Treasury Offers "Financial Marshall Plan": Peter Vinella, LECG Financial Services
In an exclusive interview, Vinella discusses:
Peter U. Vinella is a managing director in LECG's Emeryville office and has more than 20 years of experience in the financial industry. He has worked with the US Congress and GAO on a variety of issues including TARP/ESSA, program trading, derivatives regulations and the impact of September 11th on the US financial system.
LECG, a global expert services and consulting firm, provides independent expert testimony, original authoritative studies and strategic advisory and financial advisory services to clients including Fortune Global 500 corporations, major law firms, and local, state, and federal governments and agencies worldwide.
TOM FIELD: This is Tom Field, Editorial Director with Information Security Media Group. We're getting reactions to Treasury's new plan for the bank-bail out, and we're talking now with Peter Vinella, Global Head of LECG's Financial Services Sector. Peter, thanks so much for joining me today.
PETER VINELLA: Thank you for having me.
FIELD: Peter, just to give our audience a little bit of context, why don't you tell them just a bit about LECG and your role there.
VINELLA: Well, LECG is an Economic Analysis and Litigation Support Group. It also provides consulting services to a variety of institutions and government agencies. My role is to coordinate and head all the financial services practices that we have within LECG, and that primarily targets financial institutions as well as government agencies I mentioned earlier.
FIELD: Okay, now Secretary Geithner unveiled his plan today. The market liked it. What are your reactions to it?
VINELLA: Well, I think this is a definite improvement from his earlier announcement about 4-weeks ago, which basically said `Well, we're thinking about things.' I think in this case, they've come up with some concrete proposals on how they're going to go forward. I can see why the market is excited, because I think for the last month and a half or so, I think the majority of the opinion was `just announce something that you're going to do and do it.' So I think in general, it's a broad plan, and I think it does have some merits to it.
FIELD: Now when you get into some of the specifics Peter, what do you see that's different from what we've seen before from this administration and the previous?
VINELLA: Well, I think they've learned their lessons again. Starting in November, I think the idea was to stop the panic, and it really was panic when Lehman Brothers went under, and the government stepped up, I think in a very big way, and since that initial response, it's been somewhat tentative in terms of what it's actually going to do, where it's going to go, how it's going to use TARP money. There's been lots of fix and starts and different idea flows. I think here what you saw was a concerted effort, not just with Treasury, but also the FDIC ... I think Treasury now came up with a plan that basically explains a few of the real problems that TARP had. The biggest one being as how they're going to place these assets. Going in jointly with private funds, I think is a great idea; it's a unique idea.
One of the things that I heard from a lot of banks specifically was that the private Equity firms were coming in looking at getting 70% off of face for some of these assets, and if the government was going to come in and pay 80 cents, they were just going to wait. I think that the fact that now the two major buyers, the government and private equity hedge funds and other investments, are now working together. I think that'll be different. I think the blending of an asset-purchase program and the increase in the lending facility, I think is also important, and there are banks out there that don't feel the need to sell these assets. In many cases, these assets are paying as if they're perfectly-performing securities.
The underlying cash flows are coming in, and although it is a use of capital, some of these banks think that it's a reasonable use of capital. I think JP Morgan is a very good example. So coming up with a lending program that allows them to use these in a traditional leverage manner for a bank, which would be through a repo program or a security-lending program, allows banks that don't want to fill these assets to participate and get more liquidity, and then also again allows the institutions that just like to get these off their balance sheets and get them behind them, the ability to do that as well. I also think that the idea that the plan is geared towards all types of financial institutions, small and large, is also a bit different. Before, it left a lot of the community banks out in the cold in terms of some of the specifics and some of the specific assets of the TARP program. But I think we're seeing a more comprehensive plan, one that marries private and public funds, one that addresses banks that would like to sell, as well as banks would just like to increase their liquidities. I think that it's a much more detailed plan as well. I think that it's got some real merit, as I said earlier.
FIELD: so given the unique aspects here, especially the private and the public partnership, what needs to happen for this plan to work?
VINELLA: Well, there is still a lot of operational details that haven't been described, and there's also the famous chicken and egg problem. In many ways, once this program is successful, they'll be self-sustaining, and I think it's getting the critical mass to get it started where it really starts to have an effect. One of the big questions is if the private equity funds are still going to offer -- are big on these securities -- 30 cents on the dollar. There probably wont be a big appetite on banks to sell for that level. So even though the banks wont be able to wait for the government to come in, if the program doesn't really start to have demonstrable impact in terms of freeing up capital, there'll be a question of how long the government will stay with the program and, you know, abandoning it for something they find more effective. So getting the initial kick-off going quickly and getting real appetite on the part of the banks to sell these assets is a critical aspect to it. Another point is, if you look at the type of assets that they're willing to buy through this program, there's still relatively non-toxic/toxic assets.
Probably the biggest issues are just purely operational. Treasury is not an operational-oriented department. They don't do a lot in terms of settling clearing security transactions. They don't monitor principle-interest payments, and even the Federal Reserve, who has some of that capability and doesn't really have that at the kind of volumes we're talking about, they run more of a Treasury function of a bank, as opposed to really a full-fledged investment banking operation that would be processing all this type of information. And then the risk-management on top of that. So I think that a lot of the operational issues that Treasury is going to have to overcome. They gave hints that that would be done through outsourcing.
It sounded like private managers would be managing these funds. But still Treasury and the GAO, who have supervision responsibilities over Treasury, are still going to have to monitor these programs, and it's kind of a question mark of how well they're going to do. Also, I think you're starting off with the public sector and the private sector being aligned in their interests, how long that can maintain through the life of these instruments and some of these are at 30-year maturities? Also, it remains to be seen, at some point, will that partnership start to fray at the edges, and I think again, having a good communication from an operational point of view between the Private and Public aspects of this program are going to be critical.
FIELD: So really, a lot of the things that could make this work, also could derail the plan if not handled correctly.
VINELLA: Yeah, I think we're kind of on an ice edge here. It can go either way. I think, again, the market's reaction, in my opinion, is boosted as much by the fact that they've defined something now that can be, you know, it's meat on the bones. You can inspect the value of it; you can understand from the operational aspects, where before it was more `Well, we're gonna come in and help,' which is really kind of what Treasury has been saying since last November. But again if this program starts off weakly, if there's not a lot of receptivity to sell these assets, that the operational hurdles can't be overcome relatively quickly so the program can take, you know, really start in earnest in the next few weeks as opposed to the next few months, you know, all those kinds of things could clearly derail this, and then we're back kind of where we were for the last two or three months.
FIELD: Now, you mentioned a few minutes ago that this was good news for the community banking institutions. I'd like to hear some more about that. What's the message to them? How do they benefit from the news today?
VINELLA: Well again, I think the program was designed not just to help, you know, those too big that you can't let fail. I think there is a program here that allows smaller banks to saddle up and sell their assets. I think a key provision of this is the fact that government doesn't have to be part of every investment pool that would be auctioned. This is a lot of private-equity firms to get into the smaller banks as well as the larger banks, and they're not putting any limit in terms of government controls and oversight, and the type of aspects of TARP that I think has been somewhat hard, especially for the smaller banks to absorb. There has been a lot of interest in private equity buying bank assets to the point where a number of firms are looking at starting bank holding companies.
That's a very difficult and timely initiative, and I think allowing the private equity funds to go in and buy through this program is going to you know, really quicken the pace of banks funding assets to private equity firms, and again, it gives the community banks access to capital that they may not be able to naturally attract themselves. I mean, there's a small community bank in Indiana or Iowa or somewhere in the Midwest that may not have access to some of the bigger funds that tend to be located on the coast. I think the other ability is, you know, to again lend, you know, to pledge your collateral to the TSLF program, it gives them a lot more flexibility as well. Because I think one of the other issues is can you get these bad assets off your balance sheet, and now you're supposed to start lending again, well there may not be the opportunity to make the type of loans and the size of loans that a community bank needs to generate the revenues that it's share holders and it's owners expect.
So again the ability to keep some of these assets that are still generating positive cash flows and still it be at the same time able to generate liquidity, I think, is important, and I think if you look at the ultimate goal of the programs that were announced and modified in the last two weeks, this should put more, you know, borrowing power out there so that the banks can lend and hopefully, you know, get the housing market back on track. So I think from the small institutions to the largest, have a lot of good potential. Again, the issue is will it start credibly and maintain that momentum.
FIELD: One last question for you, Peter. This is sort of the first shoe dropping. What do you expect to see next in this administration in terms of financial services?
VINELLA: Well, I described the state of the financial system as looking like post World War II Europe, where there weren't roads; the infrastructure was really dismantled; there wasn't hot water; there wasn't electricity, and it all had to be rebuilt with the Marshall Plan, and I use the Marshall Plan in terms of it's size and it's scope and it's ambition as a realistic analog of what we're going to have to see in the Financial Services System here. Again, I think this is the first shoe to drop in the sense of trying to change the directory of the trajectory of the economy of going down to something very steeply to something that might level off. We still have a lot of other types of assets that are not part of these programs that are going to weigh on these bank's balance sheets and weigh very heavily on these balance sheets that are going to have to be addressed in some way or another.
There's a panoply of regulatory reform that's been already discussed. I think you're going to see some real action in that way. I think you'll see the pendulum swing very heavily in the regulatory arena to where Hedge funds and private equity funds come at least moderately regulated. I'm not necessarily advocating that, but yes, where I think the administration's going to go with it. I think the populous dent that this whole situation has taken over the last couple of weeks, especially with the AIG bonuses, if that stays at the fore, I think you'll see regulations becoming very, very heavy and very, very heavy-handed. My hope is that they understand that regulations are business inhibitors on purpose, and the more you put in there, sometimes the more you inhibit a business beyond what you initially thought, but I think you'll see lot's of actions on lot's of different fronts, so I think it'll still be maintaining lot's of liquidity in the system through the Fed's monetary policies as well as their buying of assets.
Until there's really an inflationary danger, I think you'll see that, you know, in stages we've seen over the last week in estimates at $10 million-$300 billion purchases of Treasuries. I think the other issue is, you know, $300 million up to 100 billion. I think the other issue is really where are they gonna go with looking at the international framework. There's been some talk now of even having a single regulatory framework that's actually imposed, as opposed to voluntary. I'm not sure how well that'd work. This country is really can't agree on too many things, much less inside one country trying to go across as many geographies you would have to do here, but I think that, you know, you'll start seeing some of the - a large growth in regulatory actions, if I can put it that way. Whether it's done by statute or just by regulatory mandate, I think that will definitely happen.
FIELD: It'd be an interesting administration, isn't it?
VINELLA: Well, let's just say one thing is, you know, he wanted to be elected at this point in time, and I think if you look at the kind of energy that the administration had, and not just Obama, I mean, they're definitely trying to address things. I think that the damage since November and even probably the first part of 2009, is very, very deep. I'm not sure that general lay people understand just how badly the national system has been, not just disrupted, but fundamentally changed. I mean, when this is over, traditional investment banks, as we knew them for a century or more, are basically gone.
The large banks themselves have dismantled, to a great extent, their investment-banking functions. Lending, which over the last two decades has become dominated by securitization, more than 50% of lending is through securitization as well as wholesale corporate loans as well as the consumer loans. That whole infrastructure has been dismantled. Putting that all back together and getting this economy going is not gonna happen, you know, by June. I think what'll - I think the big test of this administration is not announcing programs like this and getting a nice, new, you know, balancing the stock market, I think it's going to be what's going to be the economy and the economic condition over the next 2 to 3 years.
FIELD: Well said, Peter. I appreciate your time and your insight today.
VINELLA: Thank you very much. I enjoyed it.
FIELD: We've been talking with Peter Vinella, Global Head with Financial Services Sector for LECG. For Information Security Media Group, I'm Tom Field. Thank you very much.