Chris Whalen On Fannie's BofA Settlement: "This Is A Gift From Tim Geithner, With Politics Written All Over It"
Editor's Note: We are republishing this story from January for those who missed it the first time around.
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Is Fannie secretly bailing out the banks? Whalen thinks so.
Financial stocks just caught fire.
Someone must be getting bailed out, right?
Why yes, say critics of the giant banks. They charge that Monday's rally-stoking mortgage-putback deal between Bank of America (BAC) and Fannie Mae and Freddie Mac is nothing more than a backdoor bailout of the nation's largest lender. It comes courtesy, they say, of an administration struggling to find a fix for the housing market while quaking at the prospect of another housing-fueled banking meltdown.
Monday's arrangement, according to this view, will keep the banks standing -- but leave taxpayers on the hook for an even bigger tab should a weak economic recovery falter. Sound familiar?
"The administration is trying to weave a path between two bad alternatives," said Edward Pinto, a resident scholar at the American Enterprise Institute. "They want to bail out the big banks without doing apparent damage" to the sagging U.S. budget position.
Pinto says truly holding BofA responsible for all the mortgage mayhem tied to its 2008 purchase of subprime lender Countrywide would likely drive it into the arms of the Federal Deposit Insurance Corp., which has enough problems to deal with. Though BofA would surely dispute that analysis, it's easy enough to see where the feds don't want that outcome.
But BofA's many problems aren't the only reason for taking Monday's deal with a grain or two of salt. Critics also question the timing of the settlement, which comes on the heels of a court setback for the banks and a new legal challenge from a big investor. They wonder, given the huge sums being spent to prop up Fannie and Freddie, why the companies didn't get better terms.
And you don't need to be a conspiracy theorist to see that austerity talk in Congress means no more upfront support for financial firms. At a time of double-dipping house prices and nearly 10% unemployment, you can see where some people might find themselves devising new ways to prop up BofA and its housing-exposed rivals JPMorgan Chase (JPM), Wells Fargo (WFC) and Citi (C).
- "This looks to me like a gift from Tim Geithner," said Chris Whalen of Institutional Risk Analytics. "There's politics all over this."
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It's a Wonderful Life for Bank of America in 2011
By Chris Whalen
About a year ago, Arianna Huffington called my friend and colleague Dennis Santiago and asked if my firm could provide a list of “good banks” for an effort she was planning. Along with Rob Johnson from the Roosevelt Institute, Huffington conceived of something called “Move your Money,” which sought to get consumers to move their business from large banks to smaller community institutions.
The effort was modestly successful in terms of increasing awareness of consumers about the alternatives for financial services. But it did not really change the competitive equation between the too big to fail (TBTF) behemoths — Bank of America, JPMorgan, Wells Fargo and Citigroup — and the rest of the industry and the economy. Now that insurgents like Washington Mutual, Countrywide, Lehman Brothers and Bear Stearns & Co. and many others have disappeared, the banking industry is more concentrated than any time during the past century, both financially and in terms of the industry’s icy grip on political power.
One of the themes that motivated the “Move your Money” effort was the image of James Stewart as head of the mutual Building & Loan, who fought to keep his bank open in the Frank Capra film “It’s a Wonderful Life.” His nemesis was Potter played memorably by Lionel Barrymore, the head of the big bank that sought to take over the Building & Loan and thereby gain a monopoly position in the allegorical American town.
But given the state of the U.S. economy and the fact that almost 15% of the banks in the U.S. are considered “troubled” by the FDIC, perhaps we should reconsider this interpretation of the film’s apparent story line. Feldkamp notes that from the Great Depression of the 1930s and again in the 1980s real estate bust, the government played an important role in restructuring the banking industry — and never more so than today.
Look at the just announced settlement between Fannie and Freddie and Bank of America, where the government-sponsored enterprises (GSEs) now controlled by the Obama Administration are providing what appears to be a huge subsidy to Bank of America to the tune of tens of billions of dollars. If you look at the most recent quarterly earnings disclosure to the SEC from Bank of America on future losses from the GSEs, then look at today’s settlement with the GSEs, which was approved by the Geithner Treasury, and it is hard not to conclude that the settlement was a gift.
- The losses hitting Fannie and Freddie will be borne by the American taxpayer and not the bond holders of Bank of America. The single digit billions BofA paid to Fannie and Freddie is less than a quarter of my firm’s estimate of such losses prior to the announcement. And our estimates were by no means the highest.
- How can bankers like JPMorgan Chase CEO Jaime Dimon, who settled his own tab with Fannie and Freddie on equally attractive terms last year, complain about Barack Obama when the supposedly liberal President is so generous with public subsidies for the zombie banks?
The truth of the matter is that the federal government, through agencies like Fannie, Freddie, the Federal Home Loan Banks and the FDIC, have been calling the shots in the banking industry since the 1930s.
While American banks have, from time to time, shown a certain degree of independence, this in the form of speculative lawlessness known as “innovation,” all lenders in the U.S. are ultimately appendages of Washington.
- The degree of government support for the financial markets has never been greater in the history of the American republic and the largest players in the industry thereby exercise enormous political power.
This is why calls from observers as disparate as Kansas City Fed President Thomas Hoenig, Vermont Senator Bernard Sanders and Dallas Fed President Richard Fisher to break up the largest banks are entirely on target.
Continue reading at Reuters...
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Recent Reuters posts from Whalen...
Everything that Americans should ask about home mortgages
http://blogs.reuters.com/christopher-whalen/2010/10/20/everything-that-americans-once-knew-about-home-mortgages-but-should-ask/
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Triple threat: Fannie, Freddie, and the triumph of the corporate state
http://blogs.reuters.com/christopher-whalen/2010/10/27/triple-threat-fannie-freddie-and-the-triumph-of-the-corporate-state/
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Bernanke's Disclosure Bombshell - The FED Took Equities As Collateral During Crisis
http://dailybail.com/home/bernankes-disclosure-bombshell-the-fed-took-equities-as-coll.html
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Will 2011 mark the return of market risk, and the IMF?
http://blogs.reuters.com/christopher-whalen/2010/12/15/will-2011-mark-the-return-of-market-risk-and-the-imf/
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Memo to Obama: time to break the refinance strike by the big banks
http://blogs.reuters.com/christopher-whalen/2010/08/31/memo-to-obama-time-to-break-the-refinance-strike-by-the-big-banks/
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Related stories on Fed Governor Richard Fisher...
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Here's a similar story we covered on Monday...
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Move your money...
http://moveyourmoneyproject.org/find-a-bank
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Video - Bank Run
For Bank Of America, It’s A Wonderful Life In 2011
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Blame it on TurboTax - A clip of Geithner playing the fool...
Congressional Video - Geithner explains why he "accidentally" missed paying taxes on his income from the IMF.
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The ballad of Timothy Geithner...
She's an accountant from Nashville. This is excellent...
Song - Lady Sings The Blues annihilates Geithner...
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And the best for last...
Video - Jim Rogers on Tim Geithner's failures...
- "Mr. Geithner's been bombing for 15 years. Mr. Geithner casused this problem. You know Mr. Geithner has been head of the New York Fed for several years. That was the office that was supposed to be supervising Wall Street and the banking system. He caused the problem, and then all last year he came up with TARP. He came up with all these absurd bailouts. Listen Mr. Geithner has never known what he's doing. He doesn't know what he's doing now and pretty soon everybody's gonna find out, including mr. Obama."
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Must Read - Geithner was an 'utter failure' at the IMF...
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Feb 11, 2011 at 10:17 PM
Reader Comments (12)
http://blogs.reuters.com/christopher-whalen/2010/12/15/will-2011-mark-the-return-of-market-risk-and-the-imf/
http://blogs.reuters.com/christopher-whalen/2010/12/06/is-ben-bernanke-driving-the-qeii-or-the-titanic/
http://dailybail.com/home/bernankes-disclosure-bombshell-the-fed-took-equities-as-coll.html
http://blogs.reuters.com/christopher-whalen/2010/10/27/triple-threat-fannie-freddie-and-the-triumph-of-the-corporate-state/
http://blogs.reuters.com/christopher-whalen/2010/10/20/everything-that-americans-once-knew-about-home-mortgages-but-should-ask/
http://blogs.reuters.com/christopher-whalen/2010/08/31/memo-to-obama-time-to-break-the-refinance-strike-by-the-big-banks/
http://www.dailykos.com/storyonly/2011/1/5/933498/-Was-It-As-Good-For-You-As-It-Was-For-Bank-of-America
http://finance.fortune.cnn.com/2011/01/03/is-fannie-bailing-out-the-banks/
http://dailybail.com/home/china-warns-us-about-debt-monetization.html
http://dailybail.com/home/chris-whalen-gift-from-government-to-bank-of-america-in-28-b.html
move your money...
http://dailybail.com/home/bailout-news-video-gentle-jim-rogers-brings-the-asian-pain-i.html