Bank of America - Merrill Lynch Merger

[monsoon]

As an update to the above discussion, the new Treasury Secretary gave an interview today on this very subject. Clearly they are pissed at Wall Street and the banks that caused the mess that we are seeing with the economy now. Timothy Geithner said the method of compensation on Wall Street had to change and will be changed because it encourages the kinds of behavior that destroyed the big banks. He also added there were over 8000 banks in the USA that are well run, did not participate in these deals and as a result they will make a distinction between these banks and the bad banks. He suggested the well run banks would be supported by the administration to move the finance industry forward while, presumably, the banks that caused the mess will be punished. It would seem they are not buying the pay for talent rationale for investment banking pay.

It's an interesting approach and one that is very much needed. They also made it clear that recent behavior by executives at places such as Bank of America forced their hand at this. More to come.

[Commoner]

Eight FHC CEOs (including Ken Lewis) are being paraded in front of Barney Frank and friends today. Can y'all believe that Ken Lewis took the train to Washington? I hope he made it on time.

[Commoner]

As an update to the above discussion, the new Treasury Secretary gave an interview today on this very subject. Clearly they are pissed at Wall Street and the banks that caused the mess that we are seeing with the economy now. Timothy Geithner said the method of compensation on Wall Street had to change and will be changed because it encourages the kinds of behavior that destroyed the big banks. He also added there were over 8000 banks in the USA that are well run, did not participate in these deals and as a result they will make a distinction between these banks and the bad banks. He suggested the well run banks would be supported by the administration to move the finance industry forward while, presumably, the banks that caused the mess will be punished. It would seem they are not buying the pay for talent rationale for investment banking pay.

It's an interesting approach and one that is very much needed. They also made it clear that recent behavior by executives at places such as Bank of America forced their hand at this. More to come.

Unfortunately, I think Timmy is a better journalist than Treasury Secretary. He's known he would be the nominee for months. He's known that his boss has been displeased with TARP for months. He knows that we've evolved from a liquidity problem to a solvency problem. He understands the problem, and he makes it clear to anyone who will listen that it's a complicated problem and that it's going to be hard to get it right (nothing wrong with underpromising and over-delivering) but there are two problems. First, the plan he annunciated was incredibly vague. He's still stuck on guiding principles (like "stress tests" and praising some banks and admonishing others) but nobody has anything better than a framework at this point. This is exactly where we were with TARP in September, which leads me to the second problem ...

TARP in September was supposed to be an asset purchase vehicle. That's a significant part of this plan (we think) but the same problems remain and, in my opinion, are exacerbated by the introduction of private investment. You're going to see real price discovery (and it's going to be low). To the extent any bank actually unloads any of these bonds for what the market will pay, right now, the solvency crisis will be that much worse.

I don't see how they can get any farther with an asset purchase plan than Henry Paulson did in October (not very).

The lack of anything concrete in his comments yesterday was disappointing. The possibility that he presses on with an asset purchase plan that accelerates insolvency is frightening.

[monsoon]

Eight FHC CEOs (including Ken Lewis) are being paraded in front of Barney Frank and friends today. Can y'all believe that Ken Lewis took the train to Washington? I hope he made it on time.

Indeed. It should make for good theatre. All of these CEOs, in getting a clue from their auto industry counterparts, took commercial transportation. i.e. they left the private jets parked at home. They were earlier described by a pundit on CNBC as villain banks.

[49er]

Aren't banks caught in a sort of catch 22 today though? If they lend to everyone, they're blasted for making bad loans. If they pull back and become conservative, they're blasted for not lending enough. So much damage has been done to the big banks reputations that they really can do no right. BAC's name being dragged through the mud because of Thains office antics was horse poop, but made for great news stories.

[atlrvr]

Transcripts are now available for their comments.

They read like something like.

Mr Frank,

We blah, blah, blah, couldn't have without TARP, blah blah blah, see, people are getting helped, blah blah blah, committed to generating a positive return on taxpayer investment, blah!

Thanks for having me.

[gman430]

Transcripts are now available for their comments.

They read like something like.

Mr Frank,

We blah, blah, blah, couldn't have without TARP, blah blah blah, see, people are getting helped, blah blah blah, committed to generating a positive return on taxpayer investment, blah!

Thanks for having me.

Bank of America up already up almost 10% this morning. Coincidence? They know they're about to get more money. Congress will grill the CEO's but won't stop giving them money until the problem is fixed. We the taxpayers will continue to bend over and take it up the rear unfortunately.

[Commoner]

Aren't banks caught in a sort of catch 22 today though? If they lend to everyone, they're blasted for making bad loans. If they pull back and become conservative, they're blasted for not lending enough. So much damage has been done to the big banks reputations that they really can do no right. BAC's name being dragged through the mud because of Thains office antics was horse poop, but made for great news stories.

We have a winner!

Yes. It's time to deleverage and bolster capital reserves, as the bonds that were on your books aren't nearly the quality you anticipated. The government stepped in to accelerate [something] by taking preferred stakes. The banks apparently thought this was for accelerating their capital reservations and taking up the slack that was suddenly created by the rug getting pulled out of the MBS positions. Barney Frank and Chris Dodd thought this was for the continuation of status quo lending. (Apparently they don't think we're borrowing enough.) Catch 22 doesn't do it justice.

[gman430]

Aren't banks caught in a sort of catch 22 today though? If they lend to everyone, they're blasted for making bad loans. If they pull back and become conservative, they're blasted for not lending enough. So much damage has been done to the big banks reputations that they really can do no right. BAC's name being dragged through the mud because of Thains office antics was horse poop, but made for great news stories.

That's not the problem in my opinion. The problem is they're taking tax payers dollars and using it for bonuses and junkets instead of trying to fix the problem they mostly started. The New York Attorney General has accused Merrill Lynch executives of corporate irresponsibility by secretly awarding $3.6 billion in bonuses as taxpayers were bailing out the industry.

[Commoner]

Transcripts are now available for their comments.

They read like something like.

Mr Frank,

We blah, blah, blah, couldn't have without TARP, blah blah blah, see, people are getting helped, blah blah blah, committed to generating a positive return on taxpayer investment, blah!

Thanks for having me.

That works. Here's the Lewis transcript. The rest are available. http://dealbreaker.com/images/thumbs/kenne...lewis_-_boa.pdf

As an aside, I've been looking forward to this spectacle for days. It's difficult to avoid posting advance video from the capitol -- the showdown scene from the end of Kingpin with Bill Murray and Woody Harrelson.

Live @ http://www.cspan.org/Watch/C-SPAN3_wm.aspx

[monsoon]

I've watched parts of this spectacle at Congress on and off. IMO, Ken Lewis owes Mel Watt a dinner or something next time both are in downtown. He threw the bankers and namely Lewis some opportunities to say a few good things about themselves. Nice touch from Mel, for bringing Hugh McColl into the conversation. I don't think anyone there, other than the bankers, had any idea who this might be. Lewis, for his part, has managed to avoid answering any questions. I think he makes the mistake of assuming these congressmen are stupid. People don't get elected to Congress and the Senate in particular without being experts at BS.

Generally from the comments I get the impression that congress is falling into two camps on this issue (excluding the ones making purely partisan plays).

The first group absolutely dreads having to continue to deal with this issue. They carelessly wrote the check to GW Bush to fix this problem last October in hopes that nobody would remember it in 6 months because it was going to fix the broken banks. It didn't. Now here they are again having to deal with it and getting heat over it. They will do anything, including handing out another check without conditions, if that is what it takes for the problem to go away. They just want to problem to go away, they don't care how it is done.

The second group in Congress is infuriated at the 8 big banks and, metaphorically, want to cut off some bankers heads and stick them on pikes in the public square so all can see these villains are being dealt with. In reality, IMO, they wouldn't mind seeing the a couple of these banks taken down as an example to the rest and the shareholder equity destroyed in the process. They want to see some pain at these banks so they can go back to their constituents with examples they are doing something. If this group wins out, I am guessing there will be some bankers looking for a career change.

It's not clear which group in Congress is going to get the final say in how this ends up. There are rumors the Obama administration is faced with the same kind of split amongst it's ranks. I suppose that will depend upon two things. The first is in how the banks manage their behavior. To date they have done an absolutely miserable job at it. Marie Antoinette looks like Mother Teresa in comparison to the attitude the bankers have taken about their compensation and perks. The second, and more important is the economy. If people continue to be laid off in droves and these banks continue to be blamed for it, then there is going to be hell to pay. How bad that might be is anyone's guess.

[Commoner]

I've watched parts of this spectacle at Congress on and off. IMO, Ken Lewis owes Mel Watt a dinner or something next time both are in downtown. He threw the bankers and namely Lewis some opportunities to say a few good things about themselves. Nice touch from Mel, for bringing Hugh McColl into the conversation. I don't think anyone there, other than the bankers, had any idea who this might be. Lewis, for his part, has managed to avoid answering any questions. I think he makes the mistake of assuming these congressmen are stupid. People don't get elected to Congress and the Senate in particular without being experts at BS.

...

Are you referring* to Lewis' interaction with Maxine Waters (CA)? I didn't know people that unintelligent populated Congress. "I don't know what you're talking about" was probably the only thing he could say.

*Sorry -- was referring to the comment w/r/t Lewis avoiding questions and generally not saying anything.

[monsoon]

^No. Mel addressed them direct (maybe more than once) and threw out some random bones.

[monsoon]

I don't think the banker CEO's did themselves any favors today. Their performance is being widely derided on all the media channels from conservative to liberal. Lewis is getting special attention for his demeanor and dancing around answering questions. Rep. Maxine Waters seemed absolutely infuriated with him, especially concerning his 'complicity' in the bonuses handed out at Merrill Lynch. She was mentioned the possibility of jail time for the payment of these bonuses. It's especially galling that 4 executives at ML split more than $100M and another 400 got sums from $M+. This at a failed bank and with US taxpayer money.

Nice icing to this cake. A telephone recording has come out this evening at a high level executive meeting at one of the banks. They are clearly heard ordering everyone to stop calling them bonuses. They are "retention awards" now.

Finally one of the local TV stations got one of their DC rent a reporters to attempt to ask Lewis about layoffs in Charlotte. He got shoved by one of Lewis's staff and a very red faced Lewis marched off.

[Commoner]

I don't think the banker CEO's did themselves any favors today. Their performance is being widely derided on all the media channels from conservative to liberal. Lewis is getting special attention for his demeanor and dancing around answering questions. Rep. Maxine Waters seemed absolutely infuriated with him, especially concerning his 'complicity' in the bonuses handed out at Merrill Lynch. She was mentioned the possibility of jail time for the payment of these bonuses. It's especially galling that 4 executives at ML split more than $100M and another 400 got sums from $M+. This at a failed bank and with US taxpayer money.

Nice icing to this cake. A telephone recording has come out this evening at a high level executive meeting at one of the banks. They are clearly heard ordering everyone to stop calling them bonuses. They are "retention awards" now.

Finally one of the local TV stations got one of their DC rent a reporters to attempt to ask Lewis about layoffs in Charlotte. He got shoved by one of Lewis's staff and a very red faced Lewis marched off.

I guess it all depends on where you watch the news. One thing is certain -- the MSM has done little constructive in the course of this whole crisis, except to stoke the embers of class warfare.

I (and for what it's worth, the print and web-based outlets I use) thought the witnesses did the best they could, given that, for the most part, they were either being yelled at by members of Congress (who didn't ask any questions), were being grilled about specific small business loans to companies in representative districts (that the witnesses don't know anything about and with no background info on the borrower), or were being clumsily asked very technical questions by representatives who clearly didn't understand the subject matter, and who didn't want to understand the subject matter. I watched the entire session, from morning through afternoon, and was amazed at the grandstanding, posturing and total ineptitude (with the exception of a small number of representatives (including Frank)) of the members.

Maxine Waters led the way. If you watched her interaction with these guys, you'd know what I'm talking about. I don't understand why she is on that committee. She should be embarassed. Sure, she suggested jail time. So did Michael Capuano (D-Ma), who compared them to bank robbers who are currently incarcerated in his district. WHAT CRIME DID THEY COMMIT? Capuano and Waters are a disgrace. I can't believe we've gone from Madison and Jefferson to people like Waters, Capuano and Palin.

The whole hearing was a joke. One second, they're screaming at these guys for not lending enough, especially to marginally creditworthy consumers/businesses. The next second, they're screaming at them for lending too "willy nilly." The next second, they look ridiculous asking a question about "which of you use CDOs". I don't think the majority of these people knew what any of these instruments are. Waters was the worst. Anything she said w/r/t this hearing should be ignored.

Here's Capuano sounding ridiculous (but sounding really good to angry citizens who don't understand the situation):

http://www.youtube.com/watch?v=FLtieiyCFMw

Here's Waters. I don't think she knows what she's talking about either:

[monsoon]

Whether they know what they are talking about or not is pretty much irrelevant in this manner. When the bank executives drove their corporations into the ground so far they had to go to the government to save them, they immediately gave people such as Waters and Capuano control over them.

Sure the average person doesn't understand what has happened in detail, I would not expect them to. But they are now being asked to fund these banks with their tax money while at the same time these same banks are raising fees, foreclosing instead of negotiating and refusing to make loans, all while these bankers are flying around in corporate jets, getting outrageous bonuses and being rewarded for complete epic failure. It should make anyone angry as hell. And it is.

Beyond the bankers, I don't think your argument is going to go far in getting people to agree to cut them some slack. This is what happens when an organization takes public money. It does come with a lot of strings attached. To expect otherwise isn't reasonable.

[rockhilljames]

Lord, I just watched Maxine Waters.

She's an idiot.

[monsoon]

Lord, I just watched Maxine Waters.

She's an idiot.

Maxine Waters.

[Commoner]

Whether they know what they are talking about or not is pretty much irrelevant in this manner. When the bank executives drove their corporations into the ground so far they had to go to the government to save them, they immediately gave people such as Waters and Capuano control over them.

Sure the average person doesn't understand what has happened in detail, I would not expect them to. But they are now being asked to fund these banks with their tax money while at the same time these same banks are raising fees, foreclosing instead of negotiating and refusing to make loans, all while these bankers are flying around in corporate jets, getting outrageous bonuses and being rewarded for complete epic failure. It should make anyone angry as hell. And it is.

Beyond the bankers, I don't think your argument is going to go far in getting people to agree to cut them some slack. This is what happens when an organization takes public money. It does come with a lot of strings attached. To expect otherwise isn't reasonable.

Whether they know what they're talking about is certainly relevant as long as they're going to make demands and get into the day-to-day management of the companies. As a taxpayer, I don't want morons controlling my "shares" just like I don't want morons controlling shares in companies I choose to invest in. There's a difference between a company taking public funds and accepting strings and being told what to do by Representatives of questionable intelligence.

You can't do anything about your tax dollars subsidizing the issuance of debt to purchase preferred shares in dozens of financial institutions. Are you pleased that Maxine Waters has any degree of authority over those shares? Let's not mistaken anger and righteous indignation for leadership.

[monsoon]

. Are you pleased that Maxine Waters has any degree of authority over those shares? Let's not mistaken anger and righteous indignation for leadership.

Waters is one member of the 535 member US Congress. Because she was elected to that body, she has the right, based in the US Constitution, to have a say in how the Congress dictates terms on this tax money. I don't have any issues with the US Constitution. Maybe the bankers think they are above it, which again, is one of the problems. I am quite pleased that she is involved as she is in this process because I have not heard anything said by her, that doesn't need to be said. As the video I just posted suggests, she is doing her job to help real people solve real problems. Call me crazy, but that would seem to be what a politician should do. Exactly what are you complaining about?

I don't think any banker can lay claim that anyone else is clueless about the finance industry. We are talking about an industry that has lost the equivalent of 25 years of profits in just a few months and which has now sucked up an amazing $1 Trillion in tax money. If these people are so knowledgeable, then where were they when this collapse was happening? Why didn't they try to stop it? I go by results, and if these are the results, then I would say it is these bankers that are clueless about banking. They are, after all, the ones sitting in the driver's seat. When the car crashes, do you blame the ones that have to come in and clean up them mess? I don't think so.

[hueion39]

Technically, the Gov't is an owner via preferred stock. The government has no voting rights and therefore no say on how the company is run. Although, we clearly see there is desire for them to do so.

Edit: Let me qualify my response by stating I don't know every specific of the program, but this is my understanding of the government's ownship.

[monsoon]

^Congress can change any agreement or law as it sees fit, even retroactively. The technicalities of how preferred stock works won't bind them to any remediation they feel is needed to fix this problem.

[Commoner]

^Congress can change any agreement or law as it sees fit, even retroactively. The technicalities of how preferred stock works won't bind them to any remediation they feel is needed to fix this problem.

Congress cannot unilaterally change the subscription agreement by which it purchases preferred shares from companies. Congress may, within the four corners of the subscription agreement, make itself more and more onerous so that the companies redeem as much of the investment as possible, as quickly as possible (to the detriment of liquidity), but it may not convert the shares to common stock (voting stock) unless the companies agree to a new issuance of common stock, or the government buys the shares on the open market or in the form of a tender offer.

The idea that Congress can change agreements as it sees fit is not realistic. The executive branch can declare banks insolvent and enter them into receivership, per existing regulatory regimes (subject to proper amendment). Anything else is unconstitutional -- especially the passage of some kind of ex post facto law (which is prohibited by Article I of the USC).

The fine print and technicalities exist for a reason. They're not just window dressing.

[Commoner]

Technically, the Gov't is an owner via preferred stock. The government has no voting rights and therefore no say on how the company is run. Although, we clearly see there is desire for them to do so.

Edit: Let me qualify my response by stating I don't know every specific of the program, but this is my understanding of the government's ownship.

Absolutely right. It's not convertible, but Treasury has a warrant to purchase common in an amount not exceeding 15% of its preferred investment. It's not exactly a vanilla preferred investment, but it's not a path to nationalization or de facto nationalization.

Here's a term sheet:

http://www.treas.gov/press/releases/report...ment5hp1207.pdf

[Commoner]

Waters is one member of the 535 member US Congress. Because she was elected to that body, she has the right, based in the US Constitution, to have a say in how the Congress dictates terms on this tax money. I don't have any issues with the US Constitution. Maybe the bankers think they are above it, which again, is one of the problems. I am quite pleased that she is involved as she is in this process because I have not heard anything said by her, that doesn't need to be said. As the video I just posted suggests, she is doing her job to help real people solve real problems. Call me crazy, but that would seem to be what a politician should do. Exactly what are you complaining about?

I don't think any banker can lay claim that anyone else is clueless about the finance industry. We are talking about an industry that has lost the equivalent of 25 years of profits in just a few months and which has now sucked up an amazing $1 Trillion in tax money. If these people are so knowledgeable, then where were they when this collapse was happening? Why didn't they try to stop it? I go by results, and if these are the results, then I would say it is these bankers that are clueless about banking. They are, after all, the ones sitting in the driver's seat. When the car crashes, do you blame the ones that have to come in and clean up them mess? I don't think so.

You mean their aggregate market caps have depreciated an amount equal to their trailing 25 years of profits, right? If so, that's hardly "lost 25 years of profits." Again ... there is an important difference between market cap and P&Ls.

W/r/t Waters and what I'm complaining about ... She hounds them for failing to lend, but irresponsible lending and faulty credit risk analysis is what got us into this mess. We do not need more loans to constitutents who can't service their existing debt or to businesses that can't sell more stuff. She has not demonstrated that she understands this. Instead of castigating the only people who have any relevant expertise and attempting to micromanage (through an overwhelming bully pulpit and with language that is particularly appealing to the peasants at the moment) that which she does not understand, perhaps she should get off the refinancing hotline and work with her colleagues in creating some jobs and an actual stimulus program.

It's like her thought process is ... how do I improve an economy that is sezied by (badly needed) deleveraging? By creating incentives (or, without incentives at all, but by attempting to bully or "regulate" banks) to pour more debt into the system. Gotta make sure people are buying flat screens and cruises on credit without impediment by reason of income or existing leverage, right? It's their fundamental American right! What's next? More deposit-less NINJA loans? If they heed her call to abstain from raising interest rates, they create the impression that low interest rates are en entitlement. The last thing needed is the demonization of companies trying to raise rates in recognition of specific realities.