Why Are The Screw-Ups Still in Charge?

If there is one thing that has become abundantly clear over the past year-and-a-half or so, it is how badly so many financial institutions -- effectively, their senior executives -- managed risk in the pursuit of short-term, turbo-charged profits.

Not only did they hand out loans like candy to a wide range of high-risk borrowers, they relied on all sorts of accounting chicanery and derivative machinations to further augment their returns in ways that seemingly did not make any allowances for the possibility that things could go even a little bit wrong.

Given all the red ink that has flowed through the financial industry in the wake of this far-reaching stupidity, grotesque incompetence and criminal negligence, why is it that so many of the managers responsible are still in charge of those firms?

In fact, incredible as it seems, the screw-ups are in many cases being allowed to preside over the allocation and deployment of myriad capital injections, cheap loans, and taxpayer handouts as if they were the innocent bystanders of a totally unexpected natural disaster.

Jeez, talk about rewarding bad behavior!

In any case, Financial Week details yet another problem area for financial institutions that once took to risky behavior like crack-addicted prostitutes in "Banks, Borrowers Shoot it Out over Revolvers."

In their own run on banks, companies draw down credit facilities

Uncertainty in the financial markets has prompted a slew of companies to tap into their revolving credit lines, putting further pressure on the teetering financial industry.

Last week, eBay and Tribune joined the growing list of well over a dozen businesses that have drawn down some or all of their revolvers in the last two months. In response, banks have been seeking to tighten revolving credit lines and unload them, along with the rest of their loan portfolios, in the secondary markets. Both options have restrictions though, as a lender is legally obligated to honor a revolver as long as the borrower is in compliance with the loan agreement. Banks are also having problems selling revolvers because such loans aren’t attractive to investors.

Companies typically treat revolvers as rainy-day funds to be drawn on in a pinch. They also use them to meet short-term capital needs. Banks have extended them at low interest rates in recent years, as they assumed that few clients would ever tap them.

But a confluence of factors has spiked a run on revolvers.

The market for commercial paper has been reeling since Lehman Brothers went bankrupt, cutting off another source of short-term financing. The battered corporate bond market has also been unforgiving to new issuances, as illustrated by the high yields on recent offerings from IBM and beverage company Diageo.

Most borrowers say they want to shore up cash in the face of tough times, but there are also worries that financing might not be available should more banks go the way of Washington Mutual and Lehman Brothers. Domino’s Pizza, the Spanish Broadcasting System, Ford Motor and Accuride all had credit lines through Lehman Brothers that were thrown into uncertainty when the investment bank filed for bankruptcy. At this point, it’s anyone’s guess what will happen to Lehman’s commitments.

Companies may also be drawing on revolvers for fear their declining financial performance could prompt lenders to cut off their financing should they breach a covenant or default on a loan. Tapping a revolver now may “pre-empt any technical challenges” to a company’s access to its loans, Fitch Ratings said in a recent report.

Fitch said it has seen “numerous examples” of banks scaling back revolvers after a company breaches a covenant or refinances a loan. Restaurant operator Perkins & Marie Callender had its senior revolver cut to $26 million from $40 million in a recent refinancing. Said Fitch: “This trend is expected to accelerate.”

While tapping a revolver tends to carry a stigma, the markets seem to be forgiving of General Motors, American Airlines, Lear and the numerous other corporations that have recently accessed them, according to Daniel Gates, chief credit officer with Moody’s Investors Service.

“It can be perceived as a sign of weakness to draw your revolvers,” Mr. Gates said. “In a market like [today’s] I think some of that stigma is diminished.”

It isn’t unusual for companies to draw on revolving credit in times of uncertainty. Northwest and Southwest Airlines drew on their revolvers following the 2001 terrorist attacks, which rocked the airline industry.

At least one lender—Citigroup—has been bracing for the trend.

The bank’s chief financial officer, Gary Crittenden, said in an earnings conference call earlier this month that the firm began taking a harder look at its corporate loan portfolio about a year ago, tightening and cutting credit lines as accounts came up for renewal.

“In some cases, we size them down,” Mr. Crittenden said. “In some cases we eliminate them altogether.” He said this was evidenced in the 15% decline in its corporate loan portfolio in the third quarter. The portfolio grew by 27% during last year’s third quarter.

“We’re obviously into a period now of economic weakness, and we’ve seen accounts begin to draw down their credit lines,” Mr. Crittenden said. “At this point, there’s nothing out of pattern with those draw-downs that we haven’t seen in prior recessions. And we clearly have thought very carefully about the liquidity implications of this.”

Citigroup acted as administrative agent for one of the larger revolver drawdowns: General Motors’ tapping of the remaining $3.4 billion of its $4.5 billion revolver in September.

Industry experts say the rush to tap revolvers is another stress on the already wilting financial industry, prompting some to explore selling their revolvers on the secondary market.

GMAC, for instance, flirted with unloading a $2.7 billion portfolio that had positions in revolvers held by Rite Aid and Toys R Us, among others. GMAC, which was selling the investments as part of an effort to shed underperforming, non-core assets, pulled it off the market earlier this month, though, citing unfavorable market conditions.

That illustrated the problems some banks have in shedding a loan portfolio stocked with revolvers. They are an unattractive asset, even though sellers are willing to offer them at a discount, according to Ken Gacevich, a managing director at Babson Capital.

That’s because the holder of a revolver has to keep capital in reserve to make good on the credit facility. That’s non-performing capital that most investors would rather not have on their balance sheet, he said. When shopping a portfolio of revolvers, lenders typically include it in a larger package along with term loans or other credit facilities. But even then, they are sometimes out of luck.

“They will often get stuck holding the revolver because no one wants to buy it, because of the unfunded asset problem,” Mr. Gacevich said.

Comments

[Don]

This is the BIG question that the liars in the main stream media refuse to ask, and why the freedom of the press has become little more than a rubber stamp for the status quo.

How is it, that the very people who weren't watching the store, are now the saviors of it?

[Fuddwacher]

The media is owned by the very same corporations who own the government. Throw in the dumbing down of public education and readily available drugs to keep people stoned and you have what we have.....a system where everybody blindly believes the power elite and gives them the spoils of their work on a daily basis. The system cannot survive. The system will not survive. Gold and guns baby. Just in case I'm right.

[roger]

(In fact, incredible as it seems, the screw-ups are in many cases being allowed to preside over the allocation and deployment of myriad capital injections, cheap loans, and taxpayer handouts as if they were the innocent bystanders of a totally unexpected natural disaster.)
BETTER YET, THEY ARE POCKETING SOME OF THE BAIL MONEY!!!!

[Black Star Ranch]

...lets see. NBC News, Meet The Press, Dateline, MSNBC (with microsoft) is owned by GE; CBS, 60-Minutes, Group W, are owned by Westinghouse; ViaCom owns 20-major TV stations, Paramount, Blockbuster and Simon & Shuster Publishing; Disney owns ABC, partial A&E, History, & Disney Channel, ESPN, Lifetime, all the theme parks; CNN, TBS, TNT, HBO, and 33-BIG MAGS are owned by Time-Warner; FOX owns Fox, 132 newspapers, 25-magazines and LA Dodgers, Lakers, and Kings.

Who says we don't get the STRAIGHT unbaised fair & balanced whole story? These mega-businesses have invested billions in politicians so that we can be assured of truth, justice, and the American way!

[Robert Lewis]

Henry Paulson / Goldman Sachs tax liens

Scattered from California to New York: The judgments from the Department of Labor, tax liens against 401-K plans, state tax liens, mechanics lien, judgments from other companies
webofdeception.com

Live links to Goldman Sachs Tax Warrants
http://webofdeception.com/paulsongoldmanliens.html#goldmanlinks

[roland]

Dont blame the "senior executives". They just went along for the ride that the FED started! Why does everybody think that Paulson et. al. is acting like a complete fool when he changes his mind on what to do with $700B? Paulson, Bernanke, et. al., the agents of Fed = Goldman Sachs, JPmorgan, etc., are the ultimate, knowledgeable and extremely experienced insiders with ulterior motives and superb skills to manipulate and shape public opinion to their advantage.

It is all a smoke screen behind which bankers are hiding. They (Paulson et. al.) are extremely intelligent, experienced, focused, successful and
mission oriented. Paulson is not a drunken sailor stumbling and bumping into things as most commentators believe. Paulson, Bernanke, Bolten,
Zoellick, Corzine, Rubin, (Goldman Sachs) et. al. are executing a step-by-step plan. These agents are no dummies. These people do NOT make mistakes! What we are seeing is the world financial elite at their best. The ultimate power and wealth transfer into the hands of few. This is harvest time for them.

Not too many commentators noticed that what ever the Fed (Goldman Sachs, et al.) does doesn't work or solves the present crisis for us commoners. I don´t believe in coincidences. I don't believe this crisis is out of control. This crisis was predictable and long coming. Most knew; including and especially GS/JPmorgan agents. It was only a question of timing and pulling the trigger at the most suitable time. I believe this crisis was orchestrated and is managed to accomplish a well defined plan and strategy.

Every economic depression had its wars, or two. This depression will be no different. Those versed in history of depressions, wars and how wars were financed and by whom will understand that the next war will be very expensive and the "we people" will not finance it. The banksters will. And they will profit handsomely from it; as they always did in the past:
(America's Forgotten War Against the Central Banks By Mike Hewitt:
http://www.dollardaze.org/blog/?post_id=00255)

That is the reason why so much wealth, power and capital is now being transferred to few select banks. This crisis is a huge transfer of power
and wealth into GS/JPM's hands; at the expense of everybody else.
Printing fiat currencies is one of the oldest Ponzi schemes. Does anybody think that Mr. Charles Ponzi didn't know what he was doing?

We may want to start connecting the dots between the most powerful lobby (AIPAC) in USA, JPM/Goldman Sachs' background, the way JPmorgan and GS run and manipulate the US congress and gov't and whether that has anything to do with tensions in mid-east and Israel itching to bomb Iran.