Recapitalization Through Profits
With Bank of America joining Goldman Sachs and JP Morgan in posting huge profits I think we can see that the administration’s banking strategy, whether you like it or not, is actually working. One school of thought said that insolvent banks should just be allowed to fail and go into bankruptcy. Another school of thought said that insolvent banks should be seized by the government, recapitalized by the state, and then reprivatized. The administration’s view was that the first approach was irresponsible and the second unnecessary. Rather than seeking congressional authority for vast new spending on recapitalization and pissing off wealthy financiers by seizing banks and firing people, they took the view that a strategy of regulatory forebearance and loose monetary policy would let the banks recapitalize themselves through profits.
And it seems to be working. It’s crucial to understand that TARP is not the only government help banks have received and that even firms who’ve “paid back” the money are still, in fact, getting large explicit and implicit assistance from the government.
But of course this still leaves us with the social justice outrage that hundreds of millions of Americans seem fated to live our lives as helpless victims of the ups-and-downs of the gambling fortunes of multi-millionaire bankers. The bankers themselves, meanwhile, get to privatize all the profits and socialize many of the losses. This is something that I think desperately needs to be brought back into the tax and health care debate. When we talk about surtaxes on the wealthy to finance health care expansion for the poor and the middle class, these are the people we’re talking about taxing.
94 Responses to “Recapitalization Through Profits”
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July 17th, 2009 at 10:13 am
I’m glad Matt, as an early and vocal nationalization proponent, is acknowledging some of this. But I still have a couple quibbles:
(1) Recapitalization directly through profits wasn’t the only part of this plan. In part, the idea was also to see if banks could partially recapitalize through attracting new private capital (e.g., stock offerings), and that has also been going pretty well. Of course these are related mechanisms in many ways, but I thought this point should be made explicit;
(2) The privatize the profits, socialize the losses, stuff simply isn’t entirely true. In many of the relevant programs, the government can potentially profit, and meanwhile private investors have in fact been taking losses, sometimes total losses, in various cases. Now one can still argue about the results in particular cases or about the overall distributions of risks and rewards, but there is no simple answer regarding this issue of the kind Matt suggests.
July 17th, 2009 at 10:14 am
Unless of course you start to wonder how these banks could make such surprisingly large profits in the midst of one of the worst recessions in sixty years. How when Americans are losing their homes at a record pace, retail activity (the engine of our economy) is falling off a cliff, business bankruptcy is up 60% the first half of the year, and the jobless rate is at its highest point in 25+ years, cash that nobody has is somehow pouring into the coffers of the banking system. I suppose it could have something to do with the stock market the last three months, but if it were that simple wouldn’t it have been more predictable?
The alternative, of course, is that these so-called profits have more to do with juggling of the balance books (or a renewed interest in fraud) than they do with actual revitalization of the banking industry.
July 17th, 2009 at 10:16 am
In 10 Questions with Geithner in Time, someone asked if bankers cared about anything other than their compensation. He refused to answer, but I think the answer is clear.
And what Christopher said.
July 17th, 2009 at 10:27 am
They were talking at the time of $3 trillion of “toxic assets”. I fail to see how a couple of billions in profits are going to help, unless the government sustains those banks for a few decades. Are Goldman Sachs and co. still really insolvent, or did they unload all the toxic assets on the Fed and the Treasury? Nothing is more artificial than those profits, until we know what is on their balance sheet.
I think we can see that the administration’s banking strategy, whether you like it or not, is actually working.
The strategy was: help the greediest, biggest banks at all costs, no matter how much it costs the taxpayers. It worked indeed, but that is not something to celebrate. The next banking crisis is already coming, once the giant bonuses of this year are received.
Nothing has changed, it is “business” (although taxpayer-financed now) as usual on Wall Street, after all the pain it has inflicted on the real economy. It is really incredible.
July 17th, 2009 at 10:37 am
I think we can see that the administration’s banking strategy, whether you like it or not, is actually working.
Krugman begs to differ. Of course, Krugman actually knows something about the field he writes about, while Matthew is paid to pull shit out of his ass.
July 17th, 2009 at 10:37 am
Goldman Sachs made $3.44 billion in the second quarter. It set aside $6.65 billion for compensation in the same quarter. Bonuses are a multiple of profits. It’s much more than “profit sharing.”
Don’t forget “fair value” accounting changes, imposed by FASB under threat by Congress. Have they reined in “off balance sheet items” yet?
July 17th, 2009 at 10:38 am
I saw something about Goldman Sachs being accused of using super fast (5 milliseconds) access to the NYSE in order to frontrun trades. In other words they see a pattern of trades coming in and they hurry up and shove their trade through first. Supposedly the code that guy tried to steal from them and got snagged by the FBI is connected to all that. There’s a bunch up about it at zerohedge.com (they’re kind of crazy over there though). Anyways, this is probably all bullshit, but interesting nontheless. Perhaps our friendly, professional blogger could investigate further?
July 17th, 2009 at 10:39 am
Note that when Matthew writes “the administration”, he mainly means the Bush Administration. After all, it was the Bush Administration that saved the financial system – the Obama Administration has done virtually nothing at all. The biggest thing the Obama Administration did was to let the fixes advanced by the Bush Administration continue. Now, that’s good work by the Obama people – their first priority should be to do no harm. And that is exactly what they did.
July 17th, 2009 at 10:41 am
The profits these banks are posting are due in large (if not all) part to the fact that they got paid dollar for dollar from AIG for all of the terrible bets they made during the subprime craze. This is not something that would’ve happened in either of the two scenarios you suggested above. The AIG bailout served to pay these banks in full for the terrible investments they made, thus providing them with these record breaking profits. It’s sickening. The government didn’t give them just enough money to survive, they gave them all of what the banks are calling profits now.
July 17th, 2009 at 10:41 am
Has the government gone light on Goldman Sachs’ possible front running of trades via their proprietary trading computer software? They quickly prosecuted the Russian programmer accused of stealing Goldman code. U.S. attorneys said if the code fell into the wrong hands, they could manipulate the market.
Republicans used a man in the middle computer system to change votes in Ohio. The programmer who set up the system died in a mysterious plane crash.
AT&T had a black box that scooped up all communications for the Feds.
Has Goldman done something similar? The system is stacked in favor of the big money boys, something a government should not be enabling.
July 17th, 2009 at 10:46 am
What would have happened to the economy if all the financial institutions had been treated like Lehman Brothers? It’s surprising how quickly the source of the present situation has faded from consciousness.
July 17th, 2009 at 10:47 am
They were talking at the time of $3 trillion of “toxic assets”.
“They” were kinda wrong, if by that $3 trillion number you mean expected losses.
The strategy was: help the greediest, biggest banks at all costs, no matter how much it costs the taxpayers.
They’ve actually been trying to minimize the costs to the taxpayer. That is what has created the tension: the cheapest thing for the taxpayers is not always the most punitive thing for the banks. Of course, lots of investors in banks have in fact taken large losses already.
July 17th, 2009 at 10:49 am
One school of thought said that insolvent banks should just be allowed to fail and go into bankruptcy. Another school of thought said that insolvent banks should be seized by the government, recapitalized by the state, and then reprivatized. The administration’s view was that the first approach was irresponsible and the second unnecessary.
The FDIC uses the second strategy. It sold BankUnited to Carlyle Group et al, after zeroing out existing shareholders. The FDIC added a non-TARP $4.9 billion in subsidies. It came with no restrictions.
July 17th, 2009 at 10:50 am
After all, it was the Bush Administration that saved the financial system – the Obama Administration has done virtually nothing at all.
Wow, that is complete nonsense. There has been no new Congressional appropriation of money (if you don’t count the release of the second half of TARP), but the Obama Administration has taken that money and initiated a bunch of different programs.
July 17th, 2009 at 10:50 am
Well GS is benefiting from a sudden decrease in competition.
July 17th, 2009 at 10:53 am
In the last year the Fed/Treasury has:
-Made a gift of $12 billion of OUR money to Goldman-Sachs via AIG
-Allowed GS to become a commercial bank (with access to Fed funds) without the normal review of GS’s balance sheet, on an emergency basis, and even though GS doesn’t perform commercial bank functions.
-Has not imposed position limits on GS (and others) with regard to the amount of money that can be poured into the oil futures market, driving up the price, even though the CFTC has the authority and such a move would drastically reduce the drag on the economy from high fuel costs.
-Has guarenteed GS bond sales such that GS can borrow at almost the same rate as Treasury, then charge high rates when they relend the money.
-Has allowed GS competitors to die (Lehman, Bear,Sterns), thus greatly reducing the competition GS faces.
-Has allowed GS’s trading operations access to Fed funds with which GS can gamble on asset prices with free money, even though that was illegal under Glass-Steagal.
There must be more but it’s hard to keep track of all the shenanigans.
July 17th, 2009 at 10:53 am
The FDIC uses the second strategy.
Yep. The problem is that the cost to the taxpayer of the FDIC doing that for a lot of really big banks would have been huge, and trying to do that with a lot of really big banks simultaneously would have created a potentially disasterous interruption in banking activity.
July 17th, 2009 at 10:54 am
How could they not post a profit? We handed Wall Street bankers $3 trillion in cash! They can’t hide it all!
That is THREE TRILLION DOLLARS the US Government has forked over to INTERNATIONAL, FOREIGN, NON-AMERICAN pirates in just eight months. The same people who nearly brought this country to ruin (actually, the jury is still out, isn’t it?) are being allowed to reconstitute the same game -ripping off Americans for personal profit.
But the dirt poor, broken down US Government can’t raise $100 billion per year to pay for health care for all its citizens. What a fucking joke.
July 17th, 2009 at 10:55 am
DTM:
I’m glad Matt, as an early and vocal nationalization proponent, is acknowledging some of this.
Yeah I was agnostic about the nationalizations, but it’s not surprising to see the raging ultras of the comments section were wrong again.
What’s happened is that the toxic assets are still there but are being masked by accounting tricks. And the 2 strongest firms (thanks to the state) are eating lesser banks.
Drum points to Taibbi who has a nice hyperbolic piece in Rolling Stone (the issue deserves hyperbole).
Dean Baker made the same point as Taibbi at his blog a day earlier:
http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=07&year=2009&base_name=goldman_sachs_bet_with_taxpaye#115859
“The $3.44 billion in profits that Goldman Sachs reported for the 2nd quarter indicates that their bets with taxpayer dollars paid off. In addition to the $10 billion that Goldman borrowed through the TARP, it also borrowed $28 billion that was guaranteed by the FDIC. In addition, it likely borrowed substantial amounts of taxpayer dollars from the Fed’s special lending facilities, although the Fed will not disclose how much Goldman borrowed. And, Goldman was given more than 12 billion taxpayer dollars through AIG.
Apparently, Goldman used its borrowed money to take risky bets. It seems that the bets paid off well. If they hadn’t, then taxpayers could have lost a large amount of money.”
Meanwhile the Democrats sell out the unions again, this time on card check. But at least we avoided apocalypse which was a real possibility, something the cavalier insouciant indifferent ultras refuse to acknowledge (not to mention the glibertartians who reside in an alternate universe).
July 17th, 2009 at 10:57 am
since DTM and i were just about the only regular commenters here who said you know, krugman may actually be wrong, the geithner plan might actually work, i think DTM’s initial comment was rather restrained.
which takes us to stras: no, krugman doesn’t beg to differ. in fact, krugman, whom i respect tremendously, was just plain wrong on this issue, and he’s now acknowledging it through the back door.
that is, krugman insisted – insisted, loudly and definitively – that without taking the largest banks into receivership, it simply wasn’t possible for the financial system to survive. he had no ifs, ands, or buts.
that doesn’t mean he’s not still a brilliant guy (it was scary, a few months ago, to say “i think krugman is wrong” but you can look it up, i did), but it does mean that he was wrong on this matter.
so what he’s saying now is, ok, maybe the financial system will survive, but we haven’t done anything about the underlying structural problems that allowed this crisis to emerge. i’m happy to be back to agreeing with krugman, but that’s a different matter.
and just to return to the toxic assets: people who don’t really know a lot about finance made a very mistaken assumption – that “toxic asset” means everything is going to zero. happily, everything didn’t.
as for al’s comment, no, it wasn’t the bush administration. the bush administration began a process but it was entirely up to the obama administration as to what to do with that process, and they didn’t simply leave it in place (which is what “first do no harm” would suggest).
as for “first do no harm” itself, if only al would have thought about that before we invaded iraq, i wouldn’t have had to conclude he was such a moron.
July 17th, 2009 at 11:03 am
to pick up on the FDIC point, the FDIC typically takes over banks with hundreds of millions of dollars of assets, not a couple trillion.
to pick up on the AIG point, Goldman says it was hedged either way.
and max424, if you’re going to comment on these matters, you need to have some deeper level of information: we didn’t hand anyone $3T. you’re confusing guarantees with handing out cash.
July 17th, 2009 at 11:03 am
“They” were kinda wrong, if by that $3 trillion number you mean expected losses.
No, “they” (meaning everyone talking during the crisis) talked about a face value of $3 trillion in toxic assets. Real value (and therefore expected losses): unknown. Now as far as I know, banks have not taken their losses, or attempted to sell those assets. Where are they now? On the Fed balance sheet? Guaranteed by some new Treasury thingie? Nobody knows because even Congress can’t investigate those institutions.
Oh well, as long as Goldman Sachs can claim a big number as profits (after losing billions in December but not reporting that, exploiting creatively accounting rules Enron-style) and pump up the bonuses, I guess the Bush-Obama’s plan has “worked”.
July 17th, 2009 at 11:04 am
For what it is worth, I also basically agree with Krugman’s current position. As I have maintained all along, we very nuch need to re-institute direct, strict, even downright coercive regulation of the financial industry. That is the only proven way to moderate systemic financial risk.
July 17th, 2009 at 11:10 am
Now as far as I know, banks have not taken their losses, or attempted to sell those assets.
Actually, they’ve already written down a lot of assets, particularly as the healthier banks have acquired the sicklier banks, often through government-brokered deals. Similarly, when a healthier bank buys a sickly bank, that is a form of selling the “toxic assets” of the sickly bank.
But the real point is that once you realize that we aren’t talking about $3 trillion in expected losses, it becomes more plausible that a combination of retained earnings and new private capital will be sufficient to cover those expected losses.
July 17th, 2009 at 11:12 am
DTM,
Krugman never said the Geithner plan wouldn’t work. He said it was incredibly unfair to the taxpayer in that it put us on the hook for losses on risky bets and allow the banks to reap major profits in the event that said bets paid off. Which it would appear is exactly what has happened now. I don’t understand how he hasn’t been consistent on this topic.
July 17th, 2009 at 11:13 am
The bankers themselves, meanwhile, get to privatize all the profits and socialize many of the losses.
Statements like this are basically pretending that only rich people have investments in order to demonize them. But lots of people, such as anyone with an employer sponsored 401(K)or IRA has investments. Democrats were not shy about pointing out the drop in the stock market hurt the retirement funds of the elderly or made many people have to delay retirement when acknowledging those facts helped them.
July 17th, 2009 at 11:17 am
if only al would have thought about that before we invaded iraq, i wouldn’t have had to conclude he was such a moron.
because Iraq was a land of rainbows and kids flying kites before Saddam was overthrown?
because sanctions + Saddam hadn’t destroyed Iraq’s society and economy?
July 17th, 2009 at 11:17 am
As an addendum, if you look at the earnings statements coming out for the big commercial banks (e.g., Citi and BoA), you will see that they included large provisions against loan losses. So again, the expected losses haven’t somehow disappeared.
July 17th, 2009 at 11:19 am
as a matter of fact, BradyB, krugman did say the geithner plan wouldn’t work. he was definitive about it.
as for toxic assets, buried deep in the goldman profit reports was the fact that it has written a lot of CRE and other “toxic” assets down by 50%. if the banks are making money in other ways and meanwhile gradually writing down the asset values of the “toxic” stuff – well, that’s what the geithner plan was all about.
July 17th, 2009 at 11:21 am
DTM, Krugman never said the Geithner plan wouldn’t work . . . .
You are actually more addressing howard than me. But my recollection is also that Krugman did in fact argue that with Geithner’s plan we were falling into a Japan scenario, and I think that is proving inaccurate.
That said, I really don’t care about what Krugman did or didn’t say in the past.
July 17th, 2009 at 11:23 am
poptarts, i have no idea what your questions mean, but i’ll take a flyer: because anyone who thought for more than 30 seconds about what would happen if we invaded iraq realized that would happen would be a complete mess, and therefore, doing no harm (i.e., not invading) was the right course of action. otherwise, you had to believe in something for which there was no historic precedent: an immaculate invasion causing no collateral damage followed immediately by a complete transformation of society overnight after years of oppression.
sorta the bush-cheney-rumsfeld thought process.
July 17th, 2009 at 11:25 am
And so apparently Goldman took a lot of writedowns this quarter as well.
Incidentally, speaking of CRE, I am currently much more worried about a lot of community and small regional banks failing as the CRE issue continues to grow on a lagging basis. So far the FDIC has (barely) stayed on top of this, but if it gets bad enough we may be looking at the need for something like the approach we took to the S&L crisis.
July 17th, 2009 at 11:27 am
Those profits at BOA are an accounting trick. They are made up. They are an abstraction. An abstraction which will allow a few people to convert them into real money, and run. Just as most of the financially generated profits of the last decade were fictitious.
The GS profits were somewhat different. In their case they are using their market power to generate trading profits. Trading is essentially a zero sum game so they just took money from other traders which has zero effect on systematic growth. Their profits come from power. Not that they to do not simply manufacture them with a pen as well.
Such is the continuing structure of the economy. Pretend profits made trading fictitious capital. A system designed expressly so the very few can gain stupendous wealth.
Shrug your shoulders and say this is how it has to be. Do yourself a favor though and know you reach this conclusion because you are an inheritor of those mis priced assets as is almost everyone you know and work for. If it’s true most Americans are bound to be poorer, in income and assets one might suppose that it’s necessary if not desirable for the top to stay there. Just come out and say it.
July 17th, 2009 at 11:27 am
But the real point is that once you realize that we aren’t talking about $3 trillion in expected losses
Everyone realized and realizes that, so stop bringing up this argument. How much was that stuff really worth, and where is it now? What role did the Fed and the Treasury play, and are still playing? How many banks are still really insolvent?
You don’t know. Congress doesn’t know. So don’t pretend you can explain what happened to the “toxic assets”. The house of cards has fallen, and only taxpayer money is keeping the top of the pyramid afloat, for now (see Jon Stewart yesterday).
July 17th, 2009 at 11:33 am
DTM,
Krugman never said the Geithner plan wouldn’t work. He said it was incredibly unfair to the taxpayer in that it put us on the hook for losses on risky bets and allow the banks to reap major profits in the event that said bets paid off. Which it would appear is exactly what has happened now. I don’t understand how he hasn’t been consistent on this topic.
He said Geithner and Obama were too soft and bipartisan, first off. He said the banking industry was insolvent and that the banks needed to be nationalized so the toxic assets could be taken off the books otherwise they’d limp along as the Japanse banks did for a decade.
I thought it could have gone either way, so in my mind you can’t really blame Krugman except maybe he could have avoided the personalized attacks on Obama etc.
After the stress test, I thought it’d be okay and what you thought really depended on how truthful you thought the stress tests were.
What happened was the bubble burst and firms were overextended with toxic assets. But what also happened as a result was a panic and now that panic has seemed to subsided thanks to forceful government action.
Many of the problems are still there though and a little “creative destruction” isnt’ going to solve it.
July 17th, 2009 at 11:33 am
When the credit crunch hit, Fed/Treasury had a choice of either let some big banks fail or give them billions of taxpayer $ to keep tham afloat.
If they had chosen to let them fail, probably Citi, B of A, most investment banks and maybe others would have failed. That would mean that their bond holders, stockholders and counterparties would have lost most of their money. That would have caused much anguish for the creditor class. It would also mean that $billions of asset value would disappear overnight.
That asset value would have been the jacked-up value of mortgages plus the funny money represented by CDSs and other “innovations”. That asset value hasn’t disappeared yet because it sets on big bank balance sheets at original, inflated values. It will now disappear over seveal years as the banks write it off at a bearable pace.
The Fed is the lender of last resort. The FDIC has an unlimited credit line from Treasury. If Fed/Treasury were willing to let the big banks fail and then be closed or reorganized, and let the bubble assets burst all at once, they could have assumed the normal lending functions of the failed banks. As demonstrated by the fact that the Fed has done that in recent months.
Fed/Treasury did what they did to rescue the creditor class, not to save the real economy.
July 17th, 2009 at 11:35 am
The fallout from the subprime crisis isn’t even finished yet. Wait for the resets and recasts coming in the new few months. We have an incredibly amount of foreclosures coming up in the near future.
July 17th, 2009 at 11:37 am
Why oh why:
You don’t know. Congress doesn’t know. So don’t pretend you can explain what happened to the “toxic assets”. The house of cards has fallen, and only taxpayer money is keeping the top of the pyramid afloat, for now (see Jon Stewart yesterday).
If the house of cards had fallen – oh drama queen – there’d be zero growth and GS and JP Morgan wouldn’t be awash in profits.
What you and your ilk discount is the psychology of the post-Lehman collapse panic and the fact that the panic has subsided.
July 17th, 2009 at 11:41 am
why oh why indeed: as soon as people start saying things like k”how much was that stuff really worth,” it becomes hard to take them seriously, but we’ll try.
the whole issue of “worth” is incredibly abstract: “worth” constitutes what someone would pay for something. since not every piece of real estate on every bank’s book is going to come to market in the next 24 hours, no one knows what they are “worth” in any environment – not a “normal” one, not the current one.
so the fact that no one knows what those assets are worth today just means that today is like every other day: no one ever “knows.”
what banks can do is make reasonable guesses based on comparables, and as DTM and i have noted to you, the big banks (the only ones we care about in this context) are making reasonable guesses by gradually writing down those values.
insofar as “insolvency” matters, it only matters for the biggest players, because they are the ones who pose a systemic risk; if smaller banks are insolvent (and many are), then the FDIC can handle it, and if, as DTM notes, we run into a scenario where further deterioration in the CRE market harms a number of smaller banks, we may need further provision, but it won’t be a systemic risk.
the fed and the treasury? i’m not sure what role it is you think they are playing in this….
July 17th, 2009 at 11:43 am
Everyone realized and realizes that, so stop bringing up this argument.
This sort of claim doesn’t appear to realize that:
But if I misunderstood your original argument, I apologize.
So don’t pretend you can explain what happened to the “toxic assets”.
It really isn’t such a big mystery. Many have been written down already in one way or another. It is also true there are likely some losses still not on the books, but that is why the government has required many of the surviving firms to improve their capital ratios, which in most cases they have been doing through retained earnings and new stock issuances.
July 17th, 2009 at 11:43 am
No, but if you propped the toxic asset market up with ridiculously incentivized subsidies you can make the books look much better than they really are and keep the cards from falling.
July 17th, 2009 at 11:44 am
ron, you’re kidding, right? you actually believe there is such a thing as saving the creditor class independent of the real economy?
if the big banks had collapsed last fall, the economy would have collapsed with them, in a way that would have made the current unpleasantness look like a growth period.
July 17th, 2009 at 11:46 am
As long as the Treasury can supply at least 2 trillion of new credit a year to the system or the Fed can print some of that and maybe a bit more than gross US income should be fairly stable. Obviously that income will continue to skew to the top. This is the general outline of the economy through 2012 or so. That should allow some periods where some slow GDP growth can be shown. The bottom 5 or 10 million households can be lopped off and Best Buy can still maintain sales. It’s all pretty simple.
If some among the 5 or 10 million households are aggrieved they will take it out on Obama not GS.
July 17th, 2009 at 11:46 am
BradyB, there is no such thing as a “toxic asset market.” what are you talking about? and what are the “ridiculously incentivized subsidies” you are talking about?
there was an administration plan to subsidize buying toxic assets, but to make a long story short, it’s turned into a non-starter. whatever do you mean?
July 17th, 2009 at 11:47 am
It’s kind of hilarious to see people arguing with Al over whether Bush or Obama should get the credit for the biggest theft of public money in American history.
July 17th, 2009 at 11:48 am
If the house of cards had fallen – oh drama queen – there’d be zero growth
What does growth have to do with it? We are still officially in a recession.
As for GS profits, they are 1. the result of “Creative Accounting” ((c) Enron) 2. only possible because of tens of billions in taxpayer money — including losses, money that is never coming back.
and GS and JP Morgan wouldn’t be awash in profits.
If you think the billions in reported profits (and very real bonuses) at GS and JP Morgan are a good thing, you really haven’t understood this crisis.
July 17th, 2009 at 11:49 am
That would mean that their bond holders, stockholders and counterparties would have lost most of their money. That would have caused much anguish for the creditor class. It would also mean that $billions of asset value would disappear overnight.
It would also mean the federal government, and hence the taxpayers, would be on the hook for hundreds of billions in insured deposits.
If Fed/Treasury were willing to let the big banks fail and then be closed or reorganized, and let the bubble assets burst all at once, they could have assumed the normal lending functions of the failed banks. As demonstrated by the fact that the Fed has done that in recent months.
The Fed has created secondary markets in order to stimulate business and retail banking. It hasn’t done the primary lending itself, and that is one of the basic problems with this notion: the feds in general don’t have the staff or infrastructure to actually take over as primary lenders.
July 17th, 2009 at 11:49 am
if the big banks had collapsed last fall, the economy would have collapsed with them, in a way that would have made the current unpleasantness look like a growth period.
My position is that the Fed and FDIC could have assumed the “real economy” lending of the big banks. After all, the money originates in the Fed in the first place.
If you think differently, I think it behooves you to explain how and why the real economy would have collapsed.
July 17th, 2009 at 11:56 am
why oh why indeed: as soon as people start saying things like k”how much was that stuff really worth,” it becomes hard to take them seriously, but we’ll try.
Once upon a time financial assets were sold on a thing called “the market”. Then it was possible to know their real worth, how much people were willing to pay for it.
what banks can do is make reasonable guesses based on comparables, and as DTM and i have noted to you, the big banks (the only ones we care about in this context) are making reasonable guesses by gradually writing down those values.
Why aren’t they selling them given their dubious value, sorry, price? Provide a link supporting your claims that banks are really trying to sell those “toxic assets” in the proportion needed, and who is buying.
the fed and the treasury? i’m not sure what role it is you think they are playing in this….
Well do some research, if you have no idea what the Fed and the Treasury have done in the last months that could explain those profits.
July 17th, 2009 at 11:59 am
By the way, as howard points out, one of the most controversial parts of the Geithner Plan never really happened, and now appears unnecessary. I’m happy to admit I was wrong about this issue: I thought some price discovery through such a mechanism was going to be necessary in order for sufficient private capital to be attracted back into the financial system, but I was demonstrably wrong about that.
In fact, in retrospect I failed to account properly for precisely what we have been discussing here, namely the degree to which other programs were going to make it possible for banks to cover their ongoing losses on older assets through new activities, even in a recessionary environment. And of course private capital has seen that as well and stepped up to the plate.
Very big picturewise, however, this is all consistent with the fundamental argument in favor of the Geithner Plan. The basic logic of the Geithner Plan was to give a bunch of stuff a chance to work before leaping into something as expensive for the taxpayers as widespread nationalization. So some of that stuff worked, some didn’t, and some proved unnecessary, but so far it seems like a good call not to rush into the alternatives.
July 17th, 2009 at 12:03 pm
There has been no new Congressional appropriation of money (if you don’t count the release of the second half of TARP), but the Obama Administration has taken that money and initiated a bunch of different programs.
Oh, really? Which programs were initiated by the Obama Administration? They initiated the PPIP (or whatever it is called now), but that’s not even running yet. I’ll give you the stress tests (which, of course, were primarily to figure out what was to be done with respect to the TARP money given to banks by the Bushies) and the auto company bankruptcies. But what else? Everything else I can think of was during the September – January period when the Bushies were in office.
July 17th, 2009 at 12:07 pm
If you think differently, I think it behooves you to explain how and why the real economy would have collapsed.
Again, the basic problem is that the federal government doesn’t have the staff or infrastructure for basic banking (taking deposits and making loans and such). Now eventually they could either have built up that staff and infrastructure, or they could have found third parties that had done the same. But in the meantime, depressed banking activity would have greatly deepened and lengthened the general recession. This is a basic lesson learned from the Great Depression, as well as some other prior Panics: widespread bank failures are something you very much need to avoid in the early stages of one of these situations, even if you are confident you could eventually sort out the banking system afterward.
Once upon a time financial assets were sold on a thing called “the market”.
There isn’t a liquid market available for all financial assets at all times.
Why aren’t they selling them given their dubious value, sorry, price?
Why do you think it is important to sell these assets instead of writing them down? Even if they are getting full expected value, that is at best a wash, and if there is any liquidity issue, they are just needlessly taking additional losses.
July 17th, 2009 at 12:07 pm
actually, ron, you’re the one with some ’splain’ to do. we saw, briefly, what happened when lehman went under: the two basic elements of the modern finance system, trust and leverage, were on the verge of collapsing.
you let the banks collapse and trillions of asset values collapse with them and now we have business collapsing, credit cards not working, checking accounts no longer meaningful, and you think that the fed is just going to start making loans at that stage and the “real” economy will be fine?
July 17th, 2009 at 12:07 pm
I would also point out that nationalizing a company like Citigroup, which is one of the most international banks in the world, would be very much unrealistic and could have very adverse unforeseen consequences for trade and commerce. One possible result of that would be to spark a partial freeze and collapse in international flow of credit, thus stalling international trade, and making us end up again with the post-1929 scenario of the clock being set back on international economic integration, in favour of pretty awful protectionism.
That is the genuine risk, for Obama, coming especially strong from his own base, which could at times rave lunatic about things it hardly understands, such as globalization. Once the government gets involved in international finance, we could see its hands being tied and forced to act in a non-globalist manner.
July 17th, 2009 at 12:08 pm
(Nationalization must necessary mean the divestment of all foreign subsidiaries and the clearance of foreign credit portfolios).
July 17th, 2009 at 12:13 pm
why oh why, i understand what a “market” is: the market tells you what the asset being sold is worth. it doesn’t tell you what would happen to another asset not being sold – it only gives you a basis to make an informed guess. so no one ever, in the history of modern finance, has known what the worth of an asset on its books is in the strict sense of the term.
meanwhile, some transactions are taking place and we are getting some marks to utilize, and the big banks are utilizing those to write down bad assets, and so what if they are selling them or not? if the banks are going to survive (and they are), they are entitled to say “i’m going to hold this asset until market conditions improve” unless they have no choice. since they obviously do have a choice, i’m not sure what you think your point is.
as for the fed and treasury, i’m sorry, you need to write more clearly and not expect us to read your mind. the fed and treasury are doing nothing, directly, about toxic assets if that’s what you’re talking about. is it?
if you’re talking about other things, yes, the fed and the treasury have done things to help the big banks. so what?
July 17th, 2009 at 12:15 pm
Howard, those of us who don’t live in beltway bubble land like you do don’t actually think anything has changed.
Unemployment is still going up. Banks are still not lending. Yet these banks are doing just fine, primarily because Obama decided to let them play fantasy with their mark-to-whatever-the-fuck-you-want rules.
the ‘Real Economy’ you clearly couldn’t give three shits about is already nuked to hell, and it’s not getting even a little bit better. You’re all about sucking on banker cock, can you explain why the fuck this isn’t all going to happen again in a year and a half? No, you can’t. Because you don’t give a shit about anything but protecting the powerful.
July 17th, 2009 at 12:19 pm
@12 Howard
Wrong. $800 billion in bailout money, and $2.2 trillion of Fed money handed out through their discount window.
That is $3 trillion. Educate yourself.
July 17th, 2009 at 12:20 pm
Which programs were initiated by the Obama Administration? They initiated the PPIP (or whatever it is called now), but that’s not even running yet. I’ll give you the stress tests (which, of course, were primarily to figure out what was to be done with respect to the TARP money given to banks by the Bushies) and the auto company bankruptcies.
First, the Capital Assistance Program (aka “stress tests”) is not a trivial exception to your original claim, and your parenthetical is incorrect: in addition to leading to the modification of previous TARP funds (which itself is outside the scope of your original claim), the stress tests resulted in several firms having to get new capital from private sources, which they subsequently did. That is a good example of how an Obama Administration program has been addressing these issues without requiring new appropriations.
Second, the Treasury and Fed together have been working on the Consumer and Business Lending Initiative, a secondary markets program which was greatly expanded in size and scope under the Obama Administration.
Of course, I don’t know how many exceptions I need to cite before you would admit your original sweeping statement that the Obama Administration “has done virtually nothing at all” was complete nonsense. Personally, I think even one is obviously enough, and yet I suspect that given your ego and partisan hackery there is no number which could possibly make you admit a mistake.
July 17th, 2009 at 12:21 pm
Again, the basic problem is that the federal government doesn’t have the staff or infrastructure for basic banking (taking deposits and making loans and such).
All the commercial banks, less the few that would have failed, would still be there. Also, the Fed managed to buy commercial paper rather easily.
and you think that the fed is just going to start making loans at that stage and the “real” economy will be fine?
The real economy is in deep trouble for reasons other than the recent credit crunch. But that aside, I just stated that the Fed, being the lender of last resort, has and could do just that. Would you care to explain why it couldn’t?
July 17th, 2009 at 12:25 pm
The profits these banks are posting are due in large (if not all) part to the fact that they got paid dollar for dollar from AIG for all of the terrible bets they made during the subprime craze.
Actually, the reason JP Morgan is profitable right now is because it didn’t make those bets — it got out of subprime in 2006.
July 17th, 2009 at 12:28 pm
ron, the financial system has just collapsed. assets are worth nothing because no transactions are taking place. businesses have collapsed because credit provision has dried up.
and suddenly the Fed is just going to start making loans? i don’t think you understand what the banks collapsing would have meant.
i say to you again: you explain how it is that there is an economy into which the fed is miraculously making these loans you have in mind.
soullite, i haven’t addressed the underlying economy in the slightest, so don’t harrangue me on that topic. i happen to agree that the real economy is very weak and is likely to remain weak for the forseeable future.
we’re talking about the banks here; when there’s a real economy thread, i’ll be happy to talk about that.
max424, you are confusing loans and guarantees with handing out money. do your own frickin’ homework before you condescend to others.
July 17th, 2009 at 12:35 pm
and suddenly the Fed is just going to start making loans? i don’t think you understand what the banks collapsing would have meant.
Assertions about my lack of understanding don’t cut it Howard.
Why don’t you be so kind as to explain to my non-understanding self exactly why the Fed can’t do what I proposed?
July 17th, 2009 at 12:50 pm
We have high unemployment for another 18 months and a whole bunch of ARMs about to reset. This thing’s not over by a long shot…
July 17th, 2009 at 12:53 pm
howard,
The toxic asset market I was referring to was the market for CDOs. Obviously. How could anyone talking about the subrime mortgage crisis and the geithner plan not know that was what I was talking abou? Banks had valued these pieced together AAA mortgage-backed securities for billions when they clearly weren’t worth shit. And when everyone realized they were worth shit, the shit hit the fan.
The subsidies I was talking about were the no-fault loans offered through the Geithner Plan which allowed banks to borrow as much as 87% (I think this was the number) of the capital needed to buy more of these shitty CDOs and prop their prices up. If a no-fault loan for 87% of the price of a CDO isn’t a good incentive I don’t know what is. The math on this stuff showed the taxpayer was on the hook for the losses while the banks profited if the bets paid off. This was all covered by Krugman, who you supposedly have been reading. Calculatedrisk is your friend.
July 17th, 2009 at 1:02 pm
All the commercial banks, less the few that would have failed, would still be there.
That bolded qualification is extremely important. The top few banks provide a pretty large share of banking activity (not quite a majority, but reasonably close to it). Again, in previous cases of widespread banking failures not ALL the banks failed, but when a similarly large chunk of banks failed at the same time, in greatly deepened and lengthened the relevant recession.
By the way, I actually doubt this really would have been limited to a few large banks. There had already been a few bank runs, and even assuming the federal government had promised to cover the insured deposits at the big banks (again, at the cost of hundreds of billions of dollars), I think confidence would have been shaken in enough other banks to cause more runs. Again, not all banks would have failed, but I think the failures would have been more widespread than some imagine.
Also, the Fed managed to buy commercial paper rather easily.
A task which has radically smaller staff and infrastructure requirements in comparison to direct retail and business banking.
July 17th, 2009 at 1:07 pm
The subsidies I was talking about were the no-fault loans offered through the Geithner Plan which allowed banks to borrow as much as 87% (I think this was the number) of the capital needed to buy more of these shitty CDOs and prop their prices up.
That program hasn’t really been implemented. Incidentally, there were also two parts to the program that a lot of people got confused, and in general a lot of misinformation about how the program would work, but at this point the issue appears to be pretty much moot.
July 17th, 2009 at 1:08 pm
Howard
I said nothing about guarantees. US Government guarantees are now measured in tens of trillions. Everybody knows that. I mentioned a relatively paltry figure, 2.2 trillion “loaned” out through the Fed’s discount window.
At what rate is that money being “loaned” out at?
July 17th, 2009 at 1:14 pm
People seem to underestimate how important it was to avoid a run on the banks and a self-sustaining cascade of failure across the financial industry – important for the real economy – because we haven’t seen how horrible they can be in our lifetime.
Yes, there are a lot of other things to do. None of them mattered, until the apocalypse was warded off.
Now, if things really are shored up, we can start talking about taking scalps. Maybe some nice anti-trust actions are in order. Things need to change in the financial industry, but no, warding off a cascade of financial-sector failures should not have been held hostage to those changes.
July 17th, 2009 at 1:16 pm
The top few banks provide a pretty large share of banking activity (not quite a majority, but reasonably close to it).
A great deal of the activity of the few banks that would fail is non-commercial. Goldman does investment banking, market making and trading and has stated thay don’t intend to change. Citi does a lot of the same. Even so, I would contend that the commercial functions could be assumed rather easily. The economy has survived total bank holidays in the past.
Those losses aren’t coming back for many years. The quicker banking is cleaned up, the quicker the recession is over (see Japan).
July 17th, 2009 at 1:19 pm
DTM et al, please provide a link to the “writing down” of bad assets those banks have already done, according to you. To go back to the valuation of the “toxic assets”, they were supposed to be worth about 30% of their face value. So we were talking about $2 trillion in expected losses. The problem was: who will take this loss?
I suspect that the Fed and the Treasury have, in secret (not even Congress can investigate what Bernanke has done, and not even the oversight commitee on TARP knows where the money has gone), effectively used taxpayer money to shoulder most of the “writing down”. But possibly not all, and many of the big banks might still really be insolvent.
My basic point is that the Fed and the Treasury have been moving trillions (!) of dollars in secret. Some of it was direct subsidies to the banks. What are a few billions here and there in profits or new capital compared to that? And who knows how healthy is the financial system even today, with banks like GS making risky investments with taxpayer money?
At one point the dollar itself will cease to solve all problems; then we’re all fucked.
July 17th, 2009 at 1:35 pm
A great deal of the activity of the few banks that would fail is non-commercial. Goldman does investment banking, market making and trading and has stated thay don’t intend to change. Citi does a lot of the same.
You are right about Goldman not being a significant player in this area. On the other hand, while Citi does do a lot of other stuff too, it still counts as one of the largest commercial banks (top 5 by U.S. deposits, I believe). And then you get to banks like BoA, which you omitted and yet was generally considered the weakest surviving bank after Citi, and is easily the largest commercial bank in the country. Among the other big banks, we brokered deals for Wachovia and WaMu, I’m not sure Wells would have made it, toss in your National Cities and other smaller banks, and voila: a huge hole blown in the U.S. banking system.
On the other hand, I think it might have been freakin’ great for any big surviving banks, such as (probably) JP Morgan Chase. Of course they would only have gotten some additional market share initially, but eventually their profit margins would have skyrocketed (even more than they have with the actual scenario).
Even so, I would contend that the commercial functions could be assumed rather easily. The economy has survived total bank holidays in the past.
If you are talking about the Emergency Banking Act of 1933, that lasted for all of four days, and ended with the feds giving most banks a thumbs-up (deserved or not). The process you are proposing would severely constrain banking activity for many weeks, if not months or years. Again, the better historical examples are the interruptions in banking caused by the widespread bank failures at the beginning of the Great Depression, Panic of 1893, and so on.
People seem to underestimate how important it was to avoid a run on the banks and a self-sustaining cascade of failure across the financial industry – important for the real economy – because we haven’t seen how horrible they can be in our lifetime.
Yeah, initially I was actually surprised to see these bank-liquidationists popping up on the nominal “left”–usually it is more an Austrian thing. Then I figured out they were just too distanced from history to remember how bad it is for ordinary people when a lot of banks fail at once.
July 17th, 2009 at 1:37 pm
Unlike Matt and the defenders of big banks here, I tend to agree with this guy:
MaxKeiser
Stockholm syndrome, Matt.
July 17th, 2009 at 1:39 pm
First, the Capital Assistance Program (aka “stress tests”) is not a trivial exception to your original claim, and your parenthetical is incorrect: in addition to leading to the modification of previous TARP funds (which itself is outside the scope of your original claim), the stress tests resulted in several firms having to get new capital from private sources, which they subsequently did.
Mostly, new capital was raised in order to get rid of the TARP/CPP securities that were part of the Bush rescue plan. I think the stress tests were beneficial, in that they showed investors that the government thought most banks were basically OK now (after the Bushie saved them). So the stress test were optically important. And, you’re right, there were a few firms that had to raise capital in their own right apart from the TARP/CPP reasons to do so. But that’s pretty minor.
Second, the Treasury and Fed together have been working on the Consumer and Business Lending Initiative, a secondary markets program which was greatly expanded in size and scope under the Obama Administration
Of course, this is basically just the TALF, which was set up during the Bush Administration.
So, you’re right, “virtually nothing at all” was a slight exaggeration. Let’s put it this way, almost every government program that rescued the financial sector was put into place by the Bush Administration. The Obama Administration has had the wisdom not to mess with them too much, and to let them do what they are supposed to do instead of engaging in radical mistakes like nationalizing the banking sector.
July 17th, 2009 at 1:42 pm
why oh why, i’m really not sure you understand this, but to start with the most obvious point: there’s nothing “secret” in action here. it’s entirely clear that the largest banks are not ever going to fail: either they are going to survive or they will be taken into receivership, but the “toxic assets” are not going to drive them out of business. we don’t need an imputation of secret contrivance.
as for who “takes” the loss. let’s see, let’s see, how to explain. ok, let’s try this: i had a certain value in my IRA at the market peak. that value translated into a certain potential income level during my golden years (tarnished as they are likely to be). now my IRA value is at roughly 85 – 90% of what it was at the peak. the way i “take” that loss is not by paying out the difference; it’s by either reducing my expectations for my golden years or by going out and earning enough money to offset what i lost.
and that’s what is happening: the banks own more assets than the “toxic” ones. they have many ways of making money; in addition, as DTM has noted, they can raise new capital. so they “take” the loss not by suddenly handing over $2T or $3T to counterparties but by seeing their level of capital reduced (and with it, the future earnings prospects of shareholders) unless and until they can earn it back (so, for example, Goldman fell to around $50/share on the expectation that its future earnings prospects were distressed, and now it’s back up to near $150/share on the expectation that it can, in fact, earn enough – in conjunction with the capital it raised – to offset that loss).
as for asset markdowns, ok, this is from the wsj:
True, having a bank the size of Goldman doing well adds to confidence. But beneath the gleaming headlines, some of Goldman’s figures suggest the financial system is still in trouble. For instance, the valuations Goldman has placed on its commercial-real-estate debt should spook banks with hefty exposure that have taken few hits on this asset class so far.
The bank said its commercial-real-estate securities and loans are now marked at about half their par value. That implies big losses ahead for the wider banking system, which
typically doesn’t mark commercial-real-estate loans to market.
http://online.wsj.com/article/SB124760717296041441.html
July 17th, 2009 at 1:50 pm
if the bush administration “saved” the banks, there would have been no reason to do anything more, so we can reject that silly note of al’s.
what i’m willing to say is that i give the bush administration a C+ on the financial system crisis, which is actually the highest grade i give them on anything. of course, bush and cheney had nothing to do with the policymaking on this one, so it had to be better than the norm….
July 17th, 2009 at 1:53 pm
DTM et al, please provide a link to the “writing down” of bad assets those banks have already done, according to you.
I’m not sure there is one such link available, and this software won’t let me provide a lot of links. But it is pretty simple to find what I am talking: go through the bank’s financial statements, or even just press releases, for the last couple quarters. Focus first on all the write downs surviving banks took in association with their big acquisitions. Then look in general at their increased loan loss provisions. You shouldn’t have any trouble seeing what I am referring to.
Here is one example to get you started:
Bank of America Earns $3.2 Billion in Second Quarter
BoA just reported $3.2 billion in earnings. However, they also reported a provision for credit losses of $13.4 billion (their pre-provision income was thus over $16 billion), in part to cover a $5.4 billion increase in non-performing assets.
To go back to the valuation of the “toxic assets”, they were supposed to be worth about 30% of their face value. So we were talking about $2 trillion in expected losses.
Now I think we are getting back to those people who assumed $2 trillion in net losses simply being wrong.
July 17th, 2009 at 2:07 pm
why oh why, i’m really not sure you understand this, but to start with the most obvious point: there’s nothing “secret” in action here.
Let’s see.
Congress doesn’t know what the Fed is doing, and can’t investigate. The TARP Oversight board doesn’t know where the TARP money went, and can’t force the Treasury to tell them. And there are other Treasury plans with no oversight at all. Yet people like you think “there’s nothing nothing secret in action here”, and feel the government is open and accountable, and the big banks are really solvent after all because, well, secret government “stress tests” and their CEOs say they are.
You really have no idea what is going on (hint: you can’t, unless you’re Geithner or Bernanke), yet you feel comfortable repeating Wall Street talking points. It is really hilarious.
July 17th, 2009 at 2:07 pm
Mostly, new capital was raised in order to get rid of the TARP/CPP securities that were part of the Bush rescue plan. . . . And, you’re right, there were a few firms that had to raise capital in their own right apart from the TARP/CPP reasons to do so. But that’s pretty minor.
False. Banks in a position to repay the TARP generally weren’t required to raise new capital by the stress tests (I think Morgan Stanley is a minor exception, being required to raise $1.8 billion more but also included in the first round for TARP paybacks). Meanwhile, the banks required to raise new capital include banks that are converting TARP preferred stock into equity (pretty much the opposite of paying them back). Indeed, BoA alone was required to raise $33.9B, which is not exactly “minor”.
Of course, this is basically just the TALF, which was set up during the Bush Administration.
Except for the part about being much bigger and broader than the TALF.
Let’s put it this way, almost every government program that rescued the financial sector was put into place by the Bush Administration.
Nah, let’s put it this more accurate way: the Bush Administration did in fact get some things started, then the Obama Administration came in and modified some existing programs, while creating a crucial new program (CAP).
July 17th, 2009 at 2:14 pm
it’s entirely clear that the largest banks are not ever going to fail: either they are going to survive or they will be taken into receivership, but the “toxic assets” are not going to drive them out of business. we don’t need an imputation of secret contrivance.
This part is wonderful because it sums up perfectly the folly of cheering at GS giant profits: no GS is never going to fail, so let’s give GS taxpayer money so it can make bets as crazy as two years ago, with the same bonuses if all goes well. If it doesn’t… hey, it can’t fail so it’s time for TARP2!
July 17th, 2009 at 2:27 pm
Why oh why:
You really have no idea what is going on (hint: you can’t, unless you’re Geithner or Bernanke), yet you feel comfortable repeating Wall Street talking points. It is really hilarious.
DTM, earlier:
For what it is worth, I also basically agree with Krugman’s current position. As I have maintained all along, we very nuch need to re-institute direct, strict, even downright coercive regulation of the financial industry. That is the only proven way to moderate systemic financial risk.
I don’t think you’ve been reading what DTM has been writing. IMHO, it was a hostage situation and the government had to bail out these firms out or the whole system would collapse.
Now they are letting banks collapse again since the economy isn’t in free fall. They just let a biggish one go.
July 17th, 2009 at 2:30 pm
The process you are proposing would severely constrain banking activity for many weeks, if not months or years.
I sincerely doubt that. The top brass is fired, other staff remain. The sorting of assets and write-offs can be done ahead of time. The bank closes on Friday and reopens on Monday under new management. Deposits are still insured. A customer of Wachovia would not have known it was under new management but for news reports.
This gets tiresome. I just hope this new Pecora commission actually does a thorough job and we learn the whole story.
July 17th, 2009 at 2:43 pm
The top brass is fired, other staff remain.
Now you are talking about some form of nationalization/receivership, not having the Fed and FDIC actually act as bankers themselves. That would certainly have been doable, but likely more costly to the taxpayers. Again, the bottomline is that Geithner’s Plan has attracted new private capital to the banks, and that is capital we didn’t have to contribute ourselves.
A customer of Wachovia would not have known it was under new management but for news reports.
Of course Wachovia was bought by Wells Fargo, a company which itself has been a major beneficiary of various government programs, without ever going through FDIC receivership (although the FDIC basically forced a sale).
July 17th, 2009 at 2:49 pm
to start with the most obvious point: there’s nothing “secret” in action here
Howard, watch this video and learn something today:
http://www.youtube.com/watch?v=PXlxBeAvsB8
July 17th, 2009 at 3:06 pm
Interesting thread.
Commenters I won’t name started out trying to go toe-to-toe with DTM and howard on quantitative facts, couldn’t hold up their end, and ended up making all sorts of moralistic-sounding arguments about who is too friendly with the banks.
Facts…law…pound the table.
July 17th, 2009 at 3:10 pm
It’s really asymetrical warfare: DTM and howard are discussing economic and financial matters to make a point about economic and financial matters, while others are clearly discussing, and considering, them purely as a means to achieve an ideologically-defined, political end.
It’s sort of the difference between people who looked at the question of WMDs in Iraq in order to find out whether Iraq had WMDs, and people who looked at them because they saw an effective way to get the regime-change war they wanted.
July 17th, 2009 at 3:58 pm
[...] economic and political life. For what it’s worth, I found this from Free Exchange, this from Yglesias and this quite interesting. I think there’s ample room for saying that the [...]
July 17th, 2009 at 4:03 pm
I know that so many of us common folk are still working with up to 3 zeroes on their dollar ammounts, but the paradigm shift in government circles now has them using 12 zeroes (i.e. trillion) on their dollar amounts.
The Sachs folks don’t even dream about going that high, so please cut out the “penis envy” crap.
July 17th, 2009 at 4:14 pm
Here is one example to get you started:
Bank of America Earns $3.2 Billion in Second Quarter
BoA just reported $3.2 billion in earnings. However, they also reported a provision for credit losses of $13.4 billion (their pre-provision income was thus over $16 billion), in part to cover a $5.4 billion increase in non-performing assets.
So the best example to get started is a news release of BoA, saying BoA is fine after writing down a few “non-performing assets” (but just enough to still report a $3 billion profit, like GS!). And howard also quotes the WSJ quoting GS saying GS is fine after writing down a few bad assets.
It’s self-regulation at its best!
July 17th, 2009 at 4:18 pm
Still a hell of a lot more evidence than you’ve supplied for your theory.
July 17th, 2009 at 4:36 pm
joe, it is a fact that the Fed is using trillions of dollars in secret (neither Congress nor the IG, nor the taxpayer of course, knows where the money is going). Likewise for the Treasury. You can only have theories about the use of all this money since nobody knows except Bernanke, Geithner and other government officials. Did they guarantee some bad assets, or even buy a few of them? Again, watch the video above.
Bottom line is: either those big banks are still zombies, or they got giant subsidies from the Fed and various Treasury programs. Only a commission with teeth would be able to tell us what happened, how healthy the financial system is today, and whether those profits are real or “creative accounting”. Believing the spin from BoA or GS after all that happened is just laughable.
July 17th, 2009 at 4:45 pm
About those bad assets and possible subsidies, from Michele Davis, an “assistant secretary for public affairs and director of policy planning at the Treasury Department under Secretary Henry Paulson”:
http://www.pbs.org/wgbh/pages/frontline/breakingthebank/interviews/davis.html
Wouldn’t it be nice to know more? Don’t expect the Fed or the Treasury to tell you.
July 17th, 2009 at 5:01 pm
Nobody has questioned that. Rather, the point of contention is whether the banks are turning a profit and taking their losses while still turning a profit.
Repeating your theory is not the same thing as supporting it, y-o.
You have stated that Bank of America is not, in fact, writing down its losses while still turning a profit. You have provided not a whit of evidence for that assertion, merely denounced evidence to the contrary.
July 18th, 2009 at 12:07 am
So the best example to get started is a news release of BoA, saying BoA is fine . . .
You asked for a link to information about banks writing down bad assets. I supplied that link for that limited purpose. If you are now going to pretend that you never asked for such a link and that I supplied it for some more general purpose, then you’ll just have to live with yourself.
Bottom line is: either those big banks are still zombies, or they got giant subsidies from the Fed and various Treasury programs.
First, the idea that all these banks were “zombies” was based on a lot more speculation than fact.
Second, there is no doubt that many of the big banks–and many of the smaller banks–benefited from actions taken by the Fed and the Treasury and the FDIC and so on (collectively, “the Feds”). But the thing some people seem to have trouble grasping is that the Feds and the banks weren’t the only players in the game, but rather that various third parties were possible sources of new income and new capital for the banks. So to the extent actions by the Fed helped banks get more income and capital from these third parties, the banks could be helped by the Feds without the taxpayers being the ones supplying the resulting funds.
Unfortunately, early on some people adopted the mindset that this was a zero-sum game between the banks and the Feds. And to this day some of those people continue to insist that is the only possible way the game could be played, despite now overwhelming evidence to the contrary.