Friday, October 24, 2008


"First" of the Day: Greatest bank loss ever

When it comes to economic "firsts," I can't keep up. But for today's entertainment we have this—

Wachovia posted a $23.7 billion quarterly loss yesterday, the largest ever for a bank, as its portfolio of loans deteriorated and deposits fled. —Zachary A. Goldfarb reporting in "Wachovia reports historic loss"

Deposits did indeed flee. Goldfarb notes that in September "customers pulled out 5 percent of their deposits, or $13.4 billion -- a massive amount for a bank."

But that doesn't give the true picture. This wasn't a run on the bank by little account holders standing in line in hopes of withdrawing their deposits, as occurred during the Great Depression or more recently during the collapse of British bank Northern Rock. It was the business account holders, which didn't attract the attention of the media. In fact, the media were unaware of it.

David Ellis writes

Fears about Wachovia's ultimate demise first took hold in mid-September following the collapse of Lehman Brothers and shortly after Lehman rival Merrill Lynch was forced into the arms of Bank of America.

Even as Wachovia's consumer customers remained relatively calm about the bank's fate in the days that followed, Wednesday's results revealed that commercial depositors feared that the bank could be next. In just one quarter, the amount of commercial core deposits plunged by a colossal 24% from the previous quarter to $83.4 billion.

According to David Mildenberg, the run on Wachovia was a "catalyst" for the Federal Deposit Insurance Corporation (FDIC) to raise the government guarantee on individual deposits from $100,000 to $250,000.1

To put Wachovia's loss into perspective, Goldfarb writes that—

On top of $10 billion in losses earlier this year, the quarter wipes out nearly all the profit Wachovia has earned since 2001, when it merged with First Union and became a much bigger, national bank.

And Jill Treanor and Chris Tryhorn add that—

The $24bn (£14.7bn) of losses amount to more than the total price being paid for the North Carolina lender by its rival Wells Fargo, which was last night playing down the impact of the figures on the combined business.

Which brings us to Wachovia's savior Wells Fargo, which bested Citigroup's government-supported effort to buy Wachovia. The deal is still in the making, but Wells Fargo's offer of $15 billion was in kind, which is to say that no money would change hands, but Wells Fargo would acquire Wachovia by exchanging some of its stock for Wachovia's.

Wachovia shareholders have seen the value of their shares fall from around $47 a year ago to $5.75 as I write . The only problem is that the value of Wells Fargo stock has declined since the offer. In addition, the company is being sued for fraud for investing the money of three foundations and an insurance fund in mortgage-backed securities and then altering their financial statements. This is not likely to inspire investor confidence.

Related posts
Shades of 1929 (9/15/07)
The Depression Chronicles – 1: Bankruptcies (4/19/08)



1Another "catalyst" was the run on the money-market funds and the unprecedented government guarantee of those deposits, but I'll save that story for another day. [back]

Thursday, October 23, 2008


"First" of the Day: The death of IPOs

It's been 10 weeks since a company has held an initial public offering [IPO] in the U.S., the longest period on record since Thomson Reuters began tracking deals in 1980. The last deal occurred on Aug. 8, when Rackspace Hosting Inc. made its debut on the New York Stock Exchange. —Lynn Cowan reporting in "Absence of IPOs hits 10 weeks"

Initial public offerings, or IPOs, are the typical route for those hard-working, pizza-eating entrepreneurs you keep hearing about to cash in on their labor.

But now is a bad time to suggest to investors that they might like to buy an untested stock, especially since most IPOs issued in the past year are trading well below their initial price, Rackspace included.

Just when Simply Appalling was about to "go public"!

Related post
The Depression Chronicles – 1: Bankruptcies (4/19/08)


Tuesday, October 21, 2008


Plea for Help of the Day: Foreign contributors

The Russian mission to the UN in New York says it has turned down a request from John McCain to help fund his presidential campaign. —BBC reporting in "Russians reject McCain cash plea"

A computer glitch, they say.

9:32 — Meanwhile over in Britain, financier Nathan Rothschild has alleged that two leaders of the Conservative Party tried to solicit a donation of 50,000 pounds from Russia's richest billionaire Oleg Deripaska while aboard his yacht.

Mr. Deripaska is currently banned from entering the U.S. because of alleged ties to the Russian mafia. He is however allowed to float off the Greek island of Corfu, to which British Conservatives flock like swallows in the summer.

As in the U.S., contributions by foreigners to British political parties are illegal. So it is alleged that the would-be Chancellor of the Exchequer (the equivalent of our Secretary of the Treasury) and the party's chief executive made the suggestion that Mr. Deripaska might hide the contribution through his British company Leyland Daf. That too would be illegal but far less detectable.

Accusations and counter-accusations are being hurled in the British press. And I would be the last to want to contribute to the sliming of names among British Conservatives.

What interests me is the issue of campaign donations from corporations owned or partly owned by foreigners and by non-citizen employees of the corporation.

Corporations organize their contributions through political-action committees ("PACs"), which are normally devoted either to state or federal politics. So a corporation might organize a federal PAC and various state PACs.

According to "A Guide to New York Political Action Committees,"

... a PAC cannot knowingly solicit or accept contributions from a foreign national1 in connection with any federal, state, or local election. Under the FEC regulations, a foreign national cannot direct, control, or participate in the decision making process of any person, such as a corporation, labor organization, or political committee, regarding such person’s federal or nonfederal election-related activities.

As the British so helpfully demonstrate from time to time, I cannot think of a law that is harder to enforce, with the possible exception of the American drug laws. Indeed, although the direct contribution of a U.S. corporation to a PAC is limited, it would be hard to argue that a contribution of whatever size does not constitute a foreign intrusion into American elections if that corporation has foreign investors—and even more so if the corporation has essentially foreign ownership.

Since the U.S. Treasury has been urging banks and businesses to look for other sources of capital, which is mainly to be found abroad, the influence of foreign money in American elections promises to be harder and harder to control.

But is it really a problem? I propose a simple test: Let's ban all corporate donations to both candidates and to PACs—and while we're at it, the legal construct of the "corporate citizen." If this affects the level of foreign investment, we'll know it was a problem.



1You may be surprised to learn that—

A foreign national is defined as a foreign principal under 22 U.S.C. §611(b), or an individual who is not a citizen of the United States and who is not lawfully admitted for permanent residence.

In other words, permanent residents—otherwise known as "green card" holders—are free to use their money to attempt to influence elections. [back]

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