Fun With the Banks
We had Citigroup Rescue III today, in which the taxpayers got another bad deal as we somehow managed to exchange a substantial portion of $45 billion of preferred stock for less than $3 billion in common stock. (I don't have the details, but it's clear the deal was much less than dollar for dollar.) Citigroup Rescue IV cannot be far off.
Let's put an end to this sad saga already. Here's the deal. We make the banks' unsecured creditors (bond holders) the taxpayers' friends. We set a deadline for the banks to own up to their bad assets. June 1 sounds about right to me. We will review the debts of the banks that go under by this date and honor as large a portion of the debt as seems reasonable.
Now for the fun. The policy is that the debts of any banks that subsequently go bankrupt will only be honored at half the rate as the payback of the pre-June 1 group. In other words, if the June 1 group get 90 cents on the dollar, the creditors of the banks that subsequently go bankrupt will just get 45 cents on the dollar.
This simple measure can quickly make Wall Street fun again.
Seems to me that the available evidence shows that Citi is fundamentally insolvent. Why don't we just do what the FDIC would do with a normal bank? Put it in receivership, wipe out the stockholders, fire the obviously incompetent management, clean up the mess and sell it to new owners.
February 27, 2009 10:10 PM | Reply | Permalink
I agree with you, except... I think they have looked that option in the face, and they don't yet know how the dominoes will fall, due to the "ripples" that would result.
I think it's that much of a Jenga game, that they don't dare let anyone "fail" just yet. So they continue to kick the can down the road, just to buy time, until they can figure out a solution. Which is pretty scary.
-- ARG
February 27, 2009 11:33 PM | Reply | Permalink
No kidding. I'm far from an expert, but after a while it starts to unavoidably look like a thing where the 'monsters of banking & finance' not only hold a get-out-of-jail-free card on their risk taking (a basis of Baker's conservative nanny-state argument), but now that the crap is hitting the fan, they seem to hold this de facto veto over the terms of their own bailing out. It's nuts.
If I understand the argument, it's because Wall Street will go all basket-case if blame goes where blame is due. What the hell kind of market system is this? And what the hell kind of democracy is it where this accountability-phobic Tim Geithnerism is the best 'change' we get, over and over and over again.
And this is with the 'good guys' having won the election...meaning to me not McCain of course, but dammit not Clinton either!
It's this too-big-to-fail nonsense...like Bernie Sanders says -- and Baker essentially too, in a recent thing I saw on Cspan promoting his book -- that's too friggin' big "to exist".
But there seems to be something 'too big to fail' about Rubinomics, too. Which seems crazier and crazier to me as this thing keeps unfolding.
Frustrating.
February 28, 2009 4:13 PM | Reply | Permalink
Ah these are the reasons. If they wipe out the share holders, the market could take a major dive and they would politically alienate some big donations. And who woul want to buy it afterwards OR could.
C
February 27, 2009 10:31 PM | Reply | Permalink
This is a convenient argument for giving rich shareholders a freebee. Screw that, I'm sick and tired of this extortion. "The world will end if you don't give me all your money..." You want to make people mad, keep this crap up. Right wing radio won't save you. There aren't enough conservatives in the world, if you keep this shit up. Eventually, people will catch on, and when they do.... watch out.
February 27, 2009 10:59 PM | Reply | Permalink
I don't disagree with you one bit. I was just stating the justification, if you can call it that.
As far as I'm concerned they should all be boiled in oil, tared and feathered and run out of town on a rail. Before they are shot.
C
February 27, 2009 11:07 PM | Reply | Permalink
I believe the laws require that insolvent banks go into receivership, etc. As I understand it, it isn't an option, but a requirement. So, why does this administration continue the lawbreaking of the last one?
Actually, I understand very well. No politician will ever voluntarily stand between a wealthy man and his opportunity to grab even more wealth, let alone standing in the way of a wealthy man who wants to limit his losses of his wealth. It is human politician nature.
February 28, 2009 12:54 AM | Reply | Permalink
Hi,
I think that the bank lobby needs a theme song. Here's Woody Guthrie's "Jolly Banker". Amazing how it still hits many of today's events.
http://www.woodyguthrie.org/Lyrics/Jolly_Banker.htm
Bob Spencer
February 28, 2009 4:46 AM | Reply | Permalink
We don't need to protect the bond holders. Suspend interest payments to them immediately and offer them stock in reorganized banks in exchange. It'll be cheaper for us and the bondholders might actually make a fortune that way.
February 28, 2009 10:23 AM | Reply | Permalink
That would be a good start if things come to the point of no return.
February 28, 2009 5:10 PM | Reply | Permalink
It's time for Obama to leave office. He's incapable of handling the financial crisis. Appointing Geithner and Sanders, how dumb can you be. And then, no surprize, giant giveaway to the banks on behalf of the taxpayers. Either Obama is dumb as an ox or naive because he must know, like EVERYBODY else, that Citibank will have to be "nationalized" (receivership) by at least the summer. He's dragging the country down the Japaneses economic mess. FYI the Swedish path isn't much greater in the short term, but beneficial in the long term. I need a president with some balls and common sense. Obama=BushIII when it comes to financial systems.
By the way, who's the F*&k head negotiating these term? Are the trying to make the worst possible deal for the taxpayers? Fire them!
February 28, 2009 11:30 AM | Reply | Permalink
fromanother,
a thought occurred to me; why does the Government even need to negotiate with bankrupt banks? Wouldn't an ultimatum be more in order?
February 28, 2009 11:50 AM | Reply | Permalink
Good friggin point John! But the government people think they are there to help the banks and the rich people that profit from them. They forgot who they are really working for a long time ago and even under Obama they still haven't "gotten it".
February 28, 2009 2:44 PM | Reply | Permalink
Well, they cannot prove that the banks are legally bankrupt... yet. It seems to depend on how one values (accounts for) the assets and liabilities. There is an element of "reflexivity" in that, forward expectation values can get confused with current value, for instance.
Moral or fiscal bankruptcy would be different. Some would say the whole system has been bankrupt for decades if not longer, others would say for about a few years.
I don't see how reckless action today improves the economic fundamentals. Absent that kind of good, meddling can get lucky but it often makes things worse.
February 28, 2009 5:28 PM | Reply | Permalink
I just finished a letter to Obama and my senators and rep about this. About to put a stamp on it. Don't know why I keep doing it. It's getting to be a waste of time. I guess I thought with Obama he might actually be of a mind to give this contry back to its citizens. How the execs in these banks still have a job is beyond me. It will take a lot of political will and a serious consolidation of political power to overcome these fuckers. It's one of those things where if you give up power it is hell getting it back. Our politicians gave it up to powerful financial interests long ago and are now finding out it wasn't such a hot idea. One thing for sure this will be the best chance most people will ever see for that in their entire lifetimes. Obama wants to take them on but understands it is more than a little risky. The reality is the stakes are immense. This may be a damned if you do damned if you don't situation. We need our country back but it's going to cost us. We need to pull the trigger on these creeps. I could care less about foreign bondholders or shareholders. I'm only interested in Americans who might get hurt. And not any who have more than they need.
February 28, 2009 4:14 PM | Reply | Permalink
I think ARG's comment is right on point - Obama is biding some time to figure out the best way to handle all this. Listen to the words Obama is now using. He is using strong language that squarly points a finger at the wealthy and their greed. He made comments yesterday about the very wealthy and their lobyists and how he intends to represent the people, not the special interests. I don't think he is just talking. I think he is signaling that strong measures are in the works.
I hope so. I doubt if Obama will be as strong as I would like. He may not react strong enough to turn this run-away-train, but I do think he intends to make drastic moves soon.
February 28, 2009 5:04 PM | Reply | Permalink
Obama is talking about taking on a de facto aristocracy:
"The system we have now might work for the powerful and well-connected interests that have run Washington for far too long, but I don't. I work for the American people," says Obama. "
I wonder if 'aristocracy' will make it into the mainstream of what passes for debate and culture.
The French had the guillotine, we have a Congress which has at least one foot in the aristocracy.
February 28, 2009 5:41 PM | Reply | Permalink
LaRouche: "A Hamiltonian National Bank Act Is Needed"
February 26, 2009 (LPAC)-- It is reported that corporations are pulling money out of Citigroup, and perhaps some other banks, in the light of worries about those banks' survival and the fact that the FDIC generally only guarantees deposits up to a $250,000 limit. But, the report went on, Geither is formulating his shifting bail-out schemes with no regard to this reality.
"Geithner is focussed on special interests, which is Wall Street," LaRouche responded. "He's blinded to the reality of the national interest. We need the HBPA now. All reform of the system is built around the central theme of the HBPA. Say: `It always was the only solution. If you want to efficiently defend the American economy, this is how to do it.' Wall Street is dead; it should be given a decent burial."
Extension of the FDIC guarantee to all legitimate bank deposits is implicit in the HBPA. Nothing has to be added; you can simply explain to people that this is so. Although a minor clarification can be added to the text that the freeze on foreclosures applies to "owner occupied" homes, which was always the intention.
On the major institutions, including Citigroup and AIG, where more Federal bail-out money has already been put in than their entire value, and they've effectively been bought up by the Federal government, LaRouche said, "Yes, we have to introduce another element at this point, which is Hamilton's concept of a National Bank." In such situations, these shares or companies will be held as assets of the National Bank, until they're ready to once again become private entities. A Hamiltonian National Banking Act is needed. Some of these corporations will be placed in temporary receivership, to either be liquidated, or re-established. After we've written off all of the trash on the books of the banks, beginning with the derivatives, there will still be legitimate obligations on their books to the Federal government, that will now represent net assets on the books of the National Bank, until they are retired.
What we need is a National Banking Reform Act, to provide for these kinds of circumstances of receivership. Remove the crap, write it off, and then sort out the still-existing legitimate obligations, and put them on the balance sheets of a Federal government entity, which can use them against which to issue credit and otherwise, until they are retired.
For further elaboration go to:
LaRouche Cites Hamilton And FDR In Call For New National Bank
http://www.larouchepac.com/node/9347
February 28, 2009 8:04 PM | Reply | Permalink
Field Marshall L. Summers von Hindenburg and Quarter-Master General B. Bernanke von Ludendorff have allowed themselves to get seriously bogged down at the seige of Citigroup. Momentum has been lost. The Emperor, possibly, and the great body of loyal subjects for sure, are beginning to wonder if our trust in Obrigkeithas been misplaced . . . and everybody knows what THAT can lead to!
So why don't Our Twin Heroes just bypass that fortress and all the other fixed positions of the enemy by setting up a "Tennessee Valley Banking Authority," so to call it, that would lend directly to all those Joes the Wurzelbacher out there who only wanna create lotsa jobs and thus save the holy Homeland™ from the Bolshies?
If M. le comte de Vikram or Baron von Blankfein should ring up TVBA, let ’em be told politely they are simply TOO BIG TO BORROW. If they were to decide to split themselves into several hundred pieces first, however, perhaps their fragments’ applications might be considered.
(( No economist, this guy! ))
Happy days.
March 1, 2009 4:07 PM | Reply | Permalink