I don't usually do a lot of "naked" linking -- that is, just citing someone else's material with little commentary of my own -- but this article by John P. Hussman, manager of the $3.5 billion Hussman Strategic Growth fund (and one of the very few people to have recognized the extent to which the market was both overvalued and overlevered) is really worth a read in full:
The misguided policy response from Washington has focused almost exclusively on squandering public money and burdening our children with indebtedness in order to defend the bondholders of mismanaged financial institutions (blame Paulson and Geithner -- I've got a lot of respect for our President, but he's been sold a load of garbage by banking insiders). Meanwhile, I suspect that the little tapes in Bernanke's head playing "we let the banks fail in the Great Depression" and "we let Lehman fail and look what happened" are so loud that he is making no distinction about the form of those failures. Simply letting an institution unravel is quite different from taking receivership, protecting the customers, keeping the institution intact, replacing management, properly taking the losses out of stockholder and bondholder capital, and issuing it back into private ownership at a later date. This is what it would mean for these banks to "fail." Nobody is advocating an uncontrolled unraveling of major financial institutions or permanent nationalization as if we've suddenly become Venezuela.
Make no mistake. Buying up "troubled assets" will not materially ease this crisis, nor will it even improve the capital position of financial institutions (see You Can't Rescue the Financial System if You Can't Read a Balance Sheet). [...] We are simply protecting the bondholders of mismanaged financial institutions, even though that bondholder capital is more than sufficient to cover the losses without harm to customers. Institutions that cannot survive without continual provision of public funds should be taken into receivership, their assets should be restructured to better ensure repayment, their stockholders should be wiped out, bondholders should take a major haircut, customer assets should (and will) be fully protected, and these institutions should be re-issued to the markets when the economy stabilizes.Hussman also has some thoughts on both short- and long-run market valuations over at his site.
The course of defending the bondholders of insolvent institutions is not sustainable. Do the math. The collateral behind private market debt is being marked down by easily 20-30%. That debt represents about 3.5 times GDP. That implies collateral losses on the order of 70-100% of GDP, which itself is $14 trillion. Unless Congress is actually willing to commit that amount of public funds to defend the bondholders of mismanaged financials so they can avoid any loss, this crisis simply cannot be addressed through bailouts. Bondholders have to take losses. Debt has to be restructured. There is no other option -- but the markets are going to suffer interminably until our leaders figure that out.
The general theme I'm trying to get at with these various posts on the markets is that Wall Street doesn't necessarily know what's good for it. Someone like Hussman didn't get to manage a multi-billion dollar fund by following the crowd; he did so by being smarter than your average bull, and getting them to take the stupid side of a lot of stupid trades.
63 comments
I seriously doubt that Obama has not heard these arguments, but I agree that he has been sold a load of tripe by the insiders he has assigned to "rescue" the banks. I hope he figures it out soon. We cannot afford to waste any more time or money on this fruitless approach to the problem.
@Nate:
Not to quibble, but don't you get sick of the "burdening our children" argument against debt?
Children don't pay taxes, now or in the future. We are burdening full grown adults with families that can understand the reason for the debt.
They may be children at the moment, but the people we are "burdening" will be just like us, grown adults capable of making sophisticated and adult decisions, capable of understanding the reasons for debt and how debt can help, capable of understanding tax policy, and everything else.
The "children" formulation tries to treat these adults as helpless waifs in need of parenting. It is an emotional shtick we can do without.
And further on debt:
$1 Trillion is about 20% of our national annual earnings (100M families, averaging 50K each).
For the govt, interest on $1T is about 2.5%. Now, 2.5% of 20% of earnings is 0.5%. That's it!
The interest we must pay on $1T of national debt is 0.5% of our income as a flat tax on everybody. If we don't tax it out progressively it will cause inflation (a flat tax by caveat) of 0.5%.
This is hardly a massive burden on this population or the next generation if it prevents the national income from dropping even 1%.
And as long as I have the floor, let me reiterate the idiocy of the Republican claim that we cannot "tax and spend" our way to prosperity.
Most people that buy cars, or houses (before the bubble) or go to college or start a business will borrow money to do it, and the payments are a tax on their income.
Of course you can tax and spend your way to prosperity if your "spending" is an investment in the future, like infrastructure (a house), public transportation (a car), public schools and colleges an education) or fundamental research into cutting costs and waste (equivalent to business activity).
Other than some idiotic earmarks constituting less than 1% of the bill, the worst thing about the bailout was tax cuts. All that money should have been redirected to infrastructure.
Nate, you might add hedge funds and phantom stocks into the mix. See deepcapture.com and the HuffPo article where Jim Cramer advocates illegally fomenting stocks.
Today when 1% is over a $1B small is really big. Interested in seeing your stat skills applied to these issues.
Nate-
Bill Seidman (who ran the RTC during that collapse) agrees with this approach 100%. I have read these folks and been advocating this for months, I think it is inevitable. You might want to link to a video or writing or two from Seidman, he is the voice of reason - even on the worst "business" channel on the airwaves - CNBC.
Jim Cramer should be prosecuted, we need a fall guy for hedge funds and he made the statements on tape!
But who are these "bondholders"? The way this article was written, you'd assume they're all pinstriped fat-cats. But they're not, and giving them major haircuts has consequences. Many of them are pension funds, so you're wiping out the retirement savings of working-class people. Many of them are other banks, so you're putting the financial system at risk (again). Many of them are foreign banks and sovereign funds, and you're putting the economic reputation of the US at stake if you hurt them too much (think China). I don't disagree with his analysis of the problem, but the solution may not be so easy...
Every day, another expert with a totally different opinion.
How do the avg voters make sense of this bewildering array of views that don't reach any consensus????
Basically, NOBODY KNOWS what will work and how best to extricate ourselves from this mess.
I do wish that various opinionators and letter writers would knock off with the "I have the answer" tone.
I've never heard of Hussman, Why should I credit his views over other ones? That he managed billions? So did Bear Stearns.
In this crisis, any time someone pretends to be absolutely certain and know it all, I want to ask them where they were in September 2008, telling us how Lehmans would be dangerous to let fail, but AIG is okay. Of course, they said no such thing. They were surprised like everyone else.
What did Socrates say about being wise by knowing what you don't know?
@Harlan:
That is all true, but the money is lost either way. I am a liberal Democrat but there is one free market principle I believe in; risks must have consequences. To go with that I think we need a social safety net so retirees and old people do not become destitute, so there is some floor on poverty.
If you bail out bondholders, there are people running those retirement accounts that walk away with millions for destroying the wealth of others. That has got to be wrong.
One way or another, we have to find a way to punish that kind of speculative behavior when given a position of financial responsibility, and bailing them out does the exact opposite, it encourages this behavior in the future.
Is there anyone in power doing any deep thinking on this. Paul Krugman laid out the issues in Dec of '07 and was "hair on fire" about them then. I was confidant that with the depth of knowledge (and Nobel Prizes) available that there would be some serious cleaning up done.
Most of those banks like Bear Sterns could have been purchased outright for less than was dumped into them, and with clawbacks from looters, and serious asset clean up, turning toxic mortgages into reasonable mortgages people could pay, or even foreclosing in a manner that left them in the house (as one might in a negative mortgage)could not only save the economy, but at a bargain and perhaps even a profit.
Another aspect that nobody is talking about is the Insurance industry that is taking its lack of liquidity out on all its customers, forcing huge numbers out of business, and other economic disasters await as homeowners in Hurricane zones cannot get honest insurance. That will be another bomb just waiting the next hurricane to go off.
Krugman...I can't figure him out. His advice does not seem linear or consistent. He kinda jumps on the latest argument and spins it as far left as possible...
I think we need someone a bit less political, but I am not sure that is Geithner.
Anyone else see that the article's yesterday saying Geithner is not even talking to the committee with oversight the initial TARP funds?
There has been a great evaporation of money taken place that was perhaps ephemeral in the first place but gone never the less. All we are talking about now is this is musical chairs and the music has stopped. It has now fallen to government to sort out the mess.
I would agree that there are many small investors who will in any case get the short end of the stick. They will be held out like hostage children to keep your claws off the Fat Cats, and then they will eat the hostages as well.
The trouble at the first with mutual funds was that agency was stretched so thin that it had no existence, except as hostages, and has enabled the looting by those with no skin in the game in the first place.
I would agree that the government should not try to fulfill the promises of the Madoffs, or Mutual funds, but I would open the rivers of money that they have squirreled for themselves and family to the schools of piranha that are their ripped off angry customers.
This case has already been made, forcibly and brilliantly by a number of commentators. I suspect they'll turn out to be right.
However: what about the argument that such a move could cause another general freeze in lending, like we experienced last fall? I've heard warnings to that effect, and I think that's what the leaders in Washington are most afraid of.
If anyone hasn't yet heard the excellent program on this subject that Chicago Public Radio put together, you *have to* listen to it now.
http://www.thisamericanlife.org/Radio_Episode.aspx?episode=375
The Best Argument I've Personally Read for Bank "Nationalization" is that it's been tried before, and was a smashing success.
Why is that so hard for people to accept?
> Jim Cramer should be prosecuted, we need a fall guy for hedge funds and he made the statements on tape!
The trouble is that he boarders on whistle blower. It wasn't that he was "found out".
Anyway, yes the drumbeat for letting the worst of the banks fail. here's an argument for it that I linked in a previous post here. Although it's 15 pages long it's a quick read.
Note that although this is his personal statement this is from someone inside the Federal Reserve.
@David
Krugman laid out the problem Dec'07 that the basic problem is that lending will only happen if there is expectation of getting the money back. As long as banks cannot even trust each other, and are once burned in the first place, how is anyone going to lend.
The freeze was happening then, not a new problem that happened suddenly 8 months later. At this point the bank needs to become a utility, operating as such it has the power of Government to enforce both trust and trustworthiness like a Mafia Don if necessary, as well as enforcing out the greed that sucks the air out.
This would be Socialism, but in the Socialized Child sort of way rather than the Orwellian opposite of that, that was the Soviets. If this reality seems Left bias, it is only because the Left has a reality bias.
Agree with everything except this: "Someone like Hussman didn't get to manage a multi-billion dollar fund by following the crowd; he did so by being smarter than your average bull, and getting them to take the stupid side of a lot of stupid trades."
You could replace 'Hussman' with the name of the head of any failing financial institution and the statement would be equally valid. The head of Lehman Brothers or AIG didn't get to where they were by being stupid followers either. Being smart doesn't prevent you from being greedy and making decisions that hurt the public.
Well, I don't think the administration is willing to put too much pressure on banks - not to mention nationalize them: Treasury Official: Do Not Micromanage Banks
Thanks, Nate, for filtering out this commentary from the ocean of opinion. It's an analytic gem, esp. timely as Madoff pleads guilty.
--mt
I don't think that is wise Freedem. What that does is create an unlimited liability for the government, as you are attempting to give the impression of unlimited stability. It'll probably hold longer but when it does bust it'll do so with a catastrophic BOOM!
No, it's high time to cut bait. The markets are ready for this, to see some banks fail. Bigass banks. A lot of the pain has already been incurred. Time for Obama to earn his pay and get the public ready for this.
P.S. I'm not so sure about AIG.
"...this crisis simply cannot be addressed through bailouts."
Let's recall who requested the original $700 billion and gave away half without so much as a second thought.
Hint: It wasn't President Obama.
And let's also recall that no decisions have been made for the very reason that it's NOT being totally bought into by the President.
I'd FAR RATHER the administration takes its time and gets this right than take the knee-jerk approach of the previous administration.
Oh, and before you start hounding on the so-called Democratic Congress that OK'd the bailout, let's recall the circumstances and note that they were pretty much forced to take Paulson's word on faith about how bad things might turn out in the absence of that action.
And finally, who among us can say that, at the time, a failure to take such drastic action would NOT have resulted in a total financial meltdown?
OK. I'm no economist but, I don't think there was ever some intention to fill a 14 trillion dollar gap. I would think their intention is to ease the stress to the system until things turn around. Once things do turn around, that same debt being marked to market will be marked back up once their values rise right?
Incidentally I think the term "toxic" loan is way over baked. It freaks people out, it's like a boogieman or cooties. I think unhelpful language.
They are just loans. Loans that are likely to be defaulted on that have less equity securing them than the full amount of the principle, but just loans. The picture painted by the word "toxic" implies that just holding them is bad, which isn't accurate. Holding one of these loans is OK as long as it's true value is understood. It's like holding an unsecured loan or CC debt and banks have tons of that too. *shrug*
Further a lot of the loses are already accounted for. That's why things were unwinding for about 10 months before it snapped. In that sense the system did work to an extent in mitigating the damage, it could have been worse.
> Let's recall who requested the original $700 billion and gave away half without so much as a second thought.
Triage. First aid in the field. I don't think that it's helpful to get bent out of shape about that. Done is done and it was adequate under the conditions it was taken in.
Today is a different day with different conditions. Time for a different approach.
Well, the assets are unpriceable as the method for judging its risk of default was essentially made up, and everyone knew it but played along until now. Now that we can't quantitate the risk correctly, we cannot price the asset in the market.
IN OTHER NEWS, Obama vetting process failing yet again?
The offices of the new CTO for the coutnry are getting raided (his old job).
http://www.politico.com/blogs/bensmith/0309/FBI_raids_office_of_DC_CTO_Obama_appointee.html
@Dwight:
The problem is, the full value is understood, and it is negative. You must remember these loans represent real money that went somewhere; a builder or home owner (or flipper) or somebody got $500K in actual cash, paid by a bank or mortgage company. It isn't just a paper loss or phantom profit that never existed.
Now, that house is worth $200K, and will not ever be worth the $500K owed on it; it will be decrepit before that happens. Whoever holds the mortgage owns the house, and the problem is they paid $500K for a house worth $200K, and by any rational bookkeeping they have lost $300K that will never be recovered.
Mark to Market (MTM) demands honesty in bookkeeping; it prevents fraud. Without it, companies listed assets at a million or at zero on their own say so, depending on how they wanted their depreciation and appreciation numbers to work out. We might relax MTM, to perhaps the best market price in the last year, but killing MTM just opens the door to the next bubble and the next massive fraud.
We have to face the fact that these trillions were legally stolen from us and the law must be changed to prevent it from happening again. That will make business more difficult, to be sure, but great business doesn't buy us anything if it is all a big fraud. The dow may be smaller, but at least it will be real and not some inflated result of a giant Ponzi scheme.
The Train Wreck continues. Steele watches his grip on power, weak and futile as it was, loosen even further. How long will he hold on?
statler-
2 weeks. one to make it look like HE was the one to make the decision. Another to have the rest of the Republicans fight over who gets the job
cramer made those statements in 2006. where was the SEC?
my guess is that they could care less.
-@Dwight 9:58 AM
I don't think that is wise Freedem. What that does is create an unlimited liability for the government, as you are attempting to give the impression of unlimited stability. It'll probably hold longer but when it does bust it'll do so with a catastrophic BOOM!
I think the idea I laid out is more like the FED but as a more Socialized utility. The key point is that it would have enforced prudence, and therefore not unlimited liability.
The current problem is that all the banks became alcoholics and none of them will trust a drunk. We already technically have unlimited liability in the form of FDIC but as long as prudence prevails, the risk is small.
As a mortgage holder of last resort, a government can afford to waive interest payments (for a time)in case of unemployment say, because profit is not the only goal, where a profit based bank would not.
Nate, your posting of this puzzles me a bit. This arguments seems a bit lopsided, and takes no consideration of the political realities of the situation, something that you are very aware of yourself and have made this fact clear point after point. Why the sudden abandonment of nuanced perspective now?
Clearly, if Geithner were to signal nationalization before the government were able to do so (just from a management standpoint, he is so understaffed I don't think there's any way to realistically begin a tactical implementation), it would cause a massive panic amongst the markets, and the ensuing chaos would wreak sheer havok. I think you've alluded to this more than once.
Now, I've been pro-nationalization since the get-go from a personal belief standpoint, but I am also not the person who has to make the decision and deal with the ensuing scenario. This is the risk that bondholders take on & must realize that for every rewards scenario (even AAA rated) there will be some risk (even US Treasuries). BUT it's much easier to proclaim a need for something than to deal with the effects of that something. I think the task is to proclaim nationalization & swoop in with an execution plan at roughly the same instant, to try to ensure the least damage due to panic and uncertainty.
I'm not sure what the arguments for "chaotic nationalization immediately" vs. "orderly nationalization in 4-12 weeks time" is. Anyone care to coherently argue that POV?
> The problem is, the full value is understood, and it is negative.
No, it is NOT negative. They will have some value, well it could wind down to close to $0 on some specific individual ones.
You are talking about the past loses (the difference between their real value and the face value) and whether or not these loses have been fully recorded appropriately in the bank's books. But going forward these loans still have value.
So now suppository the government is going to organize some sort of market to sell these into to get a market evaluation of their value. Then it's time for the banks to do a full accounting of their books against those prices and [hopefully] the FDIC will be allowed to do their job and yank in any bank that is bellow the required solvency ratio or that is outright insolvent.
@Tony C:
The "toxic" loans clearly have positive value - only less value than what went into them.
In your example, the value is roughly somewhere between $200K (if the owner defaults) and $500K (if he doesn't).
Thus the loan itself does not have negative value - although the bank has possibly lost $300K on it.
Geithner reassures economy. Markets continue the surge!!!
Of COURSE Wall Street "doesn't know what's good for it!"
When asked the question lately, "what do they really want?" the answer was "they want things to go back to 2005! They want to re-inflate the bubble and get right back to the races!
Wild unsustainable housing bubble! NO oversight! Bush administration here we come!
Obama's problem seems to be that he doesn't think full nationalization is politically realistic.
The problem is that the current political system simply won't tolerate what we need to do to fix things. In that climate there is NO solution unless Obama gets out and consciously FIGHTS to totally remake what's possible politically!
And to do that he has to make a MUCH clearer case to the American people about exactly what he's done, what he wants to do and why!
People trust him, not the Republicans. But everybody is confused by the bank bailout which isn't working at all and which is wildly unpopular.
That enables Republicans to attack him. But, real populism may not be popular among Republican senators, but it's WILDLY popular out there in the streets of America!
The sooner Obama realizes this and sheds these shackles of convenience the sooner he can REALLY get to work doing what is really necessary to fix the economy!
@Freedem
You are about 96 years behind the times in calling for a federal banking utility. The Federal Reserve already exists. ;)
> We already technically have unlimited liability in the form of FDIC but as long as prudence prevails, the risk is small.
That is NOT unlimited liability. It is only limited to the specifically insured deposits into the bank, the contents of the customer's savings and chequing accounts. It does NOT guarantee the bank's debtors. It certainly does not guarantee the shareholders (who are typically wiped out when the FDIC takes over the bank).
""Let's recall who requested the original $700 billion and gave away half without so much as a second thought." Triage. First aid in the field. I don't think that it's helpful to get bent out of shape about that. Done is done and it was adequate under the conditions it was taken in. Today is a different day with different conditions. Time for a different approach."
Of COURSE it's triage - I said as much in the rest of my post. But Obama is getting pounded as if HE were the one to take that step!
And frankly, I'm tired of the people who try to bury responsibility by saying "time for laying blame after the war is won". Where have we heard THAT before!
I'm with Vince on this one. You can't nationalize the 20 largest banks in a single day.
There's no manpower to do it.
There would be mass confusion, since there would be no functioning large banks for a short period.
Bondholders sue. If the government closes banks that might not need closing they will sue.
The banks are extremely profitable (something about borrowing money at 0% and lending at 5-10%, maybe). The Fed has traditionally recapitalized sick banks by this process. I saw an estimate that 3 years earnings would cover the losses.
They don't know which banks to close. They say that all the banks will stay alive. There are two possibilities that aren't entirely exclusive.
1) The banks are too big to nationalize efficiently without breaking them up. The government could be in the banking business for years. In one case I've read, it took the FDIC 10 years to unload a bank. Breaking up all the banks at once is nationalization with a death wish.
2) They don't know how sick the banks are - thus the stress test. If a bank is really toast, they'll close it. This isn't something they'll announce in advance.
As for screwing the bondholders, they're us. Cities, pension funds, bond mutual funds... This is the exact opposite of stimulus. Now even more people would have lost retirement funds. These people would be immune to stimulus. Panic, on the other hand...
It's a confluence of economics, politics, foreign relations and limited resources. They're all lying, and it would be reckless to do otherwise.
When Hoover tried to bail out the banks, every bank for which a bailout was announce had a run. Roosevelt made the process secret. Bernanke knows this bit of history.
BTW on loses from loans, outside of the Jumbo mortgages (loans that are bigger than about 1/2 million, depending on where the house is located), most banks have probably already booked close to currently expected losses on secured loans. But that is vulnerable to how bad the economy gets before it stabilizes and starts recovering.
Unsecured loans like CCs and such could become another problem area too, depending on how much unemployment goes up.
Another big piece of the gaping chasm is that they built wildly Jengo'd profit insurance, much of it at AIG.
Like reverse multilevel marketing each level took its profit and left, so it is not so much the mortgages that are supporting more profit taking than the principal of the original mortgage.
The effect is still the same as a Ponzi scheme, even if the details are not. That is not something that the Government can or should take over, any more than Madoff inc. But unlike Madoff there is a lot of other business that can and must be saved.
I cannot imagine that anyone but a "holder of accounts of last resort" can make the decisions about what money goes where. Ultimately that set of decisions will be very political (it cannot be otherwise)but it need not be partisan, beyond necessary judgments as to who is the predators and who are the victims.
Regardless any business that is "too big to fail" is too big to exist and must be broken up. Here again only Power without interest can do the job with justice, and not the Just Us that would be the management perspective.
Nate,
I'm glad you have discovered Dr. Hussman. You two are definitely cut from the same cloth. I took his economics course at U of Michigan over a decade ago and he, like you, has a real knack for explaining complex subjects in a very simple and analytical way. Also, like you, he is a real statistics geek. He has developed methods of analyzing market data, his eonometrics, to guide his investment outlooks - not unlike what you did to guide your election outlook. Your XLY/XLP analysis was the kind of thing I suspect Hussman does.
Disclosure: I'm invested in The Hussman Strategic Growth Fund.
> 1) The banks are too big to nationalize efficiently without breaking them up
Management rule of thumb: If you have an employee that you couldn't possibly replace, get rid of them.
Same applies here. A bank being "too big to fail" is a clear sign that it's time to fail that sucker and break it up. It is just too dangerous to keep around.
> Regardless any business that is "too big to fail" is too big to exist and must be broken up. Here again only Power without interest can do the job with justice,
But you are espousing creating the ultimate "too big to fail" bank! Regardless of it's motivations for it's actions that inherent danger remains.
@Dwight, Nis:
Yes the house has value, but the net value of the mortgage is NEGATIVE if marked to market.
The entity that owns the mortgage paid $500K in real money, the house is worth $200K, the loss is real, and the balance sheet must show them $300K in the red. That is a net negative value, and that is what I am talking about. I am talking about lost money; the managers of these entities paid $500K in cash for a $200K asset. That cash came from somewhere; bond-holders or share owners or depositors or someone. Now those shares or bonds or depositors have taken a 60% haircut; or the FDIC or some other insurance agent (like AIG) is on the hook for the 60%.
You can think of the positive portion all you want but the money is lost, that is why they don't want to mark it to market, because they have been spending like sailors and if they do a true accounting, the net value of these mortgages is negative.
Hussman or any other hedge fund manager can't be taken seriously as a neutral commentator until they disclose the degree to which they've shorted bank stocks. I think you'll find its in their financial interest for the banks to be nationalized (or at least for people to think the banks will be nationalized). Don't be a patsy
> I am talking about lost money;
Yes. That is the problem. It confuses the issue and freaks people out about "toxic" loans. The mental picture it paints is highly negative and creates a sense of hopelessness that can lead to panic and/or resignation. Unhelpful, unhealthy focusing on the half of the glass that is empty.
The word "toxic" is particularly bad because when the loan is sold it magically becomes untoxic? Or we change a number in the books and it becomes untoxic? Things we normally label "toxic" things don't do that, the metaphor is very problematic.
@Lisa
You are right. The thing is, Hussman has disclosed this information. Mission Statement
"We invest our shareholders capital as carefully as we invest our own. This is not simply a principle, but a matter of fact. Except for a tiny percentage in money market funds, all of Dr. Hussman's liquid assets are invested in the Hussman Funds. The compensation of every member of our Board of Trustees is generally invested directly into the Funds. All of these investments are regular and automatic. All Fund transactions by the Advisor, its employees, and the officers and Trustees of the Fund are subject to the same cutoff times and redemption fees as applied to every shareholder."
Also, he's quite upfront about the fact that he hedges his downside by buying puts on the S&P 500. He doesn't short individual stocks and every week he updates shareholders to what degree the fund is hedged.
Also, Dr. Hussman seems to be a real progressive. He studied under Joseph Stiglitz at Stanford, railed against the Bush tax cuts - pledging to donate his personal tax savings from the policy (each and every year) to charity - and also was highly critical of the Iraq war.
Codswallet said-
You can't nationalize the 20 largest banks in a single day.
There's no manpower to do it.
There would be mass confusion, since there would be no functioning large banks for a short period.
Bondholders sue. If the government closes banks that might not need closing they will sue.
The banks are extremely profitable (something about borrowing money at 0% and lending at 5-10%, maybe). The Fed has traditionally recapitalized sick banks by this process. I saw an estimate that 3 years earnings would cover the losses.
The way they did it was a "Bank Holiday" the banks were all closed, the work was done, and then what was left, came out the other end as if there had only been a short vacation. And yes those banks that were "Nationalized" could be sold off over time, as much smaller, more numerous banks, possibly with a profit.
There are a lot more than banks that are "Too Big To Fail". Sooner or later the Government will have to deal with their "sleep at the switch" approach to approving mergers and conglobulations.
The sad fact is that the bigger something is the more power it can wield and the greater impact that corruption or even errors of judgment can have on all concerned.
A very progressive tax based on the capitalization of the business with consideration of the type of business (most of the money is machinery vs most is patents and power) would make five companies less taxed and more profitable than the one company they were before, and have zero effect on actual small businesses except possibly lowering their tax and paperwork burden.
In a COMPLETELY unrelated comment, Palin's daughter and her baby daddy announced their breakup today.
Who had 3/12/2009? Remember, if nobody picked that exact date, closest one to it wins!
wv: angth- I have seriouth angth abouth the bankth.
> A very progressive tax based on the capitalization of the business with consideration of the type of business (most of the money is machinery vs most is patents and power) would make five companies less taxed and more profitable than the one company they were before, and have zero effect on actual small businesses except possibly lowering their tax and paperwork burden.
It would help the FTC too.
Dwight said...
Yes. That is the problem. It confuses the issue and freaks people out about "toxic" loans. The mental picture it paints is highly negative and creates a sense of hopelessness that can lead to panic and/or resignation.
Actually the Toxic Assets (not the loans) are a good way of putting it. Second or third level derivatives are like poison in the bank. AAA rated one day they explode to Z rated just by looking at them hard, and worse causing others downstream to blow then as well. If Osama wanted to do real serious damage he should have gotten a job inventing creative leveraging at Bear or AIG.
> The way they did it was a "Bank Holiday" the banks were all closed, the work was done, and then what was left, came out the other end as if there had only been a short vacation. And yes those banks that were "Nationalized" could be sold off over time, as much smaller, more numerous banks, possibly with a profit.
It'd be a little weird now though because these days, via ATM cards and debit cards, we effectively have 24/7 bank access. If Interac continued to function that'd make it really painless. Though I understand that isn't as popular state-side as here in Canada? I've had a debit card for, hmmm, probably 23 years now.
It'd be a little weird now though
You could easily allow a common Government billing with a $250 a day limit, that could be sorted out afterwards. That would make it painless for nearly everyone. Checks recieved and other normal functions could just get backed up a bit.
Like then there was a lot of patience since is was a bother that would have an improved outcome. Even an animal can take a lot of pain if they know it is to fix something.
> Actually the Toxic Assets (not the loans) are a good way of putting it. Second or third level derivatives are like poison in the bank. AAA rated one day they explode to Z rated just by looking at them hard, and worse causing others downstream to blow then as well.
Derivatives are more volatile, to be sure, because of the math inherent in their nature. The problem with them was when the underlying loan had it's rating downgraded, losing some of it's market value, the derivative lost the value faster triggering a margin call. If the margin call couldn't be made by the holder of the derivative they lost the whole derivative (and if they had to initially make an extra security deposit against that derivative falling, that too). Hero to zeroed just like that.
Still, any that aren't zeroed out already, still have value...to someone willing to take the risk (and in a position to make a required margin call to ride out rough times to collected the hoped for profit in the future). They aren't inherently bad by themselves, they are just a higher risk investment.
But as I understand it the derivatives were being counted as assets on the balance sheet effectively without prejudice, as part of the required capitalization of the bank? Maybe I don't have that straight? Their highly ephemeral nature makes that unwise, I'd imagine that is where the rules are going to tighten up.
> If Osama wanted to do real serious damage he should have gotten a job inventing creative leveraging at Bear or AIG.
Apparently he would have faced very stiff competition for landing the job. ;) As I understand it AIG, the main company not the subsidiaries which were being tightly regulated, was operating as a hedge fund that wasn't hedging any of it's bets. Running with scissors, buck naked.
With the worst banks (Citi, BofA) turning profit in the last few months, isn't this all a moot point? Who would nationalize a profitable bank?
> With the worst banks (Citi, BofA) turning profit in the last few months, isn't this all a moot point?
If this whole thing should teach you one thing it is that bankers lie. They have enormous PR departments dedicated to, and very very good at talking out both sides of their both at the same time as looking you in the eye with a reassuring smile.
To some extents paper profit/loss is in how you measure it, especially one reported for a short period of time.
> Who would nationalize a profitable bank?
If they don't have enough capital buffer, meaning they are over-leveraged, the FDIC will. They should. That's what they are there for.
I think it's generally understood by the markets and by the Administration that we're in uncharted territory. The last bit of wisdom was that some companies are too big to fail and now we recognize two counterpoints to that belief: it induces risky behavior (which has led to pushback) and if it's a big event we can't afford to bail out these "too big" companies.
What's happening now is a waiting game: some in the markets are making a value play, that assets can be picked up cheaply and they'll appreciate (or at least maintain a stable enough cash flow).
The government can't afford to step in now and force confrontation with bondholders - forcing conversion to equity or deciding to default (imagine the CDS settlements then!). If the economy improves the solution will be a lot more manageable. If it gets worse, then the choices will be more stark.
"Someone like Hussman didn't get to manage a multi-billion dollar fund by following the crowd; he did so by being smarter than your average bull, and getting them to take the stupid side of a lot of stupid trades."
Umm, considering that we are suffering from a financial meltdown caused in part by people managing multi billion dollar funds and investing in a real estate bubble in one form or another, managing a proof of intelligence, going against the herd, or any special wisdom.
I mean, Hussman could be some really brilliant guy, just saying this bit of "evidence" proves nothing other than that he manages a multi billion dollar fund.
Right now we need to treat wall street as the spoiled child it is acting like and Gov't needs to be the adult and do what is needed over their tears.
A commentator on NPR the other day said, "Obama is saying exact things you should say before you nationalize the banks", and I agree. The banks will be nationalized by the end of April.
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Freedem: Your "reality bias" line is a straight rip off of Jon Stewart. Try to form original thoughts.
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