The Banks Have Stolen Enough; It's Time to Take Them Over
Hold onto your wallets. The bankers are coming bank for more money. They burned through the $350 billion that we gave them in the first round of the Troubled Asset Relief Program (TARP) and they are worried that even the second $350 billion will not be enough money to keep them solvent. The selective leaks from Treasury tell us that the banks will need far more money to cover their bad debts.
The latest story is that the banks want to sell us their bad assets at above market prices, which was the original plan that Treasury Secretary Paulson proposed, except the banks want to push off their junk on an even bigger scale. In one version, the government would set up a Resolution Trust-type corporation (RTC), like we did with the bankrupt Savings and Loans in the 80s, which would hold all the garbage and then gradually resell it to the private sector to recover a portion of what the government paid.
This is a reasonable course, except there is one big difference between what we did with the S&Ls in the 80s and the leaked plan being floated. The S&Ls were taken over by the government and then resold to the private sector. These were bankrupt institutions that were put out of business. The stockholders were wiped out, which is what is supposed to happen to stock holders when their company goes bankrupt.
But this is not what happens in the plan being discusses. In this plan, the taxpayers just do the banks the great favor of paying above market prices for their junk so that we can relieve them of the burden of their past mistakes. The taxpayers get to eat the losses and the bank executives and their shareholders go on their merry way.
These folks are not market fundamentalist types. The Wall Street view of the world, and apparently the view of at least some people in the Obama administration, is that the government always is there to help a bank or banker in need.
The idea that we would give one more penny to this crew that has wrecked the economy should make taxpayers furious. There is a legitimate public interest in keeping the banks operating; a modern economy needs a well-operating financial system. But, there is zero public interest in rewarding shareholders and overpaid banks executives.
These executives bankrupted their banks and brought the economy down with them. They belong in an unemployment line not collecting multi-million dollar paychecks in their designer office suites.
The obvious answer is to take over the insolvent banks, just as we did with the insolvent S&Ls. The government should form an RTC as we did in the 80s, which would dispose of the assets over time, collecting as much money as possible for the government. The bankrupt banks would be restructured and sold back to the private sector as soon as their books were straightened out. The point of the exercise is not have the government run the banks, the point is to keep the financial system running without giving even more money to the richest people in the country.
This is the only reasonable solution to the mess that the bankers have created. The other solutions are simply efforts to transfer dollars from hardworking taxpayers to overpaid and incompetent bank executives. It is hard to believe that anyone would take it seriously, if not for the enormous political power of the Wall Street gang.
It's too bad that the Republicans' anger over giving tax breaks to workers who did not pay income taxes does not extend to giving tax dollars to Wall Street banks who have wrecked our economy. Where are the anti-government conservatives when we need them?
Agreed!
Nationalize the banks and do it now. No reason to keep throwing good money after bad with no return even promised let alone realized. The banks are as bad as teenagers. You give them money and they are not only not grateful, they demand more and they expect it right now and refuse to do anything in return for the money.
January 24, 2009 5:42 PM | Reply | Permalink
Absolutely. Nationalize the banks and don't give them back to the private sector....ever. It's painfully obvious that the private sector will just screw things up again just like they did with the S&Ls with their greed, arrogance and short sightedness.
C
January 24, 2009 10:42 PM | Reply | Permalink
Agreed. Nationalize em. Keep em.
January 25, 2009 3:29 AM | Reply | Permalink
Turn the out-of-work mortgage brokers into Solar Panel salesmen/women, and all the "best & brightest" Wall St. minds into teachers. With some former Wall Streeters in the Teachers Union, I can see them negotiating a nice pay raise in the near future... Maybe the Pentagon will have to start holding a few bake sales to make ends meet.
January 25, 2009 2:27 PM | Reply | Permalink
There is a significant difference between the banks and the savings and loans -- the banks have significant global operations.
For example, if you nationalize Citigroup, the US Government would own and operate the third largest retail brokerage operation in Japan.
Are you suggesting that the American taxpayer should take over all the foreign operations and subsidiaries of the global banks? Including their operations on/off the books in tax havens like the Cayman Islands and the Channel Islands?
What do we do with the US subsidiaries of foreign global banks?
January 24, 2009 5:57 PM | Reply | Permalink
Merrill,
you take over the insolvent banks that are necessary to keep our financial system operating. who cares about the foreign subsidiary of a presumably solvent foreign bank. (if the foreign bank is insolvent than Japan/England/Germany etc. can worry about it.)
January 24, 2009 5:59 PM | Reply | Permalink
I might care. Why are you making light of the serious questions raised?
If banks can shift assets around they could sequester "good" assets out of the reach of a purely domestic action, leaving us with the "bad" assets to "nationalize".
The fundamental problem is that many banks lent out too much money on what are now devalued assets.
The first derivative problem is that some assets are non-performing, the cash flow streams are down or in some cases effectively vanished.
The derivative derivative problem is that CDO and CDS instruments have both muddled the market and sucked capital out of it to side bets.
The second derivative problem is that these instruments threaten to take more money away from some.
Conservation of money dictates that realized losses represent other realized gains. Follow the money.
January 24, 2009 7:04 PM | Reply | Permalink
Eds,
we aren't taking over banks to take them over. We are taking over insolvent banks that are essential to the functioning of the financial system. Any banks (domestic or foreign) can always try to play the game you describe. Have you heard of FDIC?
It's called fraud. It happens, but you supposed to spend something like 20 years in jail for doing it. There are no, as in zero, as in none, greater opportunities for this gaming in the takeover scenario I'm describing than already exist.
So, yes, what you suggest is a possible problem and it has been for 75 years.
January 25, 2009 9:41 AM | Reply | Permalink
Thanks for the reply. Yes, I've heard of the FDIC and even the old RTC. And I still don't understand how local actions ripple out to (or in from) global banking operations, if the US government does something like RTC. Plus I'm not as sanguine as you seem to be about fraud.
But that's not to say that I intend to argue against the main points of your article. I'm largely in sympathy with it.
January 25, 2009 4:16 PM | Reply | Permalink
So the US operations that used to be investment banks/brokerages named First Boston, Paine Webber, and Bankers Trust are now the responsibility of Switzerland and Germany. Commercial and consumer lending operations like Household Finance and Beneficial Finance are the resposibility of the UK, as well as consumer/commercial banking operations that used to be Marine Midland and Republic NY. (Actually, I don't think that list bit would be right, since HSBC USA, N.A. claims to be an FDIC member.)
Selling off the foreign subsidiaries of the US global banks would be even more intersting. I wonder who the buyers would be? It would end the US' current role in the global financial industry, and probably end the reserve currency status of the US as well.
It all strikes me as the financial equivalent of Smoot-Hawley.
January 24, 2009 9:08 PM | Reply | Permalink
The retail operations in Japan can be sold day one for a nice bump. The issue is not the "practices" but the balance sheet. Any division not directly related to the core bank can be shed or shuddered within days of the announcement.
In the case of Citi, Morgan Stanley has already grabbed the European and Australian retail ops. With its friend in Mitsubishi, they could absorb the Japanese retail op as well.
January 26, 2009 7:28 AM | Reply | Permalink
I think they're afraid to nationalize b/c the market will probably crash even more. Can Obama put a halt on the market for 30 days? A sort of breather period so everyone can adjust to the very necessary nationalization / conversion to public utility?
PS - Great discussion on this topic on Bill Moyers last night with Thomas Frank and David Sirota. I've always loved Frank, but Siraota used to annoyed me. I was wrong. Sirota is great to listen to. I like to hear him talk more than read his writing. Either way, they both need to keep speaking up and win some battles. Dean too.
Keep it up, and thanks!
January 24, 2009 7:13 PM | Reply | Permalink
I think it's political fear, not fear of market consequence. Frankly, from where I sit (within the recently christened pariah industry, that, heretofore, you all loved when you refinanced your homes at 5.0% and saw your 401K's grow), I'm cool with government takeover. It would kill off the drum beat of embarassing and unfortunate news that continues to devestate the market psychology, and allow the strong to prosper; instead of just survive.
Citi's $3 share is having ripple effect in the sector. Get rid of it and the sector can grow again--which might stimulate loan-making. Let it ride and we're looking at nine more months of bad reports and "oops, we forgot $3BN in exposure" type reports (e.g. State Street) that just tars and feathers everyone (note, we're not all bad, although, if I mentioned my employer you might argue that point).
January 26, 2009 7:37 AM | Reply | Permalink
Have you taken even a cursory look at who the major shareholders of these banks are? Citigroup, for example?
Top institutional holders include Barclay's, Bank of New York Mellon, Morgan Stanley, UBS. Seizing their assets could prove counterproductive.
There's also State Street Corp and Vanguard, major money managers for institutional investors, as well as several publicly-traded mutual funds.
Even if all these managers are as villainous as generally portrayed, it is not their assets you are planning to seize but those of individuals from all across the country who believed they were being prudent entrusting their retirement savings to their employers and/or professional money managers.
It is probably true that the assets seized will be practically worthless for a long time anyway but at least the money managers will have no one to blame but Citigroup and themselves. Why give them an easy way to shift blame onto the already over scapegoated government?
January 24, 2009 7:39 PM | Reply | Permalink
Some Saudi owns like 5% of Citi.
January 24, 2009 10:38 PM | Reply | Permalink
All this concern about the little shareholder is, politely speaking, baloney. It's an argument that's been made time and again, and it always seems to benefit the big shareholder. But if anyone is really worried about it, we can do abn equivalent of what the germans did in 1948: All share balances under 1000 are preserved, the rest get "restructured".
And as for owning all those foreign subsidiaries and operating units, duh. If we can sell off drug dealers' yachts, we can sell off parts of banks.
As long as the set of shareholders and managers of the financial houses is smaller by several orders of magnitude than the set of US taxpayers, we're coming out ahead with Dean's idea.
January 24, 2009 7:53 PM | Reply | Permalink
The 401Ks and pension plans are alreadt taking the hit and will continue to do so while things stay on the downward vector. RTCing and then reselling the banks at a minimum represents some potential upside for the future. No such luck on the present course.
January 26, 2009 7:39 AM | Reply | Permalink
I really can't think of anything brillant to say. I wrote down a couple of thoughts, but they just came out smart alecky. All this is very emotional to me. Bankers, as a generalization, are a bunch of theives. So, I'll just cast my vote. Dean, I agree with you 100%. Could we also put most of them in jail?
January 24, 2009 9:00 PM | Reply | Permalink
Yes, let's put them in jail. A few other things:
1. "Clawbacks" (n.) : "1. Previously given monies or benefits that are taken back due to specially arising circumstances."
2. Antitrust: Let's break them up. Instead of dozens of John Thains making 100M+, let's create 1,000's of bank CEO's making $1,000,000 a piece. Keep bank sizes smaller. Perhaps a moratorium on M&A for a few years/forever?
3. Pay Scale: Let's cap all executive pay across the country at some sane multiple of their lowest paid worker. Worried about management leaving for Europe or China? I'm not. If they leave, they hate America. F them. CostCo caps CEO pay; so can the rest. It should also help recapitalize & bring liquidity back to their company's coffers, right?
Anyway, to paraphrase Berkeley's Brad DeLong: "Raze the [Debt Economy] to the ground. Plough it under. Scatter salt in the furrows so it can never grow back."
January 24, 2009 9:17 PM | Reply | Permalink
There can be no good solutions to the financial industry problems we now face. There can only be less bad solutions, and Dean's is the least bad one I have read about.
The worst possible thing to do is to reward the stock holders, who elected their boards of directors, who hired their incompetent CEO's, who bankrupted their banks. An organization as big as Vanguard, owning as much stock as they do, should have been exercising due diligence all along, rather than just closing their eyes and hoping for still more bubble profits.
I have no sympathy at all for those banks. Let them eat cake!
January 24, 2009 9:07 PM | Reply | Permalink
I have no sympathy at all for those banks. Let them eat cake!
I have absolutely NO sympathy or compassion for anyone making a 6 figure salory and above. They can jolly well go out and buy some for themselves like they do everything else.
C
January 24, 2009 10:48 PM | Reply | Permalink
. . . Dean's [solution] is the least bad one I have read about.
You do have to smile, though, when a CEPR economist drinks the Fama-Aid and goes all Rational Markets on us.
. . . banks want to sell us their bad assets at above market prices . . . . Dean Baker
January 25, 2009 5:26 AM | Reply | Permalink
Is he? Isn't the idea of RTC which Dean advocates effectively anti-free market efficiency? Again I must ask about sarcasm...
Paulson wanted to pay above market price for "toxic assets" last summer. Apparently there was some kind of rationale for that apparently insane notion. For various plausible reasons Paulson decided not to go that way (He was clueless so when Britain went with stock injection, he followed that lead? He had no idea how to actually rationalize prices to be paid even tho' he had some theoretical mechanism in mind? The psychic balance of the universe shifted due to marginal individual inputs in favor of giving due consideration to stock injection?).
The idea of paying above current value because of future value can be rational. But efficient markets generally take this into account.
January 25, 2009 4:29 PM | Reply | Permalink
What is the relationship between "market prices" and "current value"? or for that matter "future value"?
When someone argues that paying more or less for an asset than its current market price is somehow irrational, unfair or unjust, he is, impliedly, arguing that price equals value -- and I find it amusing to watch Baker hoisted on a petard of his own making.
"The cynic knows the price of everything and the value of nothing." Oscar Wilde Replace "cynic" with "believers in the efficient market" and you've gone most of the way to explaining the current financial crisis.
January 25, 2009 6:08 PM | Reply | Permalink
yup
January 25, 2009 8:12 PM | Reply | Permalink
Your snark only makes sense if you ignore everything Dean said except that he possibly used the phrase "market price" somewhat carelessly.
You're a moron that thinks it all a bunch of bullshit and tries to equate people like Dean Baker with scum like Phil Gramm.
When you have absolutely nothing of value to add, why not just keep your nonsense to yourself?
January 25, 2009 8:24 PM | Reply | Permalink
That, in vulgar language I would not use here, says almost what I would have said in my own way in re Ellen.
There can be value in saying nothing of value, if the act inspires someone else to add to the thread what was only latent value.
January 26, 2009 1:46 AM | Reply | Permalink
current value = the value today.
future value = the value tomorrow.
The current value of a non-transferable coupon for food at a restaurant is zero if you've already been a glutton and sworn off eating more today. But its future value might be significant. The market price is zero, except if it's a collector's item in which case there is also no rational relationship between either value and it's price. regardless of whether the market is efficient, inefficient, or subject to the whim of an RTC.
As an aside: I think you are the one so hoist on your priceless values here. Maybe you misread Baker's post?
January 26, 2009 4:21 AM | Reply | Permalink
two typos so close together call for an erratum:
"no rational relationship between either value and it's price. regardless of "
and its price,
January 26, 2009 4:25 AM | Reply | Permalink
Good point. Simple example would be recent book values verse market price. Bear Sterns building in Manhattan was worth more than their market price.
You can never go wrong by quoting Wilde. Same for Shakespeare and Marlowe:
Thane's Office renovation: "Reason not the need."
Dean's economic advise: "What good is wisdom if it doth not profit the wise."
January 26, 2009 7:48 AM | Reply | Permalink
I don't know about Bear Stearns, but cherry-picking assets is silly. If BS was insolvent, any single asset was worth more than its book value, because it had negative book value and thus possibly a zero or very very low market capitalization value. Its liabilities exceeded its assets at current mark to market valuations.
January 26, 2009 3:01 PM | Reply | Permalink
It has become increasingly difficult to disregard the unwillingness of certain players in the financial sector to alter their conduct in a way that more suitably aligns their operations with the circumstances.
The single most significant circumstance we face is the degree to which the system has become centralized. That places a huge burden on the major players to take into account the influence of their actions. What we have is they are still operating as though they have only their shareholders to satisfy. Nothing could be further from the truth.
The bottom line has to be a consideration but in a climate where the Treasury, the SEC and congress have all given great leeway to their operations there arises an absolute requirement to recognize their responsibility. If they refuse, then regulate the hell out of them, or nationalize them, or break them up and disallow interstate banking operations. You can't have the nations finances so tied up in so few players and have them solely focused on profits. The perspective carries too much risk.
January 25, 2009 2:59 AM | Reply | Permalink
We have what, three hundred sixty million or so people in this country?
Consider what would have happened if, instead of giving the money to the banks and Wall Street, every American family had been given a million dollars:
Why, they would have ...
paid off their credit cards, thus ending the credit crisis.
paid off their mortgages, thus ending the forclosure and housing market crisis.
bought new cars, thus ending the auto manufacturing crisis.
invested in stocks, thus stabalizing and ending the market collapse.
put money in banks, thus ending the cash lending crisis.
bought things, thus ending retail and other layoff's.
built new small businesses, hired new employees, become innovative again due to the new reality of capitalization ...
More kids would go to college and our county become more educated...
The possibilities are endless, because ALL boats would have been floated.
Still, in order for this to have worked, there would have to be a mandate and cooperation of prices staying at current levels.
But imagine ...
Collectively, the stress of the nation would have been immediately erased, our country re-energized and stabilized from new beginnings. And, because we only spent a few hundred million, we would still have plenty of money with which to fund new infrastructures, high speed rails and other green plans, all new jobs at home. This, in turn, would have also helped the world from new trade agreements.
Instead, the government gave the money to the people who, in great part, are responsible for our problems.
In short, the government gave the money to the wrong people.
Yet, there is surprise it has all gone wrong?
January 25, 2009 3:31 AM | Reply | Permalink
You need to check your math.
I believe there are about 320 million people in the country, and perhaps 200 million households. The exact number does not matter.
You propose giving every household a million dollars. One thousand million is a billion. One thousand billion is trillion, which is also one million million.
So 200 million million would be 200 trillion dollars. That is the cost of what you proposed.
At the end, you say it would only cost a few hundred million dollars. That would only give every household a dollar or two!
And, of course, if the government suddenly "printed" 200 trillion dollars, prices would rise by somewhere between 400% and 20,000%. No "mandate and cooperation of prices staying at current levels" can stop that from happening.
In short, your idea is silly.
-- ARG
January 26, 2009 3:42 PM | Reply | Permalink
Let us suppose that the United States population is composed of 112.4 million households. Here's how we distribute the fiscal package:
Families with children: 459.5 Billion*
Families w/out children: 481.4 Billion**
Other households: 223.6 Billion***
Total Distribution: 1,164.5 Trillion
Households can save the money (banks receive funds to loan); pay mortgage costs; spend it on discretionary goods, or pay increased state and municipal taxes. Whether better or worse than the outcome of letting an arrogant elite tell us how our money will be spent, at least we won't be treated like a bunch of helots.
* Two parents ($15,000 x 24,086,303 = $361.3 Billion); Single parent ($9,000 x 10,913,281 = 98.2 Billion)
** ($12,000 x 40,119,676)
*** ($6,000 x 37,258,717)
January 26, 2009 8:58 PM | Reply | Permalink
Thanks for the research and the math, Ellen.
But do you really support this plan? I'm sure everybody would love to recieve between $6,000 and $15,000 from the government, but I don't think that $1.2 Trillion would "fix" the economy. Do you?
I mean, we tried this (on a smaller scale) last Spring. And the "tax rebates" just vaporized. Maybe they propped up a few numbers for one fiscal quarter. Maybe.
Certainly households would not be able to do all those things Pavane suggested above.
And most importantly, I don't see how this would create any jobs. Would Catapiller hire back those 20,000 employees they just laid off, just because everybody's going to have an extra $10k to spend?
Sounds like a lot of money for nothin'.
-- ARG
January 27, 2009 10:37 AM | Reply | Permalink
Private balance sheets must be repaired; we either do it slowly (the present plan of reducing unemployment from what it would be to years of 8-10% -- whoopie-do!) or quickly (Show Me the Money -- Now!).
I expect my solution would require at least a second equivalent distribution in 2010. We still might have to recapitalize the banks -- presumably, on better terms than we've gotten thus far.
January 27, 2009 12:09 PM | Reply | Permalink
Ellen, thanks very much for that link. Sobering stuff. But I don't think it supports your argument for simply dropping money out of a helicopter. In part, it says...
It seems to me that just giving people freshly printed money is very similar to "tax relief", and will therefore have the same negligible impact that this Merrill report describes.
I agree that individual balance sheets must be restored eventually. But I don't think your plan will do it, even if repeated in 2010. For someone who has lost his/her job and cannot pay his/her mortgage, annual payments of $10k (or $15k) in perpetuity wouldn't do the trick.
According to the article you linked, we're completely screwed either way, though.
-- ARG
January 27, 2009 1:42 PM | Reply | Permalink
What are the unintended consequences of wiping out shareholders equity? Would that trigger forced sale of good stocks by funds which have reported a loss on their bank holdings and are facing consequent demands from fund members who want to cash out?
Why not ,instead, issue new shares to the Treasury giving it , say, 66% equity so the existing owners will be diluted but not wiped out?
January 25, 2009 8:40 AM | Reply | Permalink
Shareholder equity has already been almost wiped out by the markets, for BAC, Citi, and some others. And even WFB and JPM are dropping, though not as much as the worst.
Besides common stock, there is other capital involved. There are various kinds of preferred stock, incl. that which the government owns in over 100 banks now. And then there is the question of bank creditors. There are small depositors (under $100K, the old FDIC level), medium depositors (people with multiple accounts at one or more banks), large depositors (persons with over the current FDIC limits), and then special creditors. I don't know how banks work, but ordinary corporations also use debt for capital, bonds or otherwise. It's clear that at least some banks have a lot going on in derivatives (futures, options, CDO, CDS,...), whether "bond like" or not. Those creditors might face the same fate as stockholders?
January 25, 2009 4:44 PM | Reply | Permalink
Yeah, the near wipe out of bank shares reduces the remaining drop to reach zero.
But reduces doesn't=eliminates.
January 25, 2009 8:09 PM | Reply | Permalink
Here are the top TARP-Twenty and their market caps as of January 27, 2009:
Citigroup ($18.15B); Bank of America ($30.10B); JPMorgan Chase ($91.45B); Wells Fargo ($51.47B); Goldman Sachs ($36.02B); Morgan Stanley ($19.99B); PNC ($10.61B); US Bancorp ($22.83B); SunTrust ($4.79B); Capital One ($7.23B); Regions Financial ($2.83B); Fifth Third ($1.55B); BB&T ($10.90B); Mellon ($27.38B); KeyCorp ($3.71B); CIT Group ($1.03B); Comerica ($2.58B); State Street ($8.84B); Marshall & Ilsley ($1.59B); Northern Trust ($12.33B)
Total Market Cap=$365.23B
If reduced by the total cap ($150.7B) of those whose names are shown in bold (those whose solvency the market is relatively confident in), the market cap of those at risk is $215.43B.
January 27, 2009 5:31 AM | Reply | Permalink
How can any rational person suggest we "bail out" the 'people' who caused this economic tsunami? Forget about the name of the bank we're bailing out, its the executives who made the decisions that we're bailing out, name them, then ask what they did with the first $350 billion.
One requirement for more money should be the firing of the present management of any bank that gets bailed out because these people have a business model ingrained in their minds, the business model that got us to where we are today.
January 25, 2009 9:09 AM | Reply | Permalink
Flavius,
I can't think of any unintended consequences of letting shareholders eat the losses that they are supposed to endure when their companies go bankrupt.
I can think of lots of unintended consequences when the governments saves their hides. Specifically, banks think that they can take whatever risks they want because the stupid taxpayer will always come to their rescue when things go bad.
January 25, 2009 9:44 AM | Reply | Permalink
Dean,
if we keep bailing out these cretins isn't that setting a precedent for the next generations of sharks coming down the road?
The politicians who helped get us into this mess, the Phil Gramms and Chuck Schumers of the world won't have to pay anything, but has anyone in the banking/mortgage/credit industry who got us into this mess lost anything?
Have they been made to pay anything for their ill gotten gains?
January 25, 2009 11:09 AM | Reply | Permalink
You are assuming John, that there will be money left when the next generation rolls around. Our imperial structure is in free fall. Nothing can save it. We need to concentrate on saving industries and sectors of the economy that actually produce products before the Chinese realize we are completely broke and a horrible credit risk.
January 25, 2009 11:50 AM | Reply | Permalink
My concern about unintended consequences by definition excludes the shareholder/investors who are the intended victims of your proposal.
Rather,I wonder about the "unknown unknowns". Other than the one I instanced :forced selling of non-bank shares by funds forced to cash out participants responding to its loss on bank shares. Presumably there are also pensioneers-esp former employees of these banks- whose retirement depends upon the bank shares in their 401s. And other pensioneers as well in the same fix.
My bottom line is: does a specific item make Depression more or less likely. I don't see exactly how wiping out any bank's equity makes a Depresssion less likely.
January 25, 2009 8:02 PM | Reply | Permalink
Thomas Friedman recently wrote what he wanted to hear President Obama say to the banks:
I like it.
January 25, 2009 11:50 AM | Reply | Permalink
Sounds strong, in a good sense.
January 26, 2009 4:15 AM | Reply | Permalink
It's ridiculous that the billions the taxpayers are being looted for to hand over to the banks is far more than the total value of the stocks of these banks on Wall Street. So, isn't it only right that the American people should have the control over them that comes with being the majority shareholder?
I'm with you Dean, nationalize them all. The conservatives will cry that it's scary socialism but really that's just how things are meant to work.
As Robert Kuttner pointed out, by nationalizing the banks: "the money that the taxpayers are putting into the banks does what money usually does in a capitalist society: it produces ownership."
January 25, 2009 1:36 PM | Reply | Permalink
I don't usually agree with Dean, but on this one I'm with you 100%. If they want OUR money, we should get what all other investors get - true ownership.
Although this sort of feels like taking ownership of a Ferrari after it was wrapped around a tree, fell off the tow truck, hurtled over a cliff, and is now firmly lodged in a ditch at the bottom of a deep ravine. If we manage to get the sucker on the road again, the executives who screwed it up sure as hell shouldn't be in a position to profit from our sacrifices.
January 25, 2009 3:26 PM | Reply | Permalink
January 25, 2009 4:03 PM | Reply | Permalink
Sorry, this was a reply to kgb.
January 25, 2009 4:07 PM | Reply | Permalink
100% agree. Nice one kgb!
January 25, 2009 4:14 PM | Reply | Permalink
I agree with Dean that nationalizing the banks are probably the 'best' solution. But I do not think that the magnitude of the problem is yet appreciated.
About two years back I did a rough estimate on the amount of money that was going to be lost by lenders in the US RRE market. It went like this. The total amount of mortgages was $11.6 trillion. If housing prices dropped to the Case-Schiller average from over the past century, these loans would be backed by $7 to 8 trillion in equity (we are rapidly approaching this point). If the lenders absorbed the difference then the total losses are in the 3.5 to 4.5 trillion range.
Since then we can add CRE, corporate bonds, CC and auto debt all made much worse because of rising unemployment precipitated in RRE collapse. Also there is no longer any reason to assume that the bottom will be reached when RRE reaches the Case-Schiller average, since during the GD housing bottomed out at about 80% of that average. Without crunching numbers it looks like total loss to lenders could be in the $6 to 8 trillion range.
This is for the US. It looks like the UK and Europe is in the same pickel.
None of the current bail out plans come any where near covering these losses. The owners of this debt is distributed among a number of players but we should realize that the US has already guarenteed much of it (remember Fanny and Freddie). These quarentees are not included in any of the bail out money now spent. If we nationalize the banks doesn't that make the taxpayer responsible for even more of the losses.
My estimations here suggest that the US government could be assuming expenses much more than the $1.5 trillion dollars included in Tarp and Obama's planned fiscal stimulas. Maybe 2 or 3 times as much. This does not seem sustainable. Hyperinflation anyone?
January 25, 2009 4:44 PM | Reply | Permalink
Hyperinflation anyone
And it's about damn time.
A good run of inflation will give an overall haircut to the overstuffed beneficiaries of the last 28 years of post Reagan wealth redistribution.
BTW, Bill Gross, the PIMCO man, says inflation protected Treasuries are the shizzle, for being a bargain like you might never see again.
January 25, 2009 5:02 PM | Reply | Permalink
Hope PIMCO's powers of prognostication have improved since June 2007.
The new risk to TIPS comes from the prospect for rising real rates . . . Hence, despite forecasting higher rates in our secular horizon, we are cautious on TIPS. "Spotlight" June 2007
In the next eight months investors in TIPS enjoyed a total return north of 19% (around 30% annually adjusted).
January 25, 2009 9:02 PM | Reply | Permalink
In the next eight months
So he's a little late to the party...
January 25, 2009 9:23 PM | Reply | Permalink
Worse! I didn't buy TIPS that summer and principally, because of PIMCO's expressed "caution."
Fool me once . . . .
January 25, 2009 10:23 PM | Reply | Permalink
Fool me once
I won't be fooled again...
The thing about TIPS is that they are protected on the downside (the unexpected deflation). They won't adjust below zero.
On the other hand, the coupon has deteriorated since the 3.25% days, but still, if you look at the implied inflation in present policies, I can't think it's less than 8-12% on the 3-7 year horizon.
January 25, 2009 11:19 PM | Reply | Permalink
Jolly, you are wise beyond your size (talking about your avatar).
Thanks for the tips re TIPS, but I'm stuffing my money under the matress for the deflation period, then buying silver and gold at the bottom for the inflation cycle.
If only I can figure out when that bottom will be. (Did I miss it?)
Regarding who benefits from inflation, it is those who owe. Those who are owed get screwed. Simple as that. (Workers get screwed by the time lag between price adjustments and wage adjustments.)
Since our country owes, big time, expect inflation. It's our only way out.
-- ARG
January 26, 2009 3:55 PM | Reply | Permalink
size
There was another half to the picture, but it was edited to comply with family friendly site content standards...
January 26, 2009 4:12 PM | Reply | Permalink
On the whole inflation is good for the overstuffed. And bad for us.
A widget the overstuffed bought for a buck they can sell for $1.10. Then go out of business and keep the dime.
Conversely workers who agreed to work for a $8/hour used to be able to buy 8 widgets , now they only get 7 with some change left over.
January 25, 2009 10:02 PM | Reply | Permalink
good for the overstuffed
Yes and no.
It's the only way to get at wealth under our tax system.
It effectively wipes out the rentier class, even as it pressures wages. But wages can be adjusted upwards dynamically, and a new equilibrium established at some incrementally higher price level.
January 25, 2009 11:22 PM | Reply | Permalink
Deflation is painful for firms which bot 10 widgets for $10 bucks and have to sell them for $8.And can't repay their $10 inventory loan when they have to sell the widgets for $8.That's describes Hoover's economy.
Initially a wage earner benefits from deflation. Her $8/hour can buy 10 widgets instead of 8.
And wages are "sticky" depending on the prevalence of unions. But with lots of firms going broke there'll be lots of unemployed workers ready to take her job if she goes on strike to protest when the boss cuts her pay to $7.20.
And if she charged $80 to her credit card when wages were $8/hour she's got a problem when they drop to $7.20.
While the rentier's in hog heaven.
Seems like zero to very low inflation is the best bet .
January 26, 2009 3:38 AM | Reply | Permalink
much more than the $1.5 trillion dollars
I think Roubini's latest number is like 2.5 Trill.
(that's a new 2.5 trill) in w. europe and us bank losses.
January 25, 2009 5:05 PM | Reply | Permalink
Is that 2.5 total losses or costs to the US govt?
January 25, 2009 5:09 PM | Reply | Permalink
2.5 total losses
here's the actual reference, which I garbled unrecongnizably:
Total $3.6T Projected Loans and Securities Losses, $1.8T Of Which At U.S. Banks/Brokers: The Specter of Technical Insolvency
January 25, 2009 5:26 PM | Reply | Permalink
Yes I saw that Roubini estimate. I doubled it by guessing where the value of the underlying equity will be in the next two years. I think Roubini is marking equity to current market value.
January 25, 2009 5:46 PM | Reply | Permalink
doubled it
When you factor into the present bloodbath numbers the multipliers that probably lurk out there (cf. Kevin Phillips on the number fudging that has been the hallmark of government reporting for the last two decades), it is hard not to get dizzy at the cumulative totals.
January 25, 2009 6:13 PM | Reply | Permalink
Kevin Phillips rules.
January 25, 2009 7:06 PM | Reply | Permalink
You should not assume uniform market prices drops across the sample. Some areas are doing pretty well, others suck. This is important because only defaults which lead to foreclosure are key to losses (not counting CDO and CDS effects).
January 26, 2009 4:29 AM | Reply | Permalink
If you are referring to residential RE you may be correct today, but the bubble collapse is now only getting started at the high end of the market. The entire RE market will be down before this is over. There are simply too many homes priced over a $million for the number of people making sufficient $. This market inflated due to people cashing in capital gains at the lower end and moving up. Those customers are today history.
January 26, 2009 3:26 PM | Reply | Permalink
I don't agree with your analysis, and I hope you're wrong.
While I expect some RE prices to continue to drift down, I have no reason to believe there will be a general mass exodus from housing beyond what we've seen. People buy homes to live in. Some buy houses to rent out, others to speculate with.
My parents' house cost them $25K. It's now valued between 1 and 2 million. If it drops by 20% that's not going to be a problem for them because they didn't borrow a million or more on it. For those in between, some will have bought into the debt bubble and taken out huge home equity loans leaving them in danger now. But my point is that these are more limited in volume, it's not the whole housing market about to be foreclosed on.
Remember that losses are only realized when you realize them, so to speak. Drops in market value are not "losses" except in the imaginary sense.
January 26, 2009 4:03 PM | Reply | Permalink
I agree and disagree. As someone who owns a house whose "value" moved close to $ 1 million, I haven't lost a dime since the market now values it in the 700K range nor will I if it drops to 500K (which is where it will likely go). If your parents home reached a say $ 1.5 million market value in a desirable area of S. Cal (San Diego?) then before the bloodshed is over it will probably settle in the $750 K range. This is all inflation adjusted $ of course, houses will always be inflation hedges once the bubble froth is burned off.
January 26, 2009 4:43 PM | Reply | Permalink
I don't see where you disagree with my prior post. You admit the earlier analysis is off if it's talking about real losses. That was my point.
Your original comment was quite a mess as written, but I wanted to point out one problem clearly.
January 26, 2009 6:25 PM | Reply | Permalink
PS - Housing has traditionally been an inflation hedge, but it's also something which can be, and is generally, taxed. So there is a cost of ownership beyond mere maintenance.
One thing which makes housing a hedge has been the growing demand for housing. If demographics change, such hedges are highly questionable. For instance, if 11 million illegals were deported (factually unlikely but for illustrative purposes), housing prices would crash further as demand deflated massively. This applies whether they are renters or owners.
And it's of course not just illegals, nor is it upward mobility (something lacking in reality the past 6-8 years even if Bush sold many the dream).
There are two kinds of inflation: Fiscal and monetary. Increasing demand tends to drive up prices if supply cannot keep up. But increasing money supply also drives prices up generally.
January 26, 2009 6:35 PM | Reply | Permalink
You are getting hung up on secondary details. My major point was that the credit problem could very easily be much worse that even Dr Doom is predicting. To give it some credibility I began with the question of what happens if (when) housing prices move back to the Case-Shiller average. Certain simplifying assumptions must of course be made in this kind of estimation.
You don't like the result. You also seem to resist the notion that the housing price collapse will eventually move into the upper end market. What you like or not is not going to defy restoration of historical housing price averages.
January 26, 2009 7:04 PM | Reply | Permalink
Please lay off the false and arrogant presumptions.
Your earlier comment threw numbers around. You seem to take property values and mortgage values as being the same thing. They are not. Equity is one big difference. I also think it's important to distinguish equity lines of credit which have been tapped into from mortgages, first (and perhaps second) deeds of trust. But I would agree that both are debt secured by the property.
I don't know how you mean Case-Schiller. You mean housing cost being historically a rough multiple of income?
January 27, 2009 2:20 AM | Reply | Permalink
Whatever, maybe you are right.
January 27, 2009 4:30 AM | Reply | Permalink
With help of Congress, Wall Street got their way so now what....how about a salary freeze for CONGRESS; for starters (Politico.com article, http://www.politico.com/news/stories/0109/17939.html ), then REDUCE their healthcare benefits, and OUTSOURCE their jobs. CONGRESS could then get a fresh perspective on capitalism, trade, and how the free market system really works.... oh but wait, how many millionaires do we already have in office, particularly in the Senate...
....don't think Nationalism is the total answer but the Obama Administration should take some kind of measured remedy; giving certain limits on how far bankruptcy judges can go, without giving way to the moral hazards of those who are already able to meet their obligations but opt out by the circumstances of those who are unable to sustain themselves financially.
January 26, 2009 1:47 PM | Reply | Permalink
Dean, I agree that we should nationalize the banks.
In fact, I agreed with you last week:
http://tpmmuckraker.talkingpointsmemo.com/2009/01/merrill_paid_billions_in_bonuses_as_new_owner_soug.php#comment-3348173
-- ARG
January 26, 2009 4:01 PM | Reply | Permalink
James A. Swanson, Los Altos, CA
www.bushleagueofnations.com [for FREE download of entire book]
At the risk of offending religious folk who worship Free Market God, I offer some blasphemy:
There’s a parallel between America’s military and America’s financial system.
Both are too important to be entrusted to private mercenaries.
There are millions of Americans like me who know “nationalization” is not a four-letter word.
Have we learned nothing from the last three decades, especially the last eight years?
When the GOP talks about reform and uses wonderful words like “free enterprise,” “privatization,” and “deregulation,” be sure to count your fingers.
Jim Swanson, Los Altos, CA
“The Bush League of Nations”
www.bushleagueofnations.com [for FREE download of entire book]
January 26, 2009 4:10 PM | Reply | Permalink
Have your read The Shock Doctrine, by Naomi Klein?
January 26, 2009 6:39 PM | Reply | Permalink
James A. Swanson, Los Altos, CA
www.bushleagueofnations.com [for FREE download of entire book]
At the risk of offending religious folk who worship Free Market God, I offer some blasphemy:
There’s a parallel between America’s military and America’s financial system.
Both are too important to be entrusted to private mercenaries.
There are millions of Americans like me who know “nationalization” is not a four-letter word.
Have we learned nothing from the last three decades, especially the last eight years?
When the GOP talks about reform and use wonderful words like “free enterprise,” “privatization,” and “deregulation,” be sure to count your fingers.
Jim Swanson, Los Altos, CA
“The Bush League of Nations”
www.bushleagueofnations.com [for FREE download of entire book]
January 26, 2009 4:14 PM | Reply | Permalink
I have a difficult time accepting the fact that shareholders have to go down the tubes under a restructuring / rescue / bailout when they were only relying on honest management. It is not their fault the management was a bunch of lying, manipulative scheming, corner cutters.
January 26, 2009 6:13 PM | Reply | Permalink
You're right. If management deceived stockholders they should sue for fraud.
But traditionally, stockholder equity is supposed to be what takes the first hit. And it is a duty of a stockholder to vet and be vigilant about Board and Management conduct. While small stockholders generally don't have much of a voice, or are not positioned to probe the company as well as say a professional, most companies have mutual fund or hedge fund or pension etc. investors who have a DUTY to police management etc.
If someone has to take the fall (loss) why should it not be the stockholders first, bond holders next, and so on... before the taxpayers at large?
January 26, 2009 6:45 PM | Reply | Permalink
Except as you say it is difficult to track what is really happening, especially when the mgt "cooks the books."
January 26, 2009 9:48 PM | Reply | Permalink
Yes, fraud is a whole other "kettle of fish" when it comes to failing businesses. But if we're talking Recourse (what to do about spilt milk) at least in cases of fraud there is in theory some way to deal with that. Incompetent management is something else.
My bottom line is: No taxpayer money for gambling losses. Some of my blog articles define "gambling" well enough if you're not sure what I mean.
January 27, 2009 2:14 AM | Reply | Permalink
When we keep bailing out these institutions we pay them to do business badly. As mentioned in the the article, we have the Savings and Loan bailout to look at. This was a model that proved to lending institutions that they will be coddled in any behavior. It is much more difficult to do anything well. We are establishing a model in which bad and risky decisions are compensated. Why work towards good and sound business methods when poor, questionable, and easily obtained contracts are always covered by Uncle Sam. They counted on Big Daddy Government to bail them out because they had an actual Bush in power and it was the same Bush family that was part of the first successfully executed and like model that rewarded bad business and exploitation of a separate class.
I taught disabled and non-reading adults reading for many years. I can tell you from experience that 1 in 4 adults can't read and probably half the population reads below an 8th grade reading level. It is not acceptable to say that people should have not gotten into these contracts if they were unable to meet their obligations. Just like we take the word of Doctors, many people rely on the expertise of these so-called professionals and have trusted these professionals to help them acquire homes.
It should be a law that if an institution makes a lending contract that cannot be accomplished based on the numbers presented by the lender that, the bank must eat those costs period. Interest rates must be fixed. Yes, not fixing interest rates is not as lucrative. However, this is why the economy is in a Depression. Because we have invented a culture that sets us adrift in millions of miles of laws, small print, and clauses just for the privilege of having a roof over our heads. A million people sit around everyday rewording laws, contracts, and policies that legally bind adults into these complex arrangements that continually shift to the financial advantage of business and resource controlling institutions, even years after the contract was made.
January 27, 2009 3:57 PM | Reply | Permalink
I caught Mr. Baker on the PBS News Hour last evening. As I have been proposing a takeover of the banks for the last three months, it's nice to see some people inching closer to the reality of the problem. In the mean time, we continue to throw billions to save failing institutions while people especially the elderly are literally freezing to death.
http://news.yahoo.com/s/ap/20090126/ap_on_re_us/frozen_indoors
93 year old freezes to death in own home due to unpaid power bills
So Wall Street gets help to continue living their posh lifestyle with handouts but a single old man is left to die? The city office that shut down his electricity then has the nerve to push this out to the neighbors, that they should have been watching over him. This is sickening.
A 93-year-old man froze to death inside his home just days after the municipal power company restricted his use of electricity because of unpaid bills, officials said.
Marvin E. Schur died "a slow, painful death," said Kanu Virani, Oakland County's deputy chief medical examiner, who performed the autopsy.
Neighbors discovered Schur's body on Jan. 17. They said the indoor temperature was below 32 degrees at the time, The Bay City Times reported Monday.
"Hypothermia shuts the whole system down, slowly," Virani said. "It's not easy to die from hypothermia without first realizing your fingers and toes feel like they're burning."
Schur owed Bay City Electric Light & Power more than $1,000 in unpaid electric bills, Bay City Manager Robert Belleman told The Associated Press on Monday.
A city utility worker had installed a "limiter" device to restrict the use of electricity at Schur's home on Jan. 13, Belleman said. The device limits power reaching a home and blows out like a fuse if consumption rises past a set level. Power is not restored until the device is reset
January 27, 2009 7:00 PM | Reply | Permalink
Indictment for manslaughter??
-- ARG
January 28, 2009 3:03 PM | Reply | Permalink