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"The Undertow of Bad Ideas": A Bad Bank is Bank Welfare
In "Obama's Challenge" by Robert Kuttner of The American Prospect, he
hopes that Obama's administration will not be done in by "the undertow
of bad ideas". One of those bad ideas is clearly "the bad bank. Dean
Baker weighed in on this on Tuesday and Paul Krugman takes it on on his
blog today: krugman.blogs.nytimes.com/
And did you catch Greg Palast on John Thain and his Big Con. Better than Dowd. "a butthole that big needs a $35,000 toilet". Then he goes on to conclude that "Tiny Tim" [Geithner] should be replaced by John Thain because only Thain has the balls to try and wheedle 1 Trillion out of the Saudis and stand a chance of getting it because he got money out of Congress twice with Tiny Tim's compliance. A very funny and seering take on this heist of our money. http://suicidegirls.com/news/politics/23528/
Dean Baker also came down hard on the "bad bank" idea on his blog and here on TPMcafe. Of course why listen to Dean Baker, the first economist to call the housing crisis what it was; a big bubble ready to burst?
Join the SEIU todayand go to a Bank of America branch near you and ask a teller to fire the CEO Kenneth Lewis. Lewis hired John Thain by merging Merrill Lynch to Bof A in a sweetheart deal financed by we the taxpayers, but at the same time Bank of America was hosting a conference call to fight the Employee Free Choice Act. http://www.seiu.org
BadThis is a turn on the famous Galbraith quote "Under capitalism "man exploits man. Under communism, it's just the opposite."
As the Obama administration apparently prepares to launch Hankie Pankie II -- buying troubled assets from banks at prices higher than they will fetch on the open market -- it occurred to me that an updated version of an old Communist-era joke may be appropriate: under Bush, financial policy consisted of Wall Street types cutting sweet deals, at taxpayer expense, for Wall Street types. Under Obama, it's precisely the reverse.
And did you catch Greg Palast on John Thain and his Big Con. Better than Dowd. "a butthole that big needs a $35,000 toilet". Then he goes on to conclude that "Tiny Tim" [Geithner] should be replaced by John Thain because only Thain has the balls to try and wheedle 1 Trillion out of the Saudis and stand a chance of getting it because he got money out of Congress twice with Tiny Tim's compliance. A very funny and seering take on this heist of our money. http://suicidegirls.com/news/politics/23528/
Dean Baker also came down hard on the "bad bank" idea on his blog and here on TPMcafe. Of course why listen to Dean Baker, the first economist to call the housing crisis what it was; a big bubble ready to burst?
Join the SEIU todayand go to a Bank of America branch near you and ask a teller to fire the CEO Kenneth Lewis. Lewis hired John Thain by merging Merrill Lynch to Bof A in a sweetheart deal financed by we the taxpayers, but at the same time Bank of America was hosting a conference call to fight the Employee Free Choice Act. http://www.seiu.org
A bad bank filled with bad ideas from very bad butthole actors posing as "masters of the universe" should be junked.
We need new ideas and good ones. And they abound in books like Kuttner's, Jamie Galbraith's "The Predator State", Gar Alperovitz and Lew Daly's new "Unjust Deserts", Dean Baker's new "Plunder and Blunder". We need to create jobs through small businesses anchored in our communities. We need to establish a health care system that will keep the workforce healthy. And we need to fund our school system to keep expanding our accumulation and communication of knowledge that will strengthen us to fight the undertow of ideas whose time has come to go far far out to sea and never return to these shores.
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Nice post dkc. As OGD said today vis avis health care, "Where is the outrage
".
January 29, 2009 12:09 PM | Reply | Permalink
Where indeed is the outrage? I was shocked by the callers on Mark Thompson's Sirius Left radio show yesterday who had almost the same comments. "Obama has too much on his plate right now. He has to take care of the economy and doesn't have time for special interests like health care? One guy, obviously young, said health care was a small concern compared to the economy. Bruce Dixon of blackagendareport.com was the guest and was appalled at the lack of understanding of the economics of health care. He had come on to talk about his piece on Jim Clyburn (House majority whip) saying on C-Span that health care was off the agenda for this year. Shocking and under reported.
We still have a lot of misinformed people out there.
January 29, 2009 12:35 PM | Reply | Permalink
We continue to have those misinformed and under-informed people because the vast majority of Americans depend on Television and radio/MSM for their 'information'. One needs only consider the advertising revenues of the Insurance and pharmaceutical industries to see which side these 'information sources' bread is buttered on. Same applies to the financial sector. It is going to be an uphill battle, and like most things this will only gain the exposure it deserves when the lack of addressing it becomes critical. Health economists have been focused on the pending crisis in health care for years, decades even, but that discussion hasn't filtered down to the general population. Economists and Treasury were aware of the impending cluster-bomb in the mortgage sector at least 3 years before it actually went off. Most Americans don't know our health care costs are the highest in the world, and increasing at a greater rate than any other country to boot. I'm beginning to think we'll wait till that bomb self detonates as well.
January 29, 2009 12:52 PM | Reply | Permalink
Feral, this is a good post. I am with Miguel on this point concerning health insurance. Employers are just going to be forced to discontinue the programs altogether.
January 29, 2009 1:27 PM | Reply | Permalink
buying troubled assets from banks at prices higher than they will fetch on the open market.
That's the understatement of the year. As is pointed out here.
Not pretty folks.
C
January 29, 2009 1:45 PM | Reply | Permalink
One thing I was thinking about - that is sort of an elephant in the living room - is the prospect of massive bank failures. Which I suspect is the main thing that scares the piss out of the government right now.
If it ever got out just how much bad assets the banks are really holding or if that stuff should start to make it's way in mass on the the real estate market right now (which is still in free fall) , the value of housing would drop faster than light entering a black hole. The FDIC simply could not cover all the deposits that would be at risk. Not to mention the rest of what little economy we have left.
I do not think that this really can be prevented though since such information eventually gets out.
C
January 29, 2009 2:49 PM | Reply | Permalink
The information is going to get out. Yes, many banks are failing and will fail. Trying to hide the bad stuff might keep some people blissful for a bit, but nationalizing the banks is a better idea. And we also have to nationalize the Fed. No more paying interest on our own money.
It's not like the old days. The banks have failed already and most people with common sense really see that. It's time "to put away childish things" right? That would be trying to hide dirty laundryf under the bed.
January 29, 2009 4:08 PM | Reply | Permalink
I think you and C have hit on the crux of the issue regarding the true, (bad), state of bank solvency. They're trying to prevent a run on banks by withholding that information. And you're right dkc that the information will get out. It's one of the problems with allowing the gumint to treat citizens as children incapable of handling the truth. Some day the kids find out that Santa isn't real, and the sadness is divided between the hard truth that Senor Klaus isn't real, and the fact that Mom and Dad lied.
January 29, 2009 4:22 PM | Reply | Permalink
Good post, Feral Cat.
January 29, 2009 4:12 PM | Reply | Permalink
"If it ever got out just how much bad assets the banks are really holding..."
Having friends who work at banks, I know that the regulators are all over them right now pouring over each asset and what it's marked at. So I don't agree that the banks are able to "hide" what they currently are holding.
But why does everybody say that the TARP is going to buy the assets at an above market price?
I think it's a great idea for the TARP to buy these assets at a price that it thinks is appropriate for the underlying risk.
That may be 20 cents on the dollar and the banks may be valuing them at 50 cents today. But I think the banks will sell them in order to get rid of them. They will sell them plus sell any non-core "crown jewel" type assets to get their leverage down.
These assets are so illiquid that everybody's valuation is really just a guess. But if the TARP makes conservative assumptions and haircuts their valuations, they should be able to ensure a good return.
January 29, 2009 8:57 PM | Reply | Permalink
That's the optimistic view of things. We've seen so much sneaky crap like the banksters still giving themselves bonuses, trying to keep buying 50 million dollar planes, cooking their pensions so that they get more money, scheming to defeat the EFCA, lobbying to keep deregulation, offshoring their accounts, laying off employees to improve their bottom line...with very little consequence that pessimism seems in order. Granted they made Citigroup give up their jet. But much more pain is in order for these folks to give up their evil ways. Read Nomi Prins "Other People's Money: The Corporate Mugging of America". She worked at Goldman Sachs and this book was published in 2004. She exposed the crookedness then. Nobody listened. Naomi Klein wrote "The Shock Doctrine" last year. No media mention of it though it was widely debated in Europe. What is happening now is classic shock doctrine. 1.Deregulate, 2.privatize, and 3.cut social spending.
So far
1. no re regulation despite people pouring over the books. Nothing happened after Enron, World Com, Tyco and Quest. Prins talks about this.
2. Watch the privatization of the stimulus.
3. Watch for cutting social security and medicare.
Are we recovering or in shock?
January 29, 2009 9:24 PM | Reply | Permalink
"But why does everybody say that the TARP is going to buy the assets at an above market price? "
Because that is the plan and it was also Paulson's "bright idea". If you buy them at their marked-to-market price, you're not recapitalizing the institution which holds the asset, you're trading cash for an asset in a straight swap.
Speaking of swaps, one of the big unknowns for me is the effect of CDO and CDS instruments on the uncertainty of the value of the assets. I believe it's huge. And I also wonder if TARP II will be aimed at buying those instruments, or only at buying up actual mortgages or the original MBSes.
"These assets are so illiquid"
Oh? How do you know, exactly?
January 29, 2009 10:02 PM | Reply | Permalink
Please show me where "the plan" or Paulson said that they would pay whatever price the banks had it marked at.
And I know they're illiquid because it's my day job.
January 29, 2009 11:01 PM | Reply | Permalink
How does your day job inform you? What does liquidity have to do with price?
You can read up on TARP online.
January 30, 2009 3:35 AM | Reply | Permalink
My day job is working at a bank in the back office helping determine the marks on our "bad assets"
When you own a performing asset but there's no buyers, just sellers, then it's very difficult to know what the appropriate "market value" of that loan is.
And I've read plenty about the TARP. Paulson's original plan never clearly outlined what price they'd pay for the bad assets. He wanted/needed flexibility so he never said publicly during the congressional hearings. But what you're missing is that it doesn't matter whether the TARP buys the assets below, at or above the seller's "mark".
What matters is that at the right price the TARP can make a ton of money if they hold the loans to maturity. Where the bank marks the asset is irrelevant to what you think intrinsic value is and what discount you buy below intrinsic value
January 30, 2009 6:20 AM | Reply | Permalink
Your answer is: Liquidity has nothing to do with price.
Liquidity is about the volume of the market, or its "velocity". Of course if a seller is desperate to sell, that tends to drive the price down, liquid or illiquid market. But that's an independent factor. Often people choose not to sell if they can't get the price they want at the time.
January 30, 2009 3:43 PM | Reply | Permalink
I'll try to be specific because you like to speak in generalities. I'll use Citibank as an example.
Citi has a USFoodservice bridge loan sitting on its books. So does JPM, GS and a bunch of other investment banks. They did a roadshow to sell the bonds to the market and they got no takers. That's what I define as an illiquid market for LBO bridge loans.
If you're Citi, how do you "mark to market" this loan if you tried to sell it and didn't get any takers?
January 30, 2009 3:56 PM | Reply | Permalink
How are houses marked to market?
1) Appraisal
2) Recorded transactions
3) ________
But you're off on a red herring hunt again, Bill :(
January 30, 2009 4:47 PM | Reply | Permalink
I'll answer your question. Please answer mine that I've already posed. How is Citi supposed to value it's USFoodservice loan (one of the "toxic" assets on its balance sheet)?
As for your question - houses are marked to market based on where other houses in the neighborhood trade and the characteristics of that house. When no houses in the neighborhood are trading then it's hard to value an individual house. That's illiquidity.
January 30, 2009 5:10 PM | Reply | Permalink
I already answered. And you still admit that pricing and liquidity aren't related directly.
Did you understand the point about why TARP is or would be paying too much?
"If you buy them at their marked-to-market price, you're not recapitalizing the institution which holds the asset, you're trading cash for an asset in a straight swap."
January 30, 2009 7:27 PM | Reply | Permalink
Yes I understand you're point but it still gets bad assets of off their books and restores confidence in the system. Jamie Dimon made the same point on CNBC this morning (did you watch it?)
And you haven't answered my question yet. So please try again - what is the price that Citi should mark its USFoodservice loan when there are no buyers?
My view is that a lack of buyers means it's an illiquid market for USFoodservice debt. Which means that it's hard to determine a "market price" of the loan.
January 30, 2009 10:36 PM | Reply | Permalink
They are still insolvent and there is no upside for them (you believe the toxic assets will be worth more soon).
January 31, 2009 5:59 AM | Reply | Permalink
Why won't you answer my question on the price of Citibank's USFoodservice loan?
It's an illiquid asset, which makes it very hard to price. But I'm waiting to hear your analysis
January 31, 2009 7:57 AM | Reply | Permalink
Analysis of what? I've already answered on topic, your repeated rude demands that I do your homework for you are not motivating me to do it for you.
January 31, 2009 2:42 PM | Reply | Permalink
I don't think I saw your answer. Must have missed it. Would love to hear your answer again. Please answer again - my question is how you would (if you were Citi) value your USFoodservice loan. You tried to sell it and there were no takers. (That would mean that it's an illiquid asset). What would you mark it at?
January 31, 2009 11:42 PM | Reply | Permalink
I think it's realistic, not optimistic. If you take the average recovery rate on mortgages, I bet they are a lot higher than where the banks currently have the assets marked. And the TARP would be paying a further discount to where the banks have the assets marked. The RTC made money and so can the TARP.
The TARP will be able to do its own diligence on the assets. I think the TARP could hire some very smart guys like Bill Gross and Warren Buffet to figure out what to pay for this stuff and we the taxpayer would do very well.
January 29, 2009 9:32 PM | Reply | Permalink
"We need new ideas and good ones. ..."
Well those ideas you mentioned might be good ones, but how do they apply to the banking situation which seems to be the focus these days?
I'd like to see all gambling losses be realized by the institutions and investors, not covered at all by the taxpayers. That could mean getting into the devilish details of the CDO and CDS instruments which are arguably THE cause of the crisis. Why are they the cause? Because it's one thing to have a house drop in value, or a mortgage stop performing. But if you add injury to insult by guaranteeing against those, then you immediately realize your losses when the insured party demands full compensation for what might otherwise be only a paper loss and a little less cash flow for awhile.
January 29, 2009 10:25 PM | Reply | Permalink
Here we go again with CDS being the root cause of this crisis.
So the overlevered consumers and overlevered companies having nothing to do with the crisis.
The insured party only gets compensated when the mortgage defaults. And I don't see how it's just a "paper loss" when a mortgage has a payment default.
And if the TARP buys the toxic assets, the "gambling losses" would be realized by these institutions. The banks will have sold assets that they bought in the high 90s for prices somewhere in the 20s or 30s. Again, assuming that the TARP pays a low enough price and holds these assets to maturity, the investment should have a positive return. The taxpayer is not covering the losses.
The taxpayer is only "covering losses" if they pay more than what the assets are worth.
January 29, 2009 10:53 PM | Reply | Permalink
"Here we go again with CDS being the root cause of this crisis."
I'm not interested in your trash talk, Bill. Try to deal with 1) reality and 2) what I actually write, if you're going to reply.
January 30, 2009 3:36 AM | Reply | Permalink
I am dealing with reality.
You keep saying that CDS is THE (your emphasis) cause of the crisis and I'm saying you're completely misinformed. Is you're real name Collin Peterson?
I'm all for regulating CDS through a common clearinghouse, but a ban is just silly. And it's even sillier to think that they were the root cause of the credit crisis.
January 30, 2009 6:27 AM | Reply | Permalink
You continually fail to read for meaning, Bill. I really cannot help you with that since you're so persistent at it.
Distinguish "bubble" from "crisis".
What role did CDS et al have in the formation and collapse of the housing and debt bubbles?
What role CDS et al have in unwinding, or "deleveraging" in the fallout of the bubbles?
Where was the "crisis" in Sept? Read up on it. How was AIG (the biggest initial beneficiary of Paulson's fascism) involved? Read up on it.
How does a simple mortgage devalue from 100% to 20% (a figure you threw out in some thread) or 9% (I hear Lehman assets went for 9 cents on the dollar last fall)? It didn't. The property value clearly didn't fall to 20% on average. So the crisis is clearly not merely the contraction in real estate prices themselves.
Please think first.
January 30, 2009 3:40 PM | Reply | Permalink
I'll do you a favor and stop trying to explain things to you. You continually fail to listen. We've had this argument numerous times but you have some axe to grind.
CDS did not have a role in the formation or collapse of the housing bubble. Lenders made poor underwriting decisions and consumers made poor buying decisions. The Fed helped with really low rates. When consumers started defaulting on sub-prime, they did this because they took on mortgages they couldn't afford. Not because of CDS.
You can continue to be delusional if it makes you feel better.
PS - what's your day job that makes you think you're so smart about CDS and the mortgage market?
January 30, 2009 4:01 PM | Reply | Permalink
http://tpmcafe.talkingpointsmemo.com/talk/blogs/dkc/2009/01/the-undertow-of-bad-ideas-a-ba.php#comment-3358020
You skipped about 90% of that.
What encouraged lenders to make bad decisions, if not easy money and AAA rated CDS instruments? But that's still only the bubble, not the crisis.
January 30, 2009 4:51 PM | Reply | Permalink
I only answered 10% because it keeps you focused. If I answered 100% then it would have taken too long. You ask too many questions at once.
Lenders made bad decisions because they knew it could be repackaged and sold. Freddie and Fannie would be everything and guarantee it. F&F and all the European banks bought up the CDOs like crazy. They would have bought them whether or not they could buy CDS protection on them. If CDS product didn't exist, F&F and the Euro banks would have all still bought securitized mortgages
January 30, 2009 5:15 PM | Reply | Permalink
You keep admitting my point and throwing up chaff, Bill, while proposing farcical counterfactuals.
January 30, 2009 6:50 PM | Reply | Permalink
I didn't admit any of your points. You are so confused. You should spend less time looking up big SAT words and more time doing your "research".
Please tell me what's your day job that makes you so informed about the mortgage mess and the CDS market
January 30, 2009 10:29 PM | Reply | Permalink
How could I spend less than zero time looking up words? What "research" is relevant to the topic?
Please stop being so rude. Discuss the topic topically in an orderly fashion, not all over the map with so many fallacies.
January 31, 2009 2:45 PM | Reply | Permalink
You're the one being rude, eds. I made a comment that the toxic assets are illiquid which makes them hard to price. Plus mark-to-market accounting forces Citi to price the asset at the "market price". You say no. So I provided an example and asked how would you price Citibank's USFoodservice bridge loan?
I tried to have a conversation about illiquidity but you just shoot me down
I think you are confusing "price" with "value". When I say hard to price, I mean put a market price per mark-to-market accounting. Citi could think that these assets are worth par (ie value) over the long run but they can't mark them (ie price) at par because other 10x leveraged credits have bonds trading in the 30s.
Pricing and liquidity are linked. Intrinsic value and liquidity are not linked.
January 31, 2009 11:49 PM | Reply | Permalink