I like this better. If they end up using the $700,000,000,000 to do something constructive that stands a better chance of not egregiously harming the average American, I'll admit that I misjudged the Goldman guys... even though their original plan sucked and would not have provided this kind of flexibility. Krugman...
So we are wasting taxpayer money on banks that are heavily invested in worthless paper instead of the worthless paper itself? Color me unimpressed. We're still not going to get over a -70% return on this deal, and it's not going to stop or even slow the recession. Actually, after a few of the banks that we bail out go bankrupt anyway, we'll wish we had just bought their paper instead of stock.
It must be tough to be a libertarian and see the majority realizing the failure of deregulation of the financial institutions. That silly rule that required investment banks to have 10% reserves, which was waived for the biggest 5 investment banks, all of which are gone or are now regular banks was so silly. Now you are seeing a move toward more regulation and the government getting at least temporary equity. Wouldn't it be horrible for libertarian dogma as well as political advancement if the government then sold the shares back on the market or to the comapny at a profit as Sweden did during a similar banking crisis. I talked to a friend, who is a Green Party fanatic recently. He wants Obama to win because when he fails to do much then finally Democrats will see the light and turn to the Green Party. As a libertarian you can always hope that once all government intervention has failed and folks have lost their life savings, and the country is broke that people will turn to the one true Libertarianism.
exactly...where do we draw the line here? when does government owned become government run? doesn't this undermine the very essence of capitalism? God forbid a government beauracrecy takes over the daily operations...as if banks aren't tiresome and inefficient enough already...
I have no problem with this, if the people are going to bail them out, we should have an ownership stake......I would like the banks to have to buy out the people though as they become solvent. DD
No of course not. Once rehabilitated the banks will be sold back to private capital. Even if some of the banks remain owned by the government, it is still not "true" socialism. The mixed economy has been accepted the world over except for a few pie in the sky libertarians, who are inspired by abstract ideology and spurred on by the monied crowed who benefit from low taxes since they don't need any government services like state universities, public schools etc.
This would probably be for the best, though we have to be sure that when we sell them back, they are reregulated to keep from pulling the stuff again and that we don't have some in- crowd make a killing as we have seen with no bid contracts to Halliburton and the privitization crowd. Now when it comes to basic insurance such as health insurance, life insurance and perhaps auto insurance, I do not see any productive role for private company middlemen --just higher prices for consumers. Many years ago when I worked for the State of Wisconsin, they had the choice of a life insurance program run by the state-- a remnant of the Progressive era. It cost lest and provided a higher benefit than any of competing private companies. The overhead was lower and of course, no profits. Sorry folks it is only available for Wisconsin residents. No argument can be made for the needed role of rugged indviduals etc. as a justifiication for insurance middlemen. You are just pooling basic risk, a concept thought of hundred if not thousands of years ago.
You do realize this buy out proposal is on top of the 700 b bail out. Just more additional debt And nationalization of banks lose-lose
failure of deregulation of the financial institutions. and now we can see the failure of regulation. This "failure of deregulation" gets tossed around a lot but i think it is misleading. There is a balance between regulations and deregulation and that balance is heavy on the dereg side. That being said, actually inforcing regulation and having some penalties with some teeth are also vital.
Hurricane Katrina Mortgage Bust 9/11 Iraq War and now Socialism of the financial industry. Is the auto industry next? Bush a communist traitor.
this man disagrees <object width="425" height="344"><param name="movie" value="http://www.youtube.com/v/cpQwZC_ChcM&hl=en&fs=1"></param><param name="allowFullScreen" value="true"></param><embed src="http://www.youtube.com/v/cpQwZC_ChcM&hl=en&fs=1" type="application/x-shockwave-flash" allowfullscreen="true" width="425" height="344"></embed></object>
I read the following about a week ago. It seemed smart then. The basic thesis is that the big problem we have is a crisis of confidence, and nationalization actually gets to the root of that crisis, and will work much better than just buying the crappy securities. The effectiveness of this strategy has been proven to work with Fanny/Freddy. If we are going to do this, nationalization makes more sense, both from a cost/return ration for the taxpayer, but also in getting to the root cause of the crisis. The problem is that investment bankers are proven shysters who will run their companies into the ground for a short term buck. The Federal government may be less efficient, but at least they aren't proven crooks. Replacing criminal malfeasance with simple negligence and ineptitude will be more likely to result in a positive outcome. Nationalization gets at the root of the problem by inspiring confidence that funding loans to institutions under taken under government control will be repaid. [rquoter] How to make the bailout work Almost everyone (including Krugman who should know better) thinks this banking crisis is about inadequate capital caused by losses. They are wrong. Its about inadequate finance caused by lack of trust. Let me explain Nobody I know calculates the total system losses plausibly above 2 trillion dollars. I have had several goes at calculating the losses on this blog. Here is an early attempt at scoping non GSE mortgage losses. If I add the private equity disasters, GSE losses and things like car loans to this I still can't get end credit losses above 1.5 trillion. That is a vast amount of money – enough for instance to solve most of Africa’s education and water problems. But in the context of the huge industry that is America’s finance system it is just not that big. So far financial institutions have raised (well) above 400 billion in fresh capital – its probably nearing 500 billion. The Federal Government has absorbed losses through the takeover of Fannie, Freddie, contingent liabilities on Wachovia, AIG and others of maybe 50-200 billion (lets use the low number). The pre-tax, pre-provision operating profit of S&P financials used to be above 400 billion and is probably still above 350 billion. Two years of that and there is another 700 billion. The banks had some capital to start with – in some cases excess capital against regulatory standards. All up – we have almost certainly raised or passed to the government – or within two years will have earned – something approaching 1.5 trillion. There is no capital shortage. Get used to it. The Krugman endorsement of the idea that you can’t save the financial system if you can’t read a balance sheet is dumb. The problem is the problem that begets all sharp-shock financial crises – which is just the sheer erosion of trust. [I consider Japan to be a slow burn financial crisis whereas Korea was more like America.] The erosion of trust was caused by lies Wall Street and big banks sold lies for years. I wrote once that the lies that destroyed Bear Stearns were told by Bear Stearns (note unfortunate investment theme in the link!). The lies that are now destroying the whole of American Finance were told by American Financial Institutions. The creditors simply do not believe any more. What is needed to make this crisis go away is the re-emergence of trust. When that happens people will lend to American financial institutions and they will stop failing. American financial institutions require lots of wholesale funding – far more wholesale funding than they require in equity. The crisis is not about the equity holders - its about the debt financiers of the US financial system. Wholesale funding is just not available. The banks are all subject to modern bank runs – the mass failure to roll or withdrawal of wholesale funding. There are several ways that the wholesale funding can be either replaced or rolled. One way is (dare I say it) the original (and deeply suspect) Paulson plan but on a much larger scale. The idea is that rather than securitise the mortgages and other assets on the bank balance sheet and sell the wholesale to people who no longer trust American Financial Institutions you sell them wholesale to the US Government. The US Government funds it wholesale by selling US Treasuries – which – despite weapons of mass destruction and other deceptions – are still widely trusted assets. The only problem is that the loan – to deposit ratios of the US Financial Institutions are just too high – and pretty well the entire wholesale funding needs to be replaced. Buying 750 billion in assets simply does not do it. Idea works – scale is not big enough. Moreover the original Paulson plan involved the taxpayer taking considerable risks – and in my view the taxpayer deserves a return for those risks. The usual solution is to give equity (ie the Democrats plan) but when the risks are large enough you wind up giving enough equity to simply nationalise the institutions. That works. We know it works – we have Sweden/Norway as external examples – and even the takeover of Fannie and Freddie clearly worked – it gave confidence to the people who provide wholesale funding and lowered the price of mortgages. But nationalisation works not because it injects equity – it works because it injects confidence. It makes the debt of those institutions similar to Treasuries and hence inspires confidence. I blogged once about how this is a very different situation from Japan. Japanese banks had no equity but plenty of funding. They survived for more than a decade in a much weakened state. By contrast Wachovia and WaMu went down when they still had plenty of stated equity but limited confidence. The reason – America needs wholesale funding. So please – I am begging here – can the pundits get their thinking straight. Its not about equity – its about funding. Got it. And the problem I have with Sheila Bair is that she thinks it is about loan books – and she scares the funding off. Moreover her takeover of WaMu was almost designed to scare off the funding – and that was dumb and should be a sacking offence. Please get this right though - its about FUNDING not about CAPITAL. Government action - Sheila included - should be designed as far as possible to give confidence back to the people who fund America. [/rquoter]
If you're into twisted humor, some levity in this catastrophically perpetual cluster of ****s. Summary: Paulson, Bush Admin, bank buddies and co. didn't like explicit wording in TARP for anything resembling the Sweden plan (post 3) or evil socialism. Because of this, deliberate ambiguity over ownership stakes was written in, and Barney Frank, aka Fannie Mae destroyer/O'Reilly Factor Villain of the Century, and Jim Moran put it on record that buying ownership stakes could be construed as "any other financial instrument". TARP passed but the markets revolted through lack in confidence of the sham plan. Paulson was forced to use that backdoor and made TARP not-TARP... "It is a sorry reflection of the state of the US democracy that hundreds of Senators and Congressfolks did vote for the biggest bailout ever in US history ($700 bn) without even knowing exactly what they were voting for." How authorization to recapitalize banks via public capital injections (“partial nationalization”) was introduced - indirectly through the back door - into the TARP legislation Nouriel Roubini | Oct 9, 2008 For a number of weeks professional economists and experts of banking crises have been arguing that the proper way to resolve a banking crisis is not to buy toxic assets but rather to recapitalize banks directly via injections of public capital (in the form of preferred shares) into distressed but solvent financial institutions. We criticized the TARP legislation just passed by Congress for not allowing for such a recapitalization of banks via public capital (an approach that has been instead now taken by the UK with its $87 bn bank rescue package and even Belgium/Netherlands in the case of the rescue of Fortis). So how come that "to inject capital into financial institutions" was the first item that Hank Paulson listed as his priority in his press conference yesterday, thus suggesting that now the US, like the UK, will undertake a partial nationalization of its distressed banks? The reality is that the TARP legislation passed by Congress (formally the Emergency Economic Stabilization Act) does not in any explicit way allow for such recapitalization of banks via injection of public capital. The US Treasury has initially resisted including explicitly such authority in the Act for several reasons: the banking industry that helped drafting the legislation was against it; there was ideological resistance to the idea of the government taking equity – however preferred – in financial institutions; there was concern that being explicit about public recap of banks would lead to banks’ resistance to participate in the toxic asset purchase program. That is why the Treasury formally resisted putting any explicit wording of public recapitalization of banks into the legislation. So how come Treasury now says that its first priority is to inject public capital in banks? And where is Paulson getting such authority since there is nothing formally explicit in the Act to allow such recapitalization? This is a fascinating story that is worth telling in full detail. Here are below those details… The 180 degree turn in the Treasury position is driven by the disastrous market reaction to the passage of this legislation and to the realization that US banks are in such a deep trouble that, absent a direct partial public takeover of the banks this severe financial crisis will get much worse. After the Senate passed the Act on Wednesday there was no relief rally in the stock market: the next day Thursday the stock market tumbled by 5%; and then on Friday when the House finally reversed itself and passed the Act the Dow fell by about another 400 points between the time the legislation passed and the close of market. Things got worse this week when on Monday and Tuesday and Wednesday stock prices tumbled even more in spite of new and aggressive actions by the Fed (interest payment on reserves and doubling of TAF on Monday; plan to purchase commercial paper on Tuesday; coordinated policy rates cuts on Wednesday). By yesterday Wednesday it was clear that we are close to a market crash that could – at this point - occur any time. When major policy actions for three days in a row fail to revive the stock market when such market is obviously oversold it is clear that there are no bottom buyers left and the risk of a 1987 like market crash is now at its highest level. So by yesterday Wednesday it was clear that we were on the verge of a systemic financial meltdown and that that flawed TARP has been effectively Tarp-edoed by the market that realized that this approach to a systemic financial crisis was flawed. Thus Treasury and Paulson had to reverse themselves 180 degree and start supporting a direct partial takeover of US banks by the US government: you may not want to call is partial nationalization of the banks as the term is politically incorrect; but this is effectively what will happen as the US will directly inject capital – in the form of preferred shares (and possibly even common shares and sub debt) into financial institutions. So where did Paulson get the authority to do such capital injection when there was no such authority in the wording of the legislation? Several of us had been explicitly and feverishly talking to Congress and the Fed and other senior officials (last week before the passage of the legislation) to include such explicit wording in the legislation; such campaign included the October 1st column by George Soros in the FT where he strongly argued – as many of us had recommended – to design legislation that explicitly allowed for public capital injection in banks. At first, Congressional aides we contacted were confused on whether the wording in the legislation did allow such public recapitalization was permitted or not. They pointed out to us that several sections of the legislation could be interpreted as allowing such public capital injection. Specifically such senior Congressional aides argued that several sections of the bill could be used to argue that the purchased “assets” as used in these provision would include not only securities accounted for as assets on the balance sheet of the financial institution but would also include common and preferred share, warrants on common and preferred shares, as well as secured and unsecured and convertible debt in the financial institution itself, which would be accounted for as assets on the balance sheet of the US Treasury. Specifically, the bill generally permitted TARP to purchase only distressed assets but opened the door wider in Sec 3(9)(B) where it included "any other financial instrument". Also, Section 111, subsection C of the bill (that stated “the Secretary shall pursue additional measures to ensure that prices paid for assets are reasonable and reflect the underlying value of the asset”) could also be used to argue that the purchased “assets” as used in this provision would include not only securities accounted for as assets on the balance sheet of the financial institution but would also include common and preferred share, warrants on common and preferred shares, as well as secured and unsecured and convertible debt in the financial institution itself, which would be accounted for as assets on the balance sheet of the US Treasury. But we pointed out that this interpretation of “assets” as including preferred shares, left to itself, was a real stretch of the meaning of the legislation as preferred shares and common shares and sub debt are liabilities – rather than assets – of the bank. Thus, it was important to clarify that "any other financial instrument" was not limited to assets but also included institution’s liabilities such as stock, preferred stock, subordinated debt, senior debt. In other terms it was necessary to explicitly clarify that the definition of “assets” or “any other financial instrument” in the legislation did allow for such public injection of capital so as to ensure that the regulations following the legislation would allow for such interpretation and actual practice. Since it was too late – by Wednesday last week - to explicitly modify the legislation to allow for explicit wording on this matter and since Treasury was resisting such late explicit changes (that would have jolted the banking industry) the tool that was used (in full agreement with the House and Senate leadership) to allow for such interpretation was to have Representative Jim Moran use the October 3rd House floor debate right before the final vote to put on the legislative record such interpretation. See the following important exchange between Jim Moran and Barney Frank that is now on the legislative record of the House: Mr. MORAN of Virginia. Thank you, Madam Speaker. I won't take that much time. I do want to thank the chairman for his masterful leadership on this bill, and I do want to clarify that the intent of this legislation is to authorize the Treasury Department to strengthen credit markets by infusing capital into weak institutions in two ways: By buying their stock, debt, or other capital instruments; and, two, by purchasing bad assets from the institutions, in coordination with existing regulatory agencies and their responsibilities under this legislation, as well as under already existing authorization for prompt, corrective action and leastcost resolution. Mr. FRANK of Massachusetts. Will the gentleman yield? Mr. MORAN of Virginia. I'd be happy to yield. Mr. FRANK of Massachusetts. I can affirm that. As the gentleman knows, the Treasury Department is in agreement with this, and we should be clear, this is one of the things that this House and the Senate added to the bill, the authority to buy equity. It is not simply buying up the assets, it is to buy equity, and to buy equity in a way that the Federal Government will able to benefit if there is an appreciation. So Moran asks Frank to clarify that the explicit intent of the legislation is to allow the purchase of bank liabilities (stock, debt, or other capital instruments) not just assets; and Frank replies firmly that this is the case and that Treasury agrees with such interpretation. Done! So, all is well that ends well. A totally flawed and ineffective legislation that did not explicitly allow to do the right thing – recapitalize banks with public capital injections – and was rather aimed to do the wrong thing (wasting $700 bn of taxpayers’ money to buy only toxic assets at an inflated price) was rescued at the last moment right before the House vote via an interpretation of the wording of the legislation in the record of the House that allowed such recapitalization. It is a sorry reflection of the state of the US democracy that hundreds of Senators and Congressfolks did vote for the biggest bailout ever in US history ($700 bn) without even knowing exactly what they were voting for. They effectively and rightly allowed for a partial nationalization of the US financial system (the only solution that will prevent a systemic financial meltdown) without even exactly knowing that they were voting for this. So a huge plan that was sold as spending $700 bn to buy toxic waste of banks - and where the public discussion was all and only about this purchase of toxic assets – was finally and luckily rectified (with the hard and explicit efforts of many of us) to allow for a partial government takeover of such financial institutions. Paulson should be lucky that his early opposition to such public capital injection in the financial system did not prevent Congress – via the back door – to do what was right. And he is now lucky that the first thing he could mention and did mention in his press conference yesterday was a plan to “inject capital into financial institutions” rather than the half-baked idea of spending most of the $700 bn to buy toxic assets. Hat tip to Justin Fox who was the first journalist that picked up the importance of what Paulson said yesterday. Adam Davidson of NPR tells me that he was the first one to scoop this "stock injection plan" story last Friday (even before Justin Fox) having been tipped by someone that had been tipped by me.
