Screaming Red Flags
The only 'high-quality' financial asset is one that's taxpayer-backed.
“Treasuries aren’t a bad place to be.”
So when does Mary Daly get fired?
[Silicon Valley Bank’s] operations bristled with “screaming red flags,” [Dennis] Kelleher told me. These included a “hyperconcentration” of uninsured depositors from a narrow business sector — chiefly high-tech and biotech startups — as well as a dramatic mismatch between assets (that is, loans and investments) and liabilities (deposits) and the mounting tide of unrealized losses on its books.
“These were visible to anyone who wanted to look,” Kelleher told me. “But apparently, the Fed was AWOL.”
When does Janet Yellen finally get fired?
(May 4, 2021) U.S. Treasury Secretary Janet Yellen said on Tuesday she sees no inflation problem brewing, downplaying earlier comments that rate hikes may be needed to stop the economy overheating
"For a $200 billion bank to have no interest rate risk controls is staggering…And of course the regulators and rating agencies are allegedly engaged here too. Doing what, we aren't sure." [Silicon Valley Bank]
Today’s CNBS drinking phrase is “twenty-five and pause.”
“We’ve never had a losing quarter.”
As Countrywide and other institutions struggled, senior officials at Lehman Brothers pronounced their company safe and healthy. They said Lehman hadn’t made the kinds of bad choices that had sunk other financial firms. After posting another record year in 2006, pulling in $4 billion, it eclipsed its own record in 2007, reporting nearly $4.2 billion in profits. “We believe we have done a good job in managing our risks,” a top Lehman executive said. One analyst noted that, “for many investors, it is not necessarily about beating expectations but the lack of skeletons in the closet…. Lehman seems to have fewer skeletons.” When a Lehman competitor, Bear Stearns, imploded in March 2008, Bear was saved via a takeover by JPMorgan Chase. The Federal Reserve made the deal possible by providing a $29 billion loan. Again Lehman officials assured investors and shareholders that their firm was in good shape.
Lehman Brothers, founded in 1850, reported record earnings in 2006 and 2007, before going bankrupt in 2008.
Even back in the late-1800’s, one thing that investors and issuers quickly learned about these mortgage-backed securities is that it was certain death to any issuer who guaranteed their payments to investors. Despite being backed by homes, mortgages are a very long term, very risky instrument. In fact, banks under the national banking system in this country - that was the system which preceded the Federal Reserve system - were forbidden to touch mortgages at all.
Now Fannie, Freddie Mac and Ginnie Mae have proved the point. The former two collapsed in bankruptcy in 2007, and they’ve now joined Ginnie Mae as departments of the U.S. government, and are sustained purely on taxpayer guarantees, so the taxpayer has been forced to make up any losses in agency mortgage bonds.
- Chris Maloney, MBS strategist at Bank of Oklahoma Capital Financial Markets
In 2006 testimony before the Senate, acting OFHEO Director James Lockhart reported: “Fannie Mae’s management directed employees to manipulate accounting and earnings to trigger maximum bonuses for senior executives from 1998 to 2004. The image of Fannie Mae as one of the lowest-risk and ‘best in class’ institutions was a façade.”
The software that Fannie Mae bought was designed by another company to disguise the truth about quarterly earnings. Raines received a higher bonus. Multiply this software design a thousandfold. Multiply the bonus chasers across financial organizations a thousandfold. That goes along way to explaining why Wall Street needed a bailout.
Fannie Mae was always a political beast, but it reached its elbow-swinging heights during the time when former Clinton administration budget director Franklin Raines sat in the CEO chair. Under Raines' leadership, Fannie overstated earnings by a stunning $10.6 billion, all the while paying Raines and his senior management team massive bonuses.
QUICK: If you imagine where things will go with Fannie and Freddie, and you think about the regulators, where were the regulators for what was happening, and can something like this be prevented from happening again?
Mr. BUFFETT: Well, it's really an incredible case study in regulation
because something called OFHEO was set up in 1992 by Congress, and the sole job of OFHEO was to watch over Fannie and Freddie, someone to watch over them. And they were there to evaluate the soundness and the accounting and all of that. Two companies were all they had to regulate. OFHEO has over 200 employees now. They have a budget now that's $65 million a year, and all they have to do is look at two companies. I mean, you know, I look at more than two companies.
QUICK: Mm-hmm.
Mr. BUFFETT: And they sat there, made reports to the Congress, you can get them on the Internet, every year. And, in fact, they reported to Sarbanes and Oxley every year. And they went--wrote 100 page reports, and they said, 'We've looked at these people and their standards are fine and their directors are fine and everything was fine.' And then all of a sudden you had two of the greatest accounting misstatements in history. You had all kinds of management malfeasance, and it all came out. And, of course, the classic thing was that after it all came out, OFHEO wrote a 350--340 page report examining what went wrong, and they blamed the management, they blamed the directors, they blamed the audit committee. They didn't have a word in there about themselves, and they're the ones that 200 people were going to work every day with just two companies to think about. It just shows the problems of regulation.
QUICK: That sounds like an argument against regulation, though. Is that what you're saying?
Mr. BUFFETT: It's an argument explaining--it's an argument that managing complex financial institutions where the management wants to deceive you can be very, very difficult.
The Great American Bubble Machine
“From tech stocks to high gas prices, Goldman Sachs has engineered every major market manipulation since the Great Depression — and they're about to do it again” - Matt Taibbi, The Great American Bubble Machine, April 2010
Goldman CEO Blankfein later dismissed the importance of the loans, telling the Financial Crisis Inquiry Commission that the bank wasn’t “relying on those mechanisms.” But in his book, Bailout, Barofsky says that Paulson told him that he believed Morgan Stanley was “just days” from collapse before government intervention, while Bernanke later admitted that Goldman would have been the next to fall.
- Matt Taibbi, Secrets and Lies of the Bailout, January 2013
"You shouldn't assume it's correct just because Goldman said it. My brother works at Goldman, and he's an idiot!"
- Joseph Cassano, as quoted in the fantasy novel “Too Big To Fail”
Amusing that Barney Frank has been on the Board of Directors of failed Signature Bank since 2015. (The Silicon Valley Bank board is here)
Speaking of Signature Bank…
No other bank has issued a higher number of commercial real-estate mortgages against New York City buildings since Jan. 1, 2020, according to an analysis by property news and data company PincusCo. Only Wells Fargo & Co. and JPMorgan Chase & Co. lent more money.
"One of my jobs during the Covid housing boom was...I would get called in to look at personal finances, and the amount of Tesla-only portfolios I saw was just - it was staggering." - Melody Wright
”The Fed, in its wisdom…” - Peter, striped tie
“We’ve cauterized the wound.” - Mike Santoli
I’m sorry but I still can’t get over the put-upon CEOs whose $ was in SVB on CNBC on Monday…..a sickening infomercial for JPM and the Biden Administration. And the CNBC heads sang backup.
But he had to give up one of his houses, right? Or, one of his islands, right? Tell me he at least had to drag his trash cans to the curb, he was forced to do that, right? Gallows humor...they don't know we exist and, surely they'll never know our rage...