, -96.01% 1 Year, and -98.47% for 3 year.

Franklin Bank is the eighteenth bank to fail in the nation this year, and the first in Texas since Bank of Sierra Blanca, Sierra Blanca, Texas, on January 18, 2008.  The 18 bank failures so far this year compare with three for all of 2007 and are more than in the previous five years combined.

In an interesting side note, Lewis S. Ranieri who founded the Franklin Bank Corporation, spent the last few years warning anyone who would listen that the housing market was about to collapse.  Obviously, he didn't listen to his own words.

The Mortgage Lender "Implode-O-Meter" has an article listing a dozen outstanding law suits against Franklin Bank in June.

And back in July, 2008 Franklin Bank Corp received a notice from the NASDAQ stock market stating it no longer met listing requirements because its share prices had been below the required minimum price of $1 for 30 consecutive days.

ADDITIONAL SOURCES:

• FDIC Press Release 113-2008
• Wall Street Journal, Market Watch
• Forbes
• Corporate Profile via Franklin Bank Web site.

From the FDIC Website:

"Freedom Bank, Bradenton, Florida, was closed today by the Commissioner of teh Florida Office of Financial Regulation, and the Federal Deposit Insurance Corporation (FDIC) was named reeiver.  To protect the depositors, the FDIC entered into a purchase and assumption agreement with Fifth Third Bank, Grand Rapids, Michigan, to assume all of the deposits of Freedom Bank.

As of October 17, 2008, Freedom Bank had total assets of $287 million and total deposits of $254 million.

The FDIC estimates the cost of the failure to its deposit-insurance fund will be between $80 million and $104 million."

Michigan based Fifth Third Bank assumed all of Freedom Bank's deposits for a premium of 1.16%.  Fifth Third will also purchase roughly $36 million of Freedom Bank's assets.  The remaining assets will be retained by the FDIC for later disposition.

Rickey McCullough, ombudsman with the FDIC stated:  "For [customers] it's transparent.  It's business as usual."  "There were no uninsured deposits in this transaction.  All the depositors were insured, even the ones over the new $250,000 limit."  All deposits were insured because they were assumed by Fifth Third Bank, McCullough said.

The bank posted a net loss of $7 million for the second quarter and had lost $14 million year-to-date.  At the end of the third quarter, Freedom Bank's losses for the year stood at $18 million.  Freedom Bank was struggling with roughly $35 million in non-performing loans.

New temporary signs had already gone up at Freedom Bank's four branches Sunday.

Freedom Bank was the 17th bank to fall this year.

SOURCES:

• Bradenton Herald
• Tampa Bay Business Journal
• Tampa Bay Business Journal
• Tampa Bay Business Journal

PELOSI:  This is Herbert and Marion Sandler.  Tell us your story.

HERBERT:  My wife and I had a company which aggressively marketed subprime mortgages, and then bundled them into securities to sell to banks such as Wachovia.  Today, our portfolio is worth almost nothing - though at one point, it was worth close to $19 billion.

PELOSI:  My God.  I am so sorry.  Were you able to sell it for anything?

HERBERT:  Yes, for $24 billion.

PELOSI:  I see.  So in that sense, you're not so to speak, actual victims.

HERBERT:  (chuckling):  Oh no.  That would be Wachovia Bank.

MARION:  Actually, we've done quite well.  We're very happy.

HERBERT:  We were sort of wondering why you asked us to come today.

MARION:  Anyway, it's delightful to see you, Nancy. (Kisses Pelosi.)

HERBERT:  And thank you, Congressman Frank, as well as many Republicans for helping block Congressional oversight of our corrupt activities.

FRANK:  Not at all.  [...]

The real life Sandlers, who use their wealth to finance a variety of nonprofit organizations such as the Human Rights Watch, the American Civil Liberties Union (ACLU) and ACORN,  are infuriated over the skit. 

Sandler, 77, spoke to the Associated Press in the San Francisco office of his family's charitable foundation the morning after NBC's "Saturday Night Live" broadcast a skit deriding the Sandlers as predatory lenders who had duped unsophisticated borrowers and Wachovia, too.  A caption shown during the sketch skewered the Sandlers as "people who should be shot."

Although the timing of the interview was coincidental, Sandler was seething after watching a replay of the skit on the Internet.

"I have been listening to this crap for two year," Sandler said.  "We are being unfairly tarred.  People have been telling us to speak out for some time, but we didn't think it was appropriate.  That was clearly a mistake."

The video was re- released by NBC with the statement above in red being removed from the newly posted NBC video.  Additionally during the skit,  the statement of "People who should be shot" that was shown below as a footer, was also removed.

On October 5th, a Los Angeles Times article addresses the issue of the removal of the video and a response from NBC.

The skit, a parody of a C-SPAN news conference, ridiculed subprime borrowers, housing speculator and Herb and Marion Sandler, the real-life couple who built Golden West Financial into a subprime lending powerhouse and sold it to Wachovia before the subprime collapse.  At one point in the skit, the Herb Sandler character says he made $24 billion off the subprime boom.  Graphics then appear labeling the Sandlers as "People who should be shot."

"Upon review, we caught certain elements in the sketch that didn't meet our standards," a spokesman for the program said in an e-mail message today.  "We took it down and made some minor changes, and it will be back online soon."

Ed Lasky recently reported on how the Sandlers - allies of left-wing billionaire George Soros - helped bring down Wachovia Bank:

Herbert and Marion Sandler, a New York lawyer and Wall Street analyst respectively, bought a small California thrift in 1963 and built it into GDW - one of the largest thrifts in the nation.  The company's business was built on adjustable rate mortgages (ARMs).  These were mortgages offered at low "teaser" rates that ratcheted upward as interest rates increased.  They were often sold aggressively to unsophisticated home buyers who did not comprehend the vast financial risks they were taking, or who assumed that housing prices would rise high enough to provide a profit to them when they sold their houses.  They were targets for lenders peddling mortgages that should have been stamped with a skull and crossbones, for these were among the most seductive and dangerous types of mortgage.

This book of business is the core reason for Wachovia's current difficulties.

The Sandlers knew their business far better than any other person could.  Not only were they the founders and major owners, they famously ran the company as a husband and wife team for all these years.

So why did they happen to cash out at precisely the right time?  Did they see the handwriting on the wall, realizing the massive risks inherent in the mortgages they originate throughout one of the most overheated real estate markets in the nation's history?  They are not talking, but when smart people cash in some of their chips, it's rarely a good time to bet against them.  Nevertheless, Wachovia bet 24 billion dollars and lost big time.

The collapse was primarily caused by the GDW purchase, which became an albatross around Wachovia's neck soon after the purchase.  "Wachovia found itself in ARM's Way" was the headline  of a recent Wall Street Journal article.  A huge percentage of these Wachovia ARMs were made to deep subprime borrowers with very poor credit scores.  Most of these were "inherited from its ill-timed acquisition of Golden West" at the end of the housing boom in 2006.

The Sandlers have started to invest their billions of dollars politically, in the manner of George Soros, sugar daddy of many far-left wing groups and an early and prominent supporter of Presidential candidate Barack Obama.  Soros has developed an empire of so-called 527 groups, putatively independent political activists groups that have influence within the Democratic Party.  These 527 groups include the Center for American Progress, MoveOn.org, Human Rights Watch, Media Matters and a slew of other like-minded groups...

Soros, Lewis and the Sandlers form a core group of billionaire activists and Democrat partisans who have formed a group called The Democracy Alliance.  They realize that they could magnify their power by working in unison and tapping other wealthy donors to further their agenda

(the superb Boston Globe article “Follow the money” is a good primer on how money and 527 groups have come together to have a huge impact on politics in America).

The Democracy Alliance is a major avenue to help them achieve their goals. The roster of its growing membership consists of a list of billionaires and mere multi-millionaires who collectively hope to give upwards of 500 million dollars each year to further promote a left-wing agenda. A partial roster of the Democracy Alliance membership can be found here.

Half a billion dollars a year can purchase a great deal of influence.

The Sandlers certainly know quite a bit about leverage from their savings and loan days.

Among the beneficiaries of their largesse: Air America, ACORN (a group that has very close and long lasting ties to Barack Obama and has a long history of engaging in voter fraud. Citizens for Responsibility and Ethics in Washington (basically a private detective group focused on the private faults and foibles of Republicans), Media Matters, a media watchdog group that engages in harsh partisan attacks against media figures and articles it considers supportive of Republicans). The list goes on and on.

They are not merely out to elect Democrats, but to also permanently realign U.S. politics and shift our society and culture in a far-left wing direction…

The website snlbailout.com, has followed the updates on this video, and hosts the original unedited video on their website and the edited version or just the portion of the video that was eventually edited, in unedited format.

Michelle Malkin has a transcript of the original skit on her website.

CLASS ACTION LAWSUITS

Three class-action lawsuits -- each a consolidation of similar lawsuits filed against the company, directors, executives (and in some cases accountants and securities underwriters) -- now pending in federal court detail the sorts of conduct that a task force may be looking into as part of its investigations.

One of those suits in particular filed August 05, 2008 (PDF) -- a securities class-action suit 470 pages long representing investors who bought WaMu stock between Oct. 19, 2005 and July 23, 2008 -- uses interviews with former employees (many identified as "confidential witnesses" followed by a number) to describe what actually was going on inside the Seattle-based consumer bank and mortgage company.  The lawsuit alleges that "WaMu's concerted efforts to transform itself from a sleepy savings and loan into a high-margin bank began to include highly questionable and unlawful practices"  taking into consideration that for the years 2006 and 2007, just under 70% of WaMu's net interest income was generated by residential real estate loans and related products and over 60% of WaMu's overall average assets were generated by residential real estate loans and related products.

One of those questionable practices, the suit says, was the heavy use of option ARM's, a type of adjustable-rate mortgage on which the borrower sets the monthly payment, even if the result is that the balance owed actually increases.  WaMu's stock fell from $37.90 a share to $4.65 in that period.

"WaMu loan production personnel were compensated based on loan volume without any regard to loan quality, and were paid even more for originating riskier loans, including option ARM loans," the suit alleges.  "WaMu's employees, accordingly, targeted more and more borrowers who were less able to afford the loan payments they would have to make, and many of whom had no realistic ability to meet the obligations incident tot he loans they were sold."

Former employees, according to the suit, said that they emphasis was "always quantity rather than quality," and that borrowers weren't informed as to the structure of the loans, in which a low teaser rate would jump to a much higher rate in the loan, or that low payments would cause the balance to increase.

Some of the bank's lenders and underwriters, who sold mortgages directly to home owners, said they felt pressure to sell as many loans as possible and push risky, but lucrative, loans onto all borrowers, according to an ABC News article.

The suit adds that WaMu deliberately weakened underwriting standards on both subprime and prime mortgages to generate volume.  Loans were labeled fully documented even when they had little or no documentation of income of assets of the borrower.  Appraisers were pressured to deliver home values that would justify making loans, and warnings from risk-assessment executives, the "gatekeepers" who were suppose to protect the bank from taking undue risks, were ignored, marginalized and, in some cases, fired.

DALE GEORGE

Dale George, a former senior risk manager at WaMu, who spoke to ABC News, likened his job to the brakes on a car.  But George claims WaMu executives "took the brakes off and drove over a cliff."  As the housing bubble swelled and high-risk mortgage lending became more lucrative, the bank changed, according to George.  WaMu began approving as many loans as it could.  "Everything we refocused on loan volume, loan volume, loan volume," he told ABC News.  George said risk managers were told to "lay off" about warnings of the risks involved in mortgage loans.

And according to ABC News, they obtained an email where one WaMu executive told risk managers about a "cultural change" at the bank, and urged them to "lead the charge in modifying the perception of compliance and risk oversight from a regulatory burden to a competitive advantage."  George said this had a chilling effect:  It told risk managers that they "could not raise meaningful issues" and "really had to sweep negative findings under the carpet."  George continued with that he refused to sweep away his findings, claiming "there was a number of instances where I was pressured to fix a certain rating or upgrade the rating."

In one case, he said he refused to improve the risk rating on a $50 million commercial loan, an improvement that would have allowed the bank to significantly increase that loan.  For that, he said he was taken off the project, reprimanded by senior management, and eventually fired when he raised his concerns to top executives.  WaMu denied any wrongdoing and said the firing wasn't retaliatory.

DOROTHEA LARKIN

Another WaMu employee, former senior underwriter Dorothea Larkin, said she, too, was uncomfortable with the sift in lending standards. "It was all about making the numbers, closing all the loans that came through the door," loans like higher risk option ARMs and subprime loans, she said.

According to the ABC News report, WaMu's underwriters were told not to question whether or not a home loan should have been approved, but just to ensure certain lending procedures were followed, according to Larkin.  She called this hands-off underwriting approach "unusual."

Larkin described a bank eager to loan money at any long-term cost.  For example, she said WaMu lent millions to a borrower even after he defaulted on a multimillion dollar home construction project.  "We just kept giving him money," she said, "and I'm sure that's one of the foreclosures WaMu is still sitting on."

"The executives are the ones who made the decision to take WaMu in this direction," she said.  "Too many of the middle folks like myself said this is wrong, we're making loans we shouldn't be making, we're qualifying borrowers who we know are going to struggle to pay the loan back."

UNKNOWN WAMU EMPLOYEE

At a stockholders meeting in April, 2008, a man who identified himself as a WaMu employee and shareholder laid the blame for the company's troubles squarely on Stephen Rotella, president and chief operating officer since 2005.

The man, whose name could not be made out clearly, said that under Rotella's leadership, WaMu loan consultants were paid more for writing subprime mortgages and so-called "option ARMs" with ultra-low teaser rates than for writing safer, fixed-rate loans.

"This man [Rotella] has driven the company to the edge of bankruptcy and he should be fired, and his bonuses should be taken back from him," the man said.

LEE LANNOYE

Lannoye, 70, retired at the end of 1998 after a decade as chief credit officer and executive vice president at WaMu.    In April, 2008 he wanted WaMu's current execs to take responsibility for leading the bank down the path to losses.  "It obviously has not been very well managed the last four or five years," he said.  "They made some pretty stupid decisions." 

"...they are losing $8 billion, $12 billion [in total projected credit losses].  An not one person has been let go," he said.  "They closed down construction lending, the closed home-loan centers, but non of the people who made the strategic decisions to lower the credit standard ... they're all still there, including the board."

"None of this would have occurred if Wall Street hadn't found a way to take bad loans and make them look good, and sell them to people who didn't know any better,"  Lannoye stated.  "That doesn't excuse WaMu management for changing their risk profile and making loans to people who didn't qualify."

RIGGINING THE NUMBERS

According to the lawsuit:  "Defendants' efforts to rig the real property appraisal process relating to WaMu's loans were designed to artificially increase loan origination volume and therefore increase growth and revenue related to WaMu's core business -- residential lending -- and thereby make WaMu's financial condition appear healthier than it actually was," the suit says.

The net effect, it adds, was that "management at the highest levels (was able) to increase the level of risk assumed by the company without informing investors of this critical fact."  The amount of money that the company should have been setting aside in reserves to cover possible loan losses was inadequate, it adds, often by hundreds of millions of dollars, which further inflated earnings.   All the while, in press releases, presentations to investors and SEC filings, the company was assuring the public that it was in good shape and managing risk.

"WaMu was saying, consistently, up to the end, that they were conservative, prudent, rigorous," but in reality, "it was run in a way that was irresponsible, reckless, dangerous," contends Chad Johnson of Bernstein Litowitz Berger & Grossmann LLP, one of the attorneys representing the shareholders who filed the lawsuit.

KERRY KILLINGER

The suit also questions sale of stock by Chief Executive Kerry Killinger even as the bank's financial condition was deteriorating, especially pertaining to insider stock sales by Killinger during the time stating they were "highly unusual and suspicious."  That Killinger's stock sales increased during the time in question, and there was an increase in stock sales at the same time as WaMu initiated major stock buybacks.

APRIL, 2008 STOCKHOLDERS MEETING

In April, 2008 investors were angry with Killinger, and he pleaded with the shareholders at a meeting.  "I know it's tough," Killinger said at the meeting.  "Nobody likes a penny dividend.  Nobody likes the stock price where it is.  Nobody likes to raise capital now.  I'd never do any of that, except we have to."  Killinger continued with "[WaMu] has the capital, the passion, the commitment to ... get through this.  We're going to have terrific days ahead of us.  I just want people to calm down, have a little faith."

At that same meeting, shareholders demanded that he, other executives and directors quit to take responsibility for WaMu's troubles. 

Additionally, WaMu's 2008 executive bonus plan was roundly denounced for minimizing the impact of sound real-estate loans and foreclosure expenses.  Many observers saw that as an attempt to shield executive bonuses from the impact of the mortgage meltdown.

Alan Henry, a stockholder, accused Killinger of opting for the investment led by TPG, rather than a reported buyout offer from J.P. Morgan Chase, simply to preserve his job.  "What you've got to do is what some real men do - real men.  When you face a situation like this, you stand down.  I ask you, out of good judgement, to stand down" Henry said to Killinger.

DEFENDANTS

The following defendants in the lawsuit;  Kerry K Killinger, Thomas W. Casey, Stephen J. Rotella, Ronald J. Catheart, David C Schneider,  John F. Woods, Melissa J. Ballenger, Anne V. Farrell, Stephen E. Frank, Thomas C. Leppert, Charles M. Lillis, Phillip D. Matthews, Regina Montoya, Michael K. Murphy, Margaret Osmer-McQuade, Mary E. Pugh, William G. Reed Jr., and Orin C. Smith.  The defendants in the case haven't filed responses to the suits, other than motions to dismiss a derivative lawsuit (in which an investor sues defendants on behalf of the company) and a second class-action lawsuit representing employees who had participated in a company saving plan that bought WaMu stock.

A motion to dismiss the securities lawsuit was due earlier this month.  But the proceedings in all three suits have been complicated and delayed by the Sept. 25 action of federal regulators to seize Washington Mutual Inc.'s banking operations, subsequently sold to J. P. Morgan Chase.

Directors and former executives haven't commented publicly about what happened at WaMu.

FEDS INVESTIGATION

US authorities have opened a wide-ranging probe into the collapse of WaMu.  A statement issued Wednesday by US Attorney Jeffrey Sullivan in Seattle, Washington said investigators were looking for information on potentially illegal activity related to the thrift's failure. 

Due to the intense public interest in the failure of Washington Mutual, I want to assure our community that federal law enforcement is examining activities at the bank to determine if any federal laws were violated.  The FBI, Federal Deposit Insurance Corporation Office of Inspector General (FDIC-OIG), Securities and Exchange Commission (SEC) and the Internal Revenue Service Criminal Investigations (IRS-CI) have all provided investigators to our task force.  We are asking that anyone with information for the task force contact this number:  1-866-915-8299; or this email address:  fbise@leo.gov.

For more than 100 years Washington Mutual was a highly regarded financial institution headquartered in Seattle.  Given the significant losses to investors, employees, and our community, it is fully appropriate that we scrutinize the activities of the bank, it's leaders, and others to determine if any federal laws were violated.

Press contact:  Emily Langlie, Public Affairs Officer, U.S. Attorney's Office, at (205) 553-4110.

U.S. Attorney's Office, Press Release

Neither the statement nor a spokeswoman for the U.S. Attorney's Office elaborated on what areas the task force might be looking at. 

J.P. MORGAN CHASE & WASHINGTON MUTUAL

In a bankruptcy court filing Tuesday, Washington Mutual said it had reached agreement with J. P. Morgan Chase granting it access to $4.4 billion it had on deposit at its subsidiary bank before the seizure and sale.  Washington Mutual said the settlement will help "maximize recovery for the debtor's creditors," calling the deposits "the largest asset of the estate available for distribution" to those creditors.

On Wednesday of this week, J.P. Morgan Chase reported it took a $640 million after-tax loss in the third quarter as a result of its purchase of WaMu, which it owned for only three business day before the end of the reporting period on Sept. 30.  Because J.P. Morgan only purchased WaMu's banking assets, it is not required to report the bank's third-quarter earnings.

J.P. Morgan Chase stock dropped $2.22 a share in trading on Wednesday to $38.49; a year ago it closed at $46.27.

WaMu stock has been delisted and now trades in the pink sheets, at about 10 cents a share.  A year ago it closed at $34.27.

A spokesman for J.P. Morgan Chase, Tom Kelly, declined to comment on the Feds investigation.

SOURCES:

• Seattle PI
• AP
• Atlanta Business Chronicle
• Class-action lawsuit against Washington Mutual (PDF), Filed August 05, 2008
• Seattle PI
• U.S. Attorney's Office, Press Release
• ABC News
• ABC News
• ABC News
• Seattle Times
• Seattle Times

UBS CEO Marcel Rogner said:  "This transaction gives us comfort."  Rogner continued with, "The extremely difficult market environment led us to accelerate our risk reduction with a definite move.  Our aim is to protect our clients form the impact of crisis to the fullest extent possible and to provide our shareholders an opportunity to renew confidence in the bank."

Teodoro Cocca, a professor of asset management at the Johannes Kepler Institute in Linz, Austria, and formerly of Zurich University's Swiss Banking Institute, says conservative practices have kept the country's banks out of deep trouble.

Swiss banks relied less heavily on intra-bank loans than their international competitors and were less susceptible to credit drying up when banks stop lending to each other, according to Cocca.  "This funding is less volatile than any other financial source.  If there is mistrust between banks it does not affect credit supply as sharply in Switzerland as in other European or US markets," he said.

With the exception of UBS, Switzerland's largest bank, most institutions have lost comparably little.  But even UBS, which was forced to write down tens of billions on bad subprime contracts, extricated itself well enough and sought the shelter of rich backers.  "UBS acted quickly and decisively enough to get itself out of the mess.  US banks in particular tried to hide their problems and bluff their way out of trouble," Cocca explained.  "UBS was more transparent about the depth of its difficulty and raised enough money quickly enough from Singapore, the Middle East and by distributing more shares."

On the announcement of UBS advising selling the stock on concerns about a weak won and slower sales growth, Kia Motors Corp, South Korea's second-largest carmaker, saw its stock plunge.  The stock fell as much as 13 percent.

ADDITIONAL SOURCES:

• Guardian UK
• Swissinfo, Switzerland
• Forbes
• Reuters via Guardian UK
• Bloomberg
• SNB Press Release (PDF)

The TARP Capital Purchase Program

PART ONE

Basically the Feds are using most of the $700-billion to inject capital into banks by purchasing equity shares.  The minimum investment will be 1 percent of risk-weighted assets with the maximum up to $25 billion or 3 percent of risk-weighted assets, whichever is less.  The Treasury will receive preferred shares that pay a 5 percent dividend, rising to 9 percent after five years with a minimum of a three year investment.  After three years, the stock may be paid back at face value.

It will get warrants to purchase common shares, equivalent to 15 percent of its initial investment.  Dividends will be payable quarterly in arrears on February 15, May 15, August 15, and November 15 of each year and dividends on other still  can not be paid until dividends have been paid to the government.  But the Treasury said it would not exercise its right to vote those common shares.  For more explicit details, see a press released on the Treasury's website.

What is also in that part are restrictions on executive compensation of the top five executives at banks that receive the capital injections.  These include a ban on the payment of golden parachutes, repayment of any bonus based on earnings that prove to be inaccurate, and a limit of $500,000 on the tax deductibility of salaries.  You can read more about this on the Treasury's website in the above press release or on a Public Term Sheet (PDF), also available from the Treasury's website.

PART TWO

The FDIC will temporarily guarantee most new debt issued by insured banks as a part of the FDIC Act that it insures through June 30, 2009.

PART THREE

Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts through December 31, 2009, also as a part of the FDIC Act.  These accounts are primarily used by businesses to meet payroll and other continuing expenses.

PART FOUR

And finally, the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper or the Commercial Paper Funding Facility (CPFF) program.  Beginning October 27, the CPFF will fund purchases of commercial paper of 3 month maturity from high-quality issuers, who have investment-grade credit ratings.

"We are pleased to announce that nine major financial institutions have already agreed to participate in both the capital purchase program and the FDIC guarantee program.  We appreciate that these healthy institutions are taking these steps to strengthen their own positions and to enhance the overall performance of the U.S. economy." - Joint Statement by Treasury, Federal Reserve, and FDIC Oct 14, 2008

THE NINE BANKS

A U.S. Treasury official declined to confirm the names of the nine banks that agreed to this program.  The Wall Street Journal however, reported Monday the following banks and amounts:

• Bank of America (BAC), $25 billion
• Merrill Lynch & Co. Inc (MER), $25 billion
• JPMorgan Chase & Co. (JPM), $25 billion
• Citigroup Inc. (C), $25 billion
• Wells Fargo Corp (WFC), between $20 and $25 billion
• Goldman Sachs Group (GS), $10 billion
• Morgan Stanley (MS), $10 billion
• Bank of New York Mellon Corp. (BK), $3 billion
• State Street Corp. (STT), $2 billion

AND BUSH ISN'T DONE

According to a CNN Money article, Bush towards the end of yesterday, was mulling over whether to tap the second installment of its $700 billion authority to rescue the financial system as it looks set to burn quickly through the first $250 billion with its new bank recapitalization plan.

Treasury Secretary Paulson and other Bush administration officials were in discussions about whether they will need to access the next $100 billion, a Treasury official said Tuesday.  Doing this would require "merely a transmittal letter from the president to Congress," the official said.

While the Treasury received $250 billion up front, the administration must notify Congress to access the next $100 billion.  The final $350 billion, which also requires such notification, can be blocked by Congress.

President Bush sent a letter to House Speaker Nancy Pelosi, on Tuesday to certify that it's "necessary" for the Treasury secretary to use his authority to "purchase, or commit to purchase, troubled assets up to the limit of $350 billion outstanding at any one time."

House Financial Services Chairman Barney Frank said Congress might need to give the Treasury more money if its multi-pronged approach does not sufficiently quell the financial crisis.  "If it's being well-used and more is needed, then yes," Frank said when asked if the Treasury Department coudl need more than $700 billion.  

"IT WAS A TAKE IT OR TAKE IT OFFER" FOR THE NINE BANKS

What the above doesn't state about the nine major financial institutions is that they weren't given a choice by the Feds.  The New York Times in an article dated October 14th states:

The chief executives of the nine largest banks in the United States trooped into a gilded conference room at the Treasury Department at 3 p.m. on Monday.  To their astonishment, they were each handed a one-page document that said they agreed to sell shares to the government, then Treasury Secretary Paulson said they must sign it before they left.

The chairman of JPMorgan Chase, Jamie Dimon, was receptive, saying he thought the deal looked pretty good once he ran the numbers through his head.  The chairman of Wells Fargo, Richard M. Kovacevich, protested strongly that, unlike his New York rivals, his bank was not in trouble because of investments in exotic mortgages, and did not need a bailout, according to people briefed on the meeting.

But by 6:20, all nine chief executives had signed...

What happened during those three and a half hours is a story of high drama and brief conflict, followed by acquiescence by the bankers, who felt they had little choice but to go along with the Treasury plan to inject $250 billion of capital into thousands of banks - starting with theirs. [...]

"It was a take it or take it offer," said one person who was briefed on the meeting, speaking on a condition of anonymity because the discussions were private.  "Everyone knew there was only one answer."

WALL STREET

On Monday of this week the Down gained 936.42 points, more than 11 percent, its biggest one-day rally since 1933.  The S&P advanced 104.13, 11.58 percent.  It was the biggest percentage gain for the index since March 15, 1933, when it surged 16.6 percent.  The Nasdaq rose 194.71, or 11.81 percent, its 10th biggest point gain.

On Tuesday of this week the Dow dropped 76.62, or 0.82 percent.  S&P dropped 65.24 or 3.54 percent.  Nasdaq dropped 65.24 or 3.54 percent.

Today, the foreign markets are dropping like flies again and as of this posting, the Dow has not opened.

Does this look normal or good to you? 

Return as of October 15, 2008 1 Month -18.48% 6 Month -24.31% YTD -29.81% 1 Year -33.93% 3 Year -9.49% 5 Year -5.12%

Steven Pearlstein, who won a 2008 Pultzer Prize for Commentary, wrote yesterday in the Washington Post:

"Do not confuse this moment of calm with a stock market bottom or a sign that a serious recession has been avoided.

"We are in a bear market and will be for some time.  That doesn't mea that you can't have good days or even long strings of good days -- what traders refer to as bear market rallies.  But for a bear market to become a bull market, there needs to be some evidence that corporate profits have bottomed out and are about to take off again in response to a pickup from the economy -- and at this point we're a long way from that." [..]

"Put it another way, we didn't just have a housing bubble and a corporate takeover bubble and a consumer credit bubble and a commodities bubble.  In time, those asset bubbles led to the creation of a bubble economy, with too many airplanes and restaurant seats and hotel rooms, too many office buildings and shopping centers, too many investment banks and media outlets dependent on advertising revenue from car companies producing too many cars and home builders producing too many houses.  Shrinking all that back to the right size is what the coming recession is all about.

"Nobody really knows how long or how deep this recession will be.  What we do know is that recessions that follow the collapse of asset bubbles tend to last longer than average -- and that this was the mother of all bubbles.  So it's a fair assumption that this recession will last through 2009 and well into 2010. [..]

"This thing ain't going away any time soon."

WILL IT HELP?

Time will tell, I suppose however, there are still issues that have not been addressed.

It does not address he systemic problem underlying all of these problems.  Unsustainable mortgages written on artificially high housing prices.  Without household debt relief, this will do nothing except transfer money from Main Street to Wall Street.

It does not force the financial institutions to be financially responsible.  This program takes huge risks in hopes that the banks can bail themselves out, if they can't, then the taxpayers lose.  If they can, then the Federal Government wins.

It does not address that people borrowed more than they can repay, and when the foreclose, who is the winner and loser in all of this?

It does not provide the fiscal stimulus that is necessary to get the economy going again.  Unemployment continues to rise.  Foreclosure rates continue to rise.  Inflation continues to rise.

It does not provide the change in corporate governance to prevent a repeat of the problems that caused this crisis.

It does not address the criminal behavior of some financial institutions.

It does not address any auditors on this deal.

SOCIALISM

Again, welcome to Socialism however, is it a lesser evil or a greater evil than letting the banks run free?

What American's keep screaming is why are they getting help?  Why are they losing their jobs and their homes?  It's become brutally obvious that our Government's priorities are focused solely on the financial institutions of this country, and nothing else, selling it under the guise that this will fix everything. 

Which brings up the question.  Which is the Government more responsible to?  Fixing the banks and Wall Street, bailing them out, paying their bills, ensuring they continue on intact in hopes that this will 'fix' everything.  Or helping the taxpayers to find jobs, so they don't lose their homes, to stop inflation, to help with medical bills, and to simply put food on the table.

Bankers, although the top five executives income will drop but no one else, and there are ways around that, will still have their jobs, their homes and food on the table.  They will still have their limo rides, and helicopter rides to work.  They will still have all their little corporate benefits.  They will still have their vacation homes.  They will still have their yachts, mansions, cocktail parties, art collections, etc.  What will you have when this is all over?

I give it until the end of the year until it all comes crashing down, and that's the best case scenario.