2) Declines in lending volumes since receiving TARP money: On first glance, this seems easy. From a public policy standpoint, banks were bailed out, so why is lending volume declining, especially while some banks are opportunistically looking to purchase other banks? While buying competitors after receiving TARP money is a sticky situation (and I personally was surprised to see no restrictions were put on this type of action), did everyone forget we are in a serious recession? The so-called worst since the Great Depression? During an economic slowdown, by its very nature, loan volume should decrease. People are not buying new houses or cars, or spending much money at all, so loan demand should naturally drop. Are banks hoarding capital? Perhaps, but in order to make a statement like that, you need to be more surgical in your analysis than just looking at overall lending volume.

AIG lost $61.6bn ($22.95 per share) in 4Q, resutling from “severe credit market deterioration, particularly in commercial mortgage-backed securities, and charges related to ongoing restructuring-related activities.” These numbers are even starting to make my jaded eyes pop. But don’t worry, pro-forma results (stripping out capital losses and other accounting items) was only a $37.9bn loss (or $14.17 per share). Phew.

“In many ways for those people who have a concern about nationalization, this announcement should put those concerns to rest.”

– Citigroup CEO Vikram Pandit providing some much needed comic relief. He’ll be here until the government replaces him. Remember to tip your waitresses. Drive home safe.

Home prices are just too high and something needs to be done to lower values. Everybody knows this. The government, combined with banks/other lending institutions, could take a “fee-hold” interest in properties underwater by a certain threshold or already in foreclosure, and work out a rental agreement with the current borrower. The borrower gives up ownership to the property. You would then carve off 25-30% of the existing lien and make that portion a tax-exempt, interest free second, that wouldn’t start accruing say for 10 years. The remaining 65-70% would be a normal, fixed rate amortizing loan. The government could allow the borrower to re-purchase the fee-hold ownership if/when they first pay off the second. The borrower also couldn’t take out a HELOC or refinance until the second was paid off. Those who hold the liability (banks/pension funds/insurance companies etc) would retail the liability, but would be exempt from mark-to-market until the accruing period starts (10 years in this example).

This is an interesting idea because both parties gain, but also share some of the pain. Homeowners can stay in their homes, and have the opportunity to repurchase them in 10 years interest free, but are more like renters and don’t technically “own” the property anymore. Banks suffer from the cost of restructuring the new mortgage and have to take a write down based on the new first mortgage. If/when the owner repurchases the house, it would be worth 70% of what it’s worth today. At that point, they can’t take out a second on the property without lender approval, and if they sell or refinance, there would be penalties on top of the capital gains tax for participating in this program, which would hopefully deter non-defaulters from trying to take advantage and let the program help its target audience. I would estimate this would stem a significant number of foreclosures and revalue the current market on income/affordability. Since the borrower already ceded ownership of the property, if a foreclosure is still needed, it will be much easier and less expensive because it would be more like an eviction, instead of a foreclosure.

Banks can preserve capital until the accrual period starts on the seconds when they would have to mark-to-market again. Also allows banks all the upside from payments on the seconds against their current marks, with the added potential of recouping losses incurred today by modifying the first mortgage, assuming the borrower eventually will pay off the obligation before the accrual period starts. No additional government money is needed, except the tax exemption on the seconds, unless the banking system needs further equity injections, which is a very possible possibility.

I haven’t completely thought through the implications of a plan like this and its unintended consequences. I do however believe it’s an improvement over the current plans being bandied about in Washington.

AIG getting another $30bn in equity, bringing its total to $70bn, which is a nice round 10% of the TARP. Not to mention the tens of billions in asset guarantees not included in the TARP. I think it’s safe to say Hank Greenberg et al had NO idea what AIG financial products was doing. There are actually some quite profitable divisions of AIG (life, prop casualty, aircraft leasing) which will help the company pay down its gigantic debt to the government.

From the New York Times:

HSBC is hoping to raise $18bn in a rights offering (5 for 12, nearly 50% discount) after reporting profitability dropped 70% in 2008. What a fantastic deal for shareholders! The stock is already down approximately 50% YTD.

I suppose the investment community should be giving HSBC credit for actually making roughly $5.7 billion this year, while the banking industry in total LOST something along lines of $30 billion just in 4Q. HSBC has very large operations in the emerging countries in Asia, but is still clearly reeling from its US/Western EU exposure. All this from the bank that sounded the bell on the “subprime” (now expanded) crisis. What is interesting is that HSBC has already lost $30bn from Household (the specialty finance lender it acquired in 2003), which is roughly twice what it paid ($15.5bn). HSBC has also had to deal with a myriad of Household legal issues, even after Household’s record setting $484 million predatory lending suit it settled in 2002, still the largest in US history.