Gretchen Morgenson wrote this weekend in the New York Times on the Federal Reserve efforts to save the financial sector during the Great Recession, at enormous cost to the taxpayers and little benefit to Main Street.
Based on information generated by Freedom of Information Act requests and its longstanding lawsuit against the Federal Reserve board, Bloomberg reported that the Fed had provided a stunning $1.2 trillion to large global financial institutions at the peak of its crisis lending in December 2008.
The money has been repaid and the Fed has said its lending programs generated no losses. But with the United States economy weakening, European banks in trouble and some large American financial institutions once again on shaky ground, the Fed may feel compelled to open up its money spigots again. (emphasis added)
This is NOT the TARP money bailout that was publicly debated and ultimately Congressionally approved, but additional amounts of money that were lent by the Federal Reserve to large banks (including foreign banks) largely in secret and at minimal interest rates in order to make sure that these banks could meet their minimum liquidity requirements so as to avoid bankruptcy.
The Fed overnight window is nothing new - the Federal Reserve has long provided short-term liquidity to help grease the wheels of finance. But the two startling things about these lending programs are (1) the amounts ($1.2 trillion!!! And we're so worried about our debt problem pshaw!), and (2) the collateral pledged in return for these loans. Under standard operating procedures, the Fed would only accept bonds with the highest credit grades in return for their cash loans (iow, US treasuries). So under normal circumstances, the Fed is arguably just swapping almost equivalent goods. Yes, banks get cash from the Fed, but they are receiving collateral worth as much and almost as liquid.
Under the 2008 emergency lending programs however, the Fed started accepting all sorts of dreck from the banks. Stocks, junk bonds, and although not mentioned in the Bloomberg article, I remember they were even accepting asset backed securities, the basically worthless investment vehicles that started all of the big banks' problems in the first place.
Yes, it is true that the Federal Reserve has not (yet) lost money in these lending endeavors, which is what the backers of these programs would argue. However, think about this practically. You are the bank. You are given (as in Morgan Stanley's case) well over $100 billion in cold hard cash. In return, you give the Fed some paper that you own which, if you had to mark-to-market at that moment (which you didn't, thanks to new accounting rules that came into place at around the same time changing MTM rules), would be worth - for arguments sake - a quarter of that (and maybe less). If you just invest that money in a basket of S&P 500 stock, you will see returns of 27% and 14% over the next two years. And even though you can't see the future, your calculations has to run something like this: if I bet big and it pays off, I get to keep all the upside less the 1.1% interest that the Fed is asking for its money. If the bet doesn't pay off, I lose a bunch of worthless paper (the collateral being held by the Fed) and go bankrupt. Which I would be anyways, if I didn't take this money.
Hmmmm.... hard choice.
As far as I'm concerned, the Fed gave the financial sector carte blanche to play fast and loose with a whole lotta taxpayer cash. Yes, this time it "worked out", but given that the reason for this weekend's NYT article is the fact that there are hints that the spigots are about to be turned on again, just how lucky does the Fed feel?
Do you feel lucky? Well, do you, Bernanke?
Read the excellent Bloomberg article here and its associated data here.
Wall Street has showered nearly $11 million on the Senate since the beginning of the year, and more than 15 percent of it has gone to a single senator: Democrat Chuck Schumer of New York.
Schumer’s $1.65 million take from the financial services industry is nearly twice that of any other senator's — and more than five times what the industry gave to any single Republican senator.
While the industry has scaled back its political spending in the wake of last year’s economic collapse, data from the Center for Responsive Politics show that it’s still investing heavily in the Senate, where it’s likely to have its best shot at stopping — or at least shaping — the crackdown on Wall Street that President Barack Obama has proposed.
And it’s clearly looking to Democrats to do it.
I've been a registered Democrat since I was 18, but let's not kid ourselves. While we were looking the other way, all obsessed about fluffy social things, we were getting the proverbial rug (iow, our country) pulled out from under our feet.
It's a wonderful strategy, really. Forget ideology. Never gamble. Always bet on whoever is in office.
Why is it that the only people who seem to care are the faux-news folk?
The astounding 2nd quarter earnings of GS, JP Morgan and now BOA are the final proof that everything that has been done (by the end of the Bush administration and the beginning of the Obama administration) to get "us" out of the economic recession has been done not only to rescue the very financial companies that brought such havoc to our "free market" system but to help them achieve record profits (and disperse record bonuses). As the rest of America lose jobs, struggle to keep their homes and get locked into a crumbling country, the financial oligarchs are gleefully getting their freak-on and hastening the process of the final looting of whatever value is left in this country.
But Matt Taibbi, whose famous Rolling Stone article proposed a somewhat absurd conspiracy theorythat described Goldman as a bubble machine, has finally figured it out.What’s wrong with Goldman isn’t that is evil or even uniquely evil. What’s wrong is that it is pocketing money that it is making, in part, because it isn’t subject to market discipline. It is close to a pure play government arbitrage firm these days.
[Here are the] ways Goldman enjoys government support. The TARP Exit Subsidy.Under the relevant law, banks wanting to exit the TARP program were supposed to not face any obstacles. They could just sent the money in, consult with their regulator and they’d be out. This was intentionally included in the law, changing an earlier agreement that the original TARP banks made to not exit TARP until they got permission.
But Tim Geithner didn’t like this new deal so he ignored it. He decided to require that the TARP recipients had to issue new equity and new debt in order to exit. (Later, he eliminated the equity requirement but it was too late—banks were already issuing the equity.)
As it turns out, this was a major boon to Goldman, since it got to underwrite many of the new issues.
Taibbi really nails this one:
So say International Reckless Dickwad Bank needs to issue $100 million in new stock to pay off TARP; they hire Goldman to do the deal, and since the fee for equity underwriting is 7%, Goldman gets, in essence, a state-mandated $7 million fee. Because so much money was lent out under TARP, the underwriters on Wall Street made a massive bonanza on all the new bank stock. As noted above, Goldman’s equity underwriting department hauled in $736 million this quarter. Does this happen without the bailouts? No. Do the bailouts happen if banks like Goldman hadn’t blown up the universe in the first place? No. You do the math; this is another subsidy.
Explicit Debt Guarantees. Under the Temporary Liquidity Guarantee Program, Goldman is basically able to piggy back on the credit of the United States taxpayers. Goldman issued $28 billion in FDIC-backed debt under this program. “Exactly how hard is it for a bank to make a profit when it has unlimited access to virtually free money? It is almost impossible for banks to not make money when their cost of capital sinks this low,” Taibbi writes.
The Discount Window. It’s not well understood by the broader public how important access to the discount window is, and how it lowers Goldman’s borrowing costs. Basically, anyone who lends money to Goldman knows that if there’s ever a short term liquidity crunch, Goldman can turn around and borrow from the Fed. This means that lenders face a lot less risk that Goldman will run into the kind of liquidity crisis that ruined Bear Stearns, which means they lend to Goldman at cheaper rates.
The Implicit Guarantee. This is one that Taibbi misses. (We forgive you Matt.) Goldman is now the equivalent of Fannie Mae, protected by a market-wide assumption that there is no way it can ever fail. Its creditors can count on Goldman’s debt being almost as good as government paper. Except Goldie Mac is even worse than Fannie, which was at least subject to supervision by a dedicated federal regulator. (for all the good that did.) We still haven’t figured out how to regulate these systemically important, too big to fail monsters. So we’re just letting them run rampant across America hoping that someday we’ll discover the financial equivalent of Saint George to slay the dragon.
The Government Carry Trade. To sum up, Goldman Sachs is taken advantage of a new trade that was invented in the midst of the crisis. It’s similar to the old fashioned carry trade where banks borrowed money in low interest rate currencies and lent where they could get higher yield. Only these days, the carry traders don’t have to go abroad to find the low interest rate. We’ve brought it home to them. They borrow cheap thanks to this conglomeration of explicit and implicit guarantees, and lend out at higher rates. If your cost of capital is artificially cheap, all sorts of trades that would never be profitable in a free market suddenly become profitable.
As Taibbi points out, this isn’t how it was supposed to work. The bailout was supposed to be an emergency measure that wouldn’t permanently warp the market. Main Street was going to benefit as much as Wall Street.
Fuck the politicians. They're either all fucking morons or all fucking liars. I'm so sick of the flat-out, in-our-face, transfer of wealth from the poor and middle-class to the rich. I'm so sick of the Dem vs. Republican bickering going on that keeps us from seeing or acting on what is happening right in front of us. This is not a free-market vs. government-controlled discussion over how to run our economy, and the longer we think it is, the more time we give them to clean out our country.
Srsly, fuck it, I'm moving to China. At least there, everybody understands that the powers that be are there just to rip you off.
I hate left-right bickering. Hate it. I especially hate the left-right bickering about the automobile bankruptcy/bailout. Yes, the approach taken w/r the bankruptcies left much to be desired, yes, I question the legality of the various things done by the government to ensure that the bankruptcies proceeded according to their "plan", and yes, there was probably a ton of politics involved (not the least of which, the preservation of the almighty union vote). But yes, a too rapid shutdown of the American auto industry would probably have had pretty deep and severe consequences, which would have required extraordinary "other" taxpayer funded programs (if nothing else, more budget for the police/military to quell the riots and social instability that would inevitably happen if unemployment climbed into the mid-teens or even twenties), and yes, I too wonder what America would look like once we lose all of our ability to manufacture (though Robert Reich, a pretty darn tootin' liberal guy, has a series of blogposts about why the whole idea of preserving American manufacturing should be pwnd). But the auto bankruptcies are not about the the unions, or the recession, or American competitiveness, or the small bondholders (more about this later).
Most of all, I hate left-right bickering because I'm increasingly convinced that it is all manufactured for the preservation of those who have absolutely destroyed America. Watch I.O.U.S.A. if you don't believe that America is up shit's creek w/o a paddle. Because of all these ridiculous left-right battles (and don't get me started on the cultural ones), we hate each other even more than we hate (1) those whose political might structured a financial system where they could get extraordinary magnified returns on the backs of those of us just trying to save for retirement or trying to put a roof over our families' heads and (2) those in other parts of the world who are just counting down the days until we explode magnificently.
When will people realize that it won't matter if we have or don't have gender equality, have or don't have the right of choice, have or don't have gay marriage, have or don't have high or low taxes when we no longer have a country?
When it's too late.
Rape the country? Too late, already done. Want more proof? Here's one:
Dimon is the CEO of JP Morgan Chase bank. While GM workers are losing their retirement health benefits, their jobs, their life savings; while shareholders are getting zilch and many creditors getting hosed, a few privileged GM lenders – led by Morgan and Citibank – expect to get back 100% of their loans to GM, a stunning $6 billion.
The way these banks are getting their $6 billion bonanza is stone cold illegal.
I smell a rat.
Stevie the Rat, to be precise. Steven Rattner, Barack Obama's 'Car Czar' - the man who essentially ordered GM into bankruptcy this morning.
When a company goes bankrupt, everyone takes a hit: fair or not, workers lose some contract wages, stockholders get wiped out and creditors get fragments of what's left. That's the law. What workers don't lose are their pensions (including old-age health funds) already taken from their wages and held in their name.
But not this time. Stevie the Rat has a different plan for GM: grab the pension funds to pay off Morgan and Citi.
Here's the scheme: Rattner is demanding the bankruptcy court simply wipe away the money GM owes workers for their retirement health insurance. Cash in the insurance fund would be replaced by GM stock. The percentage may be 17% of GM's stock - or 25%. Whatever, 17% or 25% is worth, well ... just try paying for your dialysis with 50 shares of bankrupt auto stock.
Yet Citibank and Morgan, says Rattner, should get their whole enchilada - $6 billion right now and in cash - from a company that can't pay for auto parts or worker eye exams.
JPMorgan is widely understood to be one of the biggest lenders to the U.S. auto industry, if not the single biggest. But CEO Jamie Dimon, when asked about the issue on the bank's first quarter conference call, said total losses in a worst-case scenario would be relatively small.
...a JPMorgan-led group of banks was largely unsuccessful in selling off a $12 billion loan in 2007 to finance Cerberus Capital Management's purchase of Chrysler in 2007, according to several reports at the time. Other lenders on that deal were Citigroup, Morgan Stanley, Goldman Sachs and Bear Stearns, though JPMorgan assumed Bear's exposure when it bought the faltering firm the following year.
The banks apparently hedged a good deal of this exposure by buying credit default swaps of Ford and GM. A report by bond research firm CreditSights in 2007 noted a sudden rise in credit default swaps on Ford and GM that July, which it attributed to bank hedging activity as efforts to sell the Chrysler debt ran into trouble.
Do you see what just happened? The too-big-to-fail banks NEVER LOSE. No matter what happens to every other industry, every other player in the market, every other citizen of this country, only one group of persons? bandits? cylons? are guaranteed to NEVER LOSE.
Tomorrow, we will likely see the evisceration of fair value accounting by FASB, due to the pressure of lobbyists, magnified by US lawmakers. Srsly, Congresspeople, your job should never never never be to make things less transparent. But apparently, your new motto is: Save the Bankers, Screw the People.
I have a huge blog-crush on Steve Waldman, and no more than today (emphasis mine):
I am filled with despair, not because what we are doing cannot "work", but because it is too unjust. This is not my country.
Consider a hypothetical asset manager, PIMROCK. PIMROCK reviews a pool of loans held by the bank J.P. Citi of America, and its analysts determine they are worth 30¢ of par value. The bank holds them at 80¢ on its book. PIMROCK agrees to put down $10B to purchase loans from the pool at 82¢ thrilling stock markets everywhere. It was all just a bad dream!
Under Geithner's plan, PIMROCK's $10B permits a $10B equity investment from the Treasury. Then the FDIC levers the whole thing up, providing $6 of debt for every one dollar of equity. So, $140B of bad loans are lifted from J.P. Citi of America, nearly $90B of which is sheer overpayment to the bank.
Of course, as cash flows evolve, PIMROCK's $10B is wiped out entirely, as is the Treasury's investment. The FDIC gets repaid in a bunch of securities worth about $50B, taking a $70B loss. But, as Calculated Risk, likes to say "Hoocoodanode?" These were real market prices, Geithner or his successor will argue. Our private partners lost everything. There was no subsidy here.
Meanwhile, taxpayers will be out around $80B.
Why would PIMROCK go along with this? Because they feel it is their patriotic duty to work with the government for the good of the financial system, even if that involves accepting some sacrifices. And because they hold $100B in J.P. Citi of America bonds, and they've received assurances that if we can get the nation out of the financial pickle it's in, there will be no haircuts on those bonds."Shaking hands with the government" means that nothing ever has to be put in writing.
Welcome to America, 2009. Change we can believe in.
When the powers that be are interviewed about why this option, why this incessant fixation on the cash for trash solution (how many misguided iterations must we go through before we change tactics), they always ALWAYS point to the catastrophe that was the failure of Lehman Brothers.
I am still waiting for a full accounting of what exactly happened after the bankruptcy of Lehman Brothers (other than the rather vague stories of massive outflows of cash from commercial paper and money markets) and why the apparently gigantic whole on Lehman's balance sheet has yet to lead to any sort of fraud investigation. (Meanwhile, we are dedicating our justice resources on AIG bonuses? Obscene, yes? But srsly?)
And there has been this oppressive, seeting anger in me that here we are, half a year after Lehman (and that's only if you don't count Bear Sterns, giving our government the benefit of the doubt) and we have not yet patched up the bankruptcy code so that a "run on the bank" wouldn't happen when another financial firm collapses?
And then this post turned on a light: the government at this point, is beholden to so many bondholders, the PIMROCKS of the world and not to mention CIC (the Chinese investment arm) or the royal families of the Middle East, that bankruptcy is essentially being thought of as a non-option. BECAUSE THE GOVERNMENT HAS EFFECTIVELY PROMISED THAT ALL THESE INTERESTS WILL NEVER HAVE TO TAKE A HAIRCUT ON THEIR BOND HOLDINGS!
Whatever happened to the law (Title 12, Sec. 18310) mandating that banking regulators take "prompt corrective action" to resolve any troubled bank? The law mandates that the administration place troubled banks, well before they become insolvent, in receivership, appoint competent managers, and restrain senior executive compensation (i.e., no bonuses and no raises may be paid to them). The law does not provide that the taxpayers are to bail out troubled banks. Treasury Secretary Paulson and other senior Bush financial regulators flouted the law. (The Office of the Comptroller of the Currency (OCC) and the Office of Thrift Supervision (OTS) are both bureaus within Treasury.) The Bush administration wanted to cover up the depth of the financial crisis that its policies had caused.
Mr. Geithner, as President of the Federal Reserve Bank of New York since October 2003, was one of those senior regulators who failed to take any effective regulatory action to prevent the crisis, but instead covered up its depth. He was supposed to regulate many of the largest bank holding companies in the United States. Far too many of these institutions are now deeply insolvent because the banks they own are deeply insolvent. The law mandated that Geithner and his colleagues place troubled banks in receivership long before they became insolvent. Why are the banking regulators, particularly Treasury Secretary Geithner, continuing to disobey the law?
Basically, when the FDIC was created to guarantee monies deposited by people like you and me in banks, this law was enacted to force the government to step in as early as possible so as to minimize the cost to the FDIC in paying back amounts guaranteed to depositors (remember, that amount has recently been increased to $250,000 per depositor). Theoretically, banks have been paying the FDIC a yearly premium for this insurance, but the truth is, the premiums were not nearly enough and the coffers of the FDIC are drying up at a rapid clip. If the money runs out, the guarantees will not disappear (as this would most certainly cause a run on the banks), instead, taxpayers will be expected to step in and pay for additional amounts necessary to make good on the FDIC guarantees.
The sooner the FDIC steps in and seizes a bank (or, technically, puts it into conservatorship), the sooner it is able to recover value. Just think of it this way: if you are a bank, and you now know that all of your equity (or your ownership stake) in the bank is gone, you have absolutely nothing to lose. You might as well continue to bet using the assets of the bank (which are not yours) maybe in the completely irrational hopes of making it back into black.
The FDIC, on the other hand, will try to recover as much value as possible by selling assets off as fast and for as much as possible, which minimizes the amount that it will have to pull out of its reserves to meet its guarantee obligations.
Where is the outrage that these banks, which everyone knows to be technically insovlent, are still allowed to continue to operate, without government intervention??
Srsly, stop getting hysterical over the $20k, $30k that the irresponsible neighbor down the street might be getting because he's going to be refinanced by the government under the homeowners bailout. We are bleeding money from the wound that is the financial sector in America, and apparently no one is willing to do anything about it. Not even the regulators whose job it is (and who are theoretically legally obligated) to do something about it.
Secretaries Paulson and Geithner [have] subverted the ["prompt corrective action" (or PCA)] law by allowing
failed banks to engage in massive accounting fraud (which also means
they are engaged in securities fraud). Treasury is telling the world
that resolving the failed banks will require roughly $2 trillion
dollars. That has to mean that the failed banks are insolvent by
roughly $2 trillion. The failed banks, however, are reporting that they
are not simply solvent, but "well capitalized." The regulators flout
PCA by permitting this massive accounting and securities fraud.
I've been getting a bit...um... un-awesome... in my posting frequency. But I've been feeling physically, emotionally, and spiritually sick, so it's been hard to rally up the spirit to write anything. And this is mostly a rant, so beware.
On the physical illness front, my entire family decided to come back from our vacation with the 24 hour stomach virus, which had a ferocious tenacity. We were felled like Christmas tree, one after another, and though I have the dubious honor of being the last to be stricken, stricken I was, and stricken hard. As anyone with children knows, when bugabooed with a persistent illness like this bugger of a bug, there is a whole 'nother level of complexity as J and I struggled to figure out who could be around when to take the girls to the doctor, or pick up Loo when school called mid-day with the dreaded, "you need to come get your child" message. Nanny had extra hours, but there are limitations, as she does not drive.
On the emotional front, I've realized that I've become increasingly paralyzed with fear about what is happening to the US economy. Now, I am an eternal pessimist... I know this of myself, which is why I've consistently rejected the entrepreneurial in favor of the risk-free (hello! lawyer, anyone?). But I like to be a rational pessimist, a logical pessimist. And there is a lot of conflicting signals out there.
Deflation/Inflation
Clearly, at least in the short term, we are experiencing mild deflation. The bursting of the housing bubble has caused housing prices to decline, significantly in certain areas, though only (frustratingly) modestly in my own region. Oil prices have collapsed pretty magnificently, and even with the brief run-up we've been seeing due to the Israel/Hamas conflict and the Russia/Gazprom situation, we're back down below $40/barrel as I write this. Retailers had a staggeringly bad December, reflecting both poor demand and the insane margins that retailers were willing to take in order to trim inventory. And, more importantly, there are starting to be lots of talk of people taking wage cuts in order to prevent mass lay-off. A good sign of humanity, though pretty shit bad for deflation (as it signals wages becoming "unsticky"). As far as I can tell, the only things that are increasing in prices are certain foodstuffs.... and gold.
But the amount of "money printing" has been nothing short of extraordinary. Outside of TARP and the proposed Obama stimulus, which already add up to $1.5 trillion, the Federal Reserve's balance sheet has exploded by a magnificent $1.2 trillion. I understand that this is not money printed today, but money that we're promising to someone, and mostly foreign someones, tomorrow.
This is a transference of leverage from the private sector to the public sector.
But the funny/ironic thing is. The very people that we are borrowing from won't allow the US dollar to get weaker. This is the part of this economic recession that has been so endlessly mind-boggling. That because a whole lot of Americans took out mortgages for homes that they shouldn't have, and a whole lot of American banks packaged those mortgages into supposedly risk-free securities, countries like Iceland, Ireland, Spain, Greece, Latvia and to a lesser degree, Germany and China are in far worse economic shape than they could have ever expected.
Japan has all but said that they wouldn't allow the Yen to get stronger than 70 to the dollar (if that), and China has stealthily (or not so stealthily, I guess) pegged the Yuan (and hard) back to the dollar. Who knew that for these Asian governments, it would be more important to maintain the trade imbalance between themselves and the world's consumer nation than to literally have that country (that would be the US) at their mercy financially?
And, unsurprisingly, if other countries won't let the US dollar inflate, then guess what, apparently, the US dollar won't inflate.
Credit Crunch/Insolvency
So the fed is oh so proud of itself because the credit market has been showing marked signs of improvement. The TED and A2/P2 spreads have both narrowed, and significantly (both signs that interbank lending and commercial paper lending are moving again). I've heard that most of the lending volume is still clustered around loans w/ short maturities, so things are not perfect. But on the whole this is theoretically considered promising.
Yet, at the same time, there is now a whole lot of hand-wringing about how the first 1/2 of the TARP funds have been used and the expansion of the Fed's balance sheet. Which lead to this doozy of a House hearing:
I know how this plays, and I know that us blues are supposed to love a Fed Vice Chair coming off as a total slime-bag asshat tool, but honestly, I want to know...
Do any of the politicians in Washington actually understand WTF they are talking about?
(1) Congressman Grayson is apparently asking the Fed Vice Chair about the expansion of the Fed balance sheet (by $1.2 trillion), and Kohn is trying his very best to explain that the money is lent and not spent. Then Grayson wants to know which financial institutions got the loans.
Oh, this is such disingenuous crap.
The "categories" under which Fed has lent money is actually known. In fact, here is a chart of them:
What this chart says, right off the bat, is that a HUGE chunk of money is what was committed when Bear Stearns was bailed out (Maiden) another huge chunck is the Commercial Paper Lending Facility (CPLF), which yes, was probably lent to specific banks to guarantee their commercial paper, but was something that everyone and their mama was very insistent on when Lehman's failure caused that money market fund to break the buck. And of course the Term Auction Facility (TAF).
My point being, it's hugely hypocritical to be the congress that passed the TARP on the one hand, which was all about propping up the failing banks, and then on the other hand be all up in arms about the expansion of the Fed Balance Sheet, which has been all about propping up failing banks.
(2) In these lending situations, Mark-to-Market is as much a fiction as anything else. The point is that banks have some really bad, worthless crap that they can't get any money (which they need) for. The Fed is lending them cash and holding that really bad crap as collateral. Two things can happen. Either the banks will pay the Fed back, in which case the Fed is out nothing. Or the banks won't, in which case the Fed will get to keep the really bad crap, which is worthless, and the Fed will be out what it loaned. However, if the objective is to prop up failing banks, and you insist that the collateral be valued at market, they would be valued at crap (near 0) and then the Fed won't be able to lend any money to the banks because they can't pony up any valuable collateral. No banks saved.
So either you just decide that the bad banks should fail (my personal preferred option) or you play this ball. Asking for marked-to-market accountability on collateral when the goal is to save desperate financial institutions is... idiotic.
(3) It is, and I have no link now, but I believe this is true, a long standing, well-established principle that the Fed does not reveal who it lends to at the Discount Window. Like the FDIC's watch list, which banks are never revealed, this is to prevent runs on weak banks, which would pretty much completely destroy any chance a bank might have at preventing insolvency. Of course, it is arguable that all banks are weak at this point, so what does it hurt to reveal.
I think this shield principle is rational. And it works reasonably well when not every financial institution is on the brink of insolvency. If we want to change this, say, for exigent circumstances, then we should do it through the appropriate procedures, and not during some 10 minute congressional cross-examination.
The two are not the same, they are not interchangeable.
And don't get me wrong, I have so many many problems w/the lending facilities. But I go back to the core and really think that we needed price discovery, and a few more Lehmans, despite the inevitable pain. But this, this is hypocritical idiocy.
Oh, craptastic, it's late. I need zzz's. More later.
US Debt has grown to be about ten percent of World GDP (excluding the US) which is without historic precedent.
Approximately thirty percent of US debt is being held by non-US entities, in particular foreign central banks (on chart, "official").
The
Developed Countries are holding approximately 70% of their reserves in
US Dollars. The Developing Nations have less exposure on a percentage
basis.
Above Charts from "Is the US Too Big to Fail?" by the Reinharts at VoxEU
Total
US Dollar Credit Market Debt Now Stands at 350% of US GDP. This cannot be
sustained. Certainly a certain portion of credit will be written off in
defaults. But notice that the strategy of the US is not to make
structural reforms but to try and restart the debt creation engine.
This will require continued subsidies from foreign sources with waning
appetites for US debt that can never be repaid.
I've been so livid, so many times this year, and each time I calm myself hoping that our politicians might somehow marginally redeem themselves. And they never fail... to make me even angrier.
Yesterday, many many bloggers wrote about the travesty that is the "renegotiation" of the AIG bailout. Now it seems that all of our worst fears are confirmed by that bastion of pro-business reporting, the Wall Street Journal. Via Naked Capitalism (b/c I don't have the friggin' money to subscribe to the WSJ online) (emphasis mine).
Banks in the U.S. and abroad are among the biggest winners
in the federal government's revamped $150 billion bailout of American
International Group Inc.
Many banks that previously bought
protection from the insurer on securities backed by now-troubled
mortgage assets stand to recoup the bulk of their investments under a
plan by AIG and the Federal Reserve Bank of New York to buy around $70
billion of those securities via a new company. These securities are
collateralized debt obligations backed by subprime-mortgage bonds,
commercial-mortgage loans and other assets.
Banks
in the U.S., Europe and Canada bought credit-default swaps on these
securities from AIG, which in turn promised to compensate them if the
securities defaulted. Defaults haven't been a major problem, but the
market values of these CDOs fell sharply over the past year or so.
That
enabled the banks to pry roughly $35 billion in collateral from AIG as
a result of those declines and downgrades in AIG's own credit ratings.
The banks that have sought and received collateral from AIG include
Goldman Sachs Group Inc., Merrill Lynch & Co., UBS AG, Deutsche
Bank AG and others.
Throughout
its AIG rescue efforts during the past two months, the government has
had the banks in its sights; it made its initial bailout of AIG in part
to avoid potential bank losses that might have threatened the broader
financial system.
Under the plan announced Monday, the banks
will get to keep the collateral they received from AIG, much of which
came when the government made funds available to AIG in September. The
banks also will sell the CDOs to the new facility at market prices
averaging 50 cents on the dollar. The banks that participate will be
compensated for the securities' full, or par, value in exchange for
allowing AIG to unwind the credit-default swaps it wrote.
"It's
like a home run for some of the banks," says Carlos Mendez, a senior
managing director at ICP Capital, a fixed-income investment firm in New
York. "They bought insurance from a company that ran into trouble and
still managed to get all, or most, of their money back."...
And once again, in Mom-speak, this is what's going on. A bunch of banks, including Goldman Saches (the birthplace or va ja ja from which sprang the unholy duo that is frakin' Paulson and his little lapdog Kashkari) bought a bunch of crap securities. The banks then bought guarantees (or insurance) on those securities from AIG so that if the crap securities fail, AIG would have to pay the original full (par) amount. Now these crap securities are about to fail. You might say that - hey - the banks paid for the insurance, they should collect on it. Yeah, but at taxpayer's expense? No, tks, bai.
If the crap seurities fail, then AIG would have to make good on its insurance, which it can't, which would cause it to fail. If AIG fails, then they can't make good on the guarantees, then the banks would have to take ginormous write downs.
So the government is going to buy the crap securities from the banks. Seriously. At 50 cents to the dollar (and though the language in the article is a bit confusing, it looks like some will get full par value - I'm trying to figure this out). Which sounds like a deep discount until you realize - hey - aren't we afraid that these crap securities are going to FAIL? As in go to zero?
So the banks will get 50 cents on the dollar, government will get crap securities going towards zero, AIG gets to not fail, until, as Yves points out, it has to face the OTHER $300 BILLION WORTH OF ASSETS THAT IT HAS GUARANTEED.
