Start New Banks?
By Matthew Yglesias
Paul Romer has an interesting idea that could avoid many of the problems associated with bailing out existing banks, and the problems associated with nationalizing them—why not take a few hundred billion dollars and use them to start new banks?
The government has $350 billion in Troubled Asset Relief Program (TARP) funds that it can use to encourage new bank lending. If this money is directed to newly created good banks with pristine balance sheets, it could support $3.5 trillion in new lending with a modest 9-to-1 leverage. Right out of the gate, the newly created banks could do what the Fed has already been doing — buying pools of loans originated by existing banks that meet high underwriting standards.
Instead of seizing and/or buying existing banks, in other words, the government would use its funds to set up a few new ones and then steadily sell them off into private hands. This sounds promising to me.
47 Responses to “Start New Banks?”
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February 6th, 2009 at 9:18 am
It has its advantages. But Romer doesn’t mention that setting up a new bank, when done privately, takes nearly a year. Obviously the federal government can cut its own red tape, though it would be a fair question to ask why government capital would get special treatment if what we want in the end is a private banking system. This is the sort of policy where we would really start to see the effects in the second Jindal administration.
The proposal would also have the effect of making the financial sector bigger, at least temporarily. It’s possible it would make it bigger permanently, which, again, doesn’t seem a worthy goal.
February 6th, 2009 at 9:20 am
At least we know the Obama administration will seriously consider this possiblity.
February 6th, 2009 at 9:25 am
I don’t get it. What does this have to do with tax cuts? You shouldn’t even be commenting on this! You there, Uncle Sam, you’re blocking the aisle! Outta my way!
February 6th, 2009 at 9:32 am
Halfway there:
http://www.fhlbanks.com/
February 6th, 2009 at 9:32 am
I think Romer’s piece is best read by focusing on the last line “…and an FDIC that can do it’s job, is all we need.” He’s trying to offer an argument for why we can let existing banks fail that will make sense to politicians. He’s also pointing out that policy-makers shouldn’t listen to executives at failing banks because “they will say anything to postpone a looming FDIC takeover.” The “new bank” idea is really just a shiny object to attract attention. The real mental shift it proposes is that our economic fate, and Obama’s political fate, is not tied to propping up insolvent banks. Bravo!
February 6th, 2009 at 9:33 am
That would be socialism. What we need to do is keep protecting private enterprise by handing taxpayer-funded billions to those outstandingly qualified bankers of failed banks to get rid of their imaginary trash assets and pay themselves bonuses. History has shown the wisdom of the market over all other options.
February 6th, 2009 at 9:46 am
You don’t even need to start new banks, healthy smaller banks which did a good job with risk management will step in to fill the big banks void.
There may need to be a few mergers, but as long as the Justice Department, SEC, FDIC, and other regulators provided adequate oversight, you could manage a wave of smaller banks merging and buying up the good assets of the big banks (whether capital assets, like branches, or investment assets and accounts).
What everyone clearly has forgotten in this whole mess is that there is an existing mechanism for buying up the “bad” assets in this country. Vulture funds. Companies like Citadel Capital Management. Historically, they buy up debt of weak companies and poor governments for pennies on the dollar, then they try get every cent out of the obligor possible. They’re basically corporate debt collectors. They’re pretty sleazy all around, but they could provide a useful service at this point in time.
The banks just don’t want to sell the “bad” assets for what they are really worth (IOW, what a Vulture fund would pay), but I’d imagine a vulture fund would be perfectly happy to pay, say…25 cents or 20 cents on the dollar for a bad Mortgage backed security or CDO. As a vulture fund, they want to extract every penny that they can from each purchase, so they may have a better incentive in place to renegotiate mortgages to ensure that the security performs at a high level over the long run.
But the banks think that they shouldn’t pay the price for their extreme risk taking behavior. So, they want the taxpayers to pay for their risks.
February 6th, 2009 at 9:50 am
Here’s an alternative question. Instead of directly infusing capital (and doing the job of private banks), why not directly mandate that at least a certain percentage of TARP funds have to go towards lending?
Alternatively, if the ultimate goal is to get some capital back into the economy, why can’t the government just write down certain consumer debts? Particularly ones resulting from government policies, like student loans or debts incurred thanks to the Medicare gap?
February 6th, 2009 at 9:52 am
If a fucking moron like myself could –and propose — new National Banks on this blog back in September 2008 then why couldn’t Hank Paulson, George W Bush etc see the same solution?
Answer: Because they’re whores to malefactors of great wealth and their objective was always to protect those malefactors, not to serve the national interest.
Why the fuck isn’t our Democratic Congress and Our Democratic PResident calling Dick Cheney and Paulson to testify before Congress. To explain why much of the initial $350 BIllion TARP money seems to have been pissed away.
February 6th, 2009 at 9:56 am
By the way, how much progress have you made on getting me my $40 DTV rebate coupon, Yglesias?
Or are you developing a taste for Rioja wine at 10 am in the morning.
February 6th, 2009 at 10:00 am
Don Williams: My elderly neighbors managed to get their DTV rebate coupon on their own. Why do you need Matt’s help?
February 6th, 2009 at 10:18 am
Whether its a encouraged (and injected with capital from the feds) merger or a wholly new bank, I’d like SOME bank that I could count upon to have honest books and no hidden disasters.
Currently, I can’t name a bank that I feel safe even holding my cash account (under $100K). FDIC is way over-subscribed (more committments than cash), and in a rush crash I don’t feel that I would have access to my money. Currently I have my Roth IRA in all cash, parked in the Charles Schwab Bank – but that is purely on faith. I don’t know what bad assets they may have on their books. I know that Bank of America, Citicorp, JP Morgan/Chase, and Wells Fargo are very likely insolvent today.
SO, WE NEED CERTIFIED SAFE BANKS.
February 6th, 2009 at 10:19 am
There you go! In fact, propping them up makes recovery much harder.
Almost gives me a hard-on!
February 6th, 2009 at 10:22 am
If I might paraphrase:
February 6th, 2009 at 10:24 am
it’s start new bankS (e.g., 1st TARP Bank of Bedford Falls, all over the place), not start a new big bank, but that’s a detail.
9 to 1 is a modest levering of the $350 billion remaining, but one wonders where the deposits come from ($14 T in assets is about right, and there were nearly $9 T of deposits as of 9/30/08 — http://www2.fdic.gov/idasp/ ). Seems like the only likely source of deposits for all the 1st TARP Banks is the existing deposit base — would this mean a run on existing banks, probably focused on the already dicey ones, or an orderly movement of deposits across the system in a way that would allow an orderly rejiggering of dicey bank balance sheets, with shrinkage on the liability side matching writedowns on the asset side?
February 6th, 2009 at 10:26 am
This “Newbank” doesn’t solve the problem of all those CDOs, MBSs and SIVs just treading water at
Citigroup and others, and gumming-up the works because the counterparties don’t know how to proceed.
They may be worth 10% or 20% of their face value, but until they are priced to market they don’t move.
February 6th, 2009 at 10:27 am
Anybody remember the modest proposal I made here back in Sept 2008?
http://yglesias.thinkprogress.org/archives/2008/09/take_another_little_piece_of_my_bailout.php#comment-659592
————–
# Don Williams Says:
September 23rd, 2008 at 3:59 pm
1) In my opinion, Paulson’s lying to America.
2) You need liquidity? Send in the fucking 82 Airborne to collect a $2 Trillion Income Surtax on the richest 3 percent of these egotistical motherfuckers.
Then lend the money out to real businessmen and real companies. That gives you liquidity. We don’t NEED these cocksuckers. We don’t need Paulson.
Illiquidity, in contrast, is pissing $Trillions away on unproductive parasites and bleeding people who do real work dry.
3) The Banks are doing Economic Terrorism: Make Good Our Bad Gambling Bets so we continue to collect $Billions for sitting on our ass –or we will destroy the Economy.
4) Fuck them — there are millions of Americans who work themselves to the fucking bone for years just to feed their families — and these lying shitheads want to dump this mess onto us?
About time to show these fuckers what Terror is.
February 6th, 2009 at 10:35 am
Anyone remember that little prediction I made back in Sept 2008?
http://yglesias.thinkprogress.org/archives/2008/09/punitive_measures.php#comment-659084
——————-
# Don Williams Says:
September 23rd, 2008 at 1:06 pm
Re Matt Conn Lee’s comment “Has anyone asked him how he came up with the 700 billion dollar figure? Why not 1,400 billion?”
———-
1) It IS $1,400 Billion. Paulson has ALREADY committed $700 Billion to the Bailout (Bear/EmergencyLoans to Banks/Fannie/Freddie/AIG). He wants ANOTHER $700 Billion.
That’s why the Bailout Bill will increase the federal debt limit to $11.3 Trillion, up $1.5 Trillion from the $9.8 Trillion of a few months ago.
2) They’re handing this dog turd to us in slices. “Tranches”, I believe they’re called on Wall Street.
Same sized slices , too. So that you think this NEW $700 Billion is the OLD $700 Billion that already been pissed away.
There will be MORE after this. So long as the Democratic Congress is stupid enough –or corrupt enough — to play alone.
3) For example, ANOTHER $500 Billion will be needed over the next 5 years just to pay THE INTEREST on the Treasuries being issued to cover this shit. 6 percent interest on $1.5 Trillion compounded over 5 years is $500 Billion.
You will notice that no one in the News Media, WHite House, or Congress is pointing this out.
—————
Get ready to eat another shit sandwich. Except Larry Summers and Geithner put some pepperoni on it this time because they’re our buddies.
February 6th, 2009 at 10:38 am
2) You need liquidity? Send in the fucking 82 Airborne to collect a $2 Trillion Income Surtax on the richest 3 percent of these egotistical motherfuckers.
Then lend the money out to real businessmen and real companies. That gives you liquidity. We don’t NEED these cocksuckers. We don’t need Paulson.
Illiquidity, in contrast, is pissing $Trillions away on unproductive parasites and bleeding people who do real work dry.
3) The Banks are doing Economic Terrorism: Make Good Our Bad Gambling Bets so we continue to collect $Billions for sitting on our ass –or we will destroy the Economy.
4) Fuck them — there are millions of Americans who work themselves to the fucking bone for years just to feed their families — and these lying shitheads want to dump this mess onto us?
About time to show these fuckers what Terror is.
I wonder how close we are to violence directed at bankers? Jon Stewart referred to the stimulus as revolution insurance, and I’m not sure he’s entirely wrong. Certainly social unrest wouldn’t surprise me, especially if we keep reading stories about needing a few trillion dollars to rescue the banking industry.
February 6th, 2009 at 10:40 am
This and so much of the bank takeover/creation debate is based upon the absurd notion that Obama et Cie will actually give primacy to the interests of the working classes.
This is so patently false on its face that I have to assume that the sole purpose of the debate is to obfuscate the thievery being carried out in broad and not so broad daylight by our overlords.
Good bank or bad bank the toxic “assets” are now irreversibly viewed as public not private loss to be redeemed by public funds.
February 6th, 2009 at 10:46 am
Re ron’s comment “This “Newbank” doesn’t solve the problem of all those CDOs, MBSs and SIVs just treading water at
Citigroup and others, and gumming-up the works because the counterparties don’t know how to proceed. ”
—————-
So? With US Derivatives holdings at around $180 TRILLION, someone’s obviously going to get stuffed with the Big Balldini
But so long as the real economy is isolated from the financial sector virus by new National Banks, why should we care if Citigroup , Bank Of America,etc die of cancer?
Let the people who traded in derivative drown in the cesspool they created. You can’t save the Big Banks without dumping their huge losses onto the taxpayers. So created healthy alternatives to the Big Banks –new National Banks with zero liabilities on the balance sheet.
What is very strange is that private investors should already be creating those New Banks — because the potential to attract capital from our AIDS-infested incumbents is huge.
February 6th, 2009 at 10:51 am
TW Andrews,
I particularly wonder what’s going to happen if the banks STILL aren’t lending in the face of the huge state tax hikes and service cuts necessitated by the Collins/Nelson “compromise” plan’s cuts to state aid.
Those stories about taxpayer-funded private jets and Indonesian retreats are going to really start to hurt when you’re having your kid moved to an overcrowded classroom, enduring 5-hour emergency department waits, and getting kicked out of your apartment b/c the state took too long to process your unemployment claim.
February 6th, 2009 at 10:58 am
Don Williams -
I strongly support letting Citigroup et al die.
But I also think the counterparties outside that group need to have their entanglements resolved. Make the moneycenter banks acknowledge their losses and their insolvency, nationalize them, clear their counterparties at market and sell them back to private investors in due time.
February 6th, 2009 at 11:02 am
From http://www.nytimes.com/2009/02/06/business/economy/06tarp.html?scp=2&sq=tarp&st=cse
————
“WASHINGTON (Reuters) — Watchdogs monitoring the government’s bank bailout called for an overhaul Thursday, with one accusing those running it of misleading the public, while senators slammed the program as chaotic and poorly managed.
Under the $700 billion program meant to stabilize the financial system, the Treasury Department has so far spent nearly $300 billion to bolster financial institutions and automakers in exchange for preferred shares and warrants.
But in buying those securities, Henry M. Paulson Jr., then the Treasury secretary, misled the public about how it was going to price them, said Elizabeth Warren, a Harvard law professor and head of an oversight panel for the bailout, known as the Troubled Asset Relief Program, or TARP…
…Neil M. Barofsky, another watchdog for the program, told the Senate committee his office was turning to criminal investigations. “That’s going to be a large focus of my office,” he said….
…Congress approved the $700 billion program after Mr. Paulson said it would be used to buy broken bonds and clean off banks’ balance sheets. But days after that approval, Mr. Paulson changed the focus to buying preferred shares in banks.
Ms. Warren, head of TARP’s Congressional oversight panel, told the banking committee that after three months on the job, her panel was still not getting enough answers from Treasury. She described the bailout as “an opaque process at best.”
Ms. Warren said she plans to release a report on Friday that calculates Treasury put about $254 billion into financial institutions in 2008, but got only $176 billion in value.
“That’s a shortfall of about $78 billion,” she said, adding that Mr. Paulson “was not entirely candid” in his description of TARP’s bank capital injection program.
Mr. Barofsky, the independent TARP inspector general at Treasury, raised concerns about potential fraud in one of several programs financed by bailout money, the Federal Reserve’s Term Asset-Backed Loan Facility. ..
February 6th, 2009 at 11:05 am
I guess Matt doesn’t read the comments on his old posts. I said the very same thing many weeks ago.
February 6th, 2009 at 11:06 am
I talked to Senator Dodd’s Hartford office earlier this morning (1-860-258-6940).
If a few hundred people called, he might start getting the message.
February 6th, 2009 at 11:10 am
With all due respect to MY and CAP, if there are those who believe they have a great idea for improving the world or the economy and want to get it into broader circulation with a view to actual implementation or consideration, the comment threads at Yglesias is probably not the place to leave it
February 6th, 2009 at 11:25 am
Re bdbd’s comment “if there are those who believe they have a great idea for improving the world or the economy and want to get it into broader circulation with a view to actual implementation or consideration, the comment threads at Yglesias is probably not the place to leave it”
————-
Obviously. But the point is to illustrate what lying shitheads our leaders are.
And to illustrate cases in which Progressive Matthew — with a mortgage to pay — sometimes palms the cards.
Which is sad. At age 28, he still has integrity — but it will slowly leak out. Especially if Sara becomes pregnant.
He needs to find a more honest line of work — like playing the piano in a whorehouse or extorting money from small businessmen. Else he’s going to reach age 40 and realize that he’s become George Will.
February 6th, 2009 at 11:29 am
I mean, here we are at Feb 6 and Matthew is just now discovering the idea of “New Bank”? That’s like a Dalton co-ed expressing wide-eyed shock at the idea of oral sex.
That not just disingenuity — that’s NEW YORK TIMES disingenuity.
Kinda like Pinch Salzburger expressing dismay at how Judith Miller helped con us into a disastous war that’s good for Israel.
February 6th, 2009 at 1:47 pm
With all due respect to MY and CAP, if there are those who believe they have a great idea for improving the world or the economy and want to get it into broader circulation with a view to actual implementation or consideration, the comment threads at Yglesias is probably not the place to leave it
Are you kidding? MY is the 16th most influential liberal in the media!
February 6th, 2009 at 2:12 pm
Re TW Andrews comment “MY is the 16th most influential liberal in the media!”
———–
Given the nature of the US News Media, that’s like saying Matthew is the star forward on the Special Olympics basketball team.
February 6th, 2009 at 3:14 pm
If the conservative economists in the White House (and the “reasonable” Democrats in Congress) oppose nationalization, what makes anybody think they’d get behind a truly communistic plot like this? I think a far more politically plausible idea is, say, a 25% dedicated FICA surcharge to pay for toxic assets.
February 6th, 2009 at 3:36 pm
Don’t be a fool. Banks that don’t exist don’t have lobbyists.
Otherwise, though, great idea!
February 7th, 2009 at 12:33 pm
Romer’s commenters point out some problems (the difficulty of new build-outs, and cronyism), and some good solutions.
Primarily, invest in existing banks with a track record of good management–mostly regional.
Advantages:
o Less concentration and too-big-to-fail curses. Let a thousand flowers bloom.
o It’s far easier to evaluate an existing track record than to predict who will successfully operate a new bank.
o The whole mechanism of investment is extant, transparent, and immediately available.
o Much faster effect. Existing banks can scale up internal operations, or farm out parts to the many existing shops, while retaining the crucial management control–deciding who to lend to at what rates–with more limited and judicious staff increases.
o The expanded lending from these juiced-up banks would provide the economic breathing room to let big legacy banks take their hits.
o It seems that selling government shares back to the public could/would happen more rapidly if those shares are in a company with a proven track record.
Others?
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