Are You Reading This? US Invests $250B in Banks

I’ve posted here previously about the historic times we are living in.  Well, Tuesday, October 14th, 2008 will be no exception.  The US Treasury has decided to buy preferred shares in the major US banks… and it’s not really optional.  From the New York Times piece:

The Treasury Department, in its boldest move yet, is expected to announce a plan on Tuesday to invest up to $250 billion in banks, according to officials. The United States is also expected to guarantee new debt issued by banks for three years — a measure meant to encourage the banks to resume lending to one another and to customers, officials said.

Here is some more detail on the banks affected:

Treasury Secretary Henry M. Paulson Jr. outlined the plan to nine of the nation’s leading bankers at an afternoon meeting, officials said. He essentially told the participants that they would have to accept government investment for the good of the American financial system.

Of the $250 billion, which will come from the $700 billion bailout approved by Congress, half is to be injected into nine big banks, including Citigroup, Bank of America, Wells Fargo, Goldman Sachs and JPMorgan Chase, officials said. The other half is to go to smaller banks and thrifts. The investments will be structured so that the government can benefit from a rebound in the banks’ fortunes.

And lastly, for those curious, the terms of the new preferred paper:

Bringing together all nine executives and directing them to participate was a way to avoid stigmatizing any one bank that chose to accept the government investment.

The preferred stock that each bank will have to issue will pay special dividends, at a 5 percent interest rate that will be increased to 9 percent after five years. The government will also receive warrants worth 15 percent of the face value of the preferred stock. For instance, if the government makes a $10 billion investment, then the government will receive $1.5 billion in warrants. If the stock goes up, taxpayers will share the benefits. If the stock goes down, the warrants will be worthless.

Some of the more egregious issues, however, will be addressed with executive compensation and corporate finances:

But officials said the banks would not be required to eliminate dividends, nor would the chief executives be asked to resign. They will, however, be held to strict restrictions on compensation, including a prohibition on golden parachutes and requirements to return any improper bonuses. Those rules were also part of the $700 billion bailout law passed by Congress.

This plan has some negatives to it – primarily the forced capitalization and potential costs to banks that might not have needed these terms to be successful.  However, given the collective risk of a failing bank system, that cost is likely worth bearing.

Long term, I hope that if we do decide to make executive compensation a regulated affair, that we apply it consistently across industries.  It does no one any good to have executives biased away from finance as a career option.

Overall, there is a lot to like in the current plan, as it eliminates the stigma of government help, and should effectively recapitalize banks in the short term.  More importantly, it puts some detail around how the government could continue to help capitalize the system without socializing it.

Everyone Looks Good in Blue (Updated LinkedIn Profile)

If you haven’t seen your new “blue card” yet, then you likely haven’t checked LinkedIn in the past few hours.

This is one of those simple kudos posts that says “Congratulations” to the team.  The redesign of the page is purely front-end, but it makes the page much clearer, and highlights actions that many didn’t know that LinkedIn had.  The new profile meter is also much more helpful with suggesting additions you should make to your profile.

As usual, the running joke is to use my photo somehow in the blog post… multiple times.  Of course, since it’s my profile, this blog got a small mention too, under my “Websites”.

I’m extremely excited about the improvements we’re going to be adding to the core experience at LinkedIn this Fall.  This release tonight is just the tip of the iceberg.

Go check out your blue card!  And if you haven’t updated your profile in while, get to it.

Update (10/10/2008): Very flattering blog post about the new design from

Behold, the Awesome Power of the Federal Reserve

That is not intended as a snarky title.  We are seeing the full power of the Fed come to bear in this financial crisis.  There is a reason why they have said for decades, “Don’t fight the Fed”.

The Fed’s power comes from the ability to almost limitessly create assets and money supply, with a charter to do so.  As long as the Treasury cooperates, the Federal Reserve effectively has the full balance sheet of the United States to work with.  And that’s a big balance sheet.

A lot of noise was made in the past months about the “limited” firepower of the Fed.  After all, they technically had assets of only $800B in Treasuries as of August 2007, and we’re dealing with a problem measured in trillions.

The Econoblog has a great post today on how the Federal Reserve balance sheet has shifted, particularly in the past 30 days.  It’s fairly wonky, but if you are into how modern money supplies are managed, I haven’t seen a better article:

Econobrowser: Balance Sheet of the Federal Reserve

You can read it for yourself if you are interested, but the short story is that the Federal Reserve has inflated its balance sheet to over $1.5 Trillion, with a lot of that growth happening in the past few weeks.

Check out this graph, from MacroBlog:

At this point, Bernanke and Paulson are basically calling in all the King’s horses, and all the King’s men.  Let’s hope they can put Humpty Dumpty back together again.

One fun fact – the amount of reserves that banks are now sitting on – not lending, not converting to cash, but just sitting on is approximately 2.5x the amount that got locked up post-9/11.   Unprecedented.

Time to Acquire Iceland?

I haven’t had much time to post lately on the financial crisis.  I have queued up a number of topics, but just haven’t found the minutes to commit them to WordPress… yet.  I hope to soon.

In the meantime, catch this late breaking news:

AP: Iceland’s Banks Falter

This is extremely serious.  Iceland’s banks are severely hit by the large amount of assets (including pensions) invested in now underwater securities.  Unlike larger countries, like the US, the GDP of Iceland is insufficient to actually let the government bail out their banking sector.  In fact, the banking sector in Iceland has assets of approximately 9x the GDP of the country, mostly invested in European companies.

From the article:

Prime Minister Geir H. Haarde warned late Monday that the heavy exposure of the tiny country’s banking sector to the global financial turmoil was raising the specter of “national bankruptcy.”

The government’s attempt to gain control of the increasingly dire situation and restore some confidence in the country’s hard-hit banking sector followed a day of panic Monday that saw trading in shares of major banks suspended and the Icelandic krona shrink in value against the euro.

I know things seem tough right now in the US.  However ironic as it may seem, however, the incredibly large size of the United States balance sheet (total national assets) and annual income (GDP) are formidable.  As a result, despite the current account and budget deficits, in the end, our economy is large enough to weather the storm if we don’t panic.

We may want to begin with a small acquisition at this point of a country with a small, weaker balance sheet.  Iceland seems like a good start.  The country has a GDP of $19B dollars (14B Euro) on a population of 300K.

With sufficient warrant coverage, we should be able to line up our potential 51st state with limited downside, assuming we can provide liquidity.  It would be good to have a subsidiary with currency exposure to the Euro, and we can easily assign them the requisite 2 senators and congressman based on demographics.

BTW Who does handle M&A for the US these days?  State department?

Marc Andreessen Joins eBay Board of Directors

This is literally yesterday’s news, but was worth a mention here.  From the eBay Ink blog:

Marc Andreessen has joined eBay’s board of directors, effective immediately.

Andreessen is most noted for co-founding Opsware and Netscape, and served as AOL’s CTO immediately following its acquisition of Netscape. His current venture is Ning, a new consumer Internet company founded in 2004 that is focused on building a next-gen platform for social networking. Rather than having its users join one all-encompassing social network, Ning encourages and allows users to create their own social networks for anything they’re passionate about. In four years, more than 480,000 social networks have been created by users on Ning.

I had a chance to meet Marc briefly as part of the OpenSocial launch @ Google last year.  There is no question in my mind that eBay will benefit from having his perspective on the board given their current challenges.

Some interesting facts & links:

In particular, I’m going to flag a post I wrote over a year ago about how eBay missed its opportunity to buy Ning cheaply, and why that acquisition would have made sense.  I caught some flack for that last summer… feeling at least partially vindicated here.

Ding Dong, The Apple iPhone NDA is Dead

They’ve been celebrating in the streets all day.  Apple iPhone NDA.  Gone. History. Finito.  Buh-Bye.

Great news and timing for the CS 193P class at Stanford, as this means that forums are likely to emerge quickly for students to engage with, learn from, and help each other.

Here is some text from the Apple Announcement:

We have decided to drop the non-disclosure agreement (NDA) for released iPhone software.

We put the NDA in place because the iPhone OS includes many Apple inventions and innovations that we would like to protect, so that others don’t steal our work. It has happened before. While we have filed for hundreds of patents on iPhone technology, the NDA added yet another level of protection. We put it in place as one more way to help protect the iPhone from being ripped off by others.

However, the NDA has created too much of a burden on developers, authors and others interested in helping further the iPhone’s success, so we are dropping it for released software. Developers will receive a new agreement without an NDA covering released software within a week or so. Please note that unreleased software and features will remain under NDA until they are released.

It’s interesting to note the phrase I bolded above… given Apple’s history with the Mac & Quicktime, it always seemed possible that the iPhone NDA was a reaction to those bitter lessons.

The San Jose Mercury has a funny write up here.  Ars Technica has a more verbose post up as well.

I think we’ll see a measurable increase in the number of applications and the relative quality and pace of innovation from this change.  It was shocking how much this simple legal protection was stifling the growth and development of developers new to the platform.

Need Help: Obama on Glass-Steagall Repeal in 1999

I need some help here from those closer to the inner workings of the Barrack Obama campaign.  I have it from fairly good sources that Obama has a strong economic team, and that he’s intelligent.

So why would he advocate a position based on the repeal of Glass-Steagall in 1999?

Just to rattle off a few bullets:

  • Glass-Steagall prevented companies from having both commercial & investment banks.
  • The products of the mergers that were enabled post-Glass-Steagall have been the most stable in this crisis, because they have large deposit bases in their commerical arms to balance the leverage in their investment arms.
  • The non-diversified firms, both commercial & investment banks, have been the hardest hit.
  • The investment banks that are remaining (Goldman Sachs, Morgan Stanley) are pursuing this joint model to survive the crisis.  It wouldn’t be possible if Glass-Steagall were in place.
  • The universal banks, like those in Europe, are proving to be the acquirers in this crisis.
  • Academic research has effectively shown the fallacy of the original Glass-Steagall approach, which is why Bill Clinton supported the effort in 1999.  A majority of Democrats, including John Kerry & Joe Biden, voted for the final bill in 1999, as did a majority of Republicans.

The WSJ has a nice editorial here on the topic.  Marginal Revolution, as usual, has good data too.

Can someone help explain this one to me?  Is he just hitting McCain over the head with an easy talking point?  Or does he actually believe that repealling Glass-Steagall was a mistake?

This election would be a lot more enjoyable if either candidate was making any sense on economic issues.