September 28, 2008

Ctrl BG: A Shortcut to Financial News 9/28

Since I enjoyed writing the last post so much, I've decided to continue to do so. It has proven to be a great way to help me put everything into perspective and it's been fascinating reading what everyone else thinks as well. Again, feel free to correct me and put in your two cents, as obviously, I am no expert. I'm just a girl who happens to be interested in the current state of the economy.

Last Sunday night, Goldman Sachs (GS) and Morgan Stanley (MS) were approved by the Fed to become bank holding firms, officially ending the era of the independent investment banking model on Wall Street. They will now be able to open their own commercial banking arms and take in deposits, which they can then use to back up their investment banking operations- as JP Morgan, Bank of America (BofA) etc already does- thus ending investor concerns about the sustainability of their business model model. They now also have permanent access to borrow federal money (instead of within the window temporarily opened for them) and can become a FDIC insured bank, which insures indivisuals up to $100,000 of bank deposits. The following day, MS announced that they were getting as much as $8.5 billion of cash injection from Japan's Mitsubishi UFJ Financial Group (MUFG) in exchange for up to 20% equity stake in MS, further fortifying their position. I guess the deal with China fell through (or were the Chinese getting too greedy and the US govt didn't like that?). This is probably a better move anyway, since MUFG is the world's No. 2 bank by deposits, so surely it will help MS's transition into commercial banking go more smoothly. MS apparently already has about $36 billion in bank deposits from their private wealth management (PWM) business and are looking to expand into Asia. Or so, that's what CNBC said, but I didn't know PWM deposits count as bank deposits, but if they do, I guess this means that MS are looking to expand their PWM business in Asia. Or perhaps this $36 billion comes from their Utah-base industrial bank, which will be converting into a national banking association, names the Morgan Stanley Bank, National Association? Goldman Sachs' approach is must easier to understand (or so I think). They currently already have two deposit taking subsidiaries, with about $20 billion in deposits, and plan to create a new one called GS Bank USA, that will have more than $150 billion of assets.

This conversion is not all good and dandy though. Becoming a bank holding also puts both banks under more intense scrutiny and regulations from the Fed, which will probably limit their proprietary trading capacities (the division where they trade company assets like a hedge fund, taking on great risks), which happens to be one of their most lucrative divisions. I don't know about MS but personally I'm feeling quite optimistic about GS. On Tuesday, Warren Buffet invested $5 billion in GS preferred stocks and will also recieved warrants to purchase another $5 billion in common stock within the next 5 years- effectively give him about a 10% stake in GS. They also raised another $5 billion from a public stock offering, all within a few days. This and Buffet's approval, which in the investment world is the equivalent of getting Anna Wintour's approval in the fashion world, make me quite optimistic. Besides, I have always had great confidence in the power of brand image, Buffet just likes to call it "franchise."

On Thursday, Washington Mutual (WaMu), was seized by the FDIC, making it the biggest banking failure ever. Within 9 days, customers withdrew about $16.7 million in deposits from WaMu, literally breaking the bank. JP Morgan picked up WaMu's banking assets for only $1.9 billion. JP has had its eye on WaMu's operations in CA and FL for a while, and had offered for them in March, but was rejected in favor of a capital injection from TPG private equity (whoops!). It seems like JP got yet another bargain. JP is not the only one who got a sweet deal in all this however. It appears that Mr. Alan Fishman, WaMu's CEO for only 2 weeks, is eligible for $11.6 million in cash severance AND get's to keep his $7.5 million signing bonus. Not bad for two weeks worth of work.

It seems that the financial tsunami is expanding abroad too. Fortis,
the largest Belgian financial-services firm, just received an $11.2 billion euro bailout from Belgium, the Netherlands and Luxembourg in exchange for 49% stakes in the Fortis in their respective countries. It's almost like the European version of AIG.


The next bank on the chopping block is Wachovia- funny since a week ago they were in talks to merge with MS. Citigroup and Wells Fargo are currently in a bidding war over a possible emergency takeover of Wachovia, since it's stocks dropped dramatically on Friday.

While all this was going on, politicians were hard at "work" trying to get the $700 billion bailout bill to pass Congress. I'm not that into politics, but even I tuned in Wednesday morning to hear Paulson and Bernanke defend their case to the people at Congress. I'm not sure how politics usually go, but to my untrained ears, it sounded like a verbal merry-go-around, placing blames and trying to trick each other into saying something wrong. A members ask a simple yes/no question, Paulson/Bernanke would answer in a very roundabout way which prompts the member to ask, "so was that a yes or a no?" to which they'd repeat what they'd just said again. This would go on until the time is up or someone finally gives up from the frustration of it all. No wonder it takes them months to get a bill to past.
I'd imagined it to be more diplomatic and sophisticated. Anyway, I think the gist was that people didn't think taxpayers should have to bailout Wall Street (and individual homeowners) for taking too on stupid risks. But they had to do something. So they moved onto putting clauses on the plan, for oversight to monitor the use of the money, a cap on CEO pays and for warrants in companies who will be using this plan, so taxpayers would at least get something back for the $700 billion they spent. There was a gliche, when a bunch of Republicans rejected the plan and proposed some other plan to privately insure mortgage backed securities (there was shouting involved!), but it sounds like they're back on track now and a bill will be voted on Monday.

Personally I don't know what to think about this bill. On one hand, I don't think tax payers should have to bail out people who took on unnecessary stupid risks and expect everyone else to wipe up their mess when things go down just because the mess is big enough. As if our future generations didn't already have a big enough debt to clear up already, with the war and the social security problem etc. but now we have this. On the other hand, just like a bad trend, someone has to step in and put a stop to it before it spreads through the population. With the newly added clauses, it's the next best step there is. By taking the distressed debts out of "weak" hands and into "strong" hands, they might even make money in the future when the housing prices go back up! Besides, if the likes of Paulson, Bernanke and Buffet, says this is a sound plan, who am I to gainsay the experts?

19 Comments:

Anonymous Anonymous said...

I believe that when the moral fabric of society unravels, everything unravels. Sadly, innocent people suffer along with everyone else.

9/29/2008 11:54 AM  
Blogger I'm a *HOT TOPIC* said...

That's just sad :( Write up another update soon - I'm interested :)
I agree about taxpayers' money being put to a stupid use like that, there's so much more they could do with it. They'll figure out another way surely. Anyway, new update soon?

xoxo
ayaan

P.S- I've linked you on my page at couture-sovereign.blogspot.com
Link us? kisses <33

9/29/2008 2:23 PM  
Blogger J said...

I agree that taxpayer's money shouldn't be used to "bail out" companies who took huge risks. However, they ARE including regulations/language to help prevent further foreclosures of homes. As a result, this bill is much needed.

With hope (and according to logic), the market will rebound and go up. The assets taken by the government should increase and value and everyone should get their money back.

9/29/2008 8:24 PM  
Anonymous Anonymous said...

Don't you think it's kind of fishy that wamu wouldn't sell to JP and then the goverment comes and seize them only to turn around and sell it to JP....?

9/30/2008 4:45 AM  
Anonymous Anonymous said...

Well, the bailout failed, of course. I agree with Rep. Sensenbrenner of Wisconsin, when he said:

"I am voting ‘NO’ on the bill the House will vote on later today because it will subsidize Wall Street on the backs of hard working taxpayers and small businesses on Main Street.

"To put it plainly, this legislation will not work. It will put an unbelievable amount of taxpayer money at risk, and penalize those who used common sense during a time when others elected to ignore reason by making decisions that led them to live beyond their means. It is unfair and irresponsible to ask conscientious taxpayers to now shoulder the burden and debt of those with poor foresight.

"Moreover, the federal government has no business injecting itself into the free market system, and essentially, taking it over. This completely defeats the purpose of such a system, and will have a chilling effect on future businesses that may think twice about entering the market if they have to compete with the American government. This is contrary to the spirit of American entrepreneurialism that is the foundation of our nation, and would turn our American Dream into an American Nightmare."

9/30/2008 5:01 AM  
Blogger Kelly said...

The three "experts" you mentioned in your final sentence all have a vested interest in seeing the government get its way. If you look at the words of economists, however, you will find that they overwhelmingly believe the government should stay out.

166 top economists (meaning senior professors at Harvard, Stanford, etc.) signed a petition to make sure the Bailout Bill did not pass, with good reason. We do not want to create a welfare economy for Wall Street, or suggest to other industries that they can make poor decisions and expect a bailout.

I think if you want to "listen to the experts," look at people who aren't trying to promote their own agenda (like Bernanke)and who have studied economies and markets for years. If you do so, you will find that most of the politicians are extremely misguided on the issue.

My two cents :)

9/30/2008 5:44 AM  
Blogger Savvy Mode SG said...

it's the experts that go us into this the first place. it's depressiong for me everyday. but i agree that it's important for the government to do something about it but there is got to be a better plan instead of just scaring the public about the consequence of not passing the bill. we do need to liquidity in the market place but at the same time i also need to be convinced.

9/30/2008 5:59 AM  
Anonymous CT said...

I think your WAMU numbers are wrong. I think customers pulled out 16.7 Billion and they were worth 19 Billion.

9/30/2008 6:36 AM  
Anonymous Anonymous said...

This blog is start turning into a political/Financial Blog. Nvm, it is still a personal blog after all...

9/30/2008 11:36 AM  
Anonymous Anonymous said...

Yes, innocent civilians will have to pay for Wallstreet's mistakes, however, the bailout plan is the best chance the economy has right now. Just, because so-called "experts" signed a petition to reject the plan does not mean that they know what is best for the economy. Most people want to protect their own interests and it is no different for these "experts" either. Look at it this way: A senator wants to build a highway to the city so people can drive to work more easily. However, it will cost 5 million dollars and the civilians do not want to pay for it. What will the senator do? Approve the highway or listen to the civilians? The senator will probably listen to the people. Why? Reelection, of course. What neither of these "groups" now realize is that there is now no easy way to travel to the city. This is a hypothetical situation of course.

This is why the Bailout plan was rejected yesterday. Reelection. About 25-35 senators are in a competitive race this year; this means that there is competition within their state for the position of senator. The other state senators pretty much have their job guaranteed for them. What was the difference in the for/against vote for the Bailout Plan? About 25-35. See the pattern? Unfortunately, many of these senators probably rationalized that if they did what the people wanted, then they could get reelected and "fix" the problem later.

Yes, people will have to suffer in the short run, but, the problem will disapear much quicker if there is money circulating in the economy. But, now that the bill was rejected, people have to suffer more for their (increasing amount) of mistakes. That means a certain longer, deeper Recession and a possible second Depression if the problem is not fixed.

What the economy needs is people with fortitude; they need to stop listening to their own interests even though it may hurt their pocketbooks. Isn't it better to suffer a little now than to suffer in the long run?

10/01/2008 2:51 AM  
Anonymous Anonymous said...

The Senator will probably listen to the people, because that is the Senator's JOB, to represent the PEOPLE! And, by the way, the U.S. does not have a military government; congressman are "civilians" just like everyone else who is not currently serving in one of the branches of the U.S. military.

10/01/2008 10:10 AM  
Anonymous Anonymous said...

Hmm. The Bailout Plan was rejected. I suppose america will wait to tell if this was the best choice to make. As my Government teacher would say, "Only time will tell if this bailout will put Hank Paulson in the Hall of Fame or the Hall of Shame"

his website is: cbschicago.com/school

10/01/2008 10:41 AM  
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