Smirking Tim Promotes PPP's Before Joint Economic Committee

Treasury Secretary Tim Geithner testified before the Joint Economic Committee. The topic was supposed to be financial regulatory reform. Congressional big dogs took many rabbit trails.

I tuned in to hear Tim push leveraging taxpayer money with private funds for America's significant infrastructure needs. Nearly every private equity underwriter (PEU) has an infrastructure fund, ready to participate in public-private partnerships (PPP's).

Consider Pennsylvania's consideration of privatizing interstate highways. One consultant, formerly of The Carlyle Group, criticized another consultant, Provident Capital Advisers, LLC. Transportation Secretary Ray LaHood extolled the virtue of PPP's. At his confirmation hearings, LaHood opposed tolls on existing roads. In September he changed his mind:

Other possibilities include tolled 'hot lanes' running alongside existing roads, as well as more public-private partnerships and even imposing tolls on existing roads.

"That's going to be a wildly debated topic," LaHood said of any scheme to toll existing roads.

Obama loves PPP's and PEU's, standing ready with billions in cash. However, there is mixed record between private equity and the investing public. When PEU's go public during a bubble, the public takes it on the chin. Privates win, the public loses. WSJ reported:

Moving from private to public is an old investment game and a lucrative one. The enticements to the private partners and investment banks represent some of the easiest money on Wall Street.

Smirking Tim greased the skids for more PEU government sponsored business. For acronym overload, when will PEU PPP's go public? By the way, did Geithner ever talk about PEU regulation?

Buffet Makes the Right Credit Bets

What a difference a year made for Warren Buffet's Berkshire Hathaway. The man who called derivatives "weapons of mass financial destruction" made a yatchload on those explosive instruments. Bloomberg reported:

Berkshire reported $US1.73 billion in profit on derivatives, compared with a loss of $US1.26 billion a year earlier. Contracts tied to stock markets gained $US220 million, compared with an $US880 million loss. Credit-default swap contracts, in which Berkshire protects clients from bond losses, posted a $US1.44 billion profit compared with a loss of $US342 million.

Buffett's firm was required to post about $US50 million in collateral to trading partners on derivatives as of Sept. 30, compared with $US650 million three months earlier.

But Berkshire isn't out of the water. The company may be downgraded under the huge debt burden of a Burlington Northern acquisition.

The firm may have to post as much as $US1.1 billion more if its ratings are cut, ``depending on the degree of the downgrade.''

Derivatives are a two edged sword. Warren Buffet had the blade facing away in 2009. When will it turn? How might the Oracle of Omaha profit? He plans to buy Capmark's North American servicing and mortgage-banking operations. Capmark, a huge commercial real estate CRE) lender, declared bankruptcy in late October. Did Warren have any credit bets on Capmark's or another CRE lender's failure?

Financial Fraud Task Force & Wall Street Rules

Treasury Secretary Tim Geithner went from tax challenged to bag man for Goldman Sachs to Sheriff in cases of financial malfeasance. He was at the podium announcing a financial fraud task force. The LATimes reported:

President Obama is taking a page out of his predecessor's playbook by creating a multi-agency task force to pursue criminals who bilked investors and consumers during the financial crisis.

The task force of top federal officials will work with state and local authorities to pursue financial fraud cases stemming from the crash of the housing market and the Wall Street meltdown, administration officials said Tuesday.

"Mortgages, securities and corporate fraud schemes have eroded the public's confidence in the nation's financial markets and have led to a growing sentiment that Wall Street does not play by the same rules as Main Street," Atty. Gen. Eric H. Holder Jr. said.

The Financial Fraud Enforcement Task Force will attack what Holder called "unscrupulous executives, Ponzi scheme operators and common criminals."

But Holder said the mandate of that task force wasn't broad enough to go after all the types of crimes involved with the financial crisis.

Not on the list?

1. Fraud that led to the financial crisis, including energy futures manipulation.
2. Insider trading by New York Fed Chairman Stephen Friedman (purchase of GS stock)
3. Insider trading by Senator Dick Durbin (purchase of Berkshire Hathaway)

Wall Street doesn't play by the same rules as Main Street. Neither do the Beltway Boys. As long as the Beltway's revolving door is greased and spinning, neither group will.

Update: The Chair of the House Oversight Committee asked the Federal Reserve to provide all documents relating to a rule waiver that allowed then-New York Fed Board Chairman Stephen Friedman to hold and purchase stock in Goldman Sachs.

Update 1-26-14:  Someone else noticed the insidious nature of the Government-Corporate Monstrosity in the complete lack of prosecutions for illegal activity that resulted in the 2008 financial crisis.  I appreciate their lamentation.

Update 5-25-15:  Not on the list financial fraud list are crimes from 2007 to 2013.  Cash payments are enough to make these go away under the Obama administration.

Update 10-18-15:   Holder defended his non-prosecution with "We were simply unable to do it under the existing statutes that we had, and given the ways the decision-making worked at those institutions."  He didn't indicate his role in the way decision-making worked at the U.S. "Just Us" Department.  Holder is the current benefit of fat cat gratitude.

Update 4-21-18:  For his loyalty to corporademocrats Holder may get to run for President.

Update 11-18-18:  NYT Columnist Maureen Dowd wrote about President Obama's abdication from prosecuting financial fraud.

Update 1-19-19:  Former SEC Attorney James Kidney shared his story of Obama/Holder catering to Wall Street via non-investigations and non-prosecutions. 

Update 11-16-20:  Obama has a book out whitewashing his pursuit of "Just Us" relative to corporate fraud that contributed to the 2008 Financial Crisis.  The Obama administration was The Promised Land for the wealthy and connected.  

Update 8-16-21:   In the midst of a pandemic the Obama's held a glitzy birthday party on Martha's Vineyard.  I'm sure a number of PEUs were in attendance.  The Biden cabinet is chock full of them.

Update 11-5-25:  Luke Grommen noted after the election of a Socialist Democrat as Mayor of NYC:

Without Ben Bernanke, Hank Paulson, & Tim Geithner rolling out their ‘socialism for the rich’ programs to NYC in 2008, we never could have convinced New Yorkers that ‘socialism for all’ could work!”

Ambac's CDS Priced for Failure

The cost to insured Ambac debt over five years is essentially the maturity value of the instrument. Bloomberg reported:

Five-year credit-default swaps on Ambac Assurance Corp. have jumped 3.2 percentage points since Nov. 9 to 78.3 percent upfront, according to CMA DataVision. That’s in addition to 5 percent a year, meaning it would cost $7.83 million initially and $500,000 annually to protect $10 million of Ambac obligations from default.

The price implies a 99% chance of default on the firm's debt. Ambac is a huge bond and mortgage insurer. The story went on to say:

Delinquency proceedings against the company would trigger termination payouts of $23.1 billion by its insurance unit on credit-default swap contracts, Ambac said in a filing earlier this month. Ambac also may be required to accelerate the payment of $1.6 billion of holding-company debt, the New York-based bond insurer said in the filing.

The problem is Ambac sold credit coverage to other parties. Is that part of the $23.1 billion payout?

Banks that bought credit swaps from Ambac and other insurers to hedge against losses on mortgage- related securities used swaps on the insurers to protect themselves if the companies fail to make good on the guarantees.

Might other second order consequences be in store?

Ambac isn't the only firm to have CDS reflux. ResCap, the financing arm known as GMAC, saw its credit default swaps bounce. WSJ reported:

It cost investors $4 million upfront plus a $500,000 annual fee to insure $10 million of the firm's bonds against a default.

GMAC/ResCap is in line for a third injection of taxpayer money, the only large TARP bank to have failed Treasury's stress test. GMAC's new CEO may jettison ResCap, its residential mortgage unit. Will he cut off the gangrenous hand to save the body?

Rumor is the feds will watch Ambac implode, just as it did with CIT. Incidentally, The Journal noted CIT's cds will settle November 20.

The Sweetness of Debt Restructuring

A Reuters article revealed:

Debt restructuring has been removed as a CDS trigger in the U.S.

Did credit default swap writers learned from their health insurance counterparts? Is a heavy debt load like obesity, a pre-existing condition not to be covered?

Like their insurance siblings with health, credit coverage should cover credit impairment. Who removed debt restructuring as a trigger? A different article suggested federal regulators.

Changes expected to roll out as early as next month (Feb. 2009) , however, will remove the restructuring trigger for standard contracts in North America.

Market participants are in discussions with regulators with the hope of removing or reducing the penalty for excluding restructuring as a trigger in contracts, said a person familiar with the discussions who declined to be identified.

I thought CDS's were outside the current regulatory framework. Apparently not. The timing is interesting as the Obama Stimulus bill gave a $26 billion tax break for firms buying back debt for pennies on the dollar, i.e. restructuring.

Private equity underwriters (PEU's) badly need to shed piles of debt accumulated during the buyout bubble. What else did Uncle Sam do the repave the road to profits for the PEU boys. Federally sponsored corporafornication continues.

D.C. 2010

David Rubenstein, cracker of the global financial system foundation, will prognosticate on D.C.'s future under a corporate owned federal government. Will he talk about the giant casino, with rules stacked heavily in the house's favor?

Risk takers like Rubenstein's Carlyle Group doubled down at the poker table in the financial Wild West. The Sheriff, Uncle Sam, winked at a few players, indicating he has their backs. Rubenstein nodded back. What will happen when the dealer draws from the bottom of the deck?

For more on 2010, tune in on December 7. Rubenstein may predict another looming "mother of all stimulus packages" is on Santa's sleigh. That was his October 2008 advice. That and get a lobbyist and line up for your share. It was given close to the North Pole in Seward's Folly.

A different Carlyle co-founder recently commented on D.C.'s prospects:

Carlyle Group co-Founder Ed Mathias. Eric says “there’s no question that Washington is going to come out ahead of the curve.”

“In essence, the government is running a huge portion of the economy…and permeating everything we do…if you don’t have a lobbyist nowadays, you’re extraordinarily vulnerable.”

If lobbyists restore our foundation, America is in a world of hurt. What will it look like by 2012? Part Vegas, part Soweto...

Obama's Corporate Tax Breaks

Major bills include big corporate tax breaks or direct subsidies. Consider the following enacted under the Democratic Congress and signed by President Obama:

Worker, Homeownership and Business Assistance Act of 2009--$33 billion in refunds or tax relief

Obama Stimulus bill-$26 billion in tax breaks for firms buying back debt for pennies on the dollar

House Health bill-$10 billion for corporations and unions to subsidize reinsurance for older employees

Senate Health bill- $1 billion in tax credits or Treasury loans for innovative health care firms

The giveaway continues so much that Republican GE CEO Jeffrey Immelt said "we're all Democrats now." Turn off the corporafornication tap, Mr. President. $60 billion and counting...

(Thanks to Economic Policy Journal)