Robbery Note - From The Banking Oligarchs This Morning
The modern bank robber calmly hands a note to the teller, asking for money and making a moderately specific scary threat. The robber, of course, expects the teller to hand over unmarked bills without a fuss.
This morning's "research" note from a major international bank is entitled, "Falling Short: The government needs to buy toxic assets," and the heart of their one page argument is, with the emphasis as in the original,
One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.
Tell me if you think I am overreacting - it has been a difficult week - but I interpret this as saying: "give us as much money as you can, or else." And the "or else" appears to be unemployment up around 20% and debt/GDP in the red-for-danger zone.
Can bankers really trump the American government in this fashion? It's painful to read, but probably helpful that the oligarchs put their cards (and notes) on the table so brazenly. This is, after all, a critical fight to save American democracy, and it's good to know what we are up against.
If you believe that saving the "systemically significant" banks will result in substantially lower employment and a substantially shorter recession (and no depression), then, the argument makes excellent sense.
Johnson's hung up on the Prodigal Son problem. No criticism there; I myself have always sympathized with the responsible son.
February 12, 2009 9:39 AM | Reply | Permalink
We don't have to have a depression at all. Just take the billionaire thieves assets and fix the situation. Throw those bastards in jail and set the law strait and move on. They are the ones that committed the fraud by creating the bubbles and then lied about the results.
February 12, 2009 10:21 AM | Reply | Permalink
take the billionaire thieves assets
No problema--*ol' Mr. Inflation has their home address...
*I used to promote a flea-market stall specializing in "Short skirtz and skimpy topz" with the tag line:
"Wear'em while you can, girls--Ol' Mr. Gravity has your home address..."
Ol' Mr. Gravity was a mashup of Mr. Tooth Decay and the Purple Pieman from Strawberry Shortcake...
February 13, 2009 12:36 AM | Reply | Permalink
"We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers"
I believe that approach would still leave some big banks insolvent.
Plus, the note confuses the bank bailout and the stimulus.
February 12, 2009 10:11 AM | Reply | Permalink
I've said this very thing all along. They planned this shit and should be thrown under the jail. Buster this requires a mass uprising. These fuckers are biggest thieves in history.
February 12, 2009 10:16 AM | Reply | Permalink
From yesterday's hearings, it seemed that most of the eight were not interested in selling any assets or taking any additional government money. It appeared that they have all battened down the hatches and are prepared to ride out the storm on their own. It seems likely that they have either sold or hedged their level 3 assets, or that such assets acquired during mergers have been already fenced off into pools with government guarantees. So they can hold these troubled assets until they default or mature.
What will continue to implode is the private, unregulated "shadow banking" system of short-term, securitized debt. Borrowers who have been borrowing cheap short-term money will not be able to roll it over. They either have to pay it off or borrow long at much higher rates. They are in exactly the position of the homeowner who got an ARM with a cheap rate for 3 years and expected to refinance into another ARM before the 3 years were up.
This will cause a lot of hurt for smaller banks as corporate loans and commercial mortgages go sour.
But don't expect the big banks to be very cooperative the next time the regulators ask them to take over failing smaller institutions.
February 12, 2009 10:26 AM | Reply | Permalink
"What will continue to implode is the private, unregulated "shadow banking" system of short-term, securitized debt."
-thought the expanded TALF could mitigate the damage from this...(?)
February 12, 2009 10:44 AM | Reply | Permalink
JPM, GS, and BK may be in fine shape, Merrill, but how sure are you that C and BAK, even with the guaranties, are?
Maybe we should await the results of the "stress testing" -- whatever that procedure turns out to be -- before pronouncing those institutions able to weather the storm.
February 12, 2009 10:55 AM | Reply | Permalink
Typo alert -- "BAC" not "BAK"
February 12, 2009 10:56 AM | Reply | Permalink
Ellen - as far as I can tell, the government has no way of conducting a credible stress test. They don't have the people or the models. All they are likely to do is go in and ask the bank politely whether they're solvent. Actually the banks probably can't even stress-test themselves. All they've got is their clownish VaR models.
I've got some links, if you're interested, here:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/obey/2009/02/has-geithner-got-the-right-ide.php
February 12, 2009 11:57 AM | Reply | Permalink
And look at Yves Smith's take.
As a result, this [stress testing] is a garbage in, garbage out activity to placate the public and perhaps reassure investors. It would probably be fine for a strictly US bank which was a traditional retail and commercial lender (think a WaMu). But for the really big banks with capital markets operations, this is a joke. And those firms have and will continue to be the biggest recipients of the government dole.
February 12, 2009 12:41 PM | Reply | Permalink
sorry - a really dumb question: how do you do the links that way? I can't find any other way but to copy paste the url into the comment...
February 12, 2009 12:47 PM | Reply | Permalink
Manually type in the HTML
[a href="mylink.here">my text here[/a>
replace the '[' with '<' in two places and it will show and work as
my text here.
use Preview to check it. Note that my < is synthetic so that I could just show it
<a href="mylink.here">my text here</a>
without the [ substitution. But if I just put that symbol into the text, TPM software makes it vanish, it thinks it is part of actual source code.
February 12, 2009 5:02 PM | Reply | Permalink
THanks!
February 12, 2009 5:11 PM | Reply | Permalink
testing link
February 12, 2009 7:06 PM | Reply | Permalink
You linked to my above "helpful tip" comment.
If you use Preview, you don't have to actually post the test message to see if the link works...
I tend to Preview most all comments I make which have any HTML because I cannot effectively proofread my text/hypertext when it's in the same font as when I mistyped it! :-)
February 12, 2009 7:14 PM | Reply | Permalink
ah, so much to learn...
February 12, 2009 7:38 PM | Reply | Permalink
Another trick.
Right click on the page and then, click "View Page Source."
Find the link (or some other HTML tag usage) you're interested in and you'll be able to see how the writer generated it.
Also, eds' point about using the preview box and clicking your link to assure yourself it's not broken is a good one. I try always to follow that advice.
February 12, 2009 10:04 PM | Reply | Permalink
Thanks!
February 13, 2009 7:39 AM | Reply | Permalink
Another question:
"It seems likely that they have either sold or hedged their level 3 assets,"
Really?? The government has only ring-fenced a small portion of it. And I can't imagine they've found someone willing to play counterparty to the rest of the hedges. You have good sources for this?
February 12, 2009 10:55 AM | Reply | Permalink
Instead of saying "level 3" I should have said "troubled assets". They actually have a lot of level 3 assets.
But lets look at it in more basic terms. If you were one of these CEOs, your job has been to stay out of risky businesses (like the wholesale mortgage channel business), take on a couple of failed institutions (insisted on by your regulators for the good of the country), and keep from getting screwed by the vulture capitalists (the so called "private capital", led by the hedge fund gangs).
I think that this phase is pretty much over. The larger dodgy mortgage companies like Golden West, Countrywide, IndyMac, and WaMu are all assimilated, and the wholesale mortgage channel is all but dead. Since all of these institutions are huge and have access to the Fed window, the ability of the hedgies to mount a successful run on them is much diminished.
Now your job as big bank CEO is to keep from getting screwed by the government, who want you to forego enforcing your mortgage and loan contracts while at the same time peddling more risky loans to dodgy borrowers "to get the economy going again" and "unblock lending".
So your strategy is to resist government money, boost your interest rates and fee income, work with your borrowers to modify loans for maximum long term payback, take your writedowns agressively, and model your risk conservatively.
February 12, 2009 1:28 PM | Reply | Permalink
I'm sure that IS the strategy they'd implement. I just don't think they can contain the losses. It seems to me that Citi is about to be nationalized:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/obey/2009/02/citis-about-to-get-nationalize.php
February 12, 2009 2:16 PM | Reply | Permalink
4Q'08 Citi had
11.8% Tier 1 capital ratio
15.6% Total capital ratio
6.0% Leverage ratio
All well above regulatory requirements.
Their balance sheet is down $242 billion in assets from a year ago, and they have loss reserves of about $30 billion.
Not getting Merrill Lynch was probably a good thing.
February 12, 2009 4:13 PM | Reply | Permalink
Yes, and I have a bridge to sell you.
just kidding...
more seriously - That tier 1 capital looks decent only because of the ring-fencing. But remember they take the first 50bn or so of losses of whatever assets that get the guarantee. They're about to take a big CMBS hit with the coming downgrades.
Still, the buffer the ring-fence ultimately provides is pretty unclear.
February 12, 2009 4:21 PM | Reply | Permalink
Looked at the numbers again. Maybe Citi'll make it if they suspend m2m. otherwise don't see it.
February 12, 2009 4:33 PM | Reply | Permalink
Unfortunately, they haven't posted their 4Q'08 10Q yet. Guess I'll wait.
February 12, 2009 5:34 PM | Reply | Permalink
"I think that this phase is pretty much over. "
But have the costs been wrung out fully? It's one thing to hide problems of Bank X in larger Bank Y, it's another for the X problems to be fully resolved internal to Y+X.
It does seem that the derivatives issues/problems are getting more press recently. I have no way to judge how significant they are.
February 12, 2009 7:11 PM | Reply | Permalink
"What will continue to implode is the private, unregulated "shadow banking" system of short-term, securitized debt."
-thought the expanded TALF could mitigate the damage from this...(?)
February 12, 2009 10:39 AM | Reply | Permalink
I keep looking out my window for bankers jumping out of their windows. Give 'em a view of our collective backs as we walk away from them.
February 12, 2009 11:09 AM | Reply | Permalink
Bless your heart, you are going to be dissapointed. We are screwed and they got thier jollies. How did you feel the earth move?
February 12, 2009 12:58 PM | Reply | Permalink
"because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base"
Blackmail/extortion vs. cynical fact?
Cynical fact: Homeowners took investors for $9T in cash (less some repayments) via home equity loans in the decade through 2006. Now investors want something back, since the collateral used by homeowners cannot be priced by the market to cover that cash. And that doesn't count the other losses.
Both sides are complicit, both sides must pay. Let bare minimum safety nets cover the human pain, and let corporatism suffer as much as possible.
February 12, 2009 4:46 PM | Reply | Permalink
"Cynical fact: Homeowners took investors for $9T in cash (less some repayments) via home equity loans in the decade through 2006. Now investors want something back, since the collateral used by homeowners cannot be priced by the market to cover that cash. And that doesn't count the other losses."
Your idea of what constitutes a fact is total BULL SHIT.
And by the way, so far bank creditors or investors are not getting burned as bad as homeowners who watch all of their equity evaporate due to declining values while their homes go into foreclosure because they lost their jobs.
Banks investors the "preferred holders" anyway, are making out like a bandit with tax payer money greasing the skids as the bubble grew and tax money after the bubble popped.
AND THAT IS WHY HEADS SHOULD ROLL.
February 12, 2009 5:33 PM | Reply | Permalink
I get that you are angry at something, but I would argue that your anger is misplaced. And calling a fact "bull shit" isn't discussion nor argument. Shit is part of fertilizer. Please reduce the acid content of your remarks and replace it with basic compost, if you truly have something to offer besides anger.
George Soros cites Feldstein on the $9T. I don't know what else you would object to there.
February 12, 2009 7:06 PM | Reply | Permalink
I'm saying homeowners didn't commit 9T in fraud, the banks most certainly did. You could cite maybe what 2% or 3% of mortgage contracts where the home buyer committed fraud, MOFO. That ain't 9T, jerk. It's a conservative talking point.
The banks, the free market cheerleaders in the MSM, and the realtor's hold more of the blame than people trying to buy a home. I don't give a rats ass what George Soros says. Banks mislead investors, and the homeowners about the nature of what was happening when the price of homes were accelerating between 2000 and 2005. It was a trap. They sold home buyers option ARMs like the rates would never go up. It was a shell game with the banks holding all the power but none of the responsibility in your eyes. The FED reserve keep the interest rates low to aid and abed the banks causing asset inflation. The homeowners had no control over that engineering feat. Most people don't have time to wipe their ass clean much less plan to commit fraud against investors they never met.
February 12, 2009 7:56 PM | Reply | Permalink
You're taking a very narrow view. Maybe it suits you.
"That ain't 9T, jerk."
Calling me a jerk is kind of a conversation ending gambit. But I never said $9T of fraud, so maybe you're angry at yourself.
February 12, 2009 9:11 PM | Reply | Permalink
"Cynical fact: Homeowners took investors for $9T in cash (less some repayments) via home equity loans in the decade through 2006"
February 12, 2009 9:39 PM | Reply | Permalink
And you turned that into "fraud"?
The point is that as a class, homeowners took a whole lot of cash for equity, almost a trillion per year average. Now that equity which got inflated especially from 2003-2006 is severely depressed, leaving the investors with what used to be valuable assets.
Some homeowners will continue paying off their loans, but others have already defaulted in huge numbers. So the investors' money was "laundered" through home equity loans and used as discretionary income etc. by people who won't pay back principal or interest.
I have no reason to doubt Soros' citation of Feldstein, but if you can correct it ....
February 13, 2009 2:51 AM | Reply | Permalink
Well in far too many cases, corporations are bankrupt because of debt that resulted from a leveraged buyout or merger. Some hotshot investor borrows an assload of money to buy a company, then sticks it with debt equal to the purchase price. Nothing changes, except that all the profits are eaten up by interest payments and when there are no profits, the companies are bankrupt.
So now is the time to reverse the process. The investors contributed nothing whatsoever to the company they bought, so to hell with them. Wipe them out completely, erase the leveraged buyout debt and let the company start over on its own merits. And moving forward, all this leveraged buyout nonsense should be illegal.
February 12, 2009 9:01 PM | Reply | Permalink
The banks are afraid that if the government pays reasonable prices for these assets that the government will make a market with prices so low that a lot of bank insolvencies will be revealed.
It's not just that they want the government's money, it's that they want the government to create a market with prices high enough that they can claim solvency.
February 12, 2009 9:58 PM | Reply | Permalink
this is a test
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February 13, 2009 12:40 AM | Reply | Permalink
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February 13, 2009 12:42 AM | Reply | Permalink
this is a test
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February 13, 2009 12:42 AM | Reply | Permalink
I guess I did not understand the instructions correctly
February 13, 2009 12:43 AM | Reply | Permalink
Mr. Johnson, just caught your appearance with Moyers. Nice interview.
Anti-trust laws for the financial world. Sounds reasonable.
FDIC-type interventions for marginal banks. When do we intervene? You're assuming that they are in much worse shape than they seem to be at this time. That might be prudent if a bit aggressive. Consider a worst case condition that they've been in effect lying about their assets. But TARP funds do count as capital. Should we intervene it technical statuatory limits are not significantly breached?
But I wouldn't object to taking over the banks which got those ridiculous loan guarantee giveaways, before they make use of them. Citi and BAC.
You and Moyers skipped over the synthetic derivatives issues (in what I caught anyway). Is this not a huge complicating factor in any intervention?
I thought you and Moyers were unfair to Goldman Sachs and their possibly overpaid CEO -- I've heard that GS got out of the mortgage snafu starting almost two years ago. And I've also heard that some banks didn't want TARP funds, and we know GS only took $10B. So maybe the CEO deserves a large bonus, if not $125M or whatever it was. So, in your opinion, will we be doing an intervention on GS early on or maybe never?
February 14, 2009 1:36 AM | Reply | Permalink
I just has the chance to watch the Moyers/Johnson interview and I wondered why those who are connected in some to the inner sanctum are only coming forward now? did he miss the class in collage where he was to learn that absolute power corrupts absolutely?
I know some of you have followed the writings of Christopher Story at World Reports dot org. He came out with a humdinger of an update today and it is one that shouldn't be missed. It deals with the reality of what is and has happened to our country. The US Treasury is run by the state within the state and Bush seniors fingerprints are all over this along with the Clinton's, Greenspan, Bernanke, Paulson, Geithner and others.
As many know, it would be illegal for a government agency to raise funds in a clandestine manner, but the CIA has been up to its eyeballs in such affairs. Do you recall the Lear jet that was used by the CIA for rendition flights that crashed two summers ago on the boarder of Mexico and California? Now why would think a jet that was owned by the CIA front company be carrying 7 tons of cocaine on it as reported in the LA Times?
The point to this rant is that the banking oligarchs as Johnson points out are the problem, but he stops short on the real reason why. Perhaps he's just being polite to his friends in high places when in actuality the unvarnished reason may well be this.
“Sex and corrupt politics in DC is nothing new. For example, during the Civil War there were 450 brothels in the capital. Part of the mythology of Washington, however, is what might be called the Jim Lehrer Illusion, which is to say that all people in DC do is sit around and rationally debate policy alternatives. In fact, Washington politics is also heavily driven by cowardice, bribery, blackmail, deceit, fear, loyalty to old buddies and even older bodies, cooptation, sex, and just plain crime. Journalists who pretend otherwise either don’t understand what is going on or are covering for someone.
The public often misunderstands the importance of Washington scandals, assuming them to be a simple dalliance, individual failing, or private offense. What makes both sex and crime in DC different, at least when those in power are involved, is that there is far more opportunity for blackmail and far more skill at covering things up.
The blackmail may be used by members of one branch of government against those of another, by lobbyists against members of Congress, by the police against whomever they wish, and by foreign powers. For example, one way to keep a congress member bought is for a lobbyist to provide him with high class prostitutes. And it is noteworthy that both the Israelis and Boris Yeltsin apparently knew about Bill Clinton’s affair with Monica Lewinsky before the American public did.”
February 15, 2009 5:24 PM | Reply | Permalink