Why The Bad Banks Asset Proposal Is Bad Indeed
By Susie Madrak Thursday Feb 05, 2009 5:00amI'm more than a little depressed that Obama has done such a poor job selling the stimulus package, but a great job on rationalizing this toxic "bad bank" proposal. Yves at Naked Capitalism says it's even worse than you imagine:
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 shows 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 not 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 write-offs. 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 been 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.
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For an honest post.
The financial bailout on the table from the dems is nothing more than the same old CYA crap we've gotten used to receiving from our elite ruling class with a handful of favorite pet projects thrown in to sweeten the pot.
If this shit is shoved down our throats, you can expect more than some minor grumblings.
Not one individual responsible for this disaster is going to be held accountable.
It's a recipe for revolution, and Obama risks alienating the grass roots that swept him into office.
I don't entirely blame Obama, hhe's forced to play politics with the players in office now...
In truth, Feingold, Pelosi and Reid are the real problems. I think they've "served" long enough.
Why blame Russ Feingold? Did you mean Feinstein (Dianne)?
I got a bad cold, you are correct..
FineStain is the one I am unhappy with. My apologies to a true American hero in Russ Feingold.
That's okay. This early in the morning everyone's brains are like scrambled eggs. ;)
If I were queen of the world, Russ Feingold would be president.
Blame Speaker Botox and Limp Noodle Reid.
They stacked the stimulus bill with pork they knew the GOP would balk at and oppose and resist approving. It's as if they wanted Obama to fail.
Grow up. Does it matter where the bad loans end up? The tapayers are going to pay the bill one way or another. Bad policy since 1981 are the cause.
Why blame Reed and Nancy? If any posters on this board read thru ALL the proposals, they would see that all money spent is going to grow the ecomony. Most of it is immediate, some is over a long term. Did the $300 checks send last year help create jobs? No.
The pain involved will be great. We lost our house 14 months ago when our medical expenses pushed us over the edge. We voted for Obama. I have been a lifelong Democrat. Right now we need to pull together. Why are you putting your scorn toward the Demos when it should be put on the gop dickweeds that are the problem? Just listen to them carefully to hear their bullshit.
Socialism for ME. Not for thee.
Privatised Profits...Socialised Losses.
Why the govt, since it was going to be so generous with our money didn't just pay off all the subprime mortgages? All that 'bad debt' would now be good, the banks would be out of trouble, the people wouldn't lose their homes and the economy would explode with all the people who suddenly had a lot more disposable income since their mortgages were paid off. As it is, the gov't spent the money, the banks get the money, but they're still at risk, people are still losing their homes and the economy is still heading down the crapper.
Since they didn't do the obvious and good thing I conclude it was just a scheme to rob us all.
CDOs
Collateralized Debt Obligations ie securities which contain many mortgages rolled together. Subprime Alt A etc
Credit Default swaps which are quasi insurance contracts on CDOs. To the purchaser, known as the 'counterparty' who owns the CDO it is like insurance. Unfortunately the banks and insurance companies sold 10, 20, 50 even 100 Swaps per security.
Each time they sold a swap they could and often did create 'synthetic' CDOs which had as collateral the Swaps. These were really junk.
There is much outright fraud in the entire. Unfortunately our government is completing the scam by paying off those swaps at face value.
The banks should be in bankruptcy court. Many of these people should be in jail.
I think, though, that maybe the first contract sold on a CDO could be called "insurance" - thereafter, it was all outright gambling and fraud. Our "government" actually perpetrated the scam by deregulating, and then doing absolutely nothing to slow down the problem - and, now as you say, completing the theft of our "real" wealth. We are so-o-o screwed.
It is not called the STIMULUS BILL... THAT IS THE RETHUGS TERM
PRESIDENT OBAMA CALLS IT THE RECOVERY BILL.....Get the terms right please....
The banks do need to be kept going, because they keep the real economy, the production of goods and services, going. But if the banks can only be kept going with public money, that money needs to buy what you get when you invest in a business -- control, corporate governance. Of course we the people, the new managers, would almost never leave in charge the same people who bankrupted the bank and made the public bailout necessary in the first place. We shouldn't be talking about how large a bonus these people should be allowed to have. We should send in the fraud squad as the first order of business in figuring out how these banks we now own went bust. A goodly number of these executives should be facing criminal charges, sentencing hearings and not disquisitions into how big a bonus they deserve. We should be looking into how big a cell they deserve.
Why are we, the taxpayer, giving banks money so they can loan it back to us, with interest? If they screwed up, let them fail! Another bank will pick up where they left off. Ones that didn't play the bad debt to derivatives game.
Need to be let go. They have to either fix it themselves, or go under.
The large banks, if they want the money, they need to follow the guide lines set forth.period. That will motivate them to fix it quickly. So they can go back to getting those bazillion dollar bonus's.
Otherwise, they can just fix it themselves without the tax payers help.
Now would be a good time to start a new bank. To hell with those crooks.
Just some thoughts from my sleepy head. Seems to me credit is what got us into this mess, and it would appear that credit is what is needed to get us out. The bloodstream of our economy seems to be credit, and for whatever reason it became unbalanced.
We are hearing all sorts of car companies down here offering all sorts of deals. They sound like the deals they used to offer for homes. In other words, buy our product and go into debt.
No one is going to buy anything they don't absolutely need until they feel assured that their job is safe and until people begin to purchase things again or are able to charge things again, few jobs will be safe.
It is looking like we got bamboozled by Obama, if he does not come through for us he will be far more hated then Bush.
he is a one term Prez....so with that in mind, wonder who the Repubs are honestly thinking of for the next President.
He'll get re-elected.
The alternative is too horrific to consider.
Hey, he just might pull this off.
Contrary to what some people here are saying. He still has a lot of people pulling for him.
Repub candidates have to veer too far to the right to win the primaries. Makes em kinda scary.
in a 3rd-rate circus.
Time you stopped blaming everyone and started working for solutions. You don;t know whether Obama will be re-elected or not; like the talking heads in the media, you spout off your opinions as if they were gospels from the mount. What credentials do you have that we should take your opinion as fact?
the world is in a global recession, the likes of which we've never seen before. Fact. Every President gets blamed (rightly or wrongly) when the nation is not doing well economically. Fact. Even when they try to do things, they get blamed. Fact. Jimmy Carter. Fact. The media spin. Fact.
You just got to be honest with yourself. He will be blamed for alot of stuff. He will not be re-elected unless the economy does a complete 180 and that is just not going to happen regardless what he does. It wouldn't matter if he was an R or a D, it is the only input the electorate has, and they don't seem to bring themselves to getting rid of the real guilty parties, and that is lifetime Congress Critters.
To Tarro. You think this is worse than taking our country into war based on lies? We knew before the election that who ever came into office was going to be faced with a shit load of problems that have been allowed to grow over the past eight years, while we have been busily searching the closets for "terrorist". This economic disaster didn't just happen over night and it's going to take blood sweat and tears to get us out of it, if that's even possible.
At least this president is trying to do something and hopefully the right thing, bush just cleared brush.
Its a question of what the electorate gets its collective panties in a bunch about. Idiot screws up? No biggie. Someone you counted on disappoints you? Huge problems.
I don't believe there are many thinking Americans who expect a quick and maybe even magic fix to all this. I know I sure don't. Some things may have to be done that we don't like in the short run thay will make corrections in the long run. Kind of like when you realize you are too deep in debt. You might have to give up some things you really love right now in order to get your finances in shape, but in the future when you have paid off those debts, you can once again enjoy some of the things you gave up.
But in reality, whether thinking Americans expect it to take a long time or not, when you are doing without, you will blame someone. In England, their gov't is taking it on the chin and will not get re-elected. In Iceland it brought down the gov't. When push comes to shove, and times are tough, it's the leader that gets blamed.
Right you are. The difference this time is?
C'mon, I know you can do it.
He has allready made positive decisions in my opinion. Unless your against Stem cell research, closing GITMO and the like?
As far as this money/credit crap the world's got going on. If we don't go back to square one or renovate the current monetary scheme, it will just be a matter of time, [No matter whose running the show]!!!
I don't know what knucklehead(s) stuck their wish list(s) into this grocery list, passed by congress and currently before the senate?
There is a time and place for everything! We can stimulate a house fire with water or gas!!! At sometime we'll have too renovate...
Sorta like "The Wizard of Oz" > http://www.youtube.com/watch?v=TP_wx0qrKu0
It's hard to agree too disagree when you're agreeing effects millions, billions and trillions...
Ammended: > http://www.youtube.com/watch?v=06vrqMJd2NQ > http://www.youtube.com/watch?v=jZtympOrheg
The problem with stockholders and bondholders biting the cost is that most 401 K's and mutual funds that people are planning on retiring on are based largely on such stocks. I just took an $8,000.00 hit in some of my retirement funds, and I have to sacrifice to set money aside, I don't make a lot.
Otherwise, we'll all end up totally dependent on Social Security.
Why is everybody freaking out? For some aspects of the current situation the so-called "bad" bank concept makes a lot of sense and I am quite confident that President Obama will make it so. The article Susie was reacting to quite negatively was filled with a lot of half-truths and a lot of misunderstanding. First of all, why use the scare term "toxic" as if these assets were poisonous. They are assets for which a market value is currently unknowable and which therefore have to be marked to zero or close to it. Many of them are performing and will eventually be paid off! No one can know which is the case. The approach is to purchase these from financial institutions-and the pricing is the major trick- probably for more than zero but less than the bank initially invested, ensuring that the bank, and the bank's shareholders incur some, even most, of the cost of the risk. Most people assume that in the long run most of these assets will perform or will be recoverable at least at the price the govt paid. If this is run right, the financial markets will be righted and the govt. will eventually make back all of its investment with a profit. There is ample precedent.
Everybody is trying to deal with the "troubled assets." I say that if Wall Street execs can't live off of 1/2 million per year, they can supplement their income with some of the "troubled assets" in lieu of a bonus.
And, stockholders should receive their dividend payments with shares of the "troubled assets."
Don't saddle us taxpayers with this crap. Let those who made their bed lie in it.
This is what I don't understand. When WaMu was "acquired" by JP Morgan the stockholders were wiped out over night. I know because my father - a 79 year old retiree - was one of them. Morgan basically got all the remaining assets while taking none of the crap and the shareholders apparently footed the bill. No warning, no way out, just wiped out.
After reading last weeks "Village Voice" article, it seems to me that it's not the toxic assets we're paying for, it's the INSURANCE, payable to hedge funds, on those toxic assets that are getting bailed out. I'd really like someone who has a better grasp of this than I to set me straight on this (preferably no FederalReserveblahblahblah stuff though).
is here.
The Credit Default Swaps are the elephant in the room. However the market for mortgage backed securities is all but gone.
There is not a lot of transparency in what the proposal entails. But there is poor transparency in the banks own accounting. Enron style accounting written even larger.
Interesting observations Alice, thanks. Given what I can suss about this whole mess I've at least gotta agree with your final point, the government appears to be completing the scam. I think this is the part of the movie where the "FBI" walks in at the end of "The Sting" and the taxpayers are Doyle Lonnegan. He looked about like I feel just now...
I think you may find, we're paying for both?
"INSURANCE" > http://en.wikipedia.org/wiki/Travelers_Group#...
It's my opinion if you lack concern, regarding the Federal Reserve, you'll get a picture absent one puzzle piece.
I actually share your concern about the Federal Reserve, it's just that what is usually posted is not something that hasn't been posted here at least 1000 times. The continual yapping does finally become annoying after a point.
Feb 4 (Reuters) - Setting up a 'bad bank' to absorb toxic assets of troubled U.S. lenders -- a move the Obama administration is debating -- would be an error on political and financial grounds, billionaire financier George Soros said.
The process would lead to difficulties in valuing toxic securities and generate covert subsidies for affected banks, generating "tremendous political resistance to any further (bailout),"
http://www.reuters.com/article/governmentFili...
Anything the IMF says is bullshit bankster gangster driven drivel. Quote them to me and you have lost any argument right at the outset.
I wanted Dennis Kucinich for President but am not unhappy with Obama, he leans to far back in trying to appease these wastes of life Republicans, for my taste, but it is still early in his Administration and hopefully he will be a quick study. I really hope he uses a Bush underhanded tactic and gives the Repubs everything they want in this bill and then uses the Presidential signing statement and takes it all away. Serve these maggots right. Ain't you friggin glad we didn't put our Social Security into the Market like Bush suggested, then where would we be right now?
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