Bailout Weekly: AIG loses $62B and gets a 4th course at the trough

Anyone remember how much aid A.I.G. asked for way back in September? Well, we are a long, long way from September 16, 2008 when the U.S. government extended the insurance giant a two-year loan of up to $85B in exchange for a 79.9% stake. Less than a month later, those bailout loans were increased to $123B, then to $150B in November, which included a new $40B government investment. So, here we are in March 2009, and AIG is bellying up to the TARP trough for $30B in rescue funds in a reversal of the initial plan. Last fall, the government was acting as short term lender trying to help AIG get through rough times with some "tough love". It looks like Geithner has changed the parenting philosophy by relaxing loan terms and giving more access to TARP rescue funds - now standing at $70B. Yes folks, that is 40% more than Citigroup has taken so far. What does it all mean in the context of "too big to fail"? It appears that the Feds are still trying to their arms around the deep aftershocks any kind of AIG failure would have on the financial system and beyond. It's all about buying more time and keeping the newly vigilant rating agencies at bay.

More news of interest on this snowy Monday:

• Hedge fund D.E. Shaw is reacting to Madoff, et. al. by planning to step-up its due diligence by appointing 3rd party administrators to verify investments.
  
• A Treasury audit report blames an aggressive growth strategy, nontraditional loans and insufficient underwriting for the demise of IndyMac Bancorp last summer.
• The Bank Stress Test is found to be lacking in this piece by David Reilly, and the NYT questions some of the test's assuptions in this Op-Ed.
  
• FT says and FDIC on steroids might be the answer.
• Barney Frank on bailouts.
• S&P sees more losses for subprime securities.
• More on nationalization in the NY Times Magazine.
• Is the crisis spawning new regulation for the European Union?
• Bloomberg's Caroline Baum thinks some banks need to fail to clean out the system. Former Treasury Secretary James Baker writes in the FT that we need to heed the lessons learned from Japan in the 90s and kill off some zombie banks.
  

Another investment fraud comes to light, RBS sets dubious record

Another day, another investment fraud for newly energized regulators to sink their teeth into. Paul Greenwood and Stephen Walsh were arrested by the FBI yesterday and will face criminal charges. High profile victims include Carnegie Mellon University, The University of Pittsburgh, and the Iowa Public Employees Retirement System. So, the initial perceptions are looking correct, that Madoff was, if not the tip of the iceberg, the glacier that was poking above the surface. So what is going on here? Were these "money managers" simply taking advantage of years of lax oversight coupled with investor hunger to be part of the sexy alternative investment universe? The one thing that seems to be certain is that the laissez faire regulatory environment for hedge funds will come crashing down soon. Many of these "proprietary models" (Enhanced Stock Indexing, split-strike conversion, etc.) have proven to be little more than hot air used to hide behind a cloak of secrecy offered in large part by QIB and AI rules. Prepare for change.

News links:

• RBS appears to be on the brink of Nationalization as it announced a £24B net loss for 2008. The UK government has agreed to inject up to £25.5B into the poster-child for troubled banks. And news that the Scottish behemoth could close its leveraged finance buisness as part of the pressure to refocus on UK retail and commercial customers.
  
• The EU has laid out its guidelines for toxic banks. European countries have been told to watch the total cost of bailouts and focus on banks of "systemic importance".
• Bloomberg's Jonathan Weil writes that it isn't easy getting a good estimate of what a bank's assets are worth. He cites recent disclosure by Regions and Huntington that dispute the value of loans on their books.
• Geithner laid out details of the bank stress test. The doomsday scenario includes a jobless rate above 10% and another 25% drop in home prices. Once inconceivable, those guidelines don't appear to so remote today...Click here for the Bank Stress Test FAQ.
  
• The Treasury has put out a white paper on its new Capital Assistance Program (CAP).
• Peter Wallison has some advice for Geithner on pricing troubled assets.
• Gary Gensler, Pres. Obama's choice to head the CFTC promised to act forcefully as a regulator in confirmation hearings.
  

U.S. Regulators Issue Joint Statement. Markets Tank.

As reported here in yesterday's blog, US regulators took the unusual step of issuing a joint statement to ensure the investing public knows they will be stress testing banks. President Obama is looking to clear up the stench around U.S. banks by subjecting them to reviews and trying to revive liquidity in the market for their toxic assets. The Wall Street Journal thinks the joint statement bothered the equity markets. Stress testing will begin tomorrow for 20 of the largest banks to determine which ones will need government capital injections to survive. The potential downside of "opening the kimono" in this way is that bringing banks' problems into the public spotlight is that it could intensify investor concerns rather than quell them. Citigroup continues to be the big bank "guinea pig", as officials struggle with how much more aid they can or should provide the behemoth as the nationalization debate continues to rage and shareholders worry about being completely wiped out. Former FDIC Chairman William Isaac joins the chorus against nationalization in this WSJ Op-Ed piece. Isaac was responsible for nationalizing Continental Illinois Bank in the 1980s, so he knows of which he speaks. The NYT's Eric Dash reports that at least a partial nationalization seems inevitable for Citigroup. A third injection would give the U.S. 40% ownership in Citi and likely the ability to exert more influence over the bank. Across the pond, the UK's experience with RBS which has led to a 68% ownership stake in the Scottish bank is being looked upon as a sort of model. Key management has been replaced and the the government seems to be controlling lending and strategic decisions. A key question being asked in all of this is "what's the exit strategy"?

And now for the links:

• A story on regulating the Shadow Banks in breakingviews. Political momentum for regulating these entities seems to be gaining steam in advance of April's G-20 meetings in London. Thekey question will be, "what is appropriate oversight?"
  
• PIMCO's Bill Gross thinks nationalization would be a huge mistake in his latest Investment Outlook. Gross says that if you think letting Lehman fail was a mistake, just watch what nationalizing Citi and BofA would do...
  
• What exactly is nationalization? The WSJ has a helpful primer.
  
• "Black Swan" author Nassim Nicholas Taleb says that the current banking crisis will be harder to end than the Great Depression. Taleb goes so far as to say that, for him, the real "black swan" event would be for the markets to emerge unscathed and return to normalcy.
• Here's one way to manage risk: Amex is paying potential deadbeats to go away.
• Morgan Stanley is closing its Chicago prime brokerage unit.
• Geithner's "bad bank" plan may need to provide low-cost financing to distressed asset investors.
• NPR's Jim Zaroli walks us through a bank stress test.
• Is there a dangerous bubble brewing in investment grade corporate bonds? At least one analyst thinks so.
• S&P thinks proposed Basel changes will cut risk taking.
  

Bank Lending Picked Up in December

The first results of the US Treasury's new monthly bank lending report are out and they say that bank lending rebounded in December. Overall, loan origination and underwriting activity were weak in October and November, but picked up in December, fueled by falling mortgage rates. Read about the results here. Still no word on how much the shadow banking system is lending...

More news from around the financial world:

• Greenspan comes out in favor of bank nationalization and says U.S. needs to do more
  
• A few Congressional Republicans joined him in putting nationalization on the table.
  
• R. Allen Stanford is accused by U.S. regulators of running a massive ongoing fraud through his Houston-based Stanford Group Co.
• A former chief accountant for the SEC thinks Madoff investors may be able to hold their auditors accountable in the fraud.
• RBS feels the heat and gets Draconian on incentive comp.
  

The N-Word

With the G-7 meeting kicking off in Rome today, Treasury Secretary Geithner will want to tap into his European counterparts for experience with the big N: Nationalization. Ireland injected €7B into its two largest banks this week, four of Britain's largest banks are under de facto control of the new government holding company, and now word that Germany may be ready to get in the act as Hypo Real Estate Holdings could be nationalized by Merkel. Europeans have put the questionable banks on a tight leash, while the US so far has been committed to keeping its banks in private hands. Who has the better approach? Economists seem to agree that the government needs to exercise some control to get bad assets off the books, but disagree on how much control. It is not surprising that Nouriel Roubini is one who believes it's time to nationalize U.S. banks. Roubini says the banking system is basically insolvent, with bank and finance company losses already passing the $1T mark and possibly peaking at $3.6T. He estimates the banks will need another $1.4T in new capital to resolve the credit crunch. Scary stuff. Keeping with that theme, Steve Lohr of the NYT says banks look like "dead men walking". Without a cure for the bad assets, the problem will linger and keep dragging the economy and banking system further into the mire. In a preview of the Washington Post's Sunday Outlook section, Roubini and fellow NYU professor Matthew Richardson push the idea of nationalization even further. Although Obama seems to be against a full scale nationalization, some say the U.S. is engaging in "creeping nationalization" as it empowers regulators and implements bank stress testing, but where we end up is anybody's guess at this point. Who knows, maybe some of that European aggressiveness rubs off on Geithner this weekend...

On to the Headlines:

• With all that is happening at Treasury, it looks like Geithner is understaffed. Bloomberg reports that a dearth of staff experts is slowing him down. Hmmm, hasn't he heard of GlobalRiskJobs?
• There's more grist for the regulatory mill. Hedge fund insider trading is top news today as unsealed court documents obtained by Bloomberg indicate Kynikos, SAC and other funds are being accused of trading on material non-public information. New regs may be on tap in Europe as France seems to be calling for a hedge fund crackdown. The US and UK have been oceans apart on hedge fund regulation.
  
• Regulators from the SEC are probing Stanford Financial Group.
• AIG's London-based financial products unit is being investigated.
• George Mason University law professor Todd Zywicki says the price for mortgage modification is too high in this WSJ opinion piece.
  
• Ahhhh, politics. Are campaign contribution rules going to stifle real regulatory reform?
• A Tale of Two Cities in the Junk market. Charter's filing is more evidence that souring corporate debt starting to fester, but the amount of new issue high yield bond sales tripled ($2.38B) this week, signaling investor appetite for risk may be increasing.
• Former HBOS risk chief Paul Moore stood firm on his claims against the bank.
• John M. Reich, Director of the Office of Thrift Supervision stepped down yesterday. Read the official press release.
• More negative news for big banks as Wells adds an impairment.
• Art imitates life on the big screen, as Clive Owen stars in "The International" a new film about, yup, financial corruption.
  
• And finally, some snark from Michael Lewis to get the weekend started. No matter what you think of his views, they are usually entertaining.
  

Washington Fiddles while Banks Burn

Bank of America and Citigroup seem to be running neck and neck in the race to be first to be nationalized by the federal government. Bank of America blasted through the $5 level yesterday - important because many funds are restricted from owning stocks less than $5, and is approaching $4 - a 25-year low - today as investors and traders speculate about nationalization. Citibank was quoted at $3.43 at 11:24 am.