Posts filed under 'Bailout money'
May 23rd, 2009
Federal regulators kept their word last week, seizing Florida-based BankUnited, the biggest bank failure this year, one that puts the Federal Deposit Insurance Corp. on the hook for around $5 billion.
The feds set a Tuesday deadline and waited for bidders to come forward, but the pool was limited. Even given the state of the banking industry these days, BankUnited had dug itself into a pretty deep hole, including a loss of more than $1 billion in 2008.
And, when regulators moved in Thursday, the bank was handed over to a group of private-equity firms.
Pay attention, folks. I can’t help but worry that a fox has again been put in charge of billions of chickens.
It was unavoidable, really. The feds have so far resisted significant investment from private-equity firms in the banking industry. But the companies have been circling weakened financial institutions like sharks, looking for their opening.
To be sure, there are some advantages to giving private equity a seat the banking table. It would allow collapsed institutions access to the $400 billion to $600 billion in equity money, advocates say. In BankUnited’s case, the group of private-equity managers agreed to pump $900 billion in new capital and acquire more than $20 billion in deposits and assets.
But the Federal Reserve has some problems with the idea of private equity owning banks. So do I.
Private-equity firms, by their nature, are risk-takers.
They’re informally known as the gravedancers of the economy — scooping up struggling companies by using a lot of debt and little cash, reorganize (known informally as “layoffs”), then sell to someone else, pocketing the profit.
Consider, for example, the risks taken by Cerberus Capital Management, the private-equity firm that took over Chrysler and an ownership stake in GMAC Financial Corp.; both have needed billions in federal bailout money to keep the doors open. Or Sam Zell, the billionaire Chicago investor who grandly swept Tribune Co. into bankruptcy within two years.
And the Fed is still trying to patch up the industry after one of the worst financial crises in history. I’ll forgive them for not being altogether sure that these guys will be the best stewards of other people’s money.
So far, eager private-equity players have managed to work around the Fed’s rules — the sale of IndyMac, the failed California thrift, worked the same way as that of BankUnited. A group of private-equity firms each bought up to their legal limit, with each firm’s piece adding up to 100 percent of the bank.
Here’s the problem: Banks are supposed to be boring, staid and stuffy institutions managed by well-modulated executives. That they got themselves into trouble by acting more like casinos is one of the things that got us here.
And private-equity companies like casinos better because they make more money faster.
It strikes me as a marriage bound to fail somebody — probably the bank’s customers.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
March 21st, 2009
If there is one thing a decade of easy lending creates, in addition to financial markets that are either paralyzed or collapsing, it’s a sense of entitlement.
It began with the carefully cultivated notion that money no longer needed to be earned — indeed, it was free. It no longer belonged only to an elite class of people we could only envy.
Suddenly, we were, all of us, rich. We needed only to ask and piles of money appeared before us.
So we asked, delighted to find ourselves in lifestyles to which we were completely unaccustomed, to learn that our parents were wrong when they told us money didn’t grow on trees.
At some point, such abundance became less a novelty, more a perquisite. It was nothing more than what we deserved, after all.
Today, with the economy derailed and any sort of recovery months or years away, we find ourselves dancing around a grim reality we don’t really want to see.
To forestall facing it, we have resorted to asking two questions over and over. The problem, of course, is that they’re the wrong questions.
We are first demanding — after all, we have every right to demand answers when our right to free money has been violated — the identities of the culprits responsible. These days, we seem comfortable pointing to various executives at failed insurer American International Group because of the billions of dollars in bonuses they were given.
And when they become old news, as they inevitably will, we’ll find someone else — someone even more responsible. Probably the federal government, always a good scapegoat because we are so accustomed to letting Uncle Sam take over when the going gets tough.
The second question — I get this one a lot — is when this is going to be over. It took me a few frustrating attempts at an answer before I realized what the real question is: When am I going to be rich again?
These are the wrong questions because we are determined to not hear the answers, which are, in a nutshell: 1) We are. 2) Not for a while.
We felt rich because we saddled ourselves with so much debt, which lenders are loath to approve these days. We forgot it wasn’t real money — that real money, sadly, must be earned. But we are desperate to clutch our illusion of wealth close. Why wouldn’t we? We liked being rich.
But the longer we put off accepting the answers, the more it will prolong the inevitable realization: There’s no such thing as free money.
Contact Business Editor Annette LaCross at alacross@rrstar.com or 815-987-1295.
February 7th, 2009
In one of the biggest I-could’ve-told-you-that moments of an otherwise busy week on Capitol Hill, a government oversight panel reported that we don’t seem to be getting a good return for our bailout money.
Was there ever any doubt?
For example, the Treasury Department secured assets valued at $14.8 billion from wheezing insurance giant American International Group in November. Unfortunately, it had given AIG $40 billion for those assets.
For those of you keeping score, that’s a loss of more than $25 billion — so far. AIG since has received an additional $110 billion from the Troubled Asset Relief Program.
Expect to take a bath on that money, too. Obviously, the federal government isn’t any better than Wall Street bankers when it comes to pricing the bad assets weighing down surviving banks.
But I don’t think the TARP money is the issue — I’ve already written most of that money off, anyway. The program has been poorly administered from the beginning, and recovery of even those funds not tied to toxic assets (is it really fair to keep calling them “assets” at this point?) is a long shot.
The bigger question for me is what happens when the zombies are off the government leash.
These aren’t the mindless, murderous, befouled creatures that lurch across movie screens. These zombies are the corporate kind. They’re lurching, to be sure, and arguably mindless, although the only thing they’ve murdered so far is the economy.
Killing zombies is a fairly straightforward process in the movies — or so the Register Star’s resident movie expert tells me. Separate the zombie’s brain from the rest of its body, Will Pfeifer says, and it’s been disabled, conveniently freeing Our Hero to move on to the next zombie.
But the new world order created by the mortgage meltdown has spawned a whole new class of zombies, and I’m afraid they’re going to be much harder to kill. Or keep alive. Whichever is worse.
As you probably could guess, a zombie company is essentially the same as a human one: It’s a dead body regenerated through mystical (or in this case governmental) means.
Such is the case with the companies floundering under crushing debt and the federal government’s largesse. They’ve been given new “life” through TARP funds, but whether that new life is warranted remains to be seen.
For the most part, corporate zombies tend to die off when the rest of the world grasps the depth of their insolvency.
But I’m not sure the feds will be able to pull the plug, particularly with companies like AIG — you remember, the one the government deemed too big to fail the day after it allowed Lehman Brothers to fall into bankruptcy and accelerate the crisis?
So the question is whether these companies are the “victims” of extraordinary circumstances — which they created — or whether flaws in their business model are finally coming due.
We might not know until it’s all over. And at least in AIG’s case, it may not ever be over.
