Today was a bad day in the continuing drama of the soap opera we call Europe.

Focus shifted from an insolvent Greece to a potentially insolvent Italy. The back breaker is that the cost of borrowing for Italy spiked above 7% for their 10 year bond, which most economists say is unsustainable.

Greek insolvency was a manageable problem because the Greek economy is a pimple on the ass of the European economy. Italy, OTOH, is the eighth largest economy in the world. Not only is Italy too big to fail, it it may be to big to bail. Bailing Italy out of a debt crisis would have to come from one of three sources.

1. The International Monetary Fund (IMF) which is highly reliant on funding by the US. What do you think the domestic political appetite is for US taxpayers bailing out Italy and the Eurozone via the IMF?
2. The European Central Bank (ECB), which is legally constrained from doing so, doesn’t have the money anyway, and says they won’t do it.
3. The European Financial Stability Facility (EFSF) which was the centerpiece of the Eurozone Debt “solution” touted by Merkel and Sarkozy way back two week ago. Problem being – they were expecting the Big Panda to fund those bonds. Yeah, that is not happening either. Here is why…

Al Jazeera’s Teymon Nabili recently interviewed Jin Liqun, Chairman of China’s Sovereign Wealth Fund. The remarkable interview has garnered deserved attention in the blogosphere and MSM. It is well worth the 30 minute investment of time, but for those who want to skip right to the good parts, I’ll offer a few highlights.

^{X-posted from “Divided We Stand United We Fall”}

From the department of “The more things CHANGE…”

What does this sound like to you? – A high risk “bet the company” culture, huge leverage, “smarter than you” corporate arrogance, regulators asleep at the switch, a”rock star” CEO cozying up to the President of the United States, questionable accounting, bankruptcy, investigations, and criminal prosecutions.

Most of the mainstream media coverage of the MF Global failure has focused on the leverage and the highly speculative bad business bets made by CEO Jon Corzine. But with the SEC and FBI looking under the covers, Dan Primack of Fortune Magazine goes where the NYT fears to tread:

Video of CNBC interview with Primack linked HERE.

Curiouser and curiouser.

Dipping into MF Global client funds to backstop the firm’s heavily leveraged high risk bets on European debt is about as serious as it gets. We’re talking – Federal Felony / Criminal Fraud / Grand Theft / Go To Jail / Do Not Pass Go / Do Not Collect $200 / Throw Away The Key / – that kind of serious. If tapping segregated client funds at a broker dealer is not criminal fraud, then it at least rises to criminal negligence on the part of the CEO of that firm.

Then there is the special relationship with the President and the related special provisions of the “Investment Grade” debt offerings from MF Global only two months ago:

“The futures broker sold $325 million of five-year unsecured notes, the company said today in a statement. The notes will pay an extra percentage point of interest if Corzine is named to a federal post and confirmed by the Senate before July 2013, New York-based MF Global said yesterday in a regulatory filing.

“That seems crazy,” said William Larkin, a fixed-income portfolio manager who oversees $500 million at Cabot Money Management Inc. in Salem, Massachusetts, and has 22 years of experience. “I’ve never heard of something like this.”…

A Democrat, Corzine is among the biggest fundraisers for President Barack Obama’s 2012 re-election campaign. He has been the subject of speculation about administration jobs such as Treasury secretary or White House economic adviser, said Christopher Allen, an analyst at Evercore Partners Inc. in New York…

Corzine’s employment contract is written with a view to future government service. It stipulates that he’ll be paid his $1.5 million retention bonus on a pro rata basis if he leaves to work for any “U.S. federal, state or local government” before March 31, 2014.”

I wonder if Corzine’s retention bonus and the bond interest kicker will be invoked if it turns out that Corzine’s federal employment is working in the laundry of a Federal Prison?

Meh – probably not worth worrying about that “Investment Grade” Bond Interest kicker. These bonds (which were sold in August and have yet to pay a coupon) were trading at 40 cents to the dollar on Monday. BTW – Thank you S&P for another great call. In the same time frame that S&P was downgrading US Debt early this summer, they rated this MF Global bond offering “Investment Grade”. U.S. Treasuries have increased in value since that rating. The MF Global bonds? Not so much.

UPDATE:
Jon Corzine resigned this morning and lawyered up.

The Bush Justice Department prosecuted and convicted Ken Lay. Let’s see what happens to Jon Corzine.

^{X-posted from Divided We Stand United We Fall.}

Perhaps the best reporting on yesterday’s hearing:

“The elephonkey donklephant is a genetic monstrosity whose every moment of existence is unbearable agony.” – Jon Stewart

Listen, you’ll get no arguments from me that, on the whole, capitalism has been a positive force. But the problem is it’s an amoral system when gone unchecked and it just continues to find new and inventive ways to make money until something like 2008 happens.

And today…even though they didn’t need to be…Goldman Sachs became the poster child for that excess.

No regret. No remorse. Just one clear message: greed is good.

See, what was clear from the hearings with Goldman Sachs today…they’re not a bank…they’re drug pushers, with the drug being risk, reward and potentially total financial annihilation. Take your pick. They’ll sell you anything…as long as you can pay.

And…it’s all legal…maybe. Because what the emails that Senators read reveal is a similar knowing negligence for some investors to what Enron did with energy prices and the Californian government.

But hey, don’t take my word for it…take a look at how they conducted themselves today…

Yes, the way Goldman talked about how they serve their clients today was unfortunate to say the least. They didn’t do themselves any favors and the repercussions will be felt for a long time to come.

Last week President Obama announced the “Volcker Rule” proposing tough constraints on big banks. During the announcement Barney Frank stood behind the president on the podium in visual support of the policy. As noted in my last post, the Chairman of the House Financial Services Committee then proceeded directly to an interview on CNBC, the media outlet that is arguably the most direct conduit to the banking industry affected by that policy. In the interview Barney Frank soft pedaled the impact of the proposed policy, saying it would not go into effect for 3 – 5 years.

Yesterday, in a background briefing, the administration announced a three year spending freeze on portions of the budget. Since departments with the fastest growing government expenditures like Defense, VA, the State Department, and entitlements are excluded from the “freeze”, it will have a negligible effect on the ballooning deficit. NYT:

“The payoff in budget savings would be small relative to the deficit: The estimated $250 billion in savings over 10 years would be less than 3 percent of the roughly $9 trillion in additional deficits the government is expected to accumulate over that time.”

Shortly after the announcement, Jared Bernstein, economist and economic adviser to Vice President Biden, appeared on the Rachel Maddow Show – the media outlet that is arguably the most direct conduit to the progressive community. Mr. Bernstein proceeds to soft pedal even the very modest impact the policy would have on deficits, almost apologizing for it, and practically promising that the administration will really continue to be the big spenders that the progressives know and love. Maddow wasn’t buying what Jared was selling:

I am sure the President will clear all of this up in the State of the Union address tomorrow.

Jon Stewart Clip

In Feb 2009, the company reported this…

Bank of America Corp. expects to pay back U.S. Treasury relief funds within the next three years, and “categorically” does not need further government funding, Chief Executive Ken Lewis told CNBC’s Maria Bartiromo in a televised interview Friday. Bank of America has received up to $45 billion in funds from the Trouble Asset Relief Program.

10 months later…from their press release…

PRNewswire/ — Bank of America today announced that it will repay U.S. taxpayers their entire $45 billion investment provided under the Troubled Asset Relief Program (TARP). The repayment will be made after the completion of a securities offering.

To date, Bank of America has paid $2.54 billion in dividends to the U.S. Treasury on the TARP investment. Repaying TARP will save the company approximately $3.6 billion in annual dividend costs from the TARP investment.

Some of this money is coming from their existing assets, and some of it is coming from an equity sale. But they’re paying it back.

Now, there are those who are questioning if they should be doing that or not. After all, do they have enough capital?

Yes, they do…

After the stock offering and some other capital moves, Bank of America’s Tier 1 capital ratio will stand at 11%, and Tier 1 common ratio will stand at 8.5% — stronger metrics than Wells Fargo, JPMorgan Chase or U.S. Bancorp.

Only Citigroup has higher capital ratios, due to a huge preferred-to-common conversion, but given the government’s large ownership stake and Citi’s long path to reorganization, few expect it to repay TARP in the same manner.

Long story short, we’ve made money on every single TARP repayment so far AND averted a financial meltdown AND unfroze the credit market. Yes, the big banks aren’t completely out of the woods yet, but the brush is getting a lot thinner.

So, to those who claimed that we’d never see this money again…how long before we hear some mea culpas? Especially for those who called for Geithner’s ouster?

Tick tock…

Who’s this guy?

Meet Kenneth R. Feinberg, the new pay “czar” for the White House. He’s tasked with reigning in the out of control compensation at companies the government helped recently.

I think it should be noted right off the bat that this is tied to executive compensation and bonuses…two pots of money that are so out of step with compensation in the real world it’s obscene. I mean, one year after all of these places went under and they’re giving out billions in bonuses?

Here’s more from Wash Post:

The cuts will affect 25 of the most highly paid executives at each of five major financial companies and two automakers, according to the sources, who spoke on the condition of anonymity because the plan has not been made public. Cash salaries will be cut by about 90 percent compared with last year, they said.

The administration will also curtail many corporate perks, including the use of corporate jets for personal travel, chauffeured drivers and country club fee reimbursement, people familiar with the matter have said. Individual perks worth more than $25,000 have received particular scrutiny.

And here are the companies affected…

The seven companies under Feinberg’s purview are Citigroup, Bank of America, General Motors, Chrysler, GMAC, Chrysler Financial and American International Group. These firms have received a total of about $250 billion in bailout funds from the Troubled Assets Relief Program, adopted last year by Congress, and benefited from hundreds of billions of dollars more in government guarantees and other support.

Personally, I’d like to see executive pay at publicly traded companies capped at a set price with stock options/bonuses only triggering when those folks actually produce provable results. But this “failing up” nonsense that CEOs continue to do decade after decade is ridiculous.

Of course I know this won’t happen because Wall Street firms will continue to claim that these compensation models are key to attracting the right talent, even though there are usually dozens of qualified applicants for every position they have.

Still, one can dream…

And this is for 2008…a year when their failure nearly brought the entire world’s financial system to its knees.

I don’t care if these bonuses were contractual or not. New circumstances (you know…like BANKRUPTCY!) could allow them to renegotiate with their employees.

From the AP comes the list…

Citigroup…

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

Bank of America…

Bank of America Corp., which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million. Of those, 28 received bonuses of more than $3 million.

Merrill Lynch…

Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008, with 149 of those workers getting bonuses of at least $3 million.

And less offensive are JPMorgan and Goldman Sachs, but it still makes you wonder why they took money in the first place…

JPMorgan, which gave 1,626 employees of at least $1 million, paid back the $25 billion it received in TARP money last month. Goldman, which repaid its $10 billion in government money last month as well, gave 953 workers bonuses of at least $1 million. The two banks each gave more than 200 employees bonuses of more than $3 million.

Yes, they learned nothing from last year. They’re simply taking advantage of the position they put all of us (including the government) in and doing whatever they want. Business as usual.

Amazing.

Most people don’t realize that the insane gas prices last year had nothing to do with increased demand and had everything to do with market speculation and hoarding encouraged by the top investment banks.

Now True/Slant’s own Matt Taibbi uncovers the truth behind the scam.

Read the rest at True/Slant.

Even though he’s only been in office for 5 months, this has still be a long time coming.

And there are some important measures being introduced for home loans and consumer protection.

From Wash Post:

Many of the specific proposals will require legislation, and today’s announcement will drop the plan into an already heated debate on Capitol Hill about the eventual shape of reform. The financial crisis has forced broad consensus that changes are necessary, but there are wide disagreements about the details.

The proposed Consumer Financial Protection Agency would have broad authority to regulate the relationship between financial companies and consumers of mortgage loans, credit cards, checking accounts and other financial products. It would define standards, police compliance and penalize delinquent firms. Other agencies, particularly the Federal Reserve, would surrender some powers.

One idea highlighted by the administration is to require that lenders offer all customers standard “plain vanilla” loans with simple features and streamlined pricing, such as 30-year, fixed-rate mortgages. The sale of more loans with more complicated terms would be subjected to greater scrutiny by the agency. It could even require that customers make a written choice to select anything other than a vanilla loan.

The agency would have authority to overhaul a tangled mess of federal regulations that many financial experts regard as outdated, insufficient and inadequately enforced. An oft-cited example is the massive stack of paperwork handed to mortgage borrowers at closing, including several calculations of the true cost of the loan itself.

“Consumers should have clear disclosure regarding the consequences of their financial decisions,” the plan states.

Agreed. And while we can blame consumers all we want for overreaching in the past couple decades, let’s not kid ourselves…had these measures been in place this situation never would have happened.

However, I think the biggest news to come out of this (which isn’t in the story) is that all of the agencies that used to regulate banks will now be folded into one entity. This is so banks can’t pick and choose who will regulate them…and the notion that they could do that before makes my stomach turn. Gee, I wonder who they’re going to pick…perhaps the laziest agency?

Seriously, you don’t think the current system was royally screwed up? Check out how it worked…

Under the current system, banks can choose their regulator. Because the OCC, OTS and FDIC are funded by fees from the banks, the regulators have an incentive to compete for business by offering more lenient oversight. The system also divides supervision of the largest financial conglomerates among multiple agencies, each with responsibility for certain subsidiaries, creating gaps in coverage that companies have exploited. Many experts say these failures of regulation contributed to the financial crisis.

I don’t think you have to be an expert to see that this could easily lead to all sorts of irregularities. So, again, having one agency do this is the smart way to go.

More as it develops…

Even after reading this article I think it’s an open question, but I wasn’t aware that we were paid dividends on the preferred shares.

From McClatchy:

In addition to returning the $68 billion, the 10 banks paid the government $1.8 billion in dividends on the preferred shares of stock the government owned. That translates to an annualized rate of return of about 4.64 percent on the $68 billion.

In all, the government has received $4.5 billion from all bailout recipients, who’ve received $200 billion, for an annualized rate of return since Nov. 12, 2008, when the money was lent out, of 3.94 percent.

But the government had to borrow to pay for the bailout and pay interest on those borrowings. Once the interest costs are factored in, how’d the government do?

Not bad. The annualized rate of return of 4.64 percent on the $68 billion is well above the 2 percent interest the government was paying Monday to investors who were purchasing three-year bonds. The profit margin is even higher when measured against the interest the government is paying on a six-month bond — 0.31 percent.

There are certainly other factors involved and nobody’s saying the government should make a practice of this. Still, this seems like a silver lining…at least if these banks are truly out of harm’s way.

If not, well, this will all be remembered as yet another chapter in a massive boondoggle that paved the way for a decade of little to no growth in the GDP.

In any event, here are the banks who’ve paid back their loans and those that have yet to…

More as it develops…

That’s out of the nearly $230B given out over the past 9 months.

In other words, nearly 30% of the money that we would NEVER see again is being paid back. And the government could actually make a profit if they choose to exercise stock options, but there’s word they won’t do that.

Here’s more from Wash Post:

The decision is a milestone for the Obama administration’s financial rescue plan, reflecting new confidence that some large banks have returned to stable profitability. It is also a victory for the banks, which have pressed for permission to show strength and to avoid restrictions including limits on executive pay. But senior officials cautioned that the repayments are not a sign of a broader economic revival.

“These repayments are an encouraging sign of financial repair, but we still have work to do,” Treasury Secretary Timothy F. Geithner said in a statement.

The list of banks was longer than many financial analysts had expected, in part because banks have been able to attract billions of dollars in new capital from private investors following the conclusion of government stress tests.

And those are just the big banks. Much smaller banks have already repaid their TARP funds…

The government already has allowed 22 community banks to repay about $1.8 billion in federal aid, but this marks the first time large banks have been given permission to return money. Treasury officials say they now are comfortable that these banks can weather the recession without the benefit of direct government support. The government continues to support banks through a variety of other, less visible programs, including debt guarantees, cheap loans and a pledge that the largest banks will not be allowed to fail.

No doubt there’s still a hell of a lot of taxpayer money out there, but you can’t say the Obama administration doesn’t have a plan to get this money back. And now we’re seeing that plan work, so some very encouraging signs of progress.

By the way, if you want to see the banks that went through the stress tests and the amount of TARP funds they were given, go here.

Today, Congress sent President Obama the much talked-about bill setting in place new rules for the credit card industry.

The new restrictions will protect debt-ridden consumers from many of the surprise charges common in the industry, like over-the-limit fees and a charge to pay the bill by phone. People under 21 also will find it difficult to get a card.

In addition to outlawing other hidden/unexpected fees, the bill puts into place a measure that will allow credit card holders who miss a payment and see their rates rise to lower their rate back to the original level if they pay on time for six consecutive months.

Of course, there are expected to be some negative consequences:

As banks scramble to make up for the lost revenue, cardholders who pay off their balance in full each month could see annual fees become the norm and lucrative rewards programs canceled.

Annual fees? No more thank you points? I have a feeling that competitive forces will still push credit card companies to offer perks to desirable customers. But I also have a feeling that the lost revenue from the now out-lawed fees will be recouped through various shifts and alterations of still-legal fees and rates. As long as so many of us rely on credit cards, the companies who offer us the credit will find a way to remain profitable.

I don’t think think this comes as a huge surprise, and it’s certainly disheartening.

From Wash Post:

The government signaled yesterday that its financial rescue efforts may have reached their high-water mark, announcing that the much-anticipated “stress tests” of 19 large banks showed that only one, GMAC, was likely to need additional taxpayer aid and that it would begin to unwind assistance for the healthiest firms.

Despite a deepening recession and projections that banks will continue to lose money, the government will require the firms to increase their combined capital by as little as $9.5 billion. The government will require the banks to further strengthen their capacity to absorb losses by adding $74.6 billion to the portion of their capital that comes from common equity. Banks are likely to raise some of that money from investors and some by converting other forms of capital.

The announcement at the Treasury Department yesterday culminated a three-month process designed to show that banks are returning to health after a crisis that left much of the industry dependent on federal aid.

Officials said that banks continue to hold vast quantities of ill-considered loans and could suffer losses totaling $600 billion over the next 20 months as the borrowers default. But in showing that the banks can absorb those losses, the administration hopes to restore investors’ confidence. If banks can start raising money again, they can increase lending to consumers and small businesses, a critical piece in the government’s broader strategy for renewing economic growth.

So that’s the bad news. But the good news is that healthy banks will begin repaying the money the federal government gave them…

Nine of the 19 banks were found to have sufficient capital reserves. Firms that repay the government no longer face restrictions on executive compensation.

Applicants will first be required to show that they do not need the shelter of a Federal Deposit Insurance Corp. program that helps banks raise money at lower interest rates. But banks may continue borrowing from the Federal Reserve’s emergency programs, which do not impose pay restrictions.

More as it develops…

It’s almost been two months since Geithner announced the details of how the stress tests would go down, and now the government is set to announce the results for a bunch of banks.

Still, the focus is certainly on the top two.

From Financial Times:

Citigroup and Bank of America are working on plans to raise more than $10bn each in fresh capital, even as they launch last-ditch attempts to convince the US government they do not need to bolster their balance sheets.

People close to the situation said Citi, BofA and at least two other lenders will on Monday attempt to convince the Treasury and the Federal Reserve that the findings of “stress tests” into their financial health were too pessimistic.

But with time running out – the government will present the final test results to 19 banks tomorrow with an announcement scheduled for Thursday – both Citi and BofA are looking at how they could raise extra capital.

Preliminary findings have revealed that Citi, which has already been bailed out three times by the authorities, could need an extra $10bn or more if the economy worsens. BofA, which has had $45bn in government aid, was found to need well in excess of $10bn, people familiar with the matter said.

Here’s the thing…Treasury and the Fed may indeed be too pessimistic, but I’d rather have that so the banks are flush with cash than anything close to what we once had.

In other words, maybe these banks don’t know what pessimism is anymore after two decades of irrational optimism that led to the near collapse our entire economy.

I’m just saying…

On Thursday, President Obama announced support for a new bill aimed at protecting credit card holders.

As early as next week, House Democrats expect to act on a bill that would make it harder for the industry to slap new fees and rates on cardholders while also requiring clearer disclosure of the costs and risks for cardholders. The bill would codify and expedite rules already proposed by the Federal Reserve Board, rules that would not be implemented until 2010.

Legislation pending in the Senate would go further, barring lenders from imposing interest rate increases on existing balances.

As usual with these things, the specifics will be hashed out in Congress. But the credit card companies are already warning that new restrictions will inhibit their ability to provide credit in these tough times. And Republicans are calling Obama a hypocrite for going after credit card companies when his own policies are unfairly heaping debt onto the American public.

I do not doubt that some credit card companies knowingly participate in ethically questionable business practices. But, in my mind, the central problem isn’t that new fees are created without warning or that finance charges are applied without explanation, but that too many of these companies actively exploit consumers by handing out credit to those without the means of paying off debts and by creating too-good-to-be-true offers which are designed to fool consumers into making bad decisions. Even for savvy credit card holders with good habits, picking through the small print on a new offer can be a frustrating and confusing undertaking. It’s no surprise some people end up with massive bills, choked with unaffordable finance charges.

I’m not sure what the appropriate government solution to these problems would be. Transparency in credit card offers would be a good start. No more advertising 0% finance charges for 18 months while hiding the fact that being late on one payment by one day will cause you to lose the deal and end up with 20-something percent in finance charges.

After that, I’d support some form of initiative that holds credit card companies partially liable for extending credit to consumers who clearly lack the means to pay off debts. That’s a subjective matter, so the issue would probably need to be handled through bankruptcy court. But creating some form of shared liability would help prevent cases of blatant exploitation.

Obviously, credit card companies need the freedom to earn profits and wastrel consumers shouldn’t be protected from their mistakes. But I do believe there is an unhealthy imbalance between credit card companies and their consumers. As always, I fear Congress will overreach and/or focus on the wrong aspects of the problem, but I’m not upset that the matter is being considered.

Between Wells Fargo and this news, doesn’t anybody think that this may put a slight damper on those Tea Parties on Wednesday?

From MarketWatch:

Goldman Sachs Group Inc. said Monday it swung to a profit in the first-quarter compared to the prior period, and announced it has commenced a public offering of $5 billion of its common stock.

Goldman Sachs said net earnings for the period ended in March were $1.8 billion, or $3.39 a share, compared to $1.5 billion, [...] Analysts had been anticipating earnings of $1.64 a share, according to Thomson Reuters data. [...]

Goldman Sachs said in a statement that it intends to use proceeds of the $5 billion offering to help redeem “all of the TARP capital.”

And yes, I think it’s definitely too soon to tell if these institutions are pulling out of the insolvency mess, but I can’t help but think if we’re seeing these kinds of numbers, it’s a relatively good sign that the worst could be behind us.

However, we still have yet to see the fallout from the next batch of toxic assets, but now that we have a system currently in place to deal with the subprime mess, maybe that’ll address any additional problems we face?

More as it develops…

And there was much rejoicing…

From MarketWatch:

NEW YORK (MarketWatch) — Wells Fargo & Co. said Thursday that first-quarter earnings will surge to a record $3 billion, well ahead of analyst forecasts, as loan losses and provisions dropped from the previous difficult quarter and its mortgage business thrived.

Wells shares jumped 22% as the bank also noted its Wachovia acquisition is exceeding expectations and reported another quarter of double-digit revenue growth.

Wells said first-quarter net income will be roughly $3 billion, or 55 cents a share, after paying dividends on preferred securities, including $372 million to the Treasury Department. Analysts surveyed by FactSet Research expected profits of 31 cents a share on average.

And, according to Credit Writedowns, there could be some money to be made here…

I see financial services companies shedding troubled assets, not marking other assets to market and having an enormous margin spread due to ridiculously low interest rates. To me, this is a huge buy signal. Last week, I thought a small position in out-of-the-money calls on BofA or Wells was a good idea before Wells gapped up this morning (I still think Citi is dead money). This is now less of a good risk-reward opportunity. But, don’t think Wells is alone in expecting a monster quarter here. Could we see the same at JPM or BAC? BAC has a huge tax dodge from its Countrywide acquisition so unless they haven’t finished with monster surprise writedowns, I expect a good number there as well and that looks like the best play in the space right now (despite a 20% rally today).

Still, while profits are all well and good, we still need these banks to start lending again.