The Bad Bank Assets Proposal: Even Worse Than You Imagined
DriftingByTheStorm
Posts: 8,684
For those of you who don't understand the "Good Bank \ Bad bank" proposal, or who have been mislead in to thinking this solves anything, or improves our situation -- think again.
Naked Capitalism
February 4, 2009
Dear God, let’s just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.
The Obama Administration, if the Washington Post’s latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs 2. Has key elements that studies of financial crises have recommended against 3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.
The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).
Why is this a bad idea? Let’s turn to a study by the IMF of 124 banking crises. Their conclusion:Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked.
What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.
Those who remember the origin know that triage means focusing on the middle third of the wounded on the battlefield : leaving the goners to die, leaving those wounded but stable to fend for themselves for the moment (they were in good enough shape to wait to be transported or hold on to be treated later). The middle third, those in immediate danger but who might nevertheless be salvaged, got top priority.
The concept of "triage" recognizes that resources are limited, tough decision need to be made, and some are beyond any hope. But in Team Obama Newspeak, triage means everyone can be saved because resources are presumed to be unlimited:The basic problem confronting the government is that banks hold large quantities of assets that they value on their books for much more than investors are willing to pay… Yves here. The spin is so thick I have to interject after one sentence. Note how the problem is that the investors don’t want to pay enough, not that the assets are in most cases fetid? Back to the article: Since the early days of the financial crisis, officials have struggled to unwind that knot. If the government buys the assets at prices that banks consider fair, the Treasury would take a huge loss when it ultimately sells the assets for much less. If, instead, the government insists on paying market prices, the banks may not survive their losses.
Yves here. See how saving the banks in their current form is presumed to be necessary? This is the phony policy constraint that is leading to all the distortions. The savings and loan crisis’ Resolution Trust Corporation is touted as a good "bad bank" model (it’s far from the only one). But guess what? It got those bad assets from banks that died. That little detail seems to be neglected in modern accounts.
Back to the article:Instead of taking a single approach, the Obama administration plans to divide assets and other loans into three categories, each with its own solution, according to sources familiar with the discussions, speaking on condition of anonymity because the details are not finalized. The government would buy and hold on to those assets whose falling prices are putting banks under the most pressure. Officials want to limit these purchases because of the vast expense. The centerpiece of the plan would be a guarantee to limit losses on a second group of troubled assets that can be kept by the banks because they have more stable prices. And it would allow banks to retain and profit from their healthiest assets. Beyond these initiatives, the government also is likely to inject more capital into troubled institutions.
Yves again. This sounds completely arbitrary, despite the pretense of faux science. Do they want to buy the assets most underwater? The assets most at risk of further price declines? The assets with that are the hardest to value (like lower rated CDO tranches?). It may simply be that the Post reporter doesn’t appreciate the issues at work, but I wonder if the extreme vagueness reflects instead failure to come to grips with the real objectives (which means Wall Street will be able to manipulate them) or that they don’t want the public to know what is going on (per the persistent stonewalling of efforts to find out what securities the Fed has bought and taken as collateral).
As John Paulson pointed out, a lot of poor quality paper is trading. The idea that it is illiquid is a myth.
The problem is not a lack of price discovery, as the discussion above pretends, it’s a lack of investor willingness or ability to take losses. And readers have said if a particular piece of paper doesn’t fetch a bid, that’s because its real value is not materially above zero. But per above, that’s the sort of dreck that Team Obama would buy.
And what, pray tell, is the point of the guarantee? The loss exposure on a guarantee (versus a purchase) at the same nominal price is the same, although the initial cash outlay is considerably different. Ah, but if the paper is guaranteed, then your friendly bank welfare recipient can bring the junk to the Fed and get nice cash back.
So we the taxpayers are going to eat a ton of bank losses that should instead be borne first by stockholders and bondholders This program should be labeled the Pimco bailout plan, since the giant bond fund holds a lot of bank debt. That show what a fiction Obama’s populism is. It’s mere posturing and empty phrases. Look at where the dough goes, and it is going first and foremost to the big money end of town.
Now I do no labor under the delusion that there are cheap or easy ways out of our financial sinkhole. People are suffering, and we are only partway through the process of contraction and writeoffs. I heard of a suicide today, a jewelry dealer who was $400,000 in debt (also owed a lot of money but unable to collect) who threw himself off 10 West 47th Street (from someone else in the building, this is no urban legend). A tragedy, and a visible one, and there is plenty of less acute but no less real trauma afoot.
But Team Obama is taking the cowardly approach of distributing the costs among the most disenfranchised group in the process, namely the taxpayer, when there far more obvious and logical groups to take the hits. Shareholders and bondholders bought securities KNOWING there was the possibility of loss. A lot of big financial institutions have been on the ropes for over a year. A security holding is not a marriage. When conditions change, prudent investors reassess and adjust course accordingly. If anyone is long a lot of dodgy bank paper now, they have only themselves to blame. Any why are rank and file bankers still exempt from pay cuts when the workers in another failing US industry, autos, expected to take big hits?
This is the most roundabout and probably the most costly way to not solve this problem. Another warning from the IMF paper:All too often, central banks privilege stability over cost in the heat of the containment phase: if so, they may too liberally extend loans to an illiquid bank which is almost certain to prove insolvent anyway. Also, closure of a nonviable bank is often delayed for too long, even when there are clear signs of insolvency (Lindgren, 2003). Since bank closures face many obstacles, there is a tendency to rely instead on blanket government guarantees which, if the government’s fiscal and political position makes them credible, can work albeit at the cost of placing the burden on the budget, typically squeezing future provision of needed public services.
The most amazing bit is the government acts as if it has no leverage. Look how Paulson sent teams in to inspect the accounts of Fannie and Freddie and put them into conservatorship. The reason it is obvious that this program is a crock is that it has ben cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks.
As we discuss in a separate post, the one punitive element, executive comp restrictions, are mere window-dressing. Welcome to change you can believe in.
If I was to smile and I held out my hand
If I opened it now would you not understand?
If I opened it now would you not understand?
Post edited by Unknown User on
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Comments
is this article saying the banks who made bad decisions should be left to fail...? and basically nothing can keep them afloat...?
its saying wishful and uninformed government intervention often has unforeseen, unintended and often times counterproductive consequences.
It would be my personal opinon that the dying banks (Citi & BoA being at the top of the crap pack) are too far gone to be "saved". Of course, those banks underwrite the credit standing of the United States government itself, so you will NEVER see the US Government give up on this failure doomed venture.
Truthfully, if this downturn didn't get any worse -- of course i expect it will get much worse -- i think the aforementioned banks could hold on, if just barely. They would probably never bounce back to pre-stress levels -- and by never, i mean, not in anyone living's life time -- but they would eek out slow steady returns starting somewhere 3-10 years out from this event horizon.
The problem is just that, though. We are on an event horizon. We are all here thinking this is the middle, the end, or somewhere around the 2nd or 3rd act of this "thing". Unfortunately systemic collapses are progressive in nature, and all the "experts" are making their prognosis based on pretending to know the absolutely unknowable. But an honest examination of current circumstance would force one to conclude that banking system collapse is most likely unavoidable, and government intervention can only delay the outcome. Again, this has nothing to do with the article, this is personal opinion. Having studied the numbers invovled with this for quite sometime, i tell you that the amount of money required by the government to theoretically "bail us out" of this mess is in the dozens of trillions of dollars, and that kind of "money" is a recipe for some sort of Weimar style doom and gloom.
If I opened it now would you not understand?
correct me if I'm wrong, when the whole 700 billion dollar bailout debate was happening, you and I were in disagreement, whereas I said "fuck 'em" and you said we couldn't do that because of the credit markets and the need to keep these banks alive...
It sounds like you've changed your tune...
You are not wrong. I did in fact argue in favor of the initial bailout, although i did so on the understanding that those funds would be injected direclty in to banks, in exchange for bad assets, which of course never happened.
The REASON i made this argument, however, was probably more in agreement with you than you think.
Simply put, I thought then (and unfortunately still think) that the American public at large was far too stupid, uninformed, and misguided to be prepared for a full scale financial collapse. What I was arguing for, in effect, was a FINAL TIME OUT.
The original "TARP" funds should have been a final huddle for the American people, wherein they took stock of what was happening, said, "Damn this is fucked, what oh what shall we do?", and searched quickly within their collective psyche for a rational response.
Instead the American public has proved its continued idiocy by GOING ALONG WITH ANY AND EVERYTHING that the quacks in government have suggested as a "solution" to this problem.
THIS is exactly why I argued FOR the Tarp money originally.
BECAUSE PEOPLE ARE TOO STUPID TO MAKE RATIONAL DECISIONS IN A CRISIS, and often get suckered in to the WRONG "answer". Had we NOT passed the tarp legislation, with LIBOR rates through the roof, and the credit markets absolutely seized up, we would have had outright bank failures of a MASSIVE scale, and the implications in the short term would likely have been literal martial law, bread lines, and mass suffering... along with god only knows what egregious legislation, centralized government creation, and undermining of liberties.
Don't get me wrong, i think we may still be headed there, but people didn't seem to understand the severity of the situation (as a whole) back then ... and unfortunately most people STILL don't seem to really understand what is going on.
I simply was hoping that throwing a cool trillion at the banks would shut them up, and buy us some time to gather our heads and take a stand against this massive ass raping, but instead i fear all it has done is greased our assholes for more of the same.
Sorry, my bad.
If I opened it now would you not understand?
cool...
I do think things will get much worse before it gets better....I hope it won't get as bad you think it may, but who knows...
i don't think its cool at all.
i made a post back on the old board somewhere around the end of 2007, and i got nothing but flamed for it.
I said something about it looking like we would be seeing an unprecedented size bail out, and that from my reading of history it seemed like the only people who profited from such crashes and "rescues" were the largest financial institutions that used their influence to consolidate massive amounts of wealth during the "crisis". i was unceremoniously dismissed for even thinking there would be a "bailout", or that any crisis was fomenting (this was back when Cramer was the only voice on CNBC yelling, and even so, no one took it seriously), but i believe the comment bears repeating.
If folks would only understand that the brains behind the largest banks are, in fact, NOT idiots at all, but EXTREMELY wealthy and smart individuals who have almost literally ALL THE MONEY IN THE WORLD and are NOT concerned about a few failed banks, or retail failures, or any of our "remedies" like CEO Pay Caps or other goofy classist solutions. These people are concerned about their AGENDA, and they "wont waste a good crisis" when they can get something out of it. This time around they are aimed at higher taxes, de-nationalized regulation that become international regulation, and ironicaly i think they may be after nationalized banks as well.
Why the contradiction? Well, congress doesn't work all that well for a group of folks that wants to get their way over on a people with little or no backlash or argument. For that they need international bodies, preferably with appointed positions for regulators.
However, the marketplace remains the last holdout in their fight. I truly believe that MOST banks will get nationalized in order to SUBVERT COMPETITION and USURP AND CONSOLIDATE WEALTH amongst the tippy top of the tippy top. More accurately i should say consolidate POWER, because again its not really the "wealth" that is an issue anymore. You will see many large banks get nationalized, but I almost guarantee you will see one or two of the most obvious powerbases NOT get nationalized ... say JP MORGAN CHASE and GOLDMAN SACHS ...
you are already hearing on CNBC that JP Morgan and Goldman "want to get out of Tarp", "they never wanted it in the first place, and they want out" said Larry Kudlow last night. OH REALLY?
We are already headed in the WRONG direction.
The implication of this is that the Government will have its slimy hands and regulations all over every other instituiton in the country, many of which Kudlow openly admits were FORCED or COERCED by the government in to accepting the Tarp money in the first place.
BUT THE GOLDEN GOOSE AND THE MORGAN MONSTER are going to EXEMPT themselves from the government NOOSE, huh !??!
What a fucking sham.
And i bet when it comes to nationalization we see them eat back up Citi (which is simply too far gone), BoA, Wachovia\Wells, and any other of the little guys that they can gobble up ...
but i bet you see something like JP Morgan and Goldman slip off in to the sunset as these sort of uber-private banks as last bastions of black market manipulation and private muscle, operating unscathed by collectivist control, and utterly free of competition ... now that the rest of the US banking system has become just a proxy for the government and its (at that point especially) unfathomably massive piles of public debt.
[i think at the end of all this, if the government still stands, we will have a stated public debt of well over 20 trillion dollars ... if not 40. :roll: ]
And, inmytree, i don't think this can but only get worse. NOTHING in this "stimulus" plan is going to substantialy motivate the CONSUMER, and that means MASSIVE RETAIL FAILURES. Outside of the retail sector, the HOUSING market is going nowhere but down, and on the other side of real estate, the COMMERCIAL market (especially after all the retail failures) is going to be ARMAGEDDON in a few months.
That spells the quick end of MANY of the banks, and that signifies the START of the REAL trouble for this country. Time is the only thing between that fate and us at this point.
If I opened it now would you not understand?
It's Morgan Stanley and Goldman Sachs that are going to attempt to pay back the TARP funds ASAP.