Guess the continuing deterioration in the stock market is beginning to capture the attention of the financial regulators. The Treasury, FDIC, OCC, OTS, and Federal Reserve issued a joint statement just after 4:00 PM (hat tip reader Steve). Some key bits (boldface ours);
A strong, resilient financial system is necessary to facilitate a broad and sustainable economic recovery. The U.S. government stands firmly behind the banking system during this period of financial strain to ensure it will be able to perform its key function of providing credit to households and businesses. The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth. Moreover, we reiterate our determination to preserve the viability of systemically important financial institutions so that they are able to meet their commitments.
Yves here. Rather amusing. The first sentence basically says the US needs a healthy banking system to start growing again, the second acknowledges it is on life support. We are still waiting for details on how the government “will ensure” that things will be OK. The fourth sentence is a “no more Lehmans” promise. Back to the piece:
We announced on February 10, 2009, a Capital Assistance Program to ensure that our banking institutions are appropriately capitalized, with high-quality capital. Under this program, which will be initiated on February 25, the capital needs of the major U.S. banking institutions will be evaluated under a more challenging economic environment.
Yves here. Translation: “We have a program, why are you guys so anxious?” Back to the announcment:
Should that assessment indicate that an additional capital buffer is warranted, institutions will have an opportunity to turn first to private sources of capital.
Yves here. Who do they think the audience for this is, morons? These banks have been desperately trying to raise equity, the last successful party was Goldman on rather punitive terms (the Buffet preferred stock also had very rich conversion rights). Sovereign wealth funds aren’t buying and TPG got burned on WaMu. And then Paulson gave much better deal than the least sick looking bank, Goldman, was able to extract. But you are seriously trying to tell us there might be private capital for banks at anything other than confiscatory terms? Back to the release:
Otherwise, the temporary capital buffer will be made available from the government. This additional capital does not imply a new capital standard and it is not expected to be maintained on an ongoing basis. Instead, it is available to provide a cushion against larger than expected future losses, should they occur due to a more severe economic environment, and to support lending to creditworthy borrowers.
Yves here. This wrinkle is new. So the powers that be are going to temporarily overcapitalize the banks, and pretend it is merely undue caution, rather than the required amount expected to cover unearthed or likely to be realized near term losses. Charming. More details:
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position and can be retired under improved financial conditions before the conversion becomes mandatory. Previous capital injections under the Troubled Asset Relief Program will also be eligible to be exchanged for the mandatory convertible preferred shares. The conversion feature will enable institutions to maintain or enhance the quality of their capital.
Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized…
Yves here. Yes, that’s how we got in this mess. The standards are inadequate given the risks these firms were taking. Pretty much no one in the private sector (except bank management on their more delusional moments) believes the large US banks have enough equity. Back to the release:
Because our economy functions better when financial institutions are well managed in the private sector, the strong presumption of the Capital Assistance Program is that banks should remain in private hands.
Yves again. The boldface verges on comedy. The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.
The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.
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The latest EconTalk (Best Podcast 2008) is worth a listen.
Allan Meltzer is interviewed on Fed policy. The summary:
– current policy is disastrous
– expect huge inflation a few years out
– we need regulatory certainty
– we are getting the reverse
All in all, rather depressing. But worth it for some truthful discussion (so rare and difficult to find).
Meltzer on Inflation
About that new wrinkle, Yves. Is it possible that Argentina is now setting the pace in bank policy world?
xxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
http://www.bloomberg.com/apps/news?pid=20601086&sid=aytrSM6Hwtj8&refer=latin_america
By Soraya Permatasari
Feb. 10 (Bloomberg) — Argentina’s central bank head Martin Redrado said governments should “over-react” in providing fiscal stimulus to boost growth amid a global recession.
“They should go beyond expectations,” Redrado said today at a conference of central bankers in Kuala Lumpur.
The central bank said on Dec. 30 Argentina’s economic growth will probably slow to 4 percent this year, about half the 8.3 percent annual average of the past six years, as consumers limit purchases and yada yada
Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.
Currently, the interpretation of your biopsy is that it’s considered to be benign.
Lets face it -all of this is just kabuki!
Geithner/Summers and the merry band of Obamanauts are only trying to figure out what shiny objects they can dangle to obscure the fact that taxpayers – that means you and me – are on the hook for keeping bank bond holders whole with increased taxes, devalued money and lower economic growth for years to come.
Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position…
Does this mean the Citi conversion story is true? That seems to fit ominously with:
In Citigroup’s case, converting a significant portion of the government’s preferred stock into common shares would help lift the company’s TCE ratio, perhaps to as high as 4%, according to a person familiar with the company’s thinking.
I certainly hope that is not the intent. A $45 billion investment becoming a 2.5 to $4 billion investment would make a rather nasty sound bite.
What else would one expect coming out of a bunch of incompetent at best corrupt at the worst bunch of clowns in DC.
Maybe it’s time to look again at the creation of a new Government bank.
Yves
Blogger-related editing “typo” in the indented quote after your
“Yves here. Translation . . .” comment.
Rule #1 – Anytime someone goes out of their way to tell you not to be afraid, you should be very afraid.
The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.
I think this “inaction” by the Gov’t is an opportunity. Let’s end the Greenspan Put once and for all and let the market sink. It just seems funny how all these Republican free-marketers spend all day on CNBC demanding Federal intervention because the market is falling. Let it fall.
Let the banks go for awhile, at least a month. Call the market’s bluff. Even C can meet depositor demands. Even if it is insolvent in an accounting snapshot, it is not like GM (more money out than in everyday), yet.
What is the difference between propping up C and AIG with billions after billions; and jumping to action whenever the market falls 20%?
Yves – isn’t this the statement we started the day off with? I think the market and blogland has weighed in on this one as worthless.
Yves, an honest question …
What would be your concerns and policy prescription be for the banking sector ?
Most of what we get from the MSM and the “anointed” economists is blather …
It is easy to sit and nay say but in the end we must have a better and hopefully best alternative for John Q. Public ready to go. We need impartial experts such as yourself to lead. The BS we are getting from the “experts” is obviously getting us nothing but increased misery.
The entire government approach is random. 2 weeks ago deficits did not matter as we were force fed $800 billion in “stimulus” and $250 million in mortgage mess. Today, apparently deficits do matter, so our fearful leaders want to make sure we know they are going to cut the deficit in half in 4 years. That means higher taxes and less “stimulus” into the middle of this unwind.
At least we can count on deficits not mattering again later this week when we pump up a bunch of insolvent banks . . . .
Today’s market reaction said it all. Indexes opened higher on the Citi/B of A partial nationalization chatter … then proceeded to slide all day to an 11-year closing low.
The last little blade of grass that hasn’t been uprooted from the cliff edge by the market’s desperately clawing fingernails is the Nov. 20th intraday low at 741, two points below today’s close. That’s within easy reach to be tested tomorrow.
Aside from the money-center banksters, I’m worried about the giant financial conglomerate GE. It’s in freefall, having retraced back to 1995 levels. The indicated dividend yield (from BigCharts) is over 14 percent, while the P/E ratio is under five. These are eye-popping numbers, signifying the sort of ‘death of equities’ despair last seen at the 1949 and 1974 lows. Unfortunately, the broader indices have not been beaten down to such juicy levels.
My sense is that another shoe or two needs to drop — probably big banks and autos, put into nationalization, receivership, liquidation, whatever you want to call it.
A spectre is haunting Washington … namely, how does an insolvent government bail out insolvent banks? Short-term, it can be done, by the brute application of sovereign power. But once Treasury yields commence their inexorable rise, debt service will go exponential on us in a few years.
This isn’t the end of the world, but it’s the beginning of the end, as we shovel mountains of poisoned Kool-Aid into the vast mixing vats. Beam me up, there’s no money on this planet.
— Juan Falcone
Hey, I too would like a cushion against larger than expected future losses such as losing my job or the value of my housetrap falling off a cliff
The big banks are insolvent and only need a cushion while the euthanasia drugs take effect
Anon of 6:13PM
I suspect the deficit reduction talk of the last few days was meant as Musak to accompany Clinton’s trip to China to beg for money.
This is the most succinct description of the problem and the problem with the solution I’ve read:
“The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.”
Amen.
“The government will ensure that banks [sic] have the capital and liquidity they need.”
Shouldn’t that have read “the banking system?”
I’m sorry, Yves, but we are still a long stone’s throw away from reality with ALL of these qualified reassurances from the nation’s monied-interests.
It’s NOT the financial System.
Irt’s NOT the banking system.
It’s NOT the economy.
Each of those have systemic maladies that result from the real problem.
The real source of all this systemic conflagration is the monetary system.
The debt-money system of the private federal reserve bankers is broke. We have an insolvent money system. Period.
It has FAILED to produce enough money in quantity and quality to make the debt service payments on the debt-money issued as the principal amount of ALL the loans made via the FED’s pro-cyclical, mechanized money-creation system.
The debt-money system is broke.
Gerrymandering around tax, fiscal and monetary policy WITHIN the debt-money system is a fool’s errand.
The sooner we get on the track of the new monetary system, debt-free at issue by the government, the sooner we will all start to get back to work.
And realize our proper, though somewhat reduced, standard of living in this country, and the world.
Greenbacks ’09 !
I believe the American voters wanted and still want words and not action – just look at the election results.
Please stop argue with the American voters who, in 5 elections, made the wrong choice 5 straight times, each time electing a candidate younger than 60. As I said before, and no one has proven me wrong yet, you can’t trust anyone younger than 60.
Peace, man.
Make that arguing, instead of argue.
The fundamental problem in my view is not that failed management is being kept in place; it’s that there’s no acknowledgement that their businesses are structured to operate in markets that have failed and that show no sign of coming back. Originate to distribute is dead. LBO lending is dead. CRE syndication is dead. Unsecured interbank lending is dead, for heaven’s sake. What I want to see is the plan to restructure the major banks so that they can provide needed credit flows to the real economy. Imagine if when the 1930s financial model failed, the government had propped up money center banks instead of restructuring them through Glass-Steagall and separating capital market functions from depositor intermediation and lending into the real economy. So it’s not so much that the clown colleges at the major banks are being kept in place, it’s that nobody wants to admit that the circus has left town.
What if Madoff has a twin who is employed at the Treasury or the Social Security administration right now? What if the lock box is empty, with no money ever invested there? Let’s worry about things we can do something do and let the dying blood-sucking vampire banksters and their zombie banks go.
Beside the stimulus, no “new” money has gone into the banks.
All of the tarp was there in the fall, contrary to popular opinion.
I’m fine with it the way it is. No new money.
This false sense of urgency reminds me of last fall. Is everyone’s memory really that short?
All of the above comments have validity. Current policy can be criticized from many points of view.
One thing stands out for me:
The American taxpayer has been buffered from the pain of actually repaying the national debt for a long time now.
The message this week
from an Administration under austerity pressure from “The Management” is glaringly clear:
“You’ve been living in a dream world, Mr Taxpayer. Welcome to higher taxes!”
And in a perfect Hooveresque move, as if on cue, we squeeze money out of the anemic economy and turn a recession into a depression.
Happy New World, Mr and Ms America
Exactly, the only reason there is any call to hurry is because the stock market is dropping. It is impossible to chase the market while investing, it is stupid to chase it with policy changes.
“Who do they think the audience for this is, morons?”
Yes.
And they are right.
This is a message to most Americans, who don’t have the time, education, or intelligence to realize that they are being raped. These words will soothe those people. They will not understand, but will come away with a fuzzy feeling that someone iw working very hard to solve this problem that they do not comprehend. So they will go about their business and create no trouble.
AND they will keep their money in the stock market, having been told for years that “they should always be in it for the long run, and stocks ALWAYS do well in the long run.” These are the only people keeping it from plunging, rather than sliding.
This is a statement designed for morons, and it will serve its purpose. No one ever lost a dime underestimating the American public.
joebhed – i agree – the whole monetary system is broken. A high percentage of the population knows this deep down whether they admit it or not, which is why nothing is working.
One day we will look back and wonder how we let our leaders manage the largest economy in the world via a manipulated CPI calculation, which allowed for unlimited credit creation. Simply nuts.
The Obamatrons seem to be maintaining their awe of banksters, like royal subjects did for a time in certain countries well after a republic was established and being a scycophant no longer got you anything.
The goals of the new policy directive are 2 fold:
-Disguise and play down “Nationalization” so that the ugly N-word can be avoided in press conferences.
-Give ’em more taxpayer cash to burn and survive another day but demand nothing in return (save vague assurances of “profits” if everything works out and in the future, no downside mitigation however).
So once again we’re being scammed:
-Not the slightest modicum of thought or effort has been expended to ensure that this calamity doesn’t repeat!!! No change in policies, methods or personnel is being demanded. Perhaps they believe that “Creative Financial Engineering” did not go far ENOUGH!
Maybe CDO-cubed need to be deployed to cover the underwater CDOs and CDO-squareds.
Seems like the US is not doing what it should because certain important stake holders are at the commands and refuse to see their stakes erased.
“Everyone can lose but not us.”
Just like Obama as in trying to talk your way out of everything.
I know it is very satisfying to assume that the PTB are either knowingly engaged in nefarious acts in order to benefit themselves & associates, or they are simply in over their heads and lack the knowledge/experience in which to manage this crisis.
I take a 3rd approach, which is really the most chilling if you step back and consider its implications: the PTB know exactly what they're doing because they've already modeled the expected outcomes of the more "common sense" approaches advocated here and other leading financial blogs.
In other words, these desperate attempts to soothe the financial markets are being employed in an effort to prevent a cascading series of events that leads to systemic failure.
Yves, you are in rare form today!
“The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.”
somewhat ontopic (in a parallel universe this is the text of the joint PR):
Road Map for Financial Recovery: Radical Transparency Now!
http://www.wired.com/techbiz/it/magazine/17-03/wp_reboot
fantastic article IMHO
just imagine the blogosphere poring over sChiti’s level 3’s.
endless hours of entertainment at ZERO cost to the Treasury!
The markets want action, not more words.
The economy deserves action. The markets are happy to speculate on the rumors.
I’m wondering about the “temporary capital buffer.” When I first read the phrase, I had thought that it was govspeak for “bailout.” But now that I see that reference to capital standard, is it instead a plan to relax a regulatory capital requirement for (citi)banks?
As the markets and world economy circle the drain, our government is calling for austerity.
Tonight I note a collective state of denial over the seriousness of this situation. Austerity in the middle of a recession is a repeat of Hoover’s folly of 1930.
There is unfortunately no other way to interpret the intent to shrink the federal budget deficit except this:
“Save the banks, screw the people”
There’s an ongoing welfare program for failed bankers despite ongoing negative performance. It’s the deluxe plan.
But there will be no quarter for the US taxpayer. That stimulus and tax cut? Now you see it now you don’t. Might pay for the toll on your next commute.
Next year and over the next four expect the living marrow to be sucked out of your dessicated wallet. Taxes? To pay off the $550Billion that the president assumes will be half the deficit (today alone it increased by ~$60 Billion courtesy of AIG), the bill will be hefty. In a shrinking economy and given the cost of service on US debt in the trillions, every tax return in the US would have to be submitted with a check for at least $10,000. And that’s not factoring in unemployment, furloughs and decreased hours worked etc…That’s also assuming bankers have been honest and revealed the full extent of their losses and that they and the auto industry don’t have any sudden need for cash for operations.
Federal savings? Turning to the humorous side of the crisis, Obama mentioned $7million saved at one Government agency. :-) Turning the lights out and lowering the heat won’t pay for the crushing . We have to presume a TOTAL exit from Iraq where a US troop reduction could trigger civil war.
Summing it up, if everything goes well, the rate of contraction of the economy should slow in 4-5 years when we can start paying the next half.
Bloomberg is reporting a major leading negative indicator about China. The premier UK law firm Slaughter & May plans to open an office in China. Slaughter & May only has 1 office in London. This harkens back to late 1999, when NY-centric law firms like Wachtell Lipton were thinking about opening up an office in Silicon Valley. And the TMT bubble in SV promptly cracked shortly thereafter in 2000.
http://www.bloomberg.com/apps/news?pid=20601127&sid=aK71krN1JddM&refer=law
Doctors, lawyers, and accountants are notoriously late in managing their businesses. Ramping up hiring after the economy starts to slow, ramping up firing after the economy starts to pick up, signing up long leases at real estate peaks, etc.
Yves here. Who do they think the audience for this is, morons?
when was the last time you watched NBC Nightly News or CNN –
One comment: “Lets face it -all of this is just kabuki!
Geithner/Summers and the merry band of Obamanauts are only trying to figure out what shiny objects they can dangle to obscure the fact that taxpayers – that means you and me – are on the hook for keeping bank bond holders whole with increased taxes, devalued money and lower economic growth for years to come.”
I worry about Larry Summers as much as anyone, but it is unfair to paint Obama just yet with the indubitably ugly Summers brush. As the comment quoted above reveals, it appears the level of despair and cynicism about both the efficacy and integrity of our newly elected public servants is rising rapidly.
Concerns about efficacy may (soon) turn out to be well-founded, but it is in my view a wee bit early to despair about Mr. Obama’s own integrity and that of the people he is *trying* to gather around him.
Mr. Obama’s problem is threefold:
1) he stepped into the biggest pile of shite in recent memory;
2) he has no experience as a manager of people, and thus little direct experience of how much energy is required to bend them to his will;
3) he and his few trusted advisors are as vulnerable to ‘cognitive capture’ as anyone suddenly ascended to the throne, and more vulnerable than most given their aggregate lack of experience.
On the other hand, as can be seen by the difference between his rehearsed presentations and his ad lib appearances (like the signing ceremony for Mr. Volcker’s advisory panel), Mr. Obama personally is undoubtedly the smartest and most thoughtful President we have had going back at least to Mr. Reagan (and that is no slam on my hero Mr.Reagan), and simultaneously about as ill-prepared as was his immediate and troubled predecessor.
This is a long-winded way of saying that the guy needs help in the form of genuine and constructive input, and too much of the commentary attached to this lady’s superb site sadly does not meet that urgent requirement.
Feeling powerless, as we all do, is no excuse for flaming the man who sought, and to whom our democracy granted, the responsibility for providing presidential leadership. He can surely do better, as can we, and he just *may* do better if we who visit this site do too.
Sincere apologies for the sermon, but the choice is ours, also in aggregate.
“Yves again. The boldface verges on comedy. The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.”
My understanding is that the bull market of 2002-2007 was a form of “helicopter money.” Bankers (at least the top ones) always knew that they were inflating the real estate bubble on behalf of the government. This was a form of stimulus. The fact that they were making a lot of money in the process is irrelevant. The point is that banks have not been private institutions for some time now. Whether the nationalization takes place or not is also irrelevant. It doesn’t change anything. The crisis we are dealing with is a consequence of de-facto nationalization of the banks that took place some time in the past.
Read it and weep:
AIG was founded in China in the 1900s, then kicked out. In the early 90s, AIG wanted back in to China and China wanted to join the WTO. Greenspan make something like 35 trips to China negotiating the deal. China wanted the customary 50 percent ownership of AIG as a foreign company, but they had to give up all ownership to get into the WTO. Now AIG is the only 100 foreign-owned company operating in China. And the largest.
This is where it gets bad.
Basically, the Chinese are savers, so AIG captured almost all of China’s private money, setting up a pension fund for the Chinese in the late 90s. They’re like the Social Security system. AIG also insures China’s own banking investments. When AIG faltered last fall, it almost brought down the Hong Kong Exchange.
We immediately got our marching orders from China on the AIG bailouts.
It amounts to the US paying Chinese pensions, with US pensioners savings.
Also:
http://market-ticker.org/archives/824-AIG-Inquiring-Minds-Want-To-Know.html
Go get em Yves
WSJ(2/24) AIG Seeks To Ease Its Bailout Terms
(From THE WALL STREET JOURNAL) By Matthew Karnitschnig, Liam Pleven and Serena Ng
American International Group Inc. is seeking an overhaul of its $150 billion government bailout package that would substantially reduce the insurer’s financial burden, while further exposing U.S. taxpayers to its fortunes, people familiar with the matter say.
Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG’s Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said.
The earnings report is expected to underscore AIG’s worsening condition with its total loss for the quarter likely to top $60 billion, according to people familiar with the matter.
One of the restructuring plan’s central goals is to safeguard AIG’s credit ratings, which, if cut, would force it to make billions of dollars in payments to its business partners, further weakening its already precarious financial position. The new plan is being structured in close consultation with major credit rating agencies.
AIG’s talks with the government are ongoing
Under the new structure, AIG’s interest burden on the government money would be reduced. It currently pays 3% plus the London interbank offered rate, or Libor, a common benchmark interest rate, on a loan of up to $60 billion that it gets from the government, and also pays 10% annual interest on a separate $40 billion investment by the government in the company.
One major sticking point is how to value the assets, especially because prices are in rapid decline. Similarly, the government could end up the outright owner of certain businesses, which presents myriad issues, both operational and regulatory.
Is the financial world collapsing before our eyes?
I do wonder about the e-mails going from Geithner and Summers to Rubin these days. Last summer, when writing for the FT, it appeared that Summers recognized that his friend Bob and his cohorts in financial engineering had built the biggest pile of shit since 1929. But apparently, he sold his soul back to Rubin in order to get back into office again. And Obama, much as he wanted to get out of the Senate, has relied on his colleagues there for a lot of personnel decisions. I believe when the transition history is written we will find that Senator Schumer persuaded Obama that he had had to have a safe “Wall “Street” guy in Treasury who could hit the ground running. We will have to see what happens. Washington, Lincoln, FDR, Truman, and Eisenhower all made mistakes. But they would recognized them, correct them, and cut their losses (good-by Generals McClellan, Burnside and Buell, hello Generals Grant, Sherman, Thomas, and Sheridan; good-by Henry Wallace, hello Harry Truman). Obama has been in office just a month, the pressure must be tremendous, and the reasons for the current sell-off is more all the bad news late last week that started coming in from Eastern Europe and the realization that banks will be taking huge losses there as well as in the U.S. The market is realizing that the administration is not going to be able to wave a magic wand and make this Minsky moment disappear. It will take time to heal individual and corporate balance sheets, for the banks to write off the bad loans, and for the securitization market to start believing that banks are not selling them triple AAA shit anymore. The only thing the Government can do to speed things along is take debt from individuals and businesses and put it on its own long term and far more credit worthy balance sheet (individuals and corporations default everyday, but the United States has paid its debts since Alexander Hamilton through Civil War, Great Depression, World War, and the Cold War when the debt burden major against the whole economy was a whole lot greater then wit will be after 4 years of Obama).
Yves,
People keep making the claim that if we don’t kill the banks and let them live on as zombie banks, that we will get what they got in Japan – a decade of stagnation. I have sympathy for killing the banks on moral grounds but don’t quite understand the argument that zombie banks lead to stagnation. How does one argue that zombie banks in Japan actually caused he stagnation?
It seems to me that Japan would have suffered the same fate regardless of what they did with the banks. Others (like John Maudlin) even argue that what they experienced was about as good as it gets given the bust that occurred.
Zombie banks will still lend if regulators allow them to operate with negligible capital levels.
Making new loans after all is very profitable in this kind of environment of low deposit costs. Finding good loans to make seems the more difficult problem. Isn’t the point of keeping excess capital simply to act as a buffer for these kind of times? It is like keeping two weeks of canned food in case of an earthquake. If there is an earthquake, you don’t refuse to eat the food because it would diminish your emergency reserve. You are experiencing an emergency. That is what it is for. You eat the food and then replenish it when you can.
Surely BAC and C have enough capital and more importantly future earnings power that they can become (truly) well capitalized on their own simply by retaining earnings over the next decade. It seems that they could still operate as long as they remain liquid and that is the one thing that the Fed can ensure.
Anyway, I am sure you feel otherwise but I would like to actually see the argument spelled out. The meme that gets passed around is that zombie banks lead to stagnation but no one really says why.
Yves,
This is simply one of your most lucid, to the point posts.
It was a pleasure reading it.
D
The government, alternatively, could leave well enough alone and let the proper losers take their losses.
Oddly there would remain plenty of banks and plenty of all other types of business.
The Banks Are All Bluffing!
Had the Government let AIG go down the same weekend as Lehman Brothers, JP Morgan Chase would have collapsed too. It amazes me that Jamie Dimon & JP Morgan have been allowed to tout themselves as something good, compared to Citi & B of A. Jamie & JP Morgan are just as NATIONALIZED or TAX PAYER SUPPORTED as the other two banks if not more! Besides the obvious $25 Billion of TARP they have received in plain view they also received under the table $139 Billion from the government the week Lehman went down and $30 Billion from the Bear Stearns deal too.
PRESIDENT OBAMA "Change you can believe in" kiss my ass you fricken phony! You are doing exactly the same crap the last administration did, (F-ck the tax payer for the boys on Wall Street). We are sick of it! Let the bastards fail, they deserve it! It doesn't matter any more the game is over so stop wasting our money!
To Viking –
I just read about the AIG-China connection elsewhere before i read your comment. Am still picking my jaw up off the ground.
Guess it’s no coincidence that the day after Hillary is in China begging for money, AIG drops the bomb that unless the US gov’t gives them more money and better terms on their old money, they’ll declare bankruptcy next week.
Interesting to think that maybe Treasury isn’t getting its marching orders from Obama or Wall Street, but from China.
One thing is certain; Our inaction will be followed by our children’s overreaction in the future. They could even follow some bearded guy/war vet/psycho with “ISM” that might not be so “humane” like rapid fire anarchists/extreme communists/neo-nazis…
Amazing new vintage valuations, i.e, future value has no correlation with reality; simply amazing!
Re: Japanese Finance Minister Kaoru Yosano said the government was studying measures to support the stock market, while the Nikkei briefly fell as low as 7,155.16, breaking below the Oct. 27 closing level of 7,162.90, its lowest finish since October 1982.
How do you value future value when stocks have retreated backwards 27 years?
The government will ensure that banks have the capital and liquidity they need to provide the credit necessary to restore economic growth.
Hmm, perhaps though, growth must begin and be expected to be durable before credit demand becomes sufficient to enhance expansion. Nah, that would be to admit too much, even limits to policy.
@Viking,
do you have sources for the China/AIG connection? Sounds interesting but I can’t find any substantiation on this. I would think China would be in a better position to bail their own pension funds out than we are anyway.
FED statements are not really aimed at the people who come onto this blog, they are aimed at institutional investors. Reading between the lines it is not unreasonable to suggest that the FED will try to put a bottom into bank share prices by over capitalising based on some stress test and taking a proportion of the bank in shares to compensate the tax payer.
The UK is ahead of the game here and we already know that the original stress tests for RBS and HBOS in the UK were not rigorous enough and resulted in more capital and the tax payer taking a larger share of the bank. The key will be the criteria for the stress test and I am guessing that like the UK the US will use post world war II recession worst case scenarios. The problem is that some of these assets are falling in value so far that you need to go back beyond the great depression to the long depression in the 1800’s for a reliable stress testing measure. It’s AIG all over again and even if it is not then the market will most probably perceive it that way.
The answer ought to be that they are simply all nationalised except there is again a lesson to be learned from the UK. Government run banks like Northern Rock have been run so conservatively that they failed to do any banking really. This is why the UK had to set up an intermediary to run the nationalised banks because they where so focused on getting tax payers money back that they forgot to do any banking.
Lets assume for a minute that the FED is a much better banker than the UK government was, there is yet another problem. The problem is that the bond holders are made up of insurance companies, mutual funds and pensions funds. This why some of the worlds largest insurance companies are believed to have had a meeting with Treasury to discuss their concerns about the impact that nationalisation of any banks could have on their important corporate bond holdings. Nationalising banks and hitting the bond holders will destroy pensions and savings and mean that big companies will be left with huge holes in their pension funds. Traditionally this means a significant increase in unemployment.
This is a much more dangerous game than many armchair commentators think and even though nationalisation may be necessary, this could signal an even steeper decline in the economy. What should be avoided if possible is multiple bailouts and this I think is where things will go wrong. I also believe any bank that is nationalised should have it management structure removed, but I suspect they won’t do that either. This could be very bad news for the rest of the world as well with US banks being ordered by their new masters to concentrate lending in the US. Walking the knife edge comes to mind.
Much of this Treasury statement is a recycling of the Bush Treasury’s pablum. The mandatory conversion of Treasury preferred to common–i.e., its further subordination to the most junior unsecured debt and to even to private preferred–is an eye-popper. Even Paulson was not so audacious.
If the Treasury maintains any capital ownership interest in these black holes at all–itself a very dubious proposition–then that position should be (a) superior to all unsecured debt– including deferred compensation and bonus polls–with (b) a status comparable to debtor-in-possession financing, with (c) interest rates that are punitive compared to current credit spreads on these entities (say current debt cost + 7%), and with (d) at-will loan call provisions (payable in full after 30 days notice) at any point after, say, 3 months.
(e) Non-payment of the loan after call is a default event enforceable in court via (i) mandatory Chapter 11 filing for the bank holding company and (ii) FDIC seizure of the commercial banking subsidiary (if it is not stand-alone solvent per bank examiners) and (iii) automatic state guaranty fund/insurance department take-over of insurance subsidiaries (think of AIG) if they are stand-alone insolvent.
(f) No worthless warrants, preferred, common, or other “ingenious” financing schemes to be used in any circumstances: straight callable debt as outlined in (a) to (e).
Items (a)-(f) constitute what is technically known as a short leash. It would enable the USG to pull the plug on a non-performing institution at any time after 3 months if it did not meet credit terms. With that option, multiple “TBTFs” could in fact fail, but the bankruptcies could be staggered.
FED: “The problem is contained”….to the world!
Whoops!!! “Martians announce retalitory tarrifs” “Romulans threaten war” “Klingons demand cling free”
Well done–and excellent work generally.
Your blog and the one by Barry Ritholtz (The Big Picture) are the only ones I consider must read, i.e., on par with NYT and WSJ.
@ d4winds: To be quite honest, I prefer Yves Smith and Barry Ritholz to WSJ and NYT. Any day. In fact, every day.
“FED statements are not really aimed at the people who come onto this blog, they are aimed at institutional investors. Reading between the lines it is not unreasonable to suggest that the FED will try to put a bottom into bank share prices by over capitalising based on some stress test and taking a proportion of the bank in shares to compensate the tax payer.”
It is impossible to put a floor on the prices of stocks and bonds issued by banks as long as they have prices vastly higher than those of bank assets.
The hedgies will short bank stock and bonds, and go long bank assets (loands, ABS, etc), and force the prices to converge. The government can’t do much about this unless they ban stock shorting of banks, and ban CDS on bank debt.
And if someone does that, why pray tell, shouldn’t all companies get those special favors? Car companies? Wax museums? Fast food chains? Etc.
Martin, the Netherlands:
I may diagree with you on news comprehensiveness but I definitely agree with you on preferences.
I just saw this in the NYT:
“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.”
The Administration will hopefully begin to make sense soon.
Volcker’s medicine as Fed Chairman was stiff but effective; he successfully wrung inflationary expectations and inflation itself out of an economic system that was strangling on them.
We need his return, but now to Treasury to wring bail-out expectations out of the system.
“Yves here. Who do they think the audience for this is, morons?”
Yves … sorry … but … they DO know who the audience is …
Its the same bunch of loser morons that obediently and ignorantly voted their disingenuous non responsive asses into office in a no real choice, crooked electoral process, rigged election. When you vote in such a debacle — once every few years — you only serve to validate their corruption, give up your power, and earn the title of moron. Election boycotts would be a good opening salvo in a demand for a reset of the now obviously scam ‘rule of law’. But that won’t happen until folks work through the illusionary culture that has been knowingly, willfully, incrementally, and surreptitiously created to envelope them and shape them into the timid, ignorant, twits that they are. People that have been lulled into believing that politics is a once every few years event ARE morons. All life is politics, it is a 24/7 process!
This is not a financial crisis, it is a political crisis of major proportions. We have had the vanilla greed government hijacked by the black greed elite crowd. The ‘rule of law’ is now almost non existent in scamerica and these more vile gangsters are now operating free form while running rough shod over their ignorant brain washed public. It is very sad. It kind of looks like the annual baby seal harvest.
The main difference is that the baby seals do not keep sending elaborate plans to their killers representatives telling them how they could stop the killing, nor do they vote their killers into their killing positions. Or fawn over the killers news outlets like the New York Slimes and Wall Street Urinal -YUK!!!
The marks need to unite and seize the power of their unity, but first they must see that they are marks.
Deception is the strongest political force on the planet.
I on the ball patriot
Nationalization suffers from having a bad name. Why not rename it what it is: Born Again Capitalism, or BAC, which is appropriate because BAC might be one of the first converts.
Under BAC, the government temporarily takes over, strips away and sells the toxic waste, makes up whatever holes exist on the BS by deleting retained earnings and junior debtholders, then putting the cleaned-up, ready-to-loan entity up for sale.
Only in this way will the innocent taxpayer be saved from the unnecessary wealth redistribution currently being conducted under the bailouts. Those who expected all of the upside gain—common and debtholders—will pay the price for their bad investment decisions—as capitalism intended.
anonymous@4:41 – great comment.
As for walking the knife edge – the answer is levitation, e.g. by means of hyperinflation. Wipe out everyone’s savings, the funds stay ok. Got it?
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Geithner/Summers/Bernanke use an incorrect assumption when making decisions because they evidently fervently wish it to be true, i.e., if they paper over the banking crisis using taxpayer money it will buy enough time so that a semblance of the previous financial system can be restored which will save large bank and AIG directors/managers/stock and bond holders, thereby, lifting the US economy out of recession. Their argument is fallacious because the previous financial system of selling toxic assets was unsustainable and all faith in this unregulated, self-defeating system is now entirely lost, i.e., collateralized debt obligation (CDO) securitization and credit default swaps (CDS) based on sub-prime mortgage loans leveraged 30-to-1 leading to home prices down 20 percent resulting in CDOs falling by 80% to100%; consequently, CDOs and CDSs are now worthless making many banks and AIG insolvent. Nothing even remotely resembling this completely discredited securitization system can be restarted, no matter what they do. The only question remaining is who pays for the financial ruling class’s sins: those responsible or the people. Since the plutocracy controls the Federal Reserve, Treasury, US regulatory agencies and Congress, it seems that the rich will win out in the end; of course, I’m rooting for the underdog.
Anonymous of 3:18, very repetitious.
GREAT blog, Yves! …sure wish it would print better though, in Firefox (v2) — I often print your posts to read offs-creen, but they rarely lay out correctly.