The Bonanza
Read Josh Marshall and Paul Krugman on the back-from-the-dead idea that what we need is for the government to spend hundreds of billions of dollars buying up “toxic assets” from banks and then setting up a “bad bank” to warehouse the assets and try to sell them off down the road for whatever they’re worth.
In terms of how this should work, it’s actually a close cousin to my preferred solution of nationalization. Under nationalization, you take a “too big to fail” bank whose equity value has plummeted because of problems with its balance sheet, wipe out the shareholders, and nationalize the enterprise. Then you hive off the “toxic assets” from the rest of the enterprise. You then may or may not do such things as fire top managers, put people on the GS salary scale, and force banks to operate in the public interest by lending. But the point being that you do this to some number of banks that are in serious distress. Then when there’s some measure of recovery in the economy you start re-privatizing the “good” banks and selling off the assets owned by the “bad bank” for whatever you can get for them.
Both approaches involve the taxpayers eating a substantial loss on the value of the toxic assets—there’s simply no way around that. But under a TARP scheme, the loss eaten becomes a gift to the equity stakeholders in the existing banks. Under a nationalization scheme, there is no such gift and the public cost should be lower because you get to sell off not only the toxic assets but also the “good bank” that results from the cleanup. What’s more, under a TARP scheme every bank that bought bad assets gets a gift. Under a nationalization scheme, the people who own banks really really really really really really won’t want their bank to be nationalized. Which is at it should be. The free market is good and we shouldn’t have the government running every bank under the sun. But that means that nationalization, and the resulting need for taxpayers to eat the losses on the toxic assets, will only be done to banks that are desperately in need of assistance much as the FDIC’s existing mechanism for bank failure only kicks in if the bank is actually going to fail not just if it made a bad business decision.
The TARP alternative is somewhat better for bank managers, much better for equity stakeholders in banks, much better for preserving the myths of American capitalist ideology. Nationalization would be better for ordinary citizens.
34 Responses to “The Bonanza”
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January 19th, 2009 at 12:13 pm
under a TARP scheme every bank that bought bad assets gets a gift. Under a nationalization scheme, the people who own banks really really really really really really won’t want their bank to be nationalized. Which is at it should be.
But under a nationalization scheme every bank that bought bad assets and isn’t nationalized is put at a severe disadvantage relative to the few banks that suddenly get the full backing of the Treasury balance sheet. I’m agnostic on the idea of nationalization, but I think it should definitely not be treated as a cure-all.
January 19th, 2009 at 12:16 pm
Here’s my question: Why is Obama and his economic team not talking about this? And why has no one asked them about the possibility of nationalization?
January 19th, 2009 at 12:24 pm
Is it too late for me to run out and get a bad loan and let the government pay it off? I’m kicking myself now for actually being fiscally responsible during the housing boom.
/yes, I’m bitter
//still don’t own a home
January 19th, 2009 at 12:38 pm
You write:
It doesn’t follow from that that banks should be run by private investors. For several decades after World War II, Austria and Israel had systems in which competing banks were run de facto by political parties. It worked much better than the system of investor control seems to work in the US. Many countries with market economies have done well with government-owned postal banks.
The benefits to entrepreneurship and economic growth of having a multiplicity of competing lenders are clear. The danger of allowing private decision-makers who assess profitability on a short-term horizon to make lending decisions is even clearer. You can have lots of competing banks with either private or public ownership (especially if states, localities, cooperatives, etc. own banks). Isn’t public ownership, with all its imperfections, more conducive to long-term decision-making than private ownership.
January 19th, 2009 at 12:38 pm
Re Matthew’s comment “Both approaches involve the taxpayers eating a substantial loss on the value of the toxic assets—there’s simply no way around that”
————-
Bullshit. Bullshit. Bullshit.
This meme is as bad as Nocera’s bullshit.
The fix is what I suggest 3 months ago — have the government create one or more National Banks (maybe from those it has taken over like Indymac). Have the government REPLACE –Do NOT preserve — the banks with deep losses by taking their place in funding the American businesses that make real products. Quarantine the bad banks and let them die, along with their shareholders and creditors. This isolates the contagion in the financial sector.
But instead , Bush put in fucking Hank Paulson as Treasury Secretary (in 2006 ,before things turned to shit) and Bernanke as Fed Chairman. So the very assholes who bought the bird flu into the financial sector as now spreading it throughout the Fortune 500.
There are banks with B and A ratings. Support and supplement those banks like PNC and Mellon and let fucking Citicorp and Bank of America die. After the crisis is past, sell stock in the Government Banks to the rich assholes who are holding $11 Trillion in US Treasuries in order to redeem part of the Federal Debt.
January 19th, 2009 at 12:41 pm
Everyone agrees that “toxic assets” are the central issue for banks and therefore the economy, and it’s apparent that the government doesn’t really have great tools for solving the crisis. Yes, they can loan the banks money with strings attached, but the strings can only prevent the banks from acting — not compel them to do the right thing. Maybe nationalism would help over time, but I’m not sure how much it would do, if anything, for the struggling homeowners.
Here’s a radical question. How much would it cost for the government to offer the lowest-possible price for an owner-occupied house or condo across the country, such that the government would not in the long run lose money?
Suppose that price was $25,000. This would do little or nothing for people with real assets, but would give a fresh start to lots of people trapped in an underwater house with nowhere to go and a desperate need to start over.
The government would end up with a tremendous amount of housing stock, but could over time leverage that asset into military housing, offices, park lands, or other buildings of use (cf. the Presidio in San Francisco).
Could this be a new kind of homesteading for the 21st century?
Just wondering.
January 19th, 2009 at 12:43 pm
Setting aside TARP. The Fed is now printing what will total $500 billion dollars and buying from banks, at full face value, mortgage backed securities. Thus there is no way in the world nationalization will be allowed nor any equity wipe outs. It will never happen. If needs be and it will be, other ways will be found by the Fed to directly monetize banks.
Banks in turn will participate in vulture activities. Buying up or funding the buying up of good assets at fire sale prices.
If it all works, if the other losses can be buried long enough to become meaningless is impossible to predict. However the intent of all this requires no speculation. That is the further concentration of assets in the hands of the few. Make absolutely no mistake about this. It’s more smash and grab disaster capitalism. While the absolute wealth of the top decile is huge and growing their relative wealth is continuing to grow and that is the greatest prize of all. For from this will come even more power.
January 19th, 2009 at 12:45 pm
The Republican Party OWNS this fucking mess. IT OWNS the $11 Trillion in federal debt personally approved by Reagan, Bush I and Bush II. It owns the unnecessary war in Iraq.
But we now Have a Democratic President and a Democratic Congress. Whatever happens now is on them. We will see whether they steal another $5 Trillion from us — or whether they say no to the plutocrats. We will see Whether the Democratic Party is an alternative to the Republicans — or whether they are just two sides to the same coin: Whores for the SUperrich and hence enemies to the American People.
It’s that damm simple.
January 19th, 2009 at 12:46 pm
EDIT
While the absolute wealth losses of the top decile are huge and growing their relative wealth is continuing to grow and that is the greatest prize of all. For from this will come even more power.
January 19th, 2009 at 1:03 pm
Don points out the biggest problem with this mess: the banks we are propping up are not lending. I fear his solution will have many more unintended consequences that a straight, temporary nationalization. But TARP by any name will fail at the primary goal of all this, greasing the wheels of the economy with credit.
January 19th, 2009 at 1:16 pm
Let private banks compete against National Banks!
1. National Banks will be covered by FDIC, private banks by fantastic financial instruments.
2. National Banks will offer credit at a max of 7% interest,
private Banks…
Same with Gov. vs. Private Health Insurance.
Capitalism can then thrive on the creation of non essential gadgets where profits will not be limited at all!
January 19th, 2009 at 1:22 pm
Obama’s biggest campaign contributor was the financial services industry, and he’s surrounded himself with their sock puppets – Geithner, Summers, Rubin, etc.
Game over.
January 19th, 2009 at 1:30 pm
From two days ago — at http://www.nytimes.com/2009/01/18/business/18bank.html?scp=2&sq=bailout&st=cse
—————-
Bailout Is a Windfall to Banks, if Not to Borrowers
By MIKE McINTIRE
Published: January 17, 2009
At the Palm Beach Ritz-Carlton last November, John C. Hope III, the chairman of Whitney National Bank in New Orleans, stood before a ballroom full of Wall Street analysts and explained how his bank intended to use its $300 million in federal bailout money.
“Make more loans?” Mr. Hope said. “We’re not going to change our business model or our credit policies to accommodate the needs of the public sector as they see it to have us make more loans.” …
…Congress approved the $700 billion rescue plan with the idea that banks would help struggling borrowers and increase lending to stimulate the economy, and many lawmakers want to know how the first half of that money has been spent before approving the second half. But many banks that have received bailout money so far are reluctant to lend, worrying that if new loans go bad, they will be in worse shape if the economy deteriorates…
——————-
Note that our fucking Democratic Congress does NOT have a Fucking CLUE re where that $350 Billion of OUR TAX DOLLARS went.
January 19th, 2009 at 1:33 pm
More from the above article:
————
“Individually, banks that received some of the first $350 billion from the Treasury’s Troubled Asset Relief Program, or TARP, have offered few public details about how they plan to spend the money, and they are not required to disclose what they do with it. But in conversations behind closed doors with investment analysts, some bankers have been candid about their intentions.
Most of the banks that received the money are far smaller than behemoths like Citigroup or Bank of America. A review of investor presentations and conference calls by executives of some two dozen banks around the country found that few cited lending as a priority. An overwhelming majority saw the bailout program as a no-strings-attached windfall that could be used to pay down debt, acquire other businesses or invest for the future….
…“With that capital in hand, not only do we feel comfortable that we can ride out the recession,” he said, “but we also feel that we’ll be in a position to take advantage of opportunities that present themselves once this recession is sorted out.”
—————
Anybody seen Cheney or Paulson in the news lately?
January 19th, 2009 at 1:36 pm
Krugman’s example would mean wipe out the shareholders but bail out the bondholders.
The Fed government as owner of the banks would now be responsible to see that the banks’ creditors receive their full $1.9 billion (the amount of liabilities) even though the assets are worth only $1.6 billion. The FDIC already protects the vast majority of the banks’ creditors (i.e., depositors with less than $100,000), so Krugman’s proposal would seem to benefit specifically bank bondholders et al.
What’s so wonderful about bailing out the large creditors? Weren’t they supposed to be able to measure the risk of buying bonds from bank x relative to the interest rate they were receiving on the bonds?
January 19th, 2009 at 1:59 pm
Free banking is the only solution. It worked for 150 years until 7 of the richest 10 people in America colluded to create the Federal Reserve and the Income tax in 1913. Listening to guys tinker and speculate is a joke.
At least ALLOW other banks to deal in their own currencies. Why does the government enforce a monopoly on currency and under what ground does it derive that right?
All of these issues would be eliminated if the influence and assumed necessity of the Fed was drastically reduced.
January 19th, 2009 at 2:31 pm
Nathan:
“Free banking is the only solution. It worked for 150 years until 7 of the richest 10 people in America colluded to create the Federal Reserve and the Income tax in 1913.”
My understanding is that there were bank panics on a regular basis and then you have the stock market collapse of 29 and Great Depression of the 30s, which was ended by World War II. Also I don’t understand why 7 of the richest Americans would collude to create the income tax.
Gene:
“What’s so wonderful about bailing out the large creditors? Weren’t they supposed to be able to measure the risk of buying bonds from bank x relative to the interest rate they were receiving on the bonds?”
What would Krugman say to this? The only alternative to nationalization is outright failure – which would throroughly screw the global economy?
Could one nationalize and somehow punish these large creditors?
January 19th, 2009 at 2:34 pm
The 1:1 plan had many of the features of that plan, but in a less politically provocative form. Obviously, political provocation may be good for site hits, but less good for the prospects of getting something passed.
(1) $1:$1 acquisition of Senior preferred equity and trouble assets
(2) troubled assets come with warrants on losses in recovery/maturity, so if they completely melt away that ends up being $2 in preferred shares
(3) Heavy strings attached to freedom to engage in M&A activity and executive compensation (any compensation over 10x median income in the form of 5 year deferred common stock options) … lasting until four quarters of dividend payments have been made.
(3) is a permanent hangover, with any inability to pay the preferred share premium in full re-establishing the limits on executive compensation and bank behavior, and would be guaranteed to be in place for the first year even with a single dollar in preferred shares … so banks would try to avoid having to enter the system.
And (1) and (2) would ensure that common share equity gets diluted in line with the size of the bail-out.
January 19th, 2009 at 2:44 pm
Hey, whatdya know, something I can agree with Don Williams about.
Let’s create a REAL “Bank of America”. A Fed branch in every town, with an appointed board and staffed by GSes. If you don’t want to the Feds to run everything, have state or municipal banks with local controls but Fed funded. It’s time to kill the financial industry so real capitalism can flourish.
January 19th, 2009 at 2:45 pm
kafka:
Obama’s biggest campaign contributor was the financial services industry, and he’s surrounded himself with their sock puppets – Geithner, Summers, Rubin, etc.
Game over.
Spoken like a true cynic. I saw Rahm Emanuel on Charlie Rose and I liked what he was saying. It was pretty impressive. He was saying they’ll do regulations this year. I’m betting they have sharper teeth than the accounting rules that when into effect after Enron and if you remember, business squealed like stuck pigs after those rules went into effect. But you probably don’t remember since you believe Rubin is a part of the incoming administration.
But go ahead, you guys that were crying all through the primary, keep crying. It’s amusing.
January 19th, 2009 at 2:54 pm
Re Peter K’s comment “But go ahead, you guys that were crying all through the primary, keep crying. It’s amusing.”
—————
Actually, i worked for Obama in the primary. And in the general election.
January 19th, 2009 at 4:58 pm
You know what is strange about the “Take over the banks” idea? It is part of the FDIC. Only it kicks in before insolvency. The FDIC can replace management if their capitalization goes too low. If it goes even lower, they take over the bank. It seems like that could have happened with all of these banks a long time ago, under current law, without any additional legislation. So it seems to me that all banks were always considered “too important to fail”, the only problem now is that the FDIC isn’t stepping in and taking over management.
January 19th, 2009 at 5:02 pm
Peter K
I don’t presume to know what Krugman would say, I’d be interested in his answer.
But I very strongly disagree with your use of the word “punishment.” The creditors are already screwed — they have claims on $1.9 trillion on assets worth only $1.6 trillion. I don’t propose to take anything away from them; indeed they have the $400 million in low-value/worthless paper. What I’m against is giving them the $300 million difference out of the Federal till. Just how is that punishing them?
January 19th, 2009 at 8:40 pm
the only problem now is that the FDIC isn’t stepping in and taking over management.
In a sense, all of these schemes – TARP, rely on FDIC, outright nationalisation, etc. – are pretty similar. In every case the government ends up with worse assets and the financial industry ends up with better assets. I’m starting to wonder whether the specific implementation even matters all that much, at least in terms of the next 2-3 years.
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