TARP Results Blog

GMAC Hoping Geither Still Wearing "Sucker" Name Tag

GMAC, already the recipient of $12.5 billion in cash and $7 billion in loan guarantees from the US Treasury is looking to land another $3 to $5 billion from taxpayers that the government would hold as preferred stock, according to the Wall Street Journal.

Most of us can appreciate the difficulty of being in the business of providing car loans at a time like this -- fewer people are buying cars (except during the "Cash for Clunkers" period), and those who want to buy cars are less likely to pass the now more rigorous screening process.  Most people are hanging onto cars longer, and, as we've seen over the past decade, turning away from domestic autos when they do buy.  This is a long-term problem for GMAC and one that isn't fixed by throwing another $3 billion down this gas tank. 

GMAC is a financing arm for GM and Chrysler.  These are the two most subsidized and least liked major brands.  On top of it, the assets behind the loans depreciate faster than a house in Detroit.   So they have lower originations on relatively underappreciated products that quickly decline in value. 

Message to Treasury Secretary Geither
:  Run from this business.   We're nearly $20 billion already.  Putting another $3-plus billion at risk is a bad decision.   When GMAC's CEO Alvaro de Molina calls the next time, let it go to voicemail.  And take off that name tag, Mr. Secretary.

Car Czar Writes off $20 Billion Given to GM - It's a Start

Steven Rattner, the man appointed "car czar" by President Obama, suggested at a speech given to the Brookings Institution that the $50 billion in bailout money given to GM is now probably only worth $30 billion.  However, it isn't really $30 billion.  It's more like 1% of $30 billion.

The shares of what used to be GM now closed today at about 63 cents per share, less than one-half of their value in May.  The current market cap of what used to be GM (now called Motors Liquidation) is $388 million.  60% of that is $232 million. Let's point out that what the taxpayer got for it's $30 billion investment in GM (the second slug of money) which was stated as 60% of the company was, in reality, getting shares worth maybe $500 million.  In other words, the $30 billion was mostly a gift, sent to ward off even more extensive closures and unemployment. 

So, to be clear, the car czar needs to get his pencil out.  The $50 billion given to GM is worth $232 million.  GM employed 244,000 people earlier this year.  The losses in this investment of $49.768 billion amounts to $203,900 per GM employee using these numbers, but we know GM has shed thousands of employees anyway.  It's likely that we will spend $300,000 - $400,000 per "surviving" GM employee and will never see the payback on it. 

Is this really the best way to spend money?

Treasury "Failed" in AIG Bonus Hearings

In testimony today before the House Oversight and Government Reform Committee, the special inspector general for the TARP program gave the Treasury Department -- and Timothy Geithner's management -- a failing grade, according to the Wall Street Journal.

"This was a failure of communications, a failure of management," special inspector general Neil Barofsky testified.  

Associated Press states that Barofsky testified that "Geithner is 'ultimately responsible' for regulators failing to rein in massive bonus payments..."

You can read about the AIG bonus payments at one of our prior posts here.

Creating Second Class Banks

I've struggled over the past few weeks on the issue of the "pay czar", Kenneth Feinberg, of the federal government having the opportunity to structure the compensation of the highest-ranking people in the firms who have received, or will receive, US bailout money.  Europe is also in the process of putting similar limitations in place.

After careful deliberation, I must say that this concept -- not just the execution -- is wrong, and for many reasons, the most important of which is that it creates a second-class of company in an otherwise free market environment competing for the best talent it can afford and acquire.

A similar situation, though not a perfect example, is the National Basketball Association.  Let's say that five of the thirty teams did something very, very wrong.  People were fired.  The media wrote embarrassing stories.  But, these teams still had a schedule to play, season ticket holders to please, TV contracts to fulfill, etc.  Six months later, the NBA announces that a further punishment is that the teams now need to have a salary cap that is far below the rest of the teams.  How would that play out?

You would have these five teams who couldn't pay their current top talent, and these players would move to teams where they could be paid competitively.  Bottom-tier NBA talent would be driven to these five teams since that is all these teams could afford.  In a very short period of time, the NBA would have created a two-class structure for the long-term, with the second-class being in a position to rarely, if ever, compete.

Now move to banking, where the movement of talent is even less restrictive.  Top positions at banks with pay restrictions will, over the next year or two, be filled either with people who have big loyalty, big stock ownership, or a lack of proven experience.  The top talent will have moved to other firms where compensation matches what the believe their worth to be.  

The longer-term impact of the pay issue is that banks with pay restrictions will face a talent challenge.  The talent challenge will likely mean that most of these banks will suffer competitively.  Therefore, these banks will grow slower, make less money, be less creative, create fewer jobs, and pay fewer taxes.  Yet we as US citizens own these slower, less profitable companies through the TARP program or other programs. 

There is no arguing that some of the pay packages of CEOs in the very firms we've been asked to bailout had been paid a ridiculous sum to perform poorly.  The boards should be ashamed.  The CEOs should be ashamed.  Many of the board members and CEOs should be fired, if they haven't already been.  But it seems that creating a much shallower talent pool for these troubled banks makes their recovery, and therefore our payback, much less likely.

What do you think?

Ken Lewis Agrees to Leave Bank of America at Year End

The public story is that Ken Lewis, Bank of America's CEO, has chosen to retire from the bank at the end of the year.  The underlying story is probably much more salty.

Lewis has been with the bank for 41 years, being from all accounts an exemplary executive until the last several years.   He has been at the helm while disaster after disaster struck.  Destruction of shareholder wealth?  Absolutely, as the current stock price has finally climbed back to 1996 prices -- yes, anyone who bought shares in the from 1996 to 2008 has...lost...money.  Taking on business risks that are too great?  Sure, through it's own increasingly risky mortgages capped off by the acquisition of Countrywide's cesspool of loans.  Misleading the bank's own shareholders?  Of course, though no doubt he really thought that the agreement to pay out billions of dollars of bonuses to Merrill's executives didn't really need to be disclosed. 

The mystery is why Lewis is allowed to position this as a resignation which will likely allow him to walk away with millions of dollars in severance pay and retirement benefits.  Any right-thinking board would have canned him a year ago, and perhaps the board was instrumental in pushing Lewis out at this time.  The struggle at Bank of America for the past decade wasn't a banking crisis "issue".  This was a demonstration of a failure of management, by Lewis and the board. 

Do we all get free checking from Citi now?

Over the weekend, the US Treasury converted it's warrants in Citigroup to stock and now it (we) hold 34% of the equity in Citigroup.  Obviously Citi wants to see the US reduce its stake in the company and is trying to get capital from other sources and, it hopes, to buy back some of the US' stock.  However, the US is under no obligation to sell, and may just decide to hang onto the stock for some time, as it's costs basis is under $4 per share.

So now we as taxpayers own 34% of Citigroup, a similar amount of General Motors and nearly all of AIG.   Therefore, I want to be able to buy a GM car for 10% below sticker, get a car loan from Citi at 4%, and get car insurance from AIG for $200 a year.  Is it too much to ask, now that we own them?

BofA and SEC Agreement Gets Yanked

Over the past several weeks, the agreement between the SEC and Bank of America over BofA's failure to disclose the huge Merrill Lynch bonuses has been run off the rails by Federal District Judge Jed Rakoff.  As noted here in an August 4 post, BofA and the SEC had reached an agreement whereby BofA would pay a fine of $33 million while not admitting nor denying guilt.

These types of settlements between the SEC and anyone it regulates are common.  Pay a dollar amount fine but there is no need to address the question of guilt or responsibility at all.  Having been in the business for more than twenty years, I have seen these types of agreements hundreds of times.  However, Judge Rakoff believes that a dollar fine while avoiding any guilt will not stand.  We say...well, finally!

Furthermore, Judge Rakoff astutely noted that having Bank of America Corporation pay this fine really means hitting shareholders twice -- first they are screwed by the BofA management by their failure to disclosed, and then second shareholders end up paying the fine.  Rakoff believes that the SEC should have pressed a case against BofA management personally.

Rakoff's concerns make complete sense to us.  Shareholders of companies who settle with the SEC on charges that the company misled or otherwise harmed its shareholders end up paying twice.  The people who are responsible for the fine and the acts behind the fine, in BofA's case, end up handsomely rewarded (see Ken Lewis, mysteriously still BofA CEO). 

The next step is trial that will begin in February 2010 in Rakoff's court.  Here is hoping that common sense prevails, at least how we -- and perhaps Rakoff -- are defining it:  companies don't do bad things, people in companies do bad things.  And when those bad things are considered illegal, people should be held accountable.

Read more at the Wall Street Journal (subscription may be required)

Geithner Tries to Grab Reigns on Financial Regulations

The Wall Street Journal reports that Secretary of Treasury Tim Geithner blew an obscenity-laden gasket at the heads of the other financial regulatory bodies last week.  Evidently, Geithner was trying to be the adminstration's water carrier in a room of other regulators who feel that they need to remain independent of the political fray.  The Federal Reserve's Ben Bernanke, the SEC's Mary Shapiro and the FDIC's Sheila Bair were on the receiving end of Geithner's saber-rattling.

Geithner's point of view is that the administration has made promises for change, and he's going to make sure it happens.

Our prediction:  there will be some modest financial regulation which will be trumpeted by the administration and the other regulators as bold and meaningful, and then everyone will return to their own buildings.

BofA Pays Big For Bonus Lies -- Lewis Still CEO

Bank of America paid $33 million to settle a case with the SEC regarding the allegation that it misled its investors last fall with regards to the payment of bonuses to Merrill Lynch employees, according to the Wall Street Journal.  The "smoking gun" is the proxy mailed out to Bank of America shareholders in November that stated that bonuses wouldn't be paid to Merrill employees without BofA's approval until the close of the merger.   Instead, BofA had already authorized $5.8 billion (yes, billion) in bonuses to Merrill staffers and somehow didn't let shareholders know that.  Our way of looking at it was that the proxy statement was not accurate and Ken Lewis  was dishonest.  I suppose his only defense could be that he didn't read the proxy statement before it was mailed, but that would cause other alarms that sound of careless management.   Regardless, this is another example of recklessness of the management of this firm, and we think it's CEO is long-past his sell-by date.  The board should dismiss him. 

More on this at the Charlotte Observer.

Read this book: A Colossal Failure of Common Sense

A few days ago, I began to read A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers, written by Lawrence G. McDonald who was a former vice president in Lehman's distressed debt area.   This book tells the story of Lehman in its very recent history, from 2004-present.  The author, who joined Lehman in 2004 tells a very compelling tale of an insecure and distant CEO, Dick Fuld, and his yes-man number two, who was on a mission to grow Lehman to to size of Goldman Sachs; of an out of control real estate and hedge fund buying spree; of the implications of the mortgage origination-to-securitization cycle that had investment banks, mortgage companies and ratings agencies stuffing themselves on fees without any real concern to whether the loans would ever be paid off;  to the failure of Henry Paulson to act -- perhaps due to personal dislike for Lehman's CEO instead of the best interest to the country --  to save Lehman as he already had Bear Stearns, Fannie Mae, Freddie Mac and would within a few days of Lehman's bankruptcy filing act to save AIG.

A Colossal Failure of Common Sense is a first-person account of the ending of Lehman -- a story which should rival Liar's Poker or Barbarians at the Gate.  It is a fast-paced story set primarily on the third-floor office of the author at 745 Seventh Avenue.  From his seat in distressed-debt trading, he was part of a team used to evaluating the worth of corporate debt and trading on that evaluation.  The book outlines stories of the team successfully calling the failure of Delta and Beazer and others, booking large profits for Lehman and handsome bonuses for themselves.  The biggest failure, however, was the call on Lehman itself.  While the author and, more importantly, others who were managing directors at Lehman were attempting to sound the alarm of risks, they were overwhelmed with the growth mantra of Fuld. 

It is easy to see clearly while looking backward, and no doubt the real story is much messier and confusing than it's retelling in Colossal Failure of Common Sense.  However, I appreciated the story arc and how the Lehman failure was both a symbol of greed, but also a catalyst for the acceleration of the financial crisis we still find ourselves, and the global economy, in. 

This is definitely a book worth reading.