The Treasury Department is expected to announce its bank rescue program, which entails making use of its authority under the $700 billion Trouble Assets Repurchase Program to buy pretty much anything it wants to. The Wall Street Journal provides the latest reading on what the plan might entail:
The initiatives will likely supersede many of the government’s previous efforts. They are being formulated jointly by the
Treasury Department, Federal Reserve and Federal Deposit Insurance Corp., and ensure that the U.S. banking sector will be tied to the federal government for years to come.
One central plank of these new efforts is a plan for the Treasury to take approximately $250 billion in equity stakes in potentially thousands of banks, according to people familiar with the matter, using funds approved by Congress through the $700 billion bailout bill.
In addition, the FDIC is expected to temporarily extend its backstop from bank deposits to new senior preferred debt issued by banks and thrifts for three years. That would be an aid to companies that have had a hard time raising capital without government assistance.
The FDIC is also expected to temporarily lift the insurance limits for non-interest bearing bank deposit accounts. This would extend beyond the $250,000 limit per depositor that lawmakers agreed on two weeks ago. The shift brings U.S. policy more in line with other countries that have offered blanket deposit insurance to try and prevent customers from withdrawing large sums of money from financial institutions.
Other moves could include temporary loan guarantees aimed at helping banks borrow the money they need to do business. Officials are still working through how such a plan would work.
Michael Shedlock has a worthwhile post up on the banking system rescue programs being put into place. Key observation:
To stimulate lending, the bailout plan will attempt to recapitalize banks. The method of recapitalization is best described as robbing Taxpayer Pete to pay Wall Street Paul. In essence, money is taken from the poor (via taxes, printing, and weakening of the dollar) and given to the wealthy so the wealthy supposedly will have enough money to lend back (at interest) to those who have just been robbed.
This would not be as bad as Shedlock suggests IF there was also, as in the best-practices model of Sweden, some punitive elements (getting rid of incumbent management, wiping out shareholders, nationalizing banks, which in the Swedish case enabled the taxpayer to profit) and a plan to rationalize (as in shrink in an orderly fashion) the industry. Instead, the Treasury appears to be trying to prop up the industry in place. That is not likely to be a winning formula.
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Hmmm. Any plans to “sterilize” the $2.5 trillion in
new global liquidity being proposed? I fear all the knights in Christendom couldn’t absorb all the bonds
that would be required.
Wow, as one who used to work in what was then known as ‘third world countries’, this plan eeriely strikes a distant chord.
The gist of the plan is to use public monies to subsidize failed, obsolescent industries to benefit politically connected elites.
The banks/investment banks getting this public largesse operate a failed, indeed bankrupt, business model.
No one, but no one, is going to buy equity tranches of CDOs. No one, but no one, is going to buy a CPDO rated ‘AAA’ by Moody’s.
Yet, our tax money, is being transfered to the institutions whose main source of revenue is structuring such waste.
A simpler plan would be for the government to give $5,000,000 to anyone with a title of VP or above at MS, GS, C, JPM, and a smattering of well connected hedge funds.
A truly sad day in the history of the Republic.
Yves,
Totally agree with Shedlock’s observation. Where is the outrage? What are our Nobel laureates doing?
Kind of maybe related:
Bail-out banks face tax burden
http://www.ft.com/cms/s/0/0cf6f5…? nclick_check=1
"It puts companies in a difficult position," said James Reda, founder of James F. Reda & Associates, a compensation consultancy. "If they participate in the bail-out they will get hit with a large tax bill."
Under the provision, companies that sell more than $300m in bad assets to the US government would lose the tax breaks they receive on the multi-million-dollar bonuses paid to executives. In addition, the bail-out bill reduces the amount of an executive's salary that is deductible against tax from $1m to $500,000.
The change could increase companies' expenses and reduce their earnings by millions of dollars and prevent executives from collecting their large pay packages for as long as the company participates in the programme.
I note that part of the package Gordon Brown, PM of England seemed to be proposing in his Q & A session with Parliament was for every British subject (they don't have citizens….) OVER the age of 80 years old to receive the equivalent of an immediate 1000 dollar tax rebate.
The thinking being that they were MUCH more likely to spend it than anyone else….
Matt
Wipe out some of your biggest donors (sorry, “bank shareholders and management”) just weeks before the election? Nah!
Can’t give the game away when there are still millions to be raised and spent.
Might have to wait until them slow folk in the mainstream press catch onto what’s happening and tells J6P.
“… ensure that the U.S. banking sector will be tied to the federal government for years to come …”
Yeehaw! I’ve got plenty of unsecured credit lines. And I’m running then up to the limit.
How do you screw Uncle Sam?
“D-E-F-A-U-L-T”
Thank you, Yves Smith, for your populist instincts. Hew hard to the truth.
Too late to convert to the goldbug faith? It’s looking better and better…
@Matt
What you’ve failed to take into account is that, in our nation of serfs, what with the shocking dental hygiene, and the state of the nationalised health services, there are only 4 people aged over 80. So it doesn’t matter anyway.
As for sterilizing the liquidity. The Fed cannot do it. Its function is to monetize debt. That means debt is money.
The only organizations that can sterilize US debt, are foreign banks. They can do that by exchanging whatever for dollar debt. That puts the dollar debt in the cellar, kind of like Perot’s crazy aunt.
The only problem is that the crazy aunt has to come out sometime. I suppose that she will be carried out in a pine box when the dollar is inflated away.
So the bagholder foreign banks, just bought bigger bags. Hope that they are strong enough to hold them up. This part is looking like a tug of war where the weakest member on one side let’s go, and it all breaks loose.
It really is fun to be cheery through this chaos. No point in bemoaning one’s fate.
Sterilize the 2.5 trillion? Use the unlimited currency swap facility. Looks good on paper.
So, now banks don’t have choice if the Bushies buy into them
George W. Mugabe
How does this differ from what they do in Zimbabwe?
I like this part of the description of currency swaps:
As it is considered a foreign exchange transaction, and not a loan, it is not necessary to be shown on a balance sheet by law. Currency swaps were originally designed in order to avoid foreign exchange controls (limits or restrictions by governments regarding residents holding foreign currency, or non-residents holding local currency).
First, they do not show up on the balance sheet. Hooboy, this is just like the CDS only with currencies. Nice. Here the counterparty gets to print his way out of default. Let’s see, the fed provides dollars to those who have dollar denominated defaulted debt. Those dollars are swapped with Eurorubles. Let’s say the exchange rate of the dollar collapses. The Fed hands back the Eurorubles, and the dollar holder hands back dollars.
Depending on the change in relative values of the two currencies, the losing currency gets to export its inflation to the winning currency.
Nice package.
The other half is that this was designed to get around currency controls. Hmmm. It walks like a duck. It looks like a quack.
This really is hard to understand. The treasury is finally going in the direction of the Swedish model alway incesed in this blog and still everybody complains.
What is the difference? That in Sweden the government completely washed out the shareholders while here while here they will be 80% diluted?
Who are anyhow the shareholder’s of these banks: mutual funds, 401k, you!
Do we really care so muche about few individuals bringing home millions so much that we prefere everything to fail so they get nothing?
I think it will be very obvious in few months that taxpayers are going to take a very sweet return on the investments.
The world in not collapsing, we can still recover everything, outside you computer monitor life goes on.
Indeed, ciccocicco: I have asked many people since this crisis became acute how good revenge is at putting a roof over their heads and food on their table, and no one has been able to answer.
As for the excellent point “the Treasury appears to be trying to prop up the industry in place”, that’s a legit criticism if it turns out to be the case. The financial sector of the US economy enjoyed its own outsized bubble and needs to be “shrink in an orderly fashion”, but right now isn’t it a time to emphasize “orderly” before “shrink”?
Especially since the later would be done by the next administration?
If the taxpayers were going to get a ‘sweet return’ in a few months, I assure that Wall Street would not have been clamoring for this bailout.
Private investors would be lined up to get a chance at the ‘sweet returns’
Tyrasun –
The outrage is still be expressed by folks like Shedlock and myself.
I am supportive of a plan that would shrink the industry by letting the forever hopeless firms to fail in the fashion that JP Morgan did with the Knickerbocker Trust (which was loaded with copper mining stocks for collateral of al things, how much shakier can you get? When a rumor was spread that Morgan was going to build a copper mining business in Alaska, Knickerbocker Trusts’ collateral, United Copper shares plunged into the abyss)in the rich Man’s Panic in 1907.
JP sent his examiner Benjamin Strong into Knickerbocker Trust that afternoon to examine the books. The books were hopeless. So you know what JP said, “I can’t be everybody’s goat!” And Knickerbocker Trust failed the next day. And the President hung himself a few days later.
However, JP was a judicious man. He sent Strong into other banks the next day and found their collateral to be in much better shape. That is when JP said “This is the place to stop the trouble then.” And from that moment, he and two other firms put some capital together to inject cash into the banks and trusts that could be saved over the next several weeks and months.
confidence restored, end game for the panic and just rewards to those who took on excessive risks based on shaky collateral
I still see nothing in their plan that
ciccocicco said…
Who are anyhow the shareholder’s of these banks: mutual funds, 401k, you!
This is where I will come down hard against the pension funds and mutual funds.
The investor refuses to his own due diligence and turns it over to a professional manager. These professional managers like Calpers and Fidelity and Vanguard take on huge portions of companies and then demand high rates of return on equity.
The demand for high equity rates of return is what is destroying US industry. It provides massive amounts of capital injected into stock price that is rarely available to the company to use drive a business. You might see the equitly leverage exploited on convertable preferreds or the like, but pumping of stock prices proves to be weight around the neck of companies.
Companies cannot have a few quarters of slow growth, or the heavy hitters will come down on them. There is no long term company and business building, equity needs to be sucked out by the monster funds.
Interesting that the trusts of the 20s were banned, but we are left with the corrosive effects of large funds demanding return without concern for the long term health of the business. The concern is getting return for the next quarter and then dumping when return slows.
Sorry but the pension funds and mutual funds deserve collapse. They have been mismanaged on a misguided strategy.
Bring on Sweden. The taxpayers do not need to bail out these large funds. Perhaps it is time for investors and pension funds to expect a bond rate of return, not “good figures next quarter” rate of return.
“Private investors would be lined up to get a chance at the ‘sweet returns'”
Not completely right. The Treasury is more likely to get a higher return because it is an “advantaged player”, it can play his hand while changing the rules of the game at the same time.
And also, really honestly believe that the market is always right? Hey, this is the same market that until 12 months ago was completely mispricing risks.
Example of market mispricing:
For all of last week a perpetual bond of ING (INZ on the NYSE) was trading at 23% perpetual yield. It was alll ask and no bids, for a week. Now you think that if I was a bank I should price it at those levels in my books?
Taxpayer money is being to subsidize institutions that no longer have any useful purpose.
GS/MS (and LEH, BS before that) no longer have any value added in terms of risk intermediation. Their key fixed income product (tranche securitization that gave us CDOs, CDO squareds, CPDOs) no longer has any market. They’ve effectively withdrawn from the muni ARS/TOB markets.
What exactly are MS/GS going to do with this money. Underwrite equites? Demonstrate superior trading skills? Research on commodity prices?
Putting money to save them would be like giving stagecoach manufacturers in the early 1900s.
In the 1970s, dozens of established well known brokerage firms failed. No one argued for bailouts back then. Drexel failed. Kidder failed. First Boston, Salomon, Paine Webber were bought out.
The sun rose the next day.
“The investor refuses to his own due diligence and turns it over to a professional manager. These professional managers like Calpers and Fidelity and Vanguard take on huge portions of companies and then demand high rates of return on equity.”
If anything, the issue of most of the participants to this blog, was that the price on the stock market where too high, or in other words, that investors where not requesting a high enough return compared to risk. Not that return were too high.
“Perhaps it is time for investors and pension funds to expect a bond rate of return”
And why should I invest in equity and not bonds?
The Treasury is more likely to get a higher return because it is an “advantaged player”, it can play his hand while changing the rules of the game at the same time.
That is nothing more than theft from other sources.
The government can repudiate all CDS that are in losing positions to FDIC insured banks. That would surely boost the price of the banks and provide a sweet return to the taxpayer.
Thanks, I’ll pass.
Printfaster, you might bone up on the definition of “sterilized intervention”.
It’s a term of art.
Matt
“Taxpayer money is being to subsidize institutions that no longer have any useful purpose.
GS/MS (and LEH, BS before that) no longer have any value added in terms of risk intermediation.”
It must be some kind of joke!
Do you still think that they must fail?
Lehman was not an error big enough?
It is not their role in the finance industry that is at stake here: YOU CANNOT LET ANY OF THESE BANK FAIL. If you let another one fail, any bank can fail, and if any bank can fail nobody will do business with nobody.
It is totally not time for ideology. We must be pragmatic.
ciccocicco said…
“The investor refuses to his own due diligence and turns it over to a professional manager. These professional managers like Calpers and Fidelity and Vanguard take on huge portions of companies and then demand high rates of return on equity.”
If anything, the issue of most of the participants to this blog, was that the price on the stock market where too high, or in other words, that investors where not requesting a high enough return compared to risk. Not that return were too high.
===
This makes my point. The reason that prices were high was that they were pumped by companies that needed to exhibit high rates of return on share price, not relying on a more lower rate. Management, twisted, lied, overlevered, Enroned, hid stock options, juggled sales forward, and shopped accountants. Prices should have been lower, reflecting more closely realistic expectations, and more forthright disclosure.
Once the hyped up expectations were not met, then capital flew out, and you have a market collapse. The big funds deserve their fate.
(per my last post “I still see nothing in Treasury’s proposal’s or plan that determines which banks can be salvaged and which can not.
Jesse H Jones, as chairman of the RFC , for his part acted in a responsible manner similar to JP Morgan did in 1907.
During the two week banking holiday in 1933, Jesse had all the banks classified as A, B, And C banks. “A banks were those whose capital was sound, B banks were those whose capital had disappeared but which had assets sufficient to pay depositors in full.”
“C banks were those in which the capital was completely gone and an indication of loss to depositors.”
A banks reopened immediately,
B banks were reopened as quickly as they could be, and C banks were placed into conservatorship for liquidation.
The industry was shrunk by liquidating the C banks.
We simply can’t stand by as taxpayers and concerned citizens and be everybody’s goat for all the C banks out there in 2008. We have no choice but to protest these outrageous proposals that give every indication that they will recap the crap.
What we want to do is save the damn baby and throw out the dirty bathwater.
It makes me sick to see these wingnuts in th Treasury and the Federal Reserve intending on keeping the dirty water. I promise you this, Bernanke KNOWS better as a student of the Great Depression, so I ask everyone here why he isn’t reshaping policy in the proper direction? What Paulson knows, I haven’t a clue. Paulson has as his excuse he was never a student of the Great Depression. That is not an excuse afforded the rest of us.
This offends my every sensibility, and should everyone else’s that is paying attention this matter.
They are too big to fail is a siren song that I seem to have heard all my life.
Citibank has needed some kind of rescue (‘favors’) of one kind or another in 1975, 1982, 1992, and 2007. Each has cost the taxpayers dearly and Citi never seems to learn its lessons.
This is nothing but blackmail by the investment banks.
But assume that you are going to hand the keys to the Treasury to GS and MS so that Grandma can still cash her social security check and Uncle Billy doesn’t lose his job at Best Buy.
What are MS and GS going to do with the billions that they’ve extorted from the taxpayer?
Structure CDOs? Engage in Tsy/MBS basis trades? Mezzanine financing for some hostile takeover?
You could argue nationalizing the railroads (ConRail) was worthwhile as you had thousands of companies dependent on the railroads.
We aren’t saving some pharmaceutical company that makes the only known vaccine for whooping cough.
We are using my grandchildren’s money so some Gucci cowboys can take a helicopter to Fire Island and party.
Who on earth is dependent on someone strucuturing an Nth to default CDS?
If anything, the Treasury bailout is actually impairing the process of innovation from new firms that might have real solutions.
ciccocicco
“This really is hard to understand. The treasury is finally going in the direction of the Swedish model alway incesed in this blog and still everybody complains”
Treasury has changed tack and is now going in the *general direction* of the Swedish model. It is not on course yet and given the protraction in getting to this point, cannot afford to fail or be very far off course. There is no triage. In the Swedish model the insolvent banks were merged with stronger entities.
This plan cannot save every bank.
Until banking evolves again in response to market demand, a significant % of its former income and profits (ie cdo’s and cds’s) is no longer a viable business. If the cdo bubble deflated slowly rather than burst, firms would have shrunk departments and laid off staff and focussed on areas that promised growth or were not adequately provided for by the market ie look for new opportunities. So triage or fewer and or smaller banks, while sudden in this case, is the outcome that would have evolved in any event if the bubble had defalted instead of burst.
Sweden didn’t have the world’s reserve currency and Sweden didn’t have to bailout all the world’s central banks either.
This new ‘create more debt’ will work for how long? Days, months, weeks?
The new debt will not cover the old debt.
The big boys will sell the SOW on the way up, not because they think is will go back down but because the rise will not cover the loss in value of the dollar.
I suppose this delay is better than an immediate meltdown…..I’ll drink to that!
I can’t help but think this is 30 years of zero regulation, catching up with 30 years of torrid financial innovation.
Whatever comes out of this, the regulation process needs to be way more dynamic.
for starters, OTC markets (not just cds) should be regulated or at least standardized once they reach a critical mass (maybe, 1tr instead of waiting until 64tr…or when contracts reach some multiple of the underlying).
Capital will always flow to the corners of the market with the least amount of regulation, as those are typically the places with the highest available returns (risk adjusted?). With that in mind, maybe the gov’ts equity stake will provide the govt with the leverage needed when push comes to shove when re-routing the regulatory regime (alliteration for the day).
Btw, ATC also talked about how we are about to re-regulate in a very big way.
On September 23, I posted this:
Here’s an idea – why does Paulson have to worry about whether the banks will be willing to sell the assets at a price that makes sense for taxpayers? MAKE THEM DO IT, Hank! Take Ben with you and walk into C headquarters and tell Vikram Pandit that he is fired and that C is now under government supervision. THe government has decided that C will sell all its problem assets to Treasury for next to nothing. In exchange for this “rescue” of C, the government will also take 80% of the equity in C.
That’s nuts! The government can’t do that, can it?
Sure it can. Ask FNM and FRE shareholders.
***
It was supposed to be ironic. 3 weeks later, the power grab is complete.
In addition, the bail-out bill reduces the amount of an executive's salary that is deductible against tax from $1m to $500,000.
the $1 million cap with tax penalty was initiated under Clinton and inspired compensation consultants to find a work around. Thus began the options compensation debacle.
This stuff is absurd. Taking taxpayers like taking candy from a baby. No news around to scream for the public -declawed and busted financially through levered M&A buyouts leaving no funds for journalism.
I used to think Frank and Sanders were fa real.
To Matt Dubuque who accused me of not knowing what steriliztion is:
—
Accordingly, the management of the exchange rate will influence domestic monetary conditions. In order to maintain its monetary policy target, the central bank will have to sterilize or offset its foreign exchange operations. For example, if a central bank buys foreign exchange (to counteract appreciation of the exchange rate), base money will increase. Therefore, to sterilize that increase, the central bank must also sell government debt to contract the monetary base by an equal amount. It follows that turbulent activity in foreign exchange markets can cause a central bank to lose control of domestic monetary policy when it is also managing the exchange rate.
—
My point is that sterilzation is phony. To wit exchanging debt for currency by a central bank is a nullity.
Why? Central banks monetize government debt. What does that mean? It means that government debt is as good as money.
For example, if you were to hand me 1 million dollars or a T bond maturing tomorrow for $1 Million dollars, I would accept it, save for an overnight discount. To me it is as good as money, except for any discount.
Take this further, to any maturity, to the end user it is money pure and simple. It just is printed on different paper.
Taking this to a historical context, central banks used to monetize gold. That means that money was directly exchangeable for gold at par. Gold and money were interchangeable. Today money and government debt are interchangeable. After all currency is the promise to deliver an equivalent amount of government debt.
Sterilization is ruse, phony, an accounting artifact.
Yesh, and I thought the exchanges on the “Roubini: Not Out of the Woods …” post were testy!! So let me throw this in the fire (the real world segway being: If nothing good comes from the real economy as a consequence of all this reorganization and recapitalizing, then what’s the point?)
Banks ought to exist as public utilities to provide the medium of exchange between labor and capital and all that comes with that. People and businesses need a place to put cash and take loans; people don’t need investors behind those institutions….
This is not a thesis I can now defend. It is a thesis I can consider. Think of it as one antipode of thought on finance….
We wait to see whether banks which are recapitalised are enforced to lend at pre crunch levels as it appears many will be across Europe. Can the heady days of easy credit be restarted with businesses and consumers being naive again and the wholesale funding markets cranked up again with securitisation of debt?
It would appear to me that all this does is replace wholesale funding with government funding and it will just disappear into a black hole unless saving and lending levels can be more closely matched. Inter bank lending no longer appears to me to be purely constrained by fear but by insufficient funding. The government can replace that for a while but at what point do governments decide then can no longer afford to support the continual funding.
Global lending must match saving and with a global recesion saving must be shrinking this suggest to me credit costs need to rise.All printing more treasury bills to pay for the bailouts seems to do is to replace securitised debt with government debt, but with the added bonus of diverting economically active money out of the economy and towards government debt.
I wait with bated breath to see whether inter bank lending costs do come down as expected and credit markets really do shift. Ominously yesterday it looked to me like the credit markets showed an improvement in banking but a distinct drop in the wider economy.
crisis will grow. so safe your money!!! tranfer your money in Russian market! questions? call me angortrans@inbox.ru
Argh, financial russian spam. Well anyway who’s really worse, the bandits at Wall Street or the criminals that operate from Russia?
I think there are some misunderstanding concerning how the bank crisis in Sweden was handled.
One bank, Gotabanken, was nationalised. The shareholders got nothing.
Another bank, Nordbanken, which had earlier been owned by the government, but had been privatised was bought back by the government. The reason was that the bank had been in such a bad shape when privatised. There were some high trade union officials on the board but banking experience was evidently lacking. The government had sold “damaged goods” and thought it wise to take it back. The major part of the losses was caused by Nordbanken. The bank, now called Nordea, is still to partially owned by the government.
No other banks was nationalised.
In addition one bank (now part of Swedbank) got loans on favourable terms.
there is no russian spam! the debt of USA is growing up. what are you wating? think twice when you store your money in USA banks. some people have transfered his fund to my company already.