Monday, January 19, 2009
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
felix salmon with more. outright nationalization on the swedish model will be expensive and painful enough, but it would be a steal in comparison with the absolute fleecing of the government and taxpayer that the "aggregator bank" will represent.
honestly -- i have grown steadily more disgusted as the non-efforts to repair the american banking system have rolled on, with every passing month becoming more obviously an exercize in financial rapine even as the country and world sink into a depression aggravated by its paralysis. and why? because the politicians are the purchased slaves of the powerful elite of this country whose status is tied to the bonds of these erstwhile financial powerhouses now best seen as zombie banks.
the problems facing the financial system (unlike those of the economy) are fairly easily resolved -- given that holders of equity and debt in the system are duly devastated as befits the idiocy of their investments. at the risk of oversimplifying, the rich were stupid and they must pay.
but they won't pay, and are instead working assiduously to shift the bill onto the government and therefore the taxpayer -- which is something they are not, at least now in anything like an appropriate proportion to the middle class thanks to the rentier-favorable skew of the american tax system which punishes income and preserves capital gains. and in order to facilitate the shift by extortion, they are (speaking broadly) threatening to spitefully destroy the global economy.
it is times like these that i am reminded of the compact struck by the founders of this nation and its people in perpetuity enshrined in the second amendment. the elite must be made to fear the consequences of their actions; in the eventuality that they would have coopted the institutions of government so thoroughly as to make the action of electoral political inefficacious, it is the right of the populace to bear arms that, in the final analysis, holds the powerful in check.
exactly these circumstances have now arisen, as the predator class ever more brazenly plunders the nation and the world to make themselves whole in spite of their undeservedness.
one hopes that the incoming obama administration understands that their mandate is in no small part to prove to the people that the powerful can be constrained for the good of the whole without have a loaded revolutionary pistol shoved in their metaphorical mouth. that could best be done in the short term by taking national possession of the banks and eradicating as much of the capital structure as is needed to restore the banks to health.
UPDATE: with the royal bank of scotland now completely imploding, it's becoming clear that momentum is building in parliament for an outright nationalization -- an effort which, bloomberg speculates, might prove an international template.
In exchange for government guarantees on losses from toxic debt, the bank will have to sign a binding agreement with the Treasury on how much it will lend and on what terms. Auditors will move in to check the bank is following the government directive.
“We’ll be one of the first guinea pigs,” RBS Chief Executive Officer Stephen Hester told reporters on a conference call yesterday. The Edinburgh-based company is in talks with the Treasury about terms of the agreement. Loans will only be made “on commercial terms and to creditworthy people,” he said.
UPDATE: felix salmon further attacks henry blodget's idea of a no-new-capital debt-equity swap. like salmon, i don't think this level of isolation is possible -- assets should be written down to below-worst-case valuations, but then pushing the entire recapitalization onto bondholders is unrealistic. instead, some combination of government recapitalization and debt-equity swap is needed. david merkel commented under blodget's post:
Debt-for equity cramdowns may not work in some cases because at larger banks the debt is usually at the holding company, and the bad assets are at the operating banks subsidiary. Better for the FDIC to force some sort of compromise where the operating subsidiary is made whole, while forcing holders of securities in the holding company (common, preferred, sub debt, sen debt) to face an uncertain future, while the healthy bank subsidiaries continue to operate.
At smaller banks with no holding companies, or with operating company debt, often the debt plus equity is less than the holes in the bad assets that are still valued at levels higher than warranted. In these cases, the FDIC will have to kick in something.
it is also noteable that it would not likely be possible to nationalize one bank -- once the precedent is established in the current environment, i can't imagine why any even mildly questionable bank would be able to fund itself. the financial system would have to be nationalized and granted government funding, likely including insurers and pension funds, with entities subsequently treated case-by-case and released from government control.
and of course the credit default swap market would likely have to be frozen and nullified prior to implementation -- but this is already the case and is not an added condition of systemic nationalization.
UPDATE: the economist clambers aboard the nationalization train.
UPDATE: the ft handily aggregates pro-nationalization arguments on the web.
UPDATE: amen, chris whalen.
"Lack of political courage [and] ignorance of finance" in Congress are the answers to these and related questions, according to Chris Whalen, managing director and co-founder of Institutional Risk Analytics. "Our friends in Washington who've been receiving a lot of money from Wall Street don't want to put these people out of work." ...
Stop the Fed's support of the OTC credit default swaps market: "When are we going to realize leverage in over-the-counter market is driving most of this crisis?" he wonders. Yet they refuse to deal with it because the Fed has been a sponsor of the OTC market in the first place."
The good news is Whalen thinks the crisis could be resolved within a year if politicians find the courage to take these steps. The bad news...well, I don't have to say it, do I?
I urge all readers to contact their representatives in Congress and urge them to:
(1) Reject the nomination of Timothy Geithner to Secretary of the Treasury. Mr. Geithner is an insider in the TARP travesty and should not be confirmed.
(2) Express your outrage at the management of TARP to date.
TARP has been a massive transfer of wealth to the equity and bond holders of failed financial institutions at the expense of the American taxpayer. This must end.
Thanks for your article.
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As long as everyone involved in this mess keps hiding, confusing or ignoring the facts there´s no way that a Swedish style bailout will ever be an option.
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as an american, anon, i'm sick of it too -- particularly the part where we talk all about it and forever call it the best of a bunch of bad options, and then proceed to try anything but it.
there are terrible repercussions that would emerge from nationalizing, writing down to nuclear-winter levels and then forcing debt-to-equity-conversion recapitalizations -- it will wipe out a lot of large investors, with a predictable effect on the capital markets. but that does not change the fact that such a move is not only the least-bad alternative but perhaps the only one that holds out any real hope of intermediate-term recovery.
transparency is part and parcel to making the system trustworthy again. ONLY nationalizing banks and loudly writing down their questionable assets to well under even current market levels, followed by painful recapitalization also in full view, can revive confidence in the balance sheet of these insolvent operations. anything less is going to leave open the questions which have destroyed confidence, not to mention waste unbelievable amounts of government resources.
if it destroys the capital structure of citigroup and bank of america and jpo morgan chase, SO BE IT. the problem is not in wiping out their investors (equity and debt); the problem was in the ghastly systemic ponzi scheme which they invested in and once disproportionately benefitted from.
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The "clean" banks that emerged were attractive to investors, the "bad" banks (Retriva & Securum) were eventually able to recoup most of the state´s costs.
The government were forced to proceed with some impopular but necessary reforms, which benefits Sweden´s economy today.
It wasn´t a walk in the park though, try going from being argueably the number one welfare state in the world to having soup kitchens in the streets of the nation´s capital.
My own personal view is that American politics and finance are too intertvined and decisionmaking is the victim. Looks like Japan (or worse) for you.
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