Rebel Traders – Analysis Without The Hype

The latest quarterly report from the Special Inspector General for the Troubled Asset Relief Program (SIGTARP) has been released. In short, the report points to fraud, failed policies, and taxpayer waste.

The ‘bottom line’ of the executive summary:

[…] The substantial costs of TARP — in money, moral hazard effects on the market, and Government credibility — will have been for naught if we do nothing to correct the fundamental problems in our financial system and end up in a similar or even greater crisis in two, or five, or ten years’ time.

It is hard to see how any of the fundamental problems in the system have been
addressed to date.

• To the extent that huge, interconnected, “too big to fail” institutions contributed to the crisis, those institutions are now even larger, in part because of the substantial subsidies provided by TARP and other bailout programs.

• To the extent that institutions were previously incentivized to take reckless risks through a “heads, I win; tails, the Government will bail me out” mentality, the market is more convinced than ever that the Government will step in as necessary to save systemically significant institutions. This perception was reinforced when TARP was extended until October 3, 2010, thus permitting Treasury to maintain a war chest of potential rescue funding at the same time that banks that have shown questionable ability to return to profitability (and in some cases
are posting multi-billion-dollar losses) are exiting TARP programs.

• To the extent that large institutions’ risky behavior resulted from the desire to justify ever-greater bonuses — and indeed, the race appears to be on for TARP recipients to exit the program in order to avoid its pay restrictions — the current bonus season demonstrates that although there have been some improvements in the form that bonus compensation takes for some executives, there has been little fundamental change in the excessive compensation culture on Wall Street.

• To the extent that the crisis was fueled by a “bubble” in the housing market, the Federal Government’s concerted efforts to support home prices — as discussed more fully in Section 3 of this report — risk re-inflating that bubble in light of the Government’s effective takeover of the housing market through purchases and guarantees, either direct or implicit, of nearly all of the residential mortgage market.

Stated another way, even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car. […]

That is a very bold statement from the inspector general, and one that has been spoken about by myself and many other financial bloggers who see through the noise of the Washington babble. The TARP program is indeed a complete failure in my view, it was destined to fail from the very beginning and as such is why I called, emailed, and faxed Congress back then to ‘not’ pass the the TARP bill. But, the voice of the American people does not mean anything anymore, they still went ahead and did it anyway because of the extensive lobbying from Wall Street, and Wall Street’s voice is much loader than that of the American people.

The inspector general also points out that they have opened criminal and civil investigations.

SIGTARP’s Investigations Division has continued to develop into a sophisticated white-collar investigative agency. Through December 31, 2009, SIGTARP has opened 86 and has 77 ongoing criminal and civil investigations. These investigations include complex issues concerning suspected TARP fraud, accounting fraud, securities fraud, insider trading, bank fraud, mortgage fraud, mortgage servicer misconduct, fraudulent advance-fee schemes, public corruption, false statements, obstruction of justice, money laundering, and tax-related investigations.

The full 224 page inspector general report is provided below. Also contained within the report is criticism of the Federal reserve and Secretary of the Treasury Tim Geithner.

Finally, this interview with the chairwoman Elizabeth Warren of the SIGTARP from a few days ago.

SigTarp Quarterly Report January 2010

Watch out! Bank of America is soon to be let loose once the TARP chains are cut. Announced this evening is that Bank of America will repay $45 Billion in TARP funds by using $26.2 Billion from its excess reserves, and essentially the remainder comes from throwing existing shareholders under the bus.

Bank of America Corp Confirms plans to repay entire $45B TARP funds (about 33% of market cap)

Under terms of the authorization from the U.S. Treasury and banking regulators to repay the $45 billion investment made under TARP, Bank of America will repurchase all 600,000 shares of the company’’s Fixed Rate Cumulative Perpetual Preferred Stock, Series N; all 400,000 shares of the company’’s Fixed Rate Cumulative Perpetual Preferred Stock, Series Q; and all 800,000 shares of the company’’s Fixed Rate Cumulative Perpetual Preferred Stock, Series R. The shares were issued to the U.S. Treasury as part of TARP. Bank of America is not exercising its right to repurchase the related warrants at this time.

Bank of America plans to repay the $45 billion in TARP funds using $26.2 billion in excess liquidity and $18.8 billion in proceeds from the sale of “common equivalent securities.

The $18.8 billion issuance of “common equivalent securities” would be treated as Tier 1 Common capital.  Shareholders would be asked at a special meeting to be held within 105 days of issuance to approve an increase in the authorized shares outstanding in order to allow the “common equivalent securities” to be converted into common stock.

The “common equivalent securities” carry warrants to buy a total of 60 million shares of common stock at $0.01 per share and other benefits if shareholders do not approve an increase in authorized common shares. In addition, Bank of America agreed to increase equity by $4 billion through asset sales to be approved by the Board of Governors of the Federal Reserve and contracted for by June 30, 2010. To the extent those asset sales are not completed by the end of 2010, the company agreed it would raise a commensurate amount of common equity.

Bank of America also agreed to raise up to approximately $1.7 billion through the issuance of restricted stock in lieu of a portion of incentive cash compensation to certain Bank of America associates as part of their normal year-end incentive payments.  After the TARP repayment and these initiatives, the company’’s Tier 1 Capital ratio would be 11.0 percent, pro forma based on the September 30, 2009 ratio of 12.5 percent. The Tier 1 Common capital ratio would be 8.5 percent, pro forma based on the September 30, 2009 ratio of 7.3 percent. The company will continue to have strong liquidity.

Repurchase of TARP preferred stock is expected to reduce income available to common shareholders in the fourth quarter by $4.1 billion, as the book value of the preferred is less than the amount paid.

Bank of America seems to be going to rather extraordinary measures to repay the TARP as quickly as possible. When banks still need to build up loss reserves here is BAC tapping into their piggy bank to pay off the Government. The timing of this announcement sure is interesting to say the least as it comes the night before Fed Chairman Ben Bernanke’s confirmation hearings.

Oh, in other Bank of America news:

NEW YORK, Dec 2 (Reuters) – Bank of America Corp <BAC.N> on Wednesday announced cash awards that could reach seven figures for three senior executives, including two whose salaries were cut after a review by White House pay czar Kenneth Feinberg.

On November 30, Thomas Montag, head of global markets and banking, was awarded stock units valued at $4.57 million, based on the bank’s Wednesday closing price of $15.65.

On the same day, Chief Financial Officer Joe Price received an award valued on the same basis at $2.58 million, while home loans and insurance chief Barbara Desoer got an award valued at $1.94 million. [...]

Do you hold a mortgage with Bank of America? Were you hoping to get a loan workout approved? With the TARP chain being cut you better watch out for they will have no obligations any longer to play nice. Watch out, Bank of America will be free to whore around like Tiger Woods all over again.

From Bloomberg:

President-elect Barack Obama asked the Bush administration to notify Congress he plans to seek the remaining $350 billion in financial-rescue funds, White House spokeswoman Dana Perino said.

Obama, who takes office on Jan. 20, called President George W. Bush this morning about 20 minutes after Bush said in his final White House news conference that he hadn’t been asked by the president-elect to act on his behalf and that he was willing to do so.

“President Bush agreed to the president-elect’s request,” Perino said. “We will continue our consultations with the president-elect’s transition team, and with Congress, on how best to proceed in accordance with the requirements of the statute.”

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