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Archive: March, 2009

POSTED: Tuesday, March 31, 2009, 1:31 PM

In a speech at the University of Chicago (he's often away from his district), conservative Federal Reserve Bank of Philadelphia president Charles I. Plosser praised the Federal Deposit Insurance Corp.'s method of stopping, seizing, selling, and exiting failed banks. And he implicitly criticized the way the Fed and the Bush and Obama administrations bailed out American International Group (and thus Goldman Sachs and other AIG creditors). Speech here. Excerpts:

"The belief that regulators will bail out creditors creates moral hazard that leads to poor risk-taking decisions and... creates incentives for financial firms to become too large or too complex to fail, in order to exploit the implicit government guarantees...

"At times during the past year, regulators faced the unpalatable choice of either permitting a large financial firm to enter bankruptcy, without an adequate resolution mechanism to deal with systemic risks, or taking unprecedented actions to preserve the firm to avoid perceived costly disruptions to the financial system...

"Regulators already have a resolution procedure for systemically important commercial banks.  The FDIC has the authority under FDICIA (the FDIC Improvement Act) to resolve a large bank failure by operating a bridge bank for up to five years, thereby reducing systemic disruptions as it resolves the bank’s problems...
 
"We need a resolution mechanism that explicitly addresses ways to reduce financial disruptions and minimize the costs to taxpayers.  As in the FDIC’s bridge-bank authority, uninsured creditors could receive expedited payoffs based on historical recoveries, generally less than 100 percent, while shareholders of the failed institution would be wiped out.

"This is very different from government actions taken in our current crisis, which have served to provide 100 percent protection for all creditors.  While reducing the threat of a run, such a policy reduces the incentives for market discipline and increases moral hazard.
 
"I do not believe that the Fed is the appropriate institution to run, or fund, such a bridge institution.  Doing so may result in serious conflicts of interest between monetary policy and the resolution of a single institution and thereby threaten the Fed’s independence." Leave it to FDIC, or some other specialized agency.

ADD: FDIC chairman Sheila Bair, a Bush appointee, has made points similar to Plosser's over the past year. Her agency doesn't always need those "big bank" powers -- it seized $300 billion-asset Washington Mutual Corp. and sold it to JPMorgan Chase & Co. last year without spending a dollar, says FDIC spokesman Andrew Gray. But it did use those powers when $32 billion-asset IndyMac Bank failed, also last year (no thanks to big-mouthed US Sen. Charles Schumer, D-NY, who sparked a run on the bank).  "We did not have a buyer. We ran the bank for six months as we rehabilitated the loan portfolio and resold the assets," Gray told me.
 
The IndyMac scorecard sounds like Plosser's roadmap: Shareholders (who bet on this badly-run bank) killed; bondholders (ditto) hurt; the bank-financed FDIC insurance fund paid off depositors and covered $10 billion in losses; loans and other assets sold to solvent banks. Should AIG and Bear Stearns have been handled that way?  
Joseph N. DiStefano @ 1:31 PM  Permalink | 0 comments
POSTED: Tuesday, March 31, 2009, 12:31 PM

President Obama is giving the permanent Washington business class fits by banning staffers from discussing stimulus projects with registered lobbyists. Read more in the PhillyDeals print column in last Sunday's Inquirer here. NEW: DC lobbyists and their friends at the ACLU tell Obama to cancel his anti-lobbyist policy here.

Meanwhile, Dennis Roddy of the Pittsburgh Post-Gazette writes that, despite federal probes, U.S. Rep. John Murtha, D-Pa., remains one of the most ardent and unrepentant defenders of the DC lobby system. "If I'm corrupt it's because I take care of my district," based in the ex-steel center of Johnstown, Pa., Murtha told the Post-Gazette. And: "I have no idea why they're going after these lobbyists..." Story here. Excerpts:

"In a development called the John P. Murtha Technology Center, just a stone's throw from the John P. Murtha Airport, a group of locals set up Concurrent Technologies Corp., a nonprofit research and technology combine that found its footing with Murtha-directed earmarks…. A few miles (away) sits Kuchera Industries, another garage startup that… found itself flush with defense contracts under Mr. Murtha's tutelage. Multinational firms, from Lockheed Martin and Northrop Grumman to DRS Technologies and the Norwegian firm Kongsberg Gruppen, have set up outposts here, capturing defense contracts and partnering with local companies such as CTC and JWF."

Joseph N. DiStefano @ 12:31 PM  Permalink | 0 comments
POSTED: Tuesday, March 31, 2009, 9:07 PM

President Obama wants GM and Chrysler to file for bankruptcy, says Bloomberg News, citing unnamed members of Congress and other sources. Obama "has determined that a prepackaged bankruptcy is the best way for General Motoers Corp. to restructure and become a competitive automaker, people familiar with the matter said. Obama also is prepared to let Chrysler LLC go bankrupt and be sold off piecemeal if the third-largest U.S. automaker can’t form an alliance with Fiat Sp." Story here.

In bankruptcy court, GM and Chrysler would likely split into "good" and "bad" companies Wall Street Journal writes here.

Joseph N. DiStefano @ 9:07 PM  Permalink | 0 comments
POSTED: Tuesday, March 31, 2009, 8:07 AM

If we've heard it once, we've heard it an awful lot from old John Bogle and other conservative Philadelphia investors: It's tough to time markets because you have to be right twice -- when you buy, and when you sell.

The Boston Globe's Michael Kranish writes that the Pension Benefit Guaranty Corp., the federal taxpayer-subsidized body that bails out broke pension funds, which will shortly be called on to rescue millions more pensioners' retirement payments, went and ignored that advice, dumping bonds and buying stocks and real estate last year just before the markets collapsed. Story here. Excerpt:

"Charles E.F. Millard, the former agency director who implemented the strategy until the Bush administration departed on Jan. 20 [and] a former managing director of Lehman Brothers, said flatly that 'the new investment policy is not riskier than the old one.'

Joseph N. DiStefano @ 8:07 AM  Permalink | 0 comments
POSTED: Tuesday, March 31, 2009, 4:14 PM

The maple-veneer planks are still in place, and the sample-unit kitchen, and most of the bathroom, and the podium where the Trump Tower Philadelphia model used to be.

But the 57th floor of One Liberty Place is now vacant -- the Trump organization suspended its proposed Delaware River condo tower last fall -- and it's for rent, the highest 10,000-square-foot space now available in Philadelphia. So are the 18,000-square-foot 54th and the 24,000-square-foot 33rd floors. The rest of the building is leased, like most of Philadelphia's trophy office space, for now.

The view's spectacular -- you can see from the Atlantic City casinos to the hills below Reading on a clear day -- though not when it's foggy and you have clouds on three sides of you, as I remember from when this used to be Cigna Inc.'s corporate office, back when Cigna was still a financial conglomerate and Philadelphia's biggest company, not a healthcare insurer struggling to adopt to wherever President Obama is taking medical care payments.

Joseph N. DiStefano @ 4:14 PM  Permalink | 0 comments
POSTED: Monday, March 30, 2009, 2:41 PM

Democrats in Congress want to speed up the Federal Reserve's pro-consumer credit card rules so they take effect this year instead of mid-2010. Those rules would slow interest-rate hikes by requiring 45-day warnings, limit card fees for subprime borrowers, and end "double-cycle" and other compound fees.

Don't rush, says U.S. Rep. Mike Castle, whose Delaware district includes Bank of America's and JPMorgan Chase & Co.'s credit card headquarters in Wilmington. "There's a lot of politics to this," Castle told reporters in a conference call. For banks, "the date is a major issue." He wants "a way the credit card industry can live with this." 

"If they have to put it in place too quickly, and they haven't worked out and tested all their models, and they're not confident in what they're doing, it could end up further constricting credit," warned Sandra Braunstein, director of the Federal Reserve's Consumer and Community Affairs division, who joined Castle for the call.

Haven't banks already cut back? We keep hearing from borrowers that card companies are jacking up rates and cutting credit limits. Is that because they're getting ready for the new rules -- or just because they can't sell ("securitize") old credit card loans, to finance new ones, in today's bond markets? 

Joseph N. DiStefano @ 2:41 PM  Permalink | 0 comments
POSTED: Monday, March 30, 2009, 11:10 AM

Treasury Secretary Geithner last week hinted that President Obama might effectively reinstate the Glass-Steagall Act's ban oncommercial banks getting mixed up with investment banks. Economist (and ex-Deutsche Bank and Prudential Securities strategist) Ed Yardeni, in his newsletter today, quotes Goldman Sachs ceo Lloyd Blankfein's response - "It’s hard to turn back the clock” -- then ridicules it:

"Why is it hard to turn back the clock to November 1999, when the act was gutted by a cabal of Wall Street’s power brokers and their supporters in Congress?

"The Depression-era act prohibited brokerage firms from having investment banking divisions. Following the elimination of this prohibition and restrictions on their leverage ratios in 2004 (engineered by Goldman's CEO Hank Paulson at the time), Wall Street's banks ran amuck.

"In 1999, AIG purchased a thrift in Delaware. As a result, the entire operation of AIG was regulated by the woefully understaffed Office of Thrift Supervision (OTS).

Joseph N. DiStefano @ 11:10 AM  Permalink | 0 comments
POSTED: Monday, March 30, 2009, 10:16 AM

King of Prussia-based Mitchell L. Morgan Management Inc. has sued American International Group Inc., accusing the troubled, taxpayer-backed insurance and investment giant of delaying payments on a $120 million apartment-renovation financing venture, reports today's Wall Street Journal here.

AIG, in turn, blames the Federal Reserve, which took over AIG in the waning days of the Bush administration and now runs the company under considerable pressure from Congress and an outraged public, for holding up payments and demanding more documentation.

Morgan, whose namesake operator is a leading Pennsylvania Republican activist, bought the AIG-financed apartments, mostly in PA and NJ, 2007 from the Kushner family, developers (and Democratic donors) in New York and New Jersey, the Journal said. Charles Kushner went to jail in 2005 for illegally funding former NJ Gov. McGreevy's campaign.  Philly Deals reported on AIG's plan to cut back its real estate business, and its Morgan partnership, last fall, here.

Joseph N. DiStefano @ 10:16 AM  Permalink | 0 comments
About this blog

PhillyDeals posts raw drafts and updates of Joseph N. DiStefano's columns and stories about Philly-area finance, investment, commercial real estate, tech, hiring and public spending, which he's been writing since 1989, mostly for the Philadelphia Inquirer.

DiStefano studied economics, history and a little engineering at Penn, taught writing at St. Joe's, and has written the book Comcasted, more than a thousand columns, and thousands of articles, and raised six children with his wife, who is a saint.

Reach Joseph N. at JoeD@phillynews.com or 215 854 5194.

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