Treacle at Treasury - a moral crisis and more [updated]
update May 5 to include Bloomberg on stress test leaks. The article says 10/19 banks likely to need capital. But so far no leaks on the flip side -- are any banks too weak to save? This is the key reason for stress tests -- to find out which banks should NOT be saved.
updated May 4 to include article, Geithner's New Bank Fix Is Bogus, Too, which agrees with my views that the Geithner proposed conversion of TARP preferred stock to common stock is bogus and problematic. It also supports my position re bondholders:
As an aside, I read somewhere thanks to a TPMer that Obama had critics Krugman and Stiglitz over for a dinner chat last week. That strikes me as a hopeful sign. Would love to have a transcript of that chat...
Other updates and original blog after the jump (I hope!)....
updated April 29 to include stress test article:
If a bank fails the stress test, it should be directed to prepare itself for Intervention aka an orderly bankruptcy, not offered diluted terms which keep its marginal stockholders and anxious bond speculators happy (or at least happier).
Has PPIP been abandoned? Will it be modified along the lines I have proposed?
Despite Obama's good interview in the NYT, and my appreciation of the part on page 4 about Economists, I still must question Geithner's role here. Obama might be listening to Stiglitz and others but that input is not showing up in public talk nor in publicly visible conduct by The Fed or The Feds.
updated April 21 to include article about Inspector General Barofsky on the "plan":
updated April 8 to include Sach's article The Geithner-Summers Plan is Even Worse Than We Thought on gaming issues and more (and Krugman signs on to Sach's concerns too):
updated April 7 -- another interview with William Black, Potemkin "stress test", sham, ...
original post:
Now William Black on Bill Moyers Journal, agrees with my assessment on March 31.
'Treacle' is of course a euphemism for what some seem to find an exaggeration in the March 31 title, a word starting 'trea---' and I don't mean 'treasure'. I mean what is defined here.
From that blog I recommend again re PPIP which was the focus then:
I've been pointing out that the "liquidity crisis" is fake at this point. Black outright calls it a cover up at Treasury:
Again -- Please contact the White House, House, and Senate on this.
Reminder: The deep recession is largely due to the end of unsound consumer spending based on unsound consumer borrowing (2001-2007 mortgages, home equity loans, and credit cards) and inflated house sales prices (which took hard money from investors and gave it to sellers to spend or invest as they pleased). This is a real/fundamental contraction, and is compounded by much of the borrowing being in default, aka, lost to the investors. Banks and first level lenders are at least accomplices to the frauds -- they wrote the fraudulent loans with a "wink wink" -- never mind questions about absurd AAA ratings applied to sliced and diced derivative instruments, or predatory lending allegations.
I don't know how Obama meant his "pitchforks" remark to bankers, but I think we need to give it our meaning.
Again -- Please contact the White House, House, and Senate on this. Obama said we'd need to apply pressure. So get with it.
updated May 4 to include article, Geithner's New Bank Fix Is Bogus, Too, which agrees with my views that the Geithner proposed conversion of TARP preferred stock to common stock is bogus and problematic. It also supports my position re bondholders:
Unfortunately, the plan also has two major flaws: First, it's smoke and mirrors. Second, the taxpayers will be even more exposed to losses than they are now. [...] The idea that bondholders should share the bank pain is finally gaining some momentum. Let's hope that continues in the coming weeks.As I see it, either the banks' problems are largely smoke and mirrors or Geithner is flailing helplessly. And if there has been any good news from Warren at COP, I haven't heard it.
As an aside, I read somewhere thanks to a TPMer that Obama had critics Krugman and Stiglitz over for a dinner chat last week. That strikes me as a hopeful sign. Would love to have a transcript of that chat...
Other updates and original blog after the jump (I hope!)....
updated April 29 to include stress test article:
April 29 (Bloomberg) -- At least six of the 19 largest U.S. banks require additional capital, according to preliminary results of government stress tests, people briefed on the matter said.I recall that one purpose of the stress tests was to distinguish which banks would be allowed to participate in the [stinky] PPIP (see below). This article doesn't mention that at all, rather it implies that the government is hell-bent on not allowing a single big bank to take a real hit. The article supposes that conversion of government held preferred stock to common stock will be a large part of the next move. This strikes me as using the stress tests as a dishonest ploy to justify the government taking on even more risk in the banks while giving those banks a totally free ride (no interest payments on the "loans" and no requirement to pay back the "loans" that I have seen).
If a bank fails the stress test, it should be directed to prepare itself for Intervention aka an orderly bankruptcy, not offered diluted terms which keep its marginal stockholders and anxious bond speculators happy (or at least happier).
Has PPIP been abandoned? Will it be modified along the lines I have proposed?
Despite Obama's good interview in the NYT, and my appreciation of the part on page 4 about Economists, I still must question Geithner's role here. Obama might be listening to Stiglitz and others but that input is not showing up in public talk nor in publicly visible conduct by The Fed or The Feds.
updated April 21 to include article about Inspector General Barofsky on the "plan":
Indeed, much of the 247-page report released in Washington today by Barofsky's office focuses on a segment of the bailout that is only now being put into motion -- an effort to buy toxic securities from banks and other investment groups in which the federal government would provide up to 92.5% of the money. That effort could be the most vulnerable to fraud, Barofsky said, because investors would have so little at risk.
Among the toughest recommendations in the report is for the Treasury to abandon its planned structure for buying the toxic securities, which include intricate bundles of bad mortgages and loans, before it gets rolling. [bold added]
updated April 8 to include Sach's article The Geithner-Summers Plan is Even Worse Than We Thought on gaming issues and more (and Krugman signs on to Sach's concerns too):
Let [Geithner and Summers] explain the hidden and not-so-hidden risks to the American taxpayer .... Let them explain why they are so intent on saving the banks' bondholders,... Let them work with their critics to fashion a less risky and less costly plan. So far Geithner and Summers tell us that their plan is the only option, but without a word of further explanation as to why.Yes, please. More, please.
updated April 7 -- another interview with William Black, Potemkin "stress test", sham, ...
The former regulator is extremely critical of Geithner, calling him a "failed regulator" ... "There is no real purpose [of the stress test] other than to fool us. To make us chumps," Black says. Noting policymakers have long stated the problem is a lack of confidence, Black says Treasury Secretary Tim Geithner is now essentially saying: "'If we lie and they believe us, all will be well.' It's Orwellian."Also adding this from last week:
FT has learned that the major US banks, Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS) and JP Morgan (JPM) are all interested in buying toxic assets from one another, using the massive leverage provided by Tim Geithner's public private investment partnership.
This was a possibility folks saw coming from the first day, and amazingly, Sheila Bair has said she's open to this kind of
money laundering.
And let's be honest, that's exactly what it is.
[emph. added]
original post:
Now William Black on Bill Moyers Journal, agrees with my assessment on March 31.
'Treacle' is of course a euphemism for what some seem to find an exaggeration in the March 31 title, a word starting 'trea---' and I don't mean 'treasure'. I mean what is defined here.
From that blog I recommend again re PPIP which was the focus then:
Second update is this link which says Geithner has a dirty little secret. I think it's right on.But Black goes well beyond PPIP:
Black's thesis in a word is "deceit" aka "fraud". He describes how banks committed frauds in the boardrooms. He reminds us that in 2004 the FBI was warning about significant mortgage frauds. What came of that? Black points out that Bush stole hundreds of agents to devote to post 9/11 activities and never re-filled the positions lost. He also points out that if the banks are not solvent, the law requires an Intervention (receivership), AND if they are not insolvent then for what does Geithner need a $1T PPIP (and about $1T other funds)?BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis. [bold added]
WILLIAM K. BLACK: Yes. ... Because it is a fundamental lack of integrity. ... So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.
I've been pointing out that the "liquidity crisis" is fake at this point. Black outright calls it a cover up at Treasury:
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely. [and later...] ... Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. [and later] ...But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.
Again -- Please contact the White House, House, and Senate on this.
Reminder: The deep recession is largely due to the end of unsound consumer spending based on unsound consumer borrowing (2001-2007 mortgages, home equity loans, and credit cards) and inflated house sales prices (which took hard money from investors and gave it to sellers to spend or invest as they pleased). This is a real/fundamental contraction, and is compounded by much of the borrowing being in default, aka, lost to the investors. Banks and first level lenders are at least accomplices to the frauds -- they wrote the fraudulent loans with a "wink wink" -- never mind questions about absurd AAA ratings applied to sliced and diced derivative instruments, or predatory lending allegations.
I don't know how Obama meant his "pitchforks" remark to bankers, but I think we need to give it our meaning.
The president's actions (pay no attention to his rhetoric) make it manifestly clear that the pitchforks are not aimed at the bankers but rather at the taxpayer. -- link
Again -- Please contact the White House, House, and Senate on this. Obama said we'd need to apply pressure. So get with it.
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Hi eds, very much on board with what you're saying. I have a great admiration for Black, as well. It would be nice if someone did a meta-level post on this debate - I'm thinking about your final remark about Obama asking us to put on the pressure. I think we should, and he should ask the people just that. But he isn't and we aren't. I don't know quite what that says about either party.
Well maybe I do, actually. Frankly I don't care what Obama asks - the bailout is headed in the wrong direction (to put it euphemistically), but its end-point is indeterminate insofar as (i) what Geithner has is a set of tools and requests for more, not a set of well-defined aims, (ii) his ultimate action will depend on the pervading political pressures at the time of action (end of may - june?).
(still ignoring me...?)
April 5, 2009 8:31 AM | Reply | Permalink
Not ignoring you in general, only in that one regard. What do you want from me re AIG and who owns it? That's rather public info, has been posted about plenty. btw, do you check your Blog Comments list to look for replies to comments you've made?
On topic:
"But he isn't and we aren't. "
reply -- "'What do you mean we,’ white man?"
I sorta agree with your second paragraph.
It's impossible for me to judge its "heading" in the absence of sufficient data/facts. But on the "meta" level I can say that the apparent stupidity/silence from TPTB does not build confidence, and it's plausible that your assessment is right on. That is, I'm calling for additional public debate and I'm laying out reasonable negative theories which fit enough of the evidence to be plausible. That's the main job of the critic who would speak truth to power.
Define "heading" not only in linear terms but including Spin factors. Is Obama appearing to head in the wrong direction, in effect "on purpose"? What is the 'sub rosa' game going on? What are the real facts/data?
Off topic again: No hard feelings, just tired.
April 5, 2009 3:50 PM | Reply | Permalink
"I'm laying out reasonable negative theories which fit enough of the evidence to be plausible."
No, really?
April 5, 2009 4:18 PM | Reply | Permalink
Hi. Did you want to discuss something?
April 6, 2009 1:58 AM | Reply | Permalink
Glad to hear there is no rancor. I usually follow responses through the dashboard, and it must have slipped off the end. So my sincere apologies for that. About Obama's possible 'secret' intentions on the bailout: I find the various moves hard to reconcile with serious action right now. There was no need to make the conditions on the PPIP so generous, and there was no need to make the parameters on the stress test so weak it can hardly be called a stress test. And despite what Ellen seems to think, the recent moves were a suspension of M2M as far as I understand it.
if you're going to nationalize and give haircuts, then it is best not to say so ahead of time, but it is also not good to indicate you're intending to do the exact opposite - a huge no-strings-attached handover of money.
April 6, 2009 5:25 AM | Reply | Permalink
I think PPIP has possible value for already-seized assets. Maybe you missed my comments (not sure if I put it in a blog, would have to review).
In a nutshell, FDIC loans money to itself ala PPIP to help private parties buy assets. Might sound silly, but there is method in the madness if you untwist the silly spin...
April 6, 2009 3:22 PM | Reply | Permalink
Oh, re M2Market ( not Myth), FASB seems to have reinforced that M2M was not changed, it was never required in general.
But making it clear that banks are NOT required to do M2M might moot PPIP which is supposed to be for price discovery (plus price inflation). Then the banks are considered solvent if their pricing models are justifiable and reasonable, thus no need for PPIP or at least one less excuse for it.
Part of me hopes that Geithner is playing an honest shell game here, blowing smoke so as to obfuscate in the short term while things resolve in the medium term behind the scenes. But that' kinda naive...
April 6, 2009 3:46 PM | Reply | Permalink
Up until recently I could see these moves as part of an honest shell-game, as you say. But now as the modalities of the PPIP come out and these M2M changes, he's really making it hard to do that medium-term resolution. It's zombie nation for the next few years at least...
April 6, 2009 4:34 PM | Reply | Permalink
Not necessarily. If the banks are in better shape than has been implied, PPIP can fall by the wayside.
Don't get hooked into the illusion that debt is all that great for the private sector. Only debt which is soundly projected to create greater profit from producers is sound. Consumer debt is unsound but acceptable in the very short term such as for a major appliance purchase, but even then it is unsound to lend 100% of the retail price. Not only do new things depreciate once sold, but they then proceed to wear out. So a sound loan always keeps sufficient excess collateral. 50% of a washing machine, okay. 70% of a vehicle with insurance, okay. Etc. And that's assuming the interest rate is appropriate. Borrowing at 20% to inflate lifestyle is not.
April 6, 2009 5:07 PM | Reply | Permalink
"Don't get hooked into the illusion that debt is all that great for the private sector."
I don't think of myself as 'hooked'. What I do see is willy-nilly destruction of debt, i.e. cutting of credit lines, just as much as before there was willy-nilly extension of credit, or 'credit' as you might prefer. As long as you leave the big banks with their FICO-assessment + correlation based credit policy in control of the market, we're screwed. What I'd be happy with is a policy of giving the big banks with dodgy balance sheets a punitive borrowing rate and extending free money to regional banks, that way directing private capital their way. They have much better knowledge-based lending policies, it seems.
April 6, 2009 5:40 PM | Reply | Permalink
Who’s Most Indebted? Banks, Not Consumers
by FLOYD NORRIS, April 3, 2009
April 6, 2009 6:01 PM | Reply | Permalink
oops, it's here:
http://www.nytimes.com/2009/04/04/business/economy/04charts.html
April 6, 2009 6:06 PM | Reply | Permalink
thanks for that AA!
April 6, 2009 6:35 PM | Reply | Permalink
aa -- can you explain financial sector debt to me?
"At the end of 2008, according to the Federal Reserve Board, total debt in the financial sector came to $17.2 trillion,"
I only understand Consumer and Producer debt well, and Government debt almost well. Financial sector debt seems to be people borrowing money in order to lend to third parties who are in finance. Any money borrowed to lend to Producers would be Producer borrowing with some middlemen skimming off fees. Similarly money lent to Consumers would Consumer debt even if it involved middlemen.
Is Financial sector debt an 'ouroboros' mirage/illusion, debt chasing debt in service to more debt? Morgan Stanley borrows from Goldman Sachs to fund JP Morgan lending to BAC which invests in Morgan Stanley ...? This would be a mammoth pile of fake assets and fake liabilities inflated way beyond the recent housing bubble.
But maybe I'm missing something important here...
April 6, 2009 11:07 PM | Reply | Permalink
That's a toughie. I don't know enough to answer, I just remember reading the Floyd Norris article and it popped into my mind that it might be applicable to what you were discussing. I googled a bit and it's hard to find what the particulars on what the Fed actually includes as "financial sector". But I must say I probably don't know the lingo well enough to think of good search terms.
It's suggested here, a post that seems to have been making the rounds of a lot of the economics blogs in early in March:
http://www.contrahour.com/contrahour/2009/01/digging-through-the-layers-of-debt.html
That whole post clears up what's in the other categories, like home mortgages, so maybe that helps some by eliminating.
Is this it, on page 82 in the Fed's guidebook?
http://www.federalreserve.gov/releases/Z1/fofguide.pdf
I looked at the pdf of the Fed's last 2008 quarterly report, I couldn't find definitions. They put the sources of their data first, and it appears it's not broken into categories--where they do the addition to make up the categories must be somewhere in the report but danged if I can find it. It just doesn't interest me enough to go further. Good luck figuring it out.
April 7, 2009 12:08 AM | Reply | Permalink
p.s. It's maddening because I found this "Finance Q & A" where someone is asking your exact question, and the frigging jerk doesn't answer it, he's either real condescending or can't read or both, he babbles something along the lines of "don't worry your pretty head about all the total U.S. debt," hah:
http://www.ohionanosummit.net/Total%20Debt%20Management.html
Maybe it's top secret Fed stuff. :-)
April 7, 2009 12:16 AM | Reply | Permalink
from the contrahour link:
"Second, a large part of the increase in the Credit Market Debt ratio in the early 1930s was caused by the implosion of the numerator"
Mistakes like that (it should be "denominator") take away credibility pretty fast. The notes include:
"the largest and most rapidly growing sector has been Domestic Financial sector debt. As we now know, the absurd increase in leverage by Investment and Money Center banks caused the huge increase in the Domestic Financial sector. "
What did those banks do with the funds they borrowed? Buy stocks, buy other debt, what? Where is the debt grounded in reality?
He projects declines from $17T to about $11T through losses and "sales" of assets. ??
http://www.federalreserve.gov/releases/z1/current/z1.pdf has limited info about credit markets but the numbers for F3 only come to about $2T so it must be the increment not the total. Corporate bonds and ABS seem to be big numbers, but corporate bonds... what are they -- producer borrowing or just more incestuous bank-bank-bank-... stuff?
April 7, 2009 1:41 AM | Reply | Permalink
I wrote to Norris to ask for his reference and definitions. btw, he doesn't say "domestic" for the $17T, but "total". So another loose end there too...
April 7, 2009 2:06 AM | Reply | Permalink
Art, your post reminds me of my effort a few years ago to understand derivatives. I spent a lot of effort and came up with absolutely nothing except boilerplate statements like "Derivatives are highly complex and sophisticated financial instruments, requiring specialized industry expertise -- let your broker recommend particular derivatives for your portfolio."
Now, you can google "derivatives" and in two seconds get the whole horror story.
April 8, 2009 7:48 PM | Reply | Permalink
This doesn't really cut it. I think I need to ask the author of that article from which I quoted. But is my point clear to you? That this financial sector debt figure is artificial if it's not a house of cards (firms lending to each other to lend to each other to...)?
Thanks for the links!
Table F.3 Credit Market Borrowing by Financial Sectors
Credit market borrowing by the financial sectors
is primarily a source of funds for financial
intermediation (see the introduction to table
F.1 for a definition of credit market borrowing).
...
The sectors that appear in the table are
depository institutions (commercial banks,
savings institutions, and credit unions) and
nondepository institutions (life insurance companies, federally related credit providers, issuers of asset-backed securities, finance companies, mortgage companies, real estate
investment trusts, security brokers and dealers,
and funding corporations); the credit market
borrowing of both types of financial institutions
is also shown in table F.1. There are
other financial sectors included in the flow of
funds accounts that obtain funds from noncredit-
market sources and thus do not appear
in this table.
from F1 info:
Credit market borrowing or lending is
defined here as the transfer of funds through
certain financial instruments: open market
paper, Treasury and agency securities, municipal
securities, corporate and foreign bonds,
bank loans not elsewhere classified, other
loans and advances (such as loans made under
various federal programs), mortgages, and
consumer credit. Excluded from the definition
are a number of other items
April 7, 2009 1:19 AM | Reply | Permalink
Here are some other numbers.
http://zerohedge.blogspot.com/2009/04/bail-out-for-dummies-part-1.html
Banking sector liabilities 12T. Don't know what fits into the extra 5T Norris is talking about - the 'shadow banking' sector, perhaps. I don't think the interbank loans amount to much, but the bank credit extended to hedgefunds and credit lines to private equity probably accounts for something significant.
April 8, 2009 12:15 PM | Reply | Permalink
see reply misplaced below:
http://tpmcafe.talkingpointsmemo.com/talk/blogs/eds/2009/04/treacle-at-treasury---a-moral.php#comment-3433345
I wonder if the TPM javascript code is defective or not hardened against Firefox tabs... I'm sure the "reply to Obey" box was clicked, but I did open another tab by clicking on the link to your comment after I opened the reply window. It could be that doing so wipes out the checkmark behind the scenes so the comment loses its thread order. This would account for many of my misthreads.
April 8, 2009 3:44 PM | Reply | Permalink
zerohedge might be okay. It makes some exaggerations up front which turned me off. I will try to look further, later.
"through its various implicit and explicit guarantees the administration is saying the total pain could potentially reach $8.8 trillion"
The problem here is that paper losses were locked in by market players. It's like they wrote naked puts. So when an asset price decreased they had to buy the asset at the inflated expectation value price.
If the puts had been covered (say by short selling the asset at the put strike price) then no big deal. It's just gambling losses.
But to the extent that losses are realized, that money DID GO SOMEWHERE. Paper profits and losses are imaginary, but realizing the loss literally means making the paper loss real, giving up on the expectation value the paper once had.
April 8, 2009 4:11 PM | Reply | Permalink
Not sure I follow the whole naked put analogy. But to the extent you're talking about bringing assets back on to balance sheets at par, thus bailing out SIV investors, I don't think there is a lot of 'real money' going anywhere. As for Zero Hedge, yeah, it's a bit hysterical in tone, but the charts are useful.
April 9, 2009 9:58 AM | Reply | Permalink
Selling CDS "insurance" without sufficient collateral is like writing a put option without needing to buy the stock.
If the stock price goes down a lot, you have to effectively buy the stock at the previously inflated price. CDS is basically a promise to cover losses if the asset goes down.
PPIP has the nickname Geither Put, because of this (or that's how I get it).
It's naked because a put seller who only wants the time value of the put will sell the stock short when writing the put. That basically locks in the time value as long as the stock doesn't go up. The "sold short" stock is what covers the downside bet. Of course if the stock moves up then the short sale requires collateral to cover the losing portion, and that could wipe out the time value of the option.
April 9, 2009 4:14 PM | Reply | Permalink
"It's zombie nation for the next few years at least..."
But people who worry about zombies lasting a long time are often thinking about getting lending going again, so that was the connection to your prior comment. My point would be that this whole thing about zombies and needing to get lending going again is highly distorted.
April 6, 2009 10:51 PM | Reply | Permalink
Well if "dodgy" banks have to pay higher rates to borrow then they will 1) make riskier loans, or 2) make less profit margin or spread. That's okay with me.
Finance is helpful to an economy, but an economy should not become addicted to finance such that the economy becomes instead helpful to finance.
April 6, 2009 10:55 PM | Reply | Permalink
Sorry to keep throwing Waldman stuff at you, but this piece
http://interfluidity.powerblogs.com/posts/1225607671.shtml
I've always loved. Let me know what you think, in your inimitable manner...
;0)
April 8, 2009 10:17 AM | Reply | Permalink
I almost rejected it until I realized that the blog was not just contrasting Krugman with Cowen and launching into mindless econ 101 equations and buying Krugman's indefensible "liquidity trap" notion as usual. When I hesitated and read down a bit I found'
"A financial system would be interested in the world"
etc. Now that sounds a little bit like my point about the Financial Sector having too little in the way of value investing going on.
As Borrowing Trouble asks, is the liquidity trap real? Why can't Fed Funds rates go negative, really?
"If we had a financial system, we wouldn't require the world economy to collapse, just so we could learn how it might be put back together again"
That's just a cheap shot which he basically retracts down the page. Did you find it meaningful.
The problem between K and C in the quotes is that they are both whinging. K complains about how consumer belt-tightening is untimely, but makes the correct point that this might be a good time for gov. spending. Cowen apparently replies as if K. had called for consumer spending instead of gov. spending. C comes off as an idiot, as presented - he appears to have bought into K's strawman whinge and ignored K's proposal.
I don't have time to read what might be an excellent comment section of the blog...
April 8, 2009 3:32 PM | Reply | Permalink
"Now that sounds a little bit like my point about the Financial Sector having too little in the way of value investing going on."
- yes, this was the bit I liked and thought you would like. And it's a big part of my problem with the whole strategy of keeping the big money center banks afloat at the cost of the smaller more 'value investing' regional banks.
April 9, 2009 10:03 AM | Reply | Permalink
Yes, but it's not clear to me that smaller banks didn't contribute too. That is, the central banks may have become giant warehouses of loans passed on to them by small local banks playing the same game. The upside to that is that if the junk is already consolidated, turning say Citi into a "bad bank" should solve a lot of the uncertainty-based liquidity-solvency blather-like problems, and let us get down to dealing with fundamentals in the larger economy.
You have replies from me in other places, btw.
April 9, 2009 4:19 PM | Reply | Permalink
I felt for a long time (years) that their was something fishy going on. What I was seeing happening on Wall Street simply did not jive with what I was experiencing on Main Street.
On top of that I was getting all these offers for mortgages and credit cards and my credit rating has been less than stellar. At the same time I was seeing house that hap previously going for $80k (an barely worth that) going for $200k+.
None of this made any sense to me and I said so to numerous people. But alas, they thought I was just paranoid or some such.
Guess what....I wasn't.
C
April 5, 2009 7:43 PM | Reply | Permalink
What did all those offers and price rises tell you about fishy stuff? I just saw an advertising blitz to try to get people to borrow money, because lending money out was profitable.
April 6, 2009 1:56 AM | Reply | Permalink
It told me that some people were more than a little detached from reality.
C
April 7, 2009 9:40 AM | Reply | Permalink
I remember having HUGE reservations when Obama picked Biden, it signaled that he is WITH the Old Boys Network, not shaking it up, and now my worst fears have materialized. After Biden, Rahm Emmanuel, Geithner, Larry Summers, Hillary Clinton, Dennis Ross, etc....ALL up to their ears in the OBN & Neo-Corner. It's true that with McCain on the other ticket, it was Hobson's Choice, but what about Bob Barr? This is even more Depressing than the possible near-future Depression. Losing wealth is one thing, losing faith in the whole system, Dem or Rep, is something else. Guess I'll start stocking canned food, gold coins and ammo in a remote Montana farm like those paranoid libertarians.
April 6, 2009 2:01 PM | Reply | Permalink
Don't settle down in Montana unless you make good friends there first. Good friends are more important than those other assets when it comes to frontier survival.
Or don't over-react!
April 6, 2009 4:09 PM | Reply | Permalink
We swapped the Republican Establishment for the Democratic one. Could be worse. It just was worse. Remember?
April 8, 2009 8:49 AM | Reply | Permalink
Yes, it's important to avoid Obama backlash. He is accomplishing some good stuff. But my interest in the economy makes Geithner look pretty bad, even if sub rosa there is a bigger plan which will make this look like a false flag trick.
April 8, 2009 3:47 PM | Reply | Permalink
Is it really worse to have a Bumbling Bush Con than a Suave Obama Con? I don't know what "good" he has done other than making Soothing Sound-Bites and then turning around to stab taxpayers in the back. I was sadly one of his most vocal supporters, albeit vociferously against his choice of Biden, in the run up to the vote. I did say that future support would be predicated on his Actions upon becoming President, this much I swore to many of Obama's detractors then.
The TRUE financial shenanigans are much,much worse than what Josh wrote. It wasn't just bad loans, but these were bad loans that were intentionally sought as they would then be packaged into trillions of dollars worth of derivatives, like opium crops refined and cut with even more toxic chemicals into industrial grade heroin and crack, by the likes of Goldman Sachs, JP Morgan, etc., and written into CDS by AIG and many others, peddled to the rest of America and the world, pension funds, mutual funds, municipal governments, etc, as AAA-rated investments. The obscene amount of instant lucre made it worthwhile, even if the addict/host/golden goose gets killed in the process.
All of this happened under the two Bushes and Clinton, who made sure that the regulatory boards and regulations were so gutted and degraded, no oversight would have been possible. Which is why the DLC wasn't any better than the Neo-Con GOP, they're both sides of the same corrupt coin. Schumer, Rubin, Clinton, Greenspan weren't any better than Phil Gramm, Cheney, Bernanke or Hank Paulson, they're in this together. Summers, Rubin and Greenspan, no doubt with the blessing of Clinton, went after a Democrat regulator who wanted to regulate the *very* derivatives now bringing down AIG and its counterparties. I have been aware of this since 2002, and knew the financial tsunami would be coming.
Wall St OWNS the American government, and it is increasingly clear they own Obama as well. Obama hired another Goldman Sachs alumni, Gensler, a fox to guard the regulatory henhouse.
Glenn Greenwald illuminated this much better than my post would, read this in tandem with the Moyers/Black interview to draw your own conclusions.
http://www.salon.com/opinion/greenwald/2009/04/04/summers/index.html
If the Dems don't do a damn thing about Obama's current trajectory, then they're no better than the Republicans who didn't do a damn thing while Bush fiddled and the country burned. I don't even think many are aware that this isn't just a House on fire, it's shaping up to be a horrific global inferno.
April 9, 2009 7:24 AM | Reply | Permalink
Obama was the best choice of those who were electable.
And over time he may be better than you currently expect.
It's fine to hate the banks and bankers for those of us standing on the side lines. But as long as he needs those guys Obama can't sure in the fun.
If two years from now Geithner and Gates are still in the cabinet I might come right to your position. Even so I wont feel nostalgic for McCain.
April 9, 2009 10:51 AM | Reply | Permalink
What's transpiring right now at the Treasury/White House/TARP is beyond belief, if you'd read through the recent spate of interviews, analyses, write-ups, by the likes of Stiglitz, Spitzer, Krugman, Taibbi, Milton, etc. It is not as though Obama is short on potential advisors - he CHOSE to go with the ones in bed with Wall St all along. That in itself may be wise seeing how it might take a bunch of insider-turncoats to truly take on the crooks, but a look at the actions (I assume you've read through the literature) so far betrays the the worst case scenario - everything for the Banksters, Taxpayers could end up being taken to the cleaners. The potential for the Greatest Heist in History is so huge, it makes one wonders if this very financial calamnity were engineered to bring about such an outcome for the Banksters.
9/11 comes to mind - Why are we invading Iraq when the right thing to do is to go after bin Laden? Why are we throwing OPEN the Treasury with an invitation to the Banksters when we should be putting them into receivership? These Masters of the Universe ensured that Summer, Rubin, Gramm, Greenspan, Paulson gutted the regulatory bodies for them to legally loot the world, now, it is set up such that it will be legal for them to loot TARP.
If it were McCain, it could be argued that he was too old and senile, like Reagan wrt Iran-Contra, but Obama, the smart harbinger of Change, it would only mean ONE thing. And that destroys Hope, utterly and thoroughly.
April 9, 2009 11:36 AM | Reply | Permalink
To expand on the Opium analogy - the sub-prime borrowers are just poppy farmers growing an illegal substance, making a paltry profit, the BIG money, hundreds of trillions (as opposed to hundreds of billions of bad mortgages) are churned out by the Wall St. toxic poison INDUSTRY and its worldwide network of dealers and distributors.
April 9, 2009 11:45 AM | Reply | Permalink
It's not clear to me who gets the biggest slice of the pie. In good times, even 2% plus 20% of profits could be a lot less than what the investor takes home. But yes, in marginal times such premia are purely parasitic, say at 3% profit, the manager takes 2.6 leaving only .4 for the investor, a radical ripoff.
Retail is usually the largest unit dollar mark-up in mfg. goods and maybe even food. Energy is complicated by distribution and billing services.
April 10, 2009 12:35 PM | Reply | Permalink
"Suave Obama Con? I don't know what "good" he has done other than making Soothing Sound-Bites and then turning around to stab taxpayers in the back"
Yikes. Thanks for joining my thread but maybe you need to look around more!
Obama doesn't seem suave to me, and I have no basis for calling him a con artist. I'm disappointed on a few scores, and satisfied on others. My criticism of Treasury should not be taken as an attack on Obama's programs in general.
Besides "fiddling" here while Rome burns, may I ask how you're contributing to a better future?
April 9, 2009 5:57 PM | Reply | Permalink
"bank credit extended to hedgefunds and credit lines to private equity "
That is a plausible component, only of course we're discussing actual debt, not lines of credit etc. I might have a line of credit of $1M, but only have $100K in debt. Also, to the extent that this includes short term debt, if I borrow $100 in Jan, pay it back in Mar, then borrow $300 in June, does that count as $400 total, or something else? Is this at a snapshot in time or as an average over some finite time period?
If a bank loans money to private equity, what exactly would that be, and where/how would it be grounded in reality? Lending money to a hedge fund is an effective investment in buying stock or bonds, or selling them short, whether as margin or otherwise. So broker margin accounts would also be included (millions of them adding up to billions of dollars or more).
Now the loans don't have any realworld grounding that I can see except perhaps for dividend or coupon cash flows. They don't produce real goods or services, even if the making of the loan pays commissions etc. which count as broker services. So, so far, this looks like nominally real money chasing nominally imaginary money. And it's mostly gambling, not value investing.
April 8, 2009 3:14 PM | Reply | Permalink
Thanks for your efforts in putting this blog entry together, eds.
The link to Engdahl which led me to the OCC's Quarterly Report (Table 1), alone, was worth it.
April 8, 2009 3:46 PM | Reply | Permalink
I've mentioned the OCC link elsewhere, maybe it was only in a comment in some thread. Lots of swaps still out there, huh.
Anyway, you're welcome!
April 8, 2009 3:58 PM | Reply | Permalink
Are these the US regulated entity numbers?
For example, the Deutsche Bank Trust on Table 1 would be a susidiary of Taunus on Table 2, but Table 2 wouldn't include derivatives held by Deutsche Bank elsewhere in the world?
The numbers look pretty small and probably don't include derivatives held in London and elsewhere.
May 5, 2009 11:38 AM | Reply | Permalink
Merrill, I'm not sure what you're asking Ellen.
May 5, 2009 9:56 PM | Reply | Permalink
It appeared that the numbers for derivative notional value in the OCC report were pretty small. So I was asking whether she agreed that they reflected the derivatives held in the banking and holding companies or subsidiaries in the United States only.
I think that the "US" banks, like JPM, probably hold as much or more in London or elsewhere, and for the "non-US" banks, the numbers are really small and must reflect only the US subsidiaries.
So the OCC documents don't provide an adequate picture of the overal situation.
May 6, 2009 10:04 AM | Reply | Permalink
Oh yes. I had noticed for instance that some swaps were listed at around $150T but I've seen other data saying over $400T for last year.
May 6, 2009 2:33 PM | Reply | Permalink
"Now William Black on Bill Moyers Journal, agrees with my assessment on March 31."
First you tell Kevin Phillips how to write a book, and now regulators with decades of experience are looking to you for guidance on the banking crisis. Very impressive.
April 8, 2009 5:56 PM | Reply | Permalink
Silly you! Do you get everything backwards on purpose?
April 8, 2009 6:55 PM | Reply | Permalink
I wish the economists who are so critical of Geithner would offer their own ideas. All I've seen so far are calls to nationalize, but, like the republicans' budget, no numbers. We know the cost is going to be humongous under Geithner's plan, but it seems to me the cost will be humongous any way it's done.
How will nationalization be less costly? Isn't there a possibility that the economy will improve enough in the next few years that those derivatives will be less a liability than nationalizing today would be? I'm not hearing enough from either side to make a judgment.
April 8, 2009 5:58 PM | Reply | Permalink
Right, I'm not getting enough to make a sound judgment.
I am not an economist, I only play one on the "interents", but I've mentioned some alternative to PPIP, including using PPIP in a different way.
It's not just either Krugman's "nationalize" or PPIP. And I have not seen what I'd call real number from Geithner either, while Krugman and others have put out some serious estimates (like Roubini who thinks banks will be hit for $1.8T but only had $1.4T to cover the losses).
The objections to PPIP are both internal and external. It's a bad idea in its present form as explained so far.
If PPIP 'as is' costs the FDIC less than what Intervention or Nationalization would cost, it might not be so bad. But PPIP reward bank stockholders and creditors, many of whom now are just speculators in effect (holding the declining stock in hopes the guv. will bail it out). So PPIP should require bank haircuts all around, or not be used as G. has talked about it.
April 8, 2009 7:01 PM | Reply | Permalink
I'm a very small-time bank invester through a stock directly and through mutual funds. I would bet anyone who posts on TPM and owns shares in a mutual fund is a bank investor, too. There are millions like me who would rather not be wiped out any more than we've been already. When they talk about investors they're not talking about just hedge funds and other nefarious vehicles. They're talking about pension funds like TIAAF, e.g., that represent teachers and other small investor like me.
I doubt saving the investor is the primary reason the administration is taking the steps it has proposed so far rather than opting for receivership and letting the failures collapse. saulgoodman has an excellent counterargument to the "let them fail" proposals.
April 9, 2009 9:25 AM | Reply | Permalink
I think Saul has it wrong, and I know he's got some of his numbers wrong.
I sympathize with mutual fund investors and small direct owners of stock. About 1/2 of my net wealth was in stocks, now that's about 3/8. But I am quite firm in believing that generally losses should be taken. If you owned Citibank stock, you have huge paper losses if you still own the stock. If you've bought a lot at a low price, you're a speculator. I don't believe in the government making money for speculators. The idea that future returns should be guaranteed by the government is crazy, in my view.
I don't get what you think Obama is trying to do, if not to rescue investors and depositors (FDIC will need help over about $20B losses).
April 10, 2009 3:02 AM | Reply | Permalink
This nation is definitely at a crossroads. We are not just facing a financial crisis but one that encompasses the integrity of the entire notion of governance as put forth in its original formulation. The idea that government promotes the greater good is thoroughly trashed and unrecoverable.
When you consider the run at gun shops and everything else that is happening it is difficult not to see the darkening skys and what may be brewing. Having a black man in the WH has driven the far right over the edge while the left is in a similar state with an undeniable and growing feeling of general betrayal. And both have the financial and political elites in their sights, figuratively and literally. Where entire cities like Elkhart Indiana are beiny systematically wiped out there is sure to be rising tension among middle class working people who see a general failure of government as the culprit.
It is very apparent the administration or government has no sense of the fear people are feeling. People look at the banking crisis and what government has proposed as a solution and that just increases their fears of a government that in no way reflects citizens ideas of a democracy. Citizens may not know what it is but they know what it isn't.
April 9, 2009 5:20 AM | Reply | Permalink
What is particularly disturbing about the CURRENT Obama is his chutzpah of saying one thing in public, taking on the Populist tone of outrage at CEOs of failed firms getting billions in TARP drawing bonuses, and then calmly proceeded to devise ways to circumvent Congressional oversight over CEO pay at these same firms bailed out by taxpayers. It is two-faced, an up-yours gesture to the average joe and his voter base - the audacity leaves me speechless.
April 9, 2009 8:13 AM | Reply | Permalink
Want to add that what Josh sees as "money laundering" is in fact much worse - it WOULD bring about a direct transfer of wealth from the taxpayers to the Banksters, the taxpayers taking on the "toxic" stuff off the hands of the Banksters, with the Banksters laughing all the way to the Bank.
Read the Sach's article on how it can, and if history were a lesson, how it WILL be done.
April 9, 2009 9:29 AM | Reply | Permalink
What "Josh" -- you've mentioned that name twice now. The article's author re money laundering is a "Joe".
I'm the one who cited Sachs, dunno why you're telling me to read him... ???
April 9, 2009 11:01 PM | Reply | Permalink
Another great article by exIMF Simon Johnson, who has disturbingly arrived at the conclusion that America resembles a Wall St-Washington Oligarchy, not unlike pre-Putin Russia:
The Quiet Coup
http://www.theatlantic.com/doc/200905/imf-advice
We're individual "nobodies" but we'd be fools to ignore those who would put their careers and reputation on the line to draw urgent attention to certain disturbing "directions" this Administration.
April 9, 2009 12:10 PM | Reply | Permalink
You might want to read my blog! I mentioned that the other day
http://tpmcafe.talkingpointsmemo.com/talk/blogs/eds/2009/04/the-politics-of-debt.php
April 10, 2009 1:43 AM | Reply | Permalink
You also might want to read this testimoney given to the Joint Economic Committee today.
C
April 21, 2009 8:48 PM | Reply | Permalink
Heh "testimoney"!
Not able to access the video. Anything stand out to you?
April 22, 2009 1:45 PM | Reply | Permalink
Well there was not video. But the pdf of what was said amounted to about the same thing that FDIC secretary Bair said. "Too big to fail needs to be tossed in the dust bin."
In other words Geithner is full of donkey doo.
C
April 29, 2009 11:06 PM | Reply | Permalink
It would be interesting to know precisely how many times a given toxic asset or bundle of toxic assets may have been traded. Assuming all assets having been sold twice, it effectively doubles the dollar number, while the actual asset number remained constant. I can see where this can easily double the size of the pile of shit. I guess it depends on how many CDFs or derivatives are in default.
April 21, 2009 7:20 PM | Reply | Permalink
Yeah. Who is profiting, tho?
April 21, 2009 9:05 PM | Reply | Permalink
I would guess the only profit derived is the one of commission on the trade. The only winners are the brokerages who get a commission no matter what is happening in a fluctuating market. Their core incentive is to sell, sell, sell.
April 22, 2009 5:55 AM | Reply | Permalink
I don't understand the multiplier. I think you're saying, by analogy, that if a lawnmower gets sold by the factory to a distributor who sells it to a wholesaler who sells it to a retailer who sells it to a shopper who sells it to a friend who later sells it on craigslist, that somehow each of those sales prices is getting added up into a total which is being reported somehow. There's still only one lawnmower.
That would be different than adding up all the profits and losses in the chain, which would amount to something like "total commissions plus current holder unrealized loss or gain".
April 22, 2009 1:56 PM | Reply | Permalink
Re "multiplier". I'd be happy to be corrected butg the explanation of CDSs given on -of all places- This American Life a couple of months ago went like this.
oParty A is holding a dodgy asset , say the mortgage on Flavius' mega yacht.Protects himself by buying something like a PUT from Party B.The base transaction..
oParty B wants to protect herself against the possblity of A exercising that "PUT" so she buys insurance from ,say, CIGNA. That creates a multiplier of 2.
oNow CIGNA needs to protect itself against the high probability of Flavius being under water so he hedges with God Knows Who. Multiplier=s3.
Great fleas have smaller ones that bite em
And smaller fleas have littler ones
And so on
Ad Infinitum.
April 22, 2009 9:45 PM | Reply | Permalink
Precisely. All of which (potentially) incur a debt on a common instance of some form of commerce.
April 24, 2009 10:20 AM | Reply | Permalink
Don't understand your phraseology. Not a snarky diagreement, I simply don't understand(what else is new?). When you get a chance could you explain? Thanks.
April 24, 2009 12:57 PM | Reply | Permalink
Ditto.
April 24, 2009 7:37 PM | Reply | Permalink
I mean the same item is sold multiple times. In each instance the sale is somehow indemnified (i.e. insured by AIG) so that the seller in each instance has their ass covered. That indemnification takes real dollars to cover. If you do this multiple times the item sold is only one but the dollars relative to the overall marketplace is a reflection of the single unit cost multiplied by the number of times the item is traded or sold. What I'm simply getting at is how many times might a toxic asset (CDF) have been traded under a fully covered (AAA rating) trade by AIG? How much of the booked revenue and commissions (and ultimately losses) is due to assets being traded multiple times?
April 25, 2009 8:37 AM | Reply | Permalink
I guess I retain my childlike belief that Geithner's "not a crook" to quote some one who was. If he were venal he'd have been another Goldman Sachs smartie earning 10 times his compensation from the NY Fed . And would have been spared the necessity of cheating on his taxes.
Meanwhile I liked Robert Solow as quoted yesterday at Brad Delong
April 22, 2009 7:10 AM | Reply | Permalink
Oops. Solow wrote risks , not ricks.Usually I don't correct but it's not fair to contaminate a quote.
April 22, 2009 7:15 AM | Reply | Permalink
I don't know about 'more efficient' but maybe 'more liquid'.
Do you usually type quoted material instead of copy-paste?
Geithner might not be a crook in the usual sense but still be incompetent or significantly biased (blinders if nothing else). My original complaint was that Treasury should be cooperating fully with COP, and that to delay or stonewall etc. should be considered a hostile act and thus grounds for a charge of treason. Yes, that sounds extreme, but in fact a violation of an oath of office at that level can be correctly be considered as an act of treason.
April 22, 2009 1:51 PM | Reply | Permalink
I took it that Solow was generalizing at a higher level using economy in a broad sense thus efficiency instead of liquidity.
Who knows what I type and what I copy and paste ?I certainly don't.Depends on the phases of the moon most likely.Or maybe the tides. I spent most of the day ineptly attempting to chain saw a fallen tree preferably without including myself in the segmentation. That's tended to distract me.
April 22, 2009 9:05 PM | Reply | Permalink
Gosh, comments here go all the way back to April 5th! What is this?
April 29, 2009 6:13 PM | Reply | Permalink
It is an update, as per the title and the top part of the blog.
April 29, 2009 7:07 PM | Reply | Permalink
Eds, one of the things I like about TPM is that you can come here naked, write a blog and you are not off the front page, so to speak, for hours. And a few recs and you get to stay on 24 hours.
But I really like this update. Especially when the post is technical in nature. And the update was not a paragraph, but a real update.
I like this post. A like a re-examination for a technical issue.
April 30, 2009 9:13 AM | Reply | Permalink
Thanks, Dick!
I do updates instead of posting new blogs so that the old discussion travels with them and I don't end up with tons of related blogs on my Manage Entries page. The alternative is a new blog with new title and a link to the old blog.
I'm also now using the "Read More" feature, but it doesn't seem to apply to all views, only when the post in viewed on my blog page (if someone scrolls through my recent blog posts).
And I see that today none other than Dean Baker is raising PPIP from the optically dead, too. I'm never disappointed when luminaries follow my lead, even if it's only coincidental! :-)
April 30, 2009 12:59 PM | Reply | Permalink
I can't begin to understand all the ins and outs
of Wall Street finance, taxpayer bailouts
and all the rest, but I am reminded of something
Ross Perot used to say: that when the Democrats
and Republicans in Washington agree on something,
that's when you KNOW that the American people
are being screwed.
April 29, 2009 10:07 PM | Reply | Permalink
Actually it's when Congress is in session.
C
May 4, 2009 11:19 PM | Reply | Permalink
Good body of work, eds.
One takeaway I'm getting from the talking financial heads on cable is they are seeing signs of stabilization and even a turnaround. Let us pray...
May 5, 2009 8:18 AM | Reply | Permalink
Thanks, steve. I just updated the blog May 5, too, but didn't move it up timewise.
May 5, 2009 4:44 PM | Reply | Permalink
Rather than posting the same blog, over and over, carrying your rec'ds along with you, it's best to link to a previous blog and let the readers decide on a daily basis. You're abusing a privilege here.
May 5, 2009 10:02 AM | Reply | Permalink
I could fragment the blog into a series of blogs and link them together by URL.
What exactly is the abuse? Why is one way or another "best" and who are you personally to decide when use becomes abuse at TPM? I mean, I know some would like to decide, by analogy, that all interrogations they personally don't like are torture, but in order for that to apply you still have to draw a line, something you, TheraP, haven't done that I've seen so far in the real world issue of torture.
May 5, 2009 3:17 PM | Reply | Permalink