TW: I have yet to meet a financial industry professional who does not believe our financial system was on the brink of collapse last fall. Not collapse as in another bank would have gone down like BofA, or the market would have gone down even more, but collapse as in your ATM would not have worked for awhile perhaps a long while and if that had happened for even a day or two things would have gotten real interesting really fast.
That said now that the world (for now at least) has not fallen apart, certain panderific folks are going to come out of the woodwork to claim TARP was not necessary. There were fools like Mike Pence saying as much at the time and I would expect intellectually challenged folks like Palin to make such claims. But Mitt Romney knows better. He is something worse- a pander monkey, a tendency he exhibited often during the Republican primaries.
From James Pethokoukis at Reuters:
"OK, here is what the front runner (at least according to the online betting markets) for the 2012 GOP nomination said at the Value Voters summit over the weekend:
'When government is trying to take over health care, buying car companies, bailing out banks, and giving half the White House staff the title of czar – we have every good reason to be alarmed and to speak our mind!'
Now that does sounds like a repudiation of TARP. And here is what Mitt Romney told me in March:
'The TARP program, while not transparent and not having been used as wisely it should have been, was nevertheless necessary to keep banks from collapsing in a cascade of failures. You cannot have a free economy and free market if there is not a financial system. … The TARP program was designed to keep the financial system going, to keep money circulating in the economy, without which the entire economy stops and you would really have an economic collapse.'
Now that does sound like an endorsement of TARP. If Romney liked it then and doesn’t like it now for policy reasons, I think that is OK. But if that is the case, he should explain is reasoning and change of mind. Of course, the cynical explanation is that Romney now realizes that among many conservative GOPers, endorsement of TARP is almost a disqualifier for the 2012 nomination. So he is trying to muddy his support a bit..."
http://blogs.reuters.com/james-pethokoukis/2009/09/21/did-romney-flip-flop-on-tarp/
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
Tuesday, September 22, 2009
Friday, July 10, 2009
Bi-Partisan Stupidity
TW: Really not much to say about this bi-partisan pile of dung. One of the reasons the American auto industry is dying are massive legacy costs such as these. Republican Grassley IA is sponsoring the Senate bill, such stupidity. This is how nations decline, entrenched interests which stopped adding value years ago refuse to go away. Perhaps the Dems would pass this garbage by themselves but the Republicans being huge buddies with the dealers are right there at the trough with them on this one.
From the Detroit News:
A majority of House members have signed onto a bill to reverse the closing of 789 Chrysler dealerships and block General Motors Corp. from closing more than 1,300.
The Automobile Dealer Economic Rights Restoration Act of 2009, sponsored by Rep Daniel Maffei, D-N.Y., now has 221 cosponsors — a majority of the 435-member House.
Idiots.
This comes via Jim Manzi who explains pithily: "The practical effect would be to reverse or prevent the vast majority of dealer closings that were a key component of the auto restructuring plans. This seems only fair, as the dealers paid good money for these politicians."
This is a wholly nonideological porkfest, with 133 Democratic cosponsors and 88 Republican cosponsors. (So far.) Which just goes to show: under the right circumstances, bipartisanship isn't dead after all. David Broder should be thrilled.
From the Detroit News:
A majority of House members have signed onto a bill to reverse the closing of 789 Chrysler dealerships and block General Motors Corp. from closing more than 1,300.
The Automobile Dealer Economic Rights Restoration Act of 2009, sponsored by Rep Daniel Maffei, D-N.Y., now has 221 cosponsors — a majority of the 435-member House.
Idiots.
This comes via Jim Manzi who explains pithily: "The practical effect would be to reverse or prevent the vast majority of dealer closings that were a key component of the auto restructuring plans. This seems only fair, as the dealers paid good money for these politicians."
This is a wholly nonideological porkfest, with 133 Democratic cosponsors and 88 Republican cosponsors. (So far.) Which just goes to show: under the right circumstances, bipartisanship isn't dead after all. David Broder should be thrilled.
Thursday, June 25, 2009
Should California Be Bailed Out? NOOOO!!
TW: California is barreling towards its July 1 fiscal deadline without resolution. This should be interesting. California is a partial metaphor for the rest of the nation's fiscal situation. This piece's core point- "The [CA] public imagined that they could have world class government services with extraordinarily low levels of taxation" is applicable to the balance of the nation.
The California situation frames numerous issues:
1) Fiscally speaking Californians mouths are bigger than their stomach's and their system is good at feeding the mouth without digesting properly. The governance structure in CA can relatively easily initiate new spending programs (via referendums) but cannot raise the commensurate taxes (need 2/3 majorities for that and the state districts are gerrymandered to elect strident partisans from both sides).
2) CA creates systematic risk for the rest of the country. If CA were to default on its bond obligations, we would be talking about another cascading financial crisis as other muni bonds across the nation would come under new scrutiny (rates would rise etc.). A CA default is highly unlikely as I believe the bondholders are ahead of just about every stakeholder in CA but for education. In other words CA would have to stop paying firemen, police, health care expenses first before defaulting on the bond payments.
3) CA symbolizes the challenge of variable revenues amidst a demand contraction. As CA (or any other state) contracts is spending in line with its contracting tax revenues, it feeds the downward cycle of overall demand. States unlike the Federal government do not have the leeway to deficit spend to counter the overall demand contraction.
4) But for the federal government to "bailout" CA creates a major moral hazard. If states think Washington will ultimately bail them out then their incentives to address their own problems is greatly diminished.
5) Would the rest of the country support "bailing out" CA?
For these last two reasons, I do not believe Obama will "bail out" CA. The political support issue is important but should ultimately be secondary. The moral hazard issue should be paramount. There are ways for that issue to be overcome (i.e. by CA initiating governance reforms to prevent the deficit from recurring) but the only way those reforms will happen will be through a game of chicken with the federal government. While I support playing the game, these games are how disasters occur and depressions are created. Things should never get to this point.
From Economist:
"...NPR interviewed two mayors from California cities—San Diego and Santa Anna—on the subject of the state's budget crisis and the state government's efforts to close the yawning gap between revenues and expenditures by taking or borrowing money from metropolitan budgets. The mayors were obviously not very pleased with this approach, but what surprised me was how sanguine they seemed about the crisis in general, and how unable they were to discuss the actual issues involved. The mayors appeared to believe that so long as their local budgets were sound, no amount of state level cuts would much affect them. They also stood firmly in the belief that California voters were entirely in the right in placing strict constitutional limits on tax increases, and they declared that the "literally bloated bureaucracy" needed to live within its means.
It's all well and good to talk about a bloated bureaucracy, but state legislators could cut government employment in Sacramento to the bone without making much of a dent in the budget crisis. It isn't the pencil pushers spending the money, it's the demands of the public, expressed through their elected representatives but also directly, in statewide ballot initiatives.
The public has imagined that they could have world class government services with extraordinarily low levels of taxation. This is a fantasy, and one is sorely tempted to let the state figure this out for itself. Presumably, after the sudden release of thousands of prison inmates has spurred a spike in crime, drastic cuts to top universities generate mass academic brain drain, and shortfalls in key social services lead to a wave of well-publicised suffering, Californians will begin to get the picture—you get what you pay for.
For now, the administration seems inclined to take this approach...presidential advisors have determined that California is not yet at the brink and ought to work harder to close its budget gap by itself. Obama officials are also nervous that a California bail-out will lead to a wave of requests from other states
...Structural budget problems in California and elsewhere are a major roadblock, and no aid should be forthcoming until binding negotiations have taken place between state and federal officials, establishing a path to long-run budget stability. But this is the wrong place to hold a line against bail-outs.
For one thing, countercyclical aid to states is entirely appropriate. Most state constitutions prevent their governments from running annual budget deficits. This means that in recessions, pro-cyclical tax increases and service cuts are necessary. There should be a federal aid automatic stabiliser in place to prevent this (accompanied by a "tax" on state budgets during boom times).
...But it is also clear to me that this is the next Lehman. This is the domino you can't let topple. There are no good options available. A default would roil municipal debt markets and could seriously harm both state budgets and financial markets. Solving the budget crisis without addressing the constituional issues would involve pro-cyclical and economically destabilising budget cuts. Solving the crisis while addressing the constitutional limits on tax increases would prevent dangerous cuts to services, but would still be pro-cyclical, and is at any rate impossible in the necessary time frame.
The downsides to intervention are clear—moral hazard, growing demands from other states, the risk that California may not fix the underlying issues, the use of scarce political capital to obtain funds from Congress, and so on. But the adminstration has gone to great lengths to put a floor under this economy, guaranteeing that no major financial institutions would fail and racking up a trillion dollar deficit. Letting California go would throw much of that work out the window. How one observes the failure of a middling investment bank creating global financial havoc and then allows the world's eighth largest economy to crater over a matter of $24 billion is beyond me. I remain convinced that the adminstration will not allow it to happen"
http://www.economist.com/blogs/freeexchange/2009/06/slipping_into_the_sea.cfm
The California situation frames numerous issues:
1) Fiscally speaking Californians mouths are bigger than their stomach's and their system is good at feeding the mouth without digesting properly. The governance structure in CA can relatively easily initiate new spending programs (via referendums) but cannot raise the commensurate taxes (need 2/3 majorities for that and the state districts are gerrymandered to elect strident partisans from both sides).
2) CA creates systematic risk for the rest of the country. If CA were to default on its bond obligations, we would be talking about another cascading financial crisis as other muni bonds across the nation would come under new scrutiny (rates would rise etc.). A CA default is highly unlikely as I believe the bondholders are ahead of just about every stakeholder in CA but for education. In other words CA would have to stop paying firemen, police, health care expenses first before defaulting on the bond payments.
3) CA symbolizes the challenge of variable revenues amidst a demand contraction. As CA (or any other state) contracts is spending in line with its contracting tax revenues, it feeds the downward cycle of overall demand. States unlike the Federal government do not have the leeway to deficit spend to counter the overall demand contraction.
4) But for the federal government to "bailout" CA creates a major moral hazard. If states think Washington will ultimately bail them out then their incentives to address their own problems is greatly diminished.
5) Would the rest of the country support "bailing out" CA?
For these last two reasons, I do not believe Obama will "bail out" CA. The political support issue is important but should ultimately be secondary. The moral hazard issue should be paramount. There are ways for that issue to be overcome (i.e. by CA initiating governance reforms to prevent the deficit from recurring) but the only way those reforms will happen will be through a game of chicken with the federal government. While I support playing the game, these games are how disasters occur and depressions are created. Things should never get to this point.
From Economist:
"...NPR interviewed two mayors from California cities—San Diego and Santa Anna—on the subject of the state's budget crisis and the state government's efforts to close the yawning gap between revenues and expenditures by taking or borrowing money from metropolitan budgets. The mayors were obviously not very pleased with this approach, but what surprised me was how sanguine they seemed about the crisis in general, and how unable they were to discuss the actual issues involved. The mayors appeared to believe that so long as their local budgets were sound, no amount of state level cuts would much affect them. They also stood firmly in the belief that California voters were entirely in the right in placing strict constitutional limits on tax increases, and they declared that the "literally bloated bureaucracy" needed to live within its means.
It's all well and good to talk about a bloated bureaucracy, but state legislators could cut government employment in Sacramento to the bone without making much of a dent in the budget crisis. It isn't the pencil pushers spending the money, it's the demands of the public, expressed through their elected representatives but also directly, in statewide ballot initiatives.
The public has imagined that they could have world class government services with extraordinarily low levels of taxation. This is a fantasy, and one is sorely tempted to let the state figure this out for itself. Presumably, after the sudden release of thousands of prison inmates has spurred a spike in crime, drastic cuts to top universities generate mass academic brain drain, and shortfalls in key social services lead to a wave of well-publicised suffering, Californians will begin to get the picture—you get what you pay for.
For now, the administration seems inclined to take this approach...presidential advisors have determined that California is not yet at the brink and ought to work harder to close its budget gap by itself. Obama officials are also nervous that a California bail-out will lead to a wave of requests from other states
...Structural budget problems in California and elsewhere are a major roadblock, and no aid should be forthcoming until binding negotiations have taken place between state and federal officials, establishing a path to long-run budget stability. But this is the wrong place to hold a line against bail-outs.
For one thing, countercyclical aid to states is entirely appropriate. Most state constitutions prevent their governments from running annual budget deficits. This means that in recessions, pro-cyclical tax increases and service cuts are necessary. There should be a federal aid automatic stabiliser in place to prevent this (accompanied by a "tax" on state budgets during boom times).
...But it is also clear to me that this is the next Lehman. This is the domino you can't let topple. There are no good options available. A default would roil municipal debt markets and could seriously harm both state budgets and financial markets. Solving the budget crisis without addressing the constituional issues would involve pro-cyclical and economically destabilising budget cuts. Solving the crisis while addressing the constitutional limits on tax increases would prevent dangerous cuts to services, but would still be pro-cyclical, and is at any rate impossible in the necessary time frame.
The downsides to intervention are clear—moral hazard, growing demands from other states, the risk that California may not fix the underlying issues, the use of scarce political capital to obtain funds from Congress, and so on. But the adminstration has gone to great lengths to put a floor under this economy, guaranteeing that no major financial institutions would fail and racking up a trillion dollar deficit. Letting California go would throw much of that work out the window. How one observes the failure of a middling investment bank creating global financial havoc and then allows the world's eighth largest economy to crater over a matter of $24 billion is beyond me. I remain convinced that the adminstration will not allow it to happen"
http://www.economist.com/blogs/freeexchange/2009/06/slipping_into_the_sea.cfm
Friday, June 12, 2009
How Soon We Forget
TW: We are no where near out of the economic woods but folks are eager to forget any notions of reform and move on to the usual partisan bickering. In particular the old mantras of limited government are moving front and center. Folks want limited government except of course when they want their asses saved.
I made the mistake (a thankfully rare one) of turning on CNBC this morning where the lamentations were rife about "shaky policies out of Washington, getting in the way of Wall Street ". About the last time I had on CNBC was last fall when the same exact schmucks were screaming, begging even for "drastic government action".
From Steve Pearlstein at WaPo:
"Last fall, during the darkest days of the financial crisis, if you'd predicted that by the middle of this year, 10 of the biggest banks would have paid back all $68 billion of their bailout money and begun to raise private capital again, that General Motors and Chrysler would have been run through a dramatic bankruptcy restructuring and that the stock market would be up 35 percent from its lows, I probably would have given you 10-to-1 odds that you were wrong.
Now that it's all come to pass, you might think we'd take a moment and offer a pat on the back to the people who helped to engineer this little miracle -- folks like Hank Paulson, Ben Bernanke, Tim Geithner, Neel Kashkari, Sheila Bair, Barney Frank and so forth. There was nothing preordained about this fortuitous outcome. Nor, given the extraordinary amount of government intervention, can most of the credit go to the free market's natural self-correcting process.
Instead of celebrating this feat of economic policy, however, there are those who seem more in the mood for second-guessing and recrimination.
A House subcommittee yesterday worked itself into a self-righteous lather over the strong-arm tactics used by then-Treasury secretary Paulson and Bernanke to persuade Bank of America to go through with its purchase of Merrill Lynch after the bank discovered, long after it should have, that the firm known for being bullish on America had a balance sheet full of manure.
Committee members were shocked that regulators would threaten to use their supervisory powers to remove Bank of America's directors and chief executive if they backed out of the transaction at the last minute.
Never mind that if the deal had collapsed, the federal government would have had to step in with tens of billions of additional taxpayer dollars to prevent Merrill from collapsing and taking the already wounded financial system down with it.
And never mind that confidential Federal Reserve documents obtained by the committee showed that Bank of America itself -- with its own mounting losses and thinly capitalized balance sheet -- would have been the first and biggest casualty in such a meltdown.
Now that the deal has gone through and crisis has been averted, committee members were only too willing to summon a full measure of self-righteousness to denounce what they saw as a market-distorting abuse of governmental authority.
...For sheer hypocrisy, however, you can't beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration's proposal for bailing out domestic auto manufacturers, saying it didn't force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.
Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He's outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.
...Every crisis generates its own set of leaders willing to take risks, twist arms and even bend a few rules to get us through it. Every crisis also generates its own set of political ankle-biters. It's not hard to tell the two apart."
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/11/AR2009061104224.html?wprss=rss_business
I made the mistake (a thankfully rare one) of turning on CNBC this morning where the lamentations were rife about "shaky policies out of Washington, getting in the way of Wall Street ". About the last time I had on CNBC was last fall when the same exact schmucks were screaming, begging even for "drastic government action".
From Steve Pearlstein at WaPo:
"Last fall, during the darkest days of the financial crisis, if you'd predicted that by the middle of this year, 10 of the biggest banks would have paid back all $68 billion of their bailout money and begun to raise private capital again, that General Motors and Chrysler would have been run through a dramatic bankruptcy restructuring and that the stock market would be up 35 percent from its lows, I probably would have given you 10-to-1 odds that you were wrong.
Now that it's all come to pass, you might think we'd take a moment and offer a pat on the back to the people who helped to engineer this little miracle -- folks like Hank Paulson, Ben Bernanke, Tim Geithner, Neel Kashkari, Sheila Bair, Barney Frank and so forth. There was nothing preordained about this fortuitous outcome. Nor, given the extraordinary amount of government intervention, can most of the credit go to the free market's natural self-correcting process.
Instead of celebrating this feat of economic policy, however, there are those who seem more in the mood for second-guessing and recrimination.
A House subcommittee yesterday worked itself into a self-righteous lather over the strong-arm tactics used by then-Treasury secretary Paulson and Bernanke to persuade Bank of America to go through with its purchase of Merrill Lynch after the bank discovered, long after it should have, that the firm known for being bullish on America had a balance sheet full of manure.
Committee members were shocked that regulators would threaten to use their supervisory powers to remove Bank of America's directors and chief executive if they backed out of the transaction at the last minute.
Never mind that if the deal had collapsed, the federal government would have had to step in with tens of billions of additional taxpayer dollars to prevent Merrill from collapsing and taking the already wounded financial system down with it.
And never mind that confidential Federal Reserve documents obtained by the committee showed that Bank of America itself -- with its own mounting losses and thinly capitalized balance sheet -- would have been the first and biggest casualty in such a meltdown.
Now that the deal has gone through and crisis has been averted, committee members were only too willing to summon a full measure of self-righteousness to denounce what they saw as a market-distorting abuse of governmental authority.
...For sheer hypocrisy, however, you can't beat Republican Sen. Bob Corker of Tennessee. Last November, Corker took to the Senate floor to denounce the Bush administration's proposal for bailing out domestic auto manufacturers, saying it didn't force the companies to do enough to restructure their costs and their operations. Among his big concerns: oversize dealer networks that prevented even the strongest dealerships from making a decent profit.
Fast forward to today, as Chrysler and GM are finally undergoing the radical downsizing and restructuring that Corker had long demanded. And what does Corker have to say about that? He's outraged at the way the discontinued dealers have been treated and is pushing legislation to ensure that they get at least six months to wind down their operations and receive full refunds from the automakers for any unsold cars or parts.
...Every crisis generates its own set of leaders willing to take risks, twist arms and even bend a few rules to get us through it. Every crisis also generates its own set of political ankle-biters. It's not hard to tell the two apart."
http://www.washingtonpost.com/wp-dyn/content/article/2009/06/11/AR2009061104224.html?wprss=rss_business
Sunday, May 24, 2009
Keeping Things In Perspective
From Kevin Drum at Mother Jones:
"...BankUnited in Florida has finally been taken into receivership. No surprise there, but the price tag might be: apparently the FDIC estimates the takeover will ultimately cost taxpayers a cool $4.9 billion-and that's for a bank with less than $15 billion in assets."
TW: Think about that one for a second. $5 billion that is a nice chunk of change. With all of financial carnage which has occurred over the past year or so, to a certain degree we have become immune to these announcements. But put that in perspective $5.0 billion could buy a lot of things: education for needy kids, meals for the undernourished, a nice cushy padded cell for Dick Cheney. Some group of executives ran that bank into the ground, the conservatives bitch and moan and whine about guvmint but at the end of the day you the taxpayer are cleaning up the turds of "capitalists" and free markets gone wild. A little good effective regulation can go a long way.
"...BankUnited in Florida has finally been taken into receivership. No surprise there, but the price tag might be: apparently the FDIC estimates the takeover will ultimately cost taxpayers a cool $4.9 billion-and that's for a bank with less than $15 billion in assets."
TW: Think about that one for a second. $5 billion that is a nice chunk of change. With all of financial carnage which has occurred over the past year or so, to a certain degree we have become immune to these announcements. But put that in perspective $5.0 billion could buy a lot of things: education for needy kids, meals for the undernourished, a nice cushy padded cell for Dick Cheney. Some group of executives ran that bank into the ground, the conservatives bitch and moan and whine about guvmint but at the end of the day you the taxpayer are cleaning up the turds of "capitalists" and free markets gone wild. A little good effective regulation can go a long way.
Friday, April 3, 2009
Does Obama's Aggressiveness With GM Reconcile To His Financial Bailouts?
TW: Many have asked why is Obama being a hardass with GM while pandering to the banks. They are different situations requiring differing responses. A simple concept lost to many. The banks have a balance sheet problem, a very huge balance sheet problem whereby their assets are worth far less than book value but their underlying businesses do produce profits. In time the banks will be restored to "normalcy". In addition, it is a dead certainty without a viable banking system one does not have a viable economy.
The automakers as an earlier post showed are in a long-term sectoral decline. As currently structured their legacy costs not only related to retirees but also just old installed capital bases are not profitable now and will never realistically be profitable. Obama has a choice between the lesser of two evils, bite the bullet now or kick the can down the road. Those legacy costs have to be addressed through a combination of retiree concessions, bond holder haircuts and taxpayer subsidies. We can do it now or later. Now is not a good time to do it given the overall economy but there does not appear to be a viable alternative.
From Jim Suroweicki at New Yorker:
"In the wake of the Obama Administration’s decision to take a hard line on bailout funding for G.M. and Chrysler, there’s been a lot of talk about why there seems to be a double standard at work in the way the Administration is dealing with the automakers and the way it’s dealing with the banks. This may well be a premature conclusion: it’s not obvious that the Administration won’t adopt a tough line with at least some banks after the stress tests are completed next month. But to the extent that there does seem to be a difference between the Administration’s strategy for dealing with the two industries, there is an obvious explanation: it’s relatively easy to see how the banks can return to profitability, while it’s much harder to see how the automakers can become profitable again, at least in the absence of the kind of radical restructuring you’d get through bankruptcy or some kind of deal with the bondholders.
The money the government has been giving the automakers has been going not to shore up their capital base, but literally to pay their bills. In the absence of government aid, the automakers would have had to shut down their factories because of their inability to pay suppliers and workers. That’s not true of even the most troubled big banks, which are having no problem meeting their debt payments or paying their bills: the government’s aid has gone instead to replenish their capital and allow them to stay in regulatory compliance. That doesn’t mean the government’s aid was not essential, but it was different: the money the government gave G.M. has already gone out the door, while in the case of the banks it’s still, for the most part, sitting on their balance sheets (which is where it’s supposed to be)..."
The automakers as an earlier post showed are in a long-term sectoral decline. As currently structured their legacy costs not only related to retirees but also just old installed capital bases are not profitable now and will never realistically be profitable. Obama has a choice between the lesser of two evils, bite the bullet now or kick the can down the road. Those legacy costs have to be addressed through a combination of retiree concessions, bond holder haircuts and taxpayer subsidies. We can do it now or later. Now is not a good time to do it given the overall economy but there does not appear to be a viable alternative.
From Jim Suroweicki at New Yorker:
"In the wake of the Obama Administration’s decision to take a hard line on bailout funding for G.M. and Chrysler, there’s been a lot of talk about why there seems to be a double standard at work in the way the Administration is dealing with the automakers and the way it’s dealing with the banks. This may well be a premature conclusion: it’s not obvious that the Administration won’t adopt a tough line with at least some banks after the stress tests are completed next month. But to the extent that there does seem to be a difference between the Administration’s strategy for dealing with the two industries, there is an obvious explanation: it’s relatively easy to see how the banks can return to profitability, while it’s much harder to see how the automakers can become profitable again, at least in the absence of the kind of radical restructuring you’d get through bankruptcy or some kind of deal with the bondholders.
The money the government has been giving the automakers has been going not to shore up their capital base, but literally to pay their bills. In the absence of government aid, the automakers would have had to shut down their factories because of their inability to pay suppliers and workers. That’s not true of even the most troubled big banks, which are having no problem meeting their debt payments or paying their bills: the government’s aid has gone instead to replenish their capital and allow them to stay in regulatory compliance. That doesn’t mean the government’s aid was not essential, but it was different: the money the government gave G.M. has already gone out the door, while in the case of the banks it’s still, for the most part, sitting on their balance sheets (which is where it’s supposed to be)..."
It Was Inevitable: Undertakers Ask For Bailout
TW: I admit once the bailouts start they are hard to stop. Monkey see, monkey do becomes the approach. If them, why not me etc. So naturally funeral directors have decided to petition for some bailout support. Luckily so far they have been thwarted, but they are suffering not because of fewer customers but because the customers are using fewer frills and extras. This, of course, is a clear example of what happens in a demand contraction, even the unavoidable consumption is impacted as consumers squeeze the spending down to only the minimum necessary to get by.
From Dana Milbank at WaPo:
"It has long been suspected that the funeral business is immune from economic cycles, that the Grim Reaper tends not to follow the stock market. But this time, funeral homes are discovering that their clients' thrift -- sheet-metal urns instead of bronze caskets, cheese-and-cracker nibbles instead of traditional funeral luncheons -- is positively killing profits.
So funeral directors did what everybody else does: They asked for a federal bailout.
"We recognized that there may be a situation where a lot of folks who were displaced or unemployed might need some help in paying for their funerals," John Fitch Jr., lobbyist for the National Funeral Directors Association, explained yesterday at the group's annual gathering, at the Mayflower Hotel. "We had some preliminary discussions about providing some stimulus payments to the states" for funerals, he added.
It was quite an undertaking, and it didn't work; apparently, funding funerals wasn't regarded as a spur to economic growth, because much of the benefit gets deep-sixed.
...(It's not that people have stopped dying. Though there's some evidence that the death rate drops during a recession (people drive less, for example, so they have fewer accidents), any such effect will soon be swamped as baby boomers prepare to shuffle off this mortal coil. When it comes to the death rate, "the statistics on this are fairly certain," funeral director Patrick Lynch explained at yesterday's news conference. "It's 100 percent."
...a trio of funeral directors, all in dark suits, lined up at a table, draped in black fabric, for the news conference. They looked much like the banking and automotive executives who came to town to ask for government help, except they attracted rather less interest: a grand total of two reporters.
The undertakers traded tales of penny-pinching mourners. Lynch, of Michigan, spoke about the "huge bowl of Bazooka bubble gum" displayed at one visitation. "Didn't cost a lot of money," he said. "That's what we see people doing."
"Instead of feeding everybody dinner or lunch, we've been throwing little, for lack of a better word, cocktail-party type things, cheese and crackers," added James Olson of Wisconsin. "Also," he said, "my cremation rate has gone up in the last two years. . . . I'm at 42 percent."
Lynch turned to the "merchandise" of the funeral. "People, rather than selecting a copper or a bronze casket, may choose a 20-gauge steel casket painted in a copper color," he said. "Instead of choosing a mahogany casket made of real mahogany, they may choose a poplar casket stained with a mahogany stain, which to most observers looks the same. Perhaps they would chose a crepe interior as opposed to a velvet interior in a casket. Perhaps they would choose a sheet-metal urn as opposed to a solid-bronze urn."
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/31/AR2009033103477.html?nav=rss_opinion/columns
From Dana Milbank at WaPo:
"It has long been suspected that the funeral business is immune from economic cycles, that the Grim Reaper tends not to follow the stock market. But this time, funeral homes are discovering that their clients' thrift -- sheet-metal urns instead of bronze caskets, cheese-and-cracker nibbles instead of traditional funeral luncheons -- is positively killing profits.
So funeral directors did what everybody else does: They asked for a federal bailout.
"We recognized that there may be a situation where a lot of folks who were displaced or unemployed might need some help in paying for their funerals," John Fitch Jr., lobbyist for the National Funeral Directors Association, explained yesterday at the group's annual gathering, at the Mayflower Hotel. "We had some preliminary discussions about providing some stimulus payments to the states" for funerals, he added.
It was quite an undertaking, and it didn't work; apparently, funding funerals wasn't regarded as a spur to economic growth, because much of the benefit gets deep-sixed.
...(It's not that people have stopped dying. Though there's some evidence that the death rate drops during a recession (people drive less, for example, so they have fewer accidents), any such effect will soon be swamped as baby boomers prepare to shuffle off this mortal coil. When it comes to the death rate, "the statistics on this are fairly certain," funeral director Patrick Lynch explained at yesterday's news conference. "It's 100 percent."
...a trio of funeral directors, all in dark suits, lined up at a table, draped in black fabric, for the news conference. They looked much like the banking and automotive executives who came to town to ask for government help, except they attracted rather less interest: a grand total of two reporters.
The undertakers traded tales of penny-pinching mourners. Lynch, of Michigan, spoke about the "huge bowl of Bazooka bubble gum" displayed at one visitation. "Didn't cost a lot of money," he said. "That's what we see people doing."
"Instead of feeding everybody dinner or lunch, we've been throwing little, for lack of a better word, cocktail-party type things, cheese and crackers," added James Olson of Wisconsin. "Also," he said, "my cremation rate has gone up in the last two years. . . . I'm at 42 percent."
Lynch turned to the "merchandise" of the funeral. "People, rather than selecting a copper or a bronze casket, may choose a 20-gauge steel casket painted in a copper color," he said. "Instead of choosing a mahogany casket made of real mahogany, they may choose a poplar casket stained with a mahogany stain, which to most observers looks the same. Perhaps they would chose a crepe interior as opposed to a velvet interior in a casket. Perhaps they would choose a sheet-metal urn as opposed to a solid-bronze urn."
http://www.washingtonpost.com/wp-dyn/content/article/2009/03/31/AR2009033103477.html?nav=rss_opinion/columns
Wednesday, March 18, 2009
"These People Have No Idea..."
TW: Have refrained from commenting on the AIG mess but I agree with below:
From Economist:
"EDWARD Liddy, the CEO of AIG, is sitting before the capital markets subcommittee of House Financial Services and taking punch after punch from members of Congress. There is no one message coming out of either party: there is only rage, and fear of the angry constituents who are melting the circuits on the Hill.
"We should let AIG go bankrupt and bring in new management," says Walt Minnick, a Democrat from idaho.
"We want the money back," says Judy Biggert, a Republican from Illinois. "We will, perhaps, have to take legal action."
"There has been a criminal conspiracy to hide information from the American people," says Brad Sherman, a Democrat from California.
"No more taxpayer funds," says Jeb Hensarling, a Republican from Texas. "No more bonuses until the taxpayer is made whole."
Loosely speaking, Republicans want to use the AIG scandal to put the brakes on future bail-outs. Loosely speaking, Democrats want to use it to exert more control over America's failing companies. But the clearest message of the hearing is: These people have no idea what they're doing."
From Economist:
"EDWARD Liddy, the CEO of AIG, is sitting before the capital markets subcommittee of House Financial Services and taking punch after punch from members of Congress. There is no one message coming out of either party: there is only rage, and fear of the angry constituents who are melting the circuits on the Hill.
"We should let AIG go bankrupt and bring in new management," says Walt Minnick, a Democrat from idaho.
"We want the money back," says Judy Biggert, a Republican from Illinois. "We will, perhaps, have to take legal action."
"There has been a criminal conspiracy to hide information from the American people," says Brad Sherman, a Democrat from California.
"No more taxpayer funds," says Jeb Hensarling, a Republican from Texas. "No more bonuses until the taxpayer is made whole."
Loosely speaking, Republicans want to use the AIG scandal to put the brakes on future bail-outs. Loosely speaking, Democrats want to use it to exert more control over America's failing companies. But the clearest message of the hearing is: These people have no idea what they're doing."
Wednesday, February 25, 2009
Another (Relatively) Simple Credit Crisis Perspective
TW: I try to avoid getting sucked into too much detail re the credit crisis (complex and frequently beyond my own knowledge base). But when I run across something that I think frames the issues in a relatively simple format I bring it up. Krugman (king of lefties) is frustrated, the righties are frustrated. As I have said before, I suspect answers are lacking due to a dearth of viable answers not lack of trying.
From Paul Krugman at NYT:
"I’m trying to be sympathetic to the various plans, or rumors of plans, for bank aid; but I keep not being able to understand either what the plans are, or why they’re supposed to work. And I don’t think it’s me.
So the latest is that we’re going to convert preferred stock held by the government to common stock, maybe...And it’s not at all clear what is accomplished thereby.
Here’s my stylized picture of the situation:
At the top are a bank’s assets. Below are its obligations to various parties, with decreasing seniority from left to right. I’ve drawn it to embody a pessimistic assumption about the bank’s finances, because those are the cases we’re interested in: the bank’s assets aren’t enough to cover its debts. Nonetheless, the stock, both preferred and common, has a positive market value. Why? Because of the Geithner put: the bank is protected from collapse, keeping the creditors appeased, but stockholders will get the gains if somehow things turn up.
What we want to do is clean up the bank’s balance sheet, so that it no longer has to be a ward of the state. When the FDIC confronts a bank like this, it seizes the thing, cleans out the stockholders, pays off some of the debt, and reprivatizes.
What Treasury now seems to be proposing is converting some of the green equity to blue equity — converting preferred to common. It’s true that preferred stock has some debt-like qualities — there are required dividend payments, etc.. But does anyone think that the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt?
I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger."
So the latest is that we’re going to convert preferred stock held by the government to common stock, maybe...And it’s not at all clear what is accomplished thereby.
Here’s my stylized picture of the situation:
At the top are a bank’s assets. Below are its obligations to various parties, with decreasing seniority from left to right. I’ve drawn it to embody a pessimistic assumption about the bank’s finances, because those are the cases we’re interested in: the bank’s assets aren’t enough to cover its debts. Nonetheless, the stock, both preferred and common, has a positive market value. Why? Because of the Geithner put: the bank is protected from collapse, keeping the creditors appeased, but stockholders will get the gains if somehow things turn up.What we want to do is clean up the bank’s balance sheet, so that it no longer has to be a ward of the state. When the FDIC confronts a bank like this, it seizes the thing, cleans out the stockholders, pays off some of the debt, and reprivatizes.
What Treasury now seems to be proposing is converting some of the green equity to blue equity — converting preferred to common. It’s true that preferred stock has some debt-like qualities — there are required dividend payments, etc.. But does anyone think that the reason banks are crippled is that they are tied down by their obligations to preferred stockholders, as opposed to having too much plain vanilla debt?
I just don’t get it. And my sinking feeling that the administration plan is to rearrange the deck chairs and hope the iceberg melts just keeps getting stronger."
Thursday, February 19, 2009
Brief Overview Of the Obama Housing Plan
TW: I try not to get sucked into too many details on the various bailouts percolating out of DC, there are many of them (because we are in a precarious pickle) and they get very convoluted quickly. But Economist put together a readily digestible summary.
From Economist:
"...First, the administration will increase the number of homeowners able to refinance at current, low mortgage rates. Borrowers whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance a loan up to 105% of the home's value (up from 80%, previously). This is expected to help about 4 to 5 million households who owe nearly as much or more than the value of their homes. This seems like a reasonable step to take, though as Calculated Risk notes, it's a bit of a lottery. Those whose mortgages haven't been purchased by Fannie or Freddie are basically out of luck.
The second part is the one that's grabbed headlines; the president has dedicated $75 billion toward efforts to prevent foreclosures. Chief among these efforts is a plan to reduce monthly payments for troubled borrowers. For those spending greater than 38% of their income on mortgage payments, up to 43%, the government will ask lenders to reduce interest rates to bring payments down to the 38% level. The government will then match lender dollars, one-for-one, in bringing down interest payments until the borrower is only spending 31% of income. Both borrower and lender will be eligible for $1000 payments when payments are reworked, and if the planned payments are made. If it's necessary to reduce principle, then Treasury will provide assistance with this, as well.
This portion of the plan has drawn criticism, since many homeowners with too-large payments are those who took on irresponsible loan structures or who simply purchased too much house—who behaved irresponsibly, in other words. Ideally, officials would no doubt prefer not to help such borrowers (just as they'd no doubt prefer to let bankers who'd made bad decisions go under). But frankly, that's not a top concern of mine. Rather, I'm interested in whether or not this is the best way to use $75 billion to halt foreclosures.
On that score, this is probably one of the better among a list of not-so-good options. Calculated Risk worries that this will only delay foreclosure, since interest payments are being reduced first, and principle written down only as a last resort (such that many who take advantage of the programme will nonetheless remain underwater). Perhaps, but by trying to leave principle alone, the government is avoiding excessive transfers of wealth to borrowers. A shared-equity plan might have been better, but this will halt some foreclosures and incent homeowners to stay in their homes longer. That's bad for economic mobility, but good for a glutted housing market. Ending the downward spiral of price declines, defaults, and bank sales leading to further, dramatic price declines has to be a top priority.
Another question concerning the plan is whether the incentives to rework the payments are sufficient. Presumably, it's already in the interest of lenders to reduce payments rather than foreclose, so it's unclear whether $1000 is going to alter the balance. This, I think, is a more serious point. The housing plan passed last year to help rework problem mortgages seriously underperformed—where some 400,000 borrowers were deemed to be eligible, actual applications numbered in the tens.
The final portion of the plan involves measures to "strengthen" Fannie and Freddie and to keep mortgage credit available and fairly cheap. All told, the plan will be funded to the tune of about $200 billion.
By itself, the plan is unlikely to turn the tide. In combination with the stimulus, the bank rescue, and the collapse in home construction, it has a chance. Still, what would have been really nice to see would have been a comprehensive plan to get borrowers out of ownership without forcing them into bankruptcy or rushing waves of new foreclosures to market—an own-to-rent programme, for instance. Defaults are an immediate concern, but for the long-term health of the economy, lingering debt is going to be an issue. If foreclosure rates slow, but households continue to battle to get their heads above water by drastically cutting spending to pay down debt, recovery will be a long time coming."
http://www.economist.com/blogs/freeexchange/2009/02/housing_repair.cfm
From Economist:
"...First, the administration will increase the number of homeowners able to refinance at current, low mortgage rates. Borrowers whose mortgages are owned or guaranteed by Fannie Mae or Freddie Mac will be able to refinance a loan up to 105% of the home's value (up from 80%, previously). This is expected to help about 4 to 5 million households who owe nearly as much or more than the value of their homes. This seems like a reasonable step to take, though as Calculated Risk notes, it's a bit of a lottery. Those whose mortgages haven't been purchased by Fannie or Freddie are basically out of luck.
The second part is the one that's grabbed headlines; the president has dedicated $75 billion toward efforts to prevent foreclosures. Chief among these efforts is a plan to reduce monthly payments for troubled borrowers. For those spending greater than 38% of their income on mortgage payments, up to 43%, the government will ask lenders to reduce interest rates to bring payments down to the 38% level. The government will then match lender dollars, one-for-one, in bringing down interest payments until the borrower is only spending 31% of income. Both borrower and lender will be eligible for $1000 payments when payments are reworked, and if the planned payments are made. If it's necessary to reduce principle, then Treasury will provide assistance with this, as well.
This portion of the plan has drawn criticism, since many homeowners with too-large payments are those who took on irresponsible loan structures or who simply purchased too much house—who behaved irresponsibly, in other words. Ideally, officials would no doubt prefer not to help such borrowers (just as they'd no doubt prefer to let bankers who'd made bad decisions go under). But frankly, that's not a top concern of mine. Rather, I'm interested in whether or not this is the best way to use $75 billion to halt foreclosures.
On that score, this is probably one of the better among a list of not-so-good options. Calculated Risk worries that this will only delay foreclosure, since interest payments are being reduced first, and principle written down only as a last resort (such that many who take advantage of the programme will nonetheless remain underwater). Perhaps, but by trying to leave principle alone, the government is avoiding excessive transfers of wealth to borrowers. A shared-equity plan might have been better, but this will halt some foreclosures and incent homeowners to stay in their homes longer. That's bad for economic mobility, but good for a glutted housing market. Ending the downward spiral of price declines, defaults, and bank sales leading to further, dramatic price declines has to be a top priority.
Another question concerning the plan is whether the incentives to rework the payments are sufficient. Presumably, it's already in the interest of lenders to reduce payments rather than foreclose, so it's unclear whether $1000 is going to alter the balance. This, I think, is a more serious point. The housing plan passed last year to help rework problem mortgages seriously underperformed—where some 400,000 borrowers were deemed to be eligible, actual applications numbered in the tens.
The final portion of the plan involves measures to "strengthen" Fannie and Freddie and to keep mortgage credit available and fairly cheap. All told, the plan will be funded to the tune of about $200 billion.
By itself, the plan is unlikely to turn the tide. In combination with the stimulus, the bank rescue, and the collapse in home construction, it has a chance. Still, what would have been really nice to see would have been a comprehensive plan to get borrowers out of ownership without forcing them into bankruptcy or rushing waves of new foreclosures to market—an own-to-rent programme, for instance. Defaults are an immediate concern, but for the long-term health of the economy, lingering debt is going to be an issue. If foreclosure rates slow, but households continue to battle to get their heads above water by drastically cutting spending to pay down debt, recovery will be a long time coming."
http://www.economist.com/blogs/freeexchange/2009/02/housing_repair.cfm
Friday, February 13, 2009
The Bank Morass and Geithner
TW: I do not post on the details of the banking morass as there is cacophony of voices trying generally unsuccessfully to provide some level of insight. The problem as Silver outlines is that few are actually qualified to speak intelligently to the topic and if they are the details are intricate unless one devolves into ideology (a frequent occurrence).
Bitching about the proposals out of the government is the easy route, that was true with Paulson and it is true with Geithner. But again as Silver points out, if anyone has an incentive to get this thing right it is the Obama Administration. Those on the left squawking about a sellout to Wall Street are from my perspective deeply wrong.
I sense that our financial system is screwed (specifically not only insolvent but deeply so). I do not know the answer. I suspect nationalization may be the ultimate direction as the losses are enormous (measured in trillions). One way or the other the governments here and elsewhere will have to absorb massive losses created by our financial institutions and their customers. While this is highly annoying and frustrating, I have yet to read a viable alternative solution. For those repulsed by the concept of nationalization I simply ask what is your solution especially one that is not merely socializing all the losses while in form avoiding nationalization.
From Nate Silver:
"...I'm sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue. And I'm certainly in the majority on this one. My anecdotal experience for the past several months has been that the more someone knows about the economy, the more they know (or at least are willing to admit to) what they don't know. Anyone who is professing with certainty that this or that will work -- nationalizing the banks, for instance -- is an idiot.
...Nobody, absolutely nobody, has more incentive to get this right than the Obama Administration. If the economy collapses -- well, more than it already has collapsed -- then the Democrats get slaughtered in 2010, Obama is a one-termer, health care doesn't happen, the poverty rate increases by a couple orders of magnitude, and the imperative to fix the environment gets put on the backburner. To suggest that Obama or Geithner are tools of Wall Street and are looking out for something other than the country's best interest is freaking asinine. Maybe their ideas are wrong -- but their hearts are in the right place."
http://www.fivethirtyeight.com/2009/02/give-geithner-break.html
Bitching about the proposals out of the government is the easy route, that was true with Paulson and it is true with Geithner. But again as Silver points out, if anyone has an incentive to get this thing right it is the Obama Administration. Those on the left squawking about a sellout to Wall Street are from my perspective deeply wrong.
I sense that our financial system is screwed (specifically not only insolvent but deeply so). I do not know the answer. I suspect nationalization may be the ultimate direction as the losses are enormous (measured in trillions). One way or the other the governments here and elsewhere will have to absorb massive losses created by our financial institutions and their customers. While this is highly annoying and frustrating, I have yet to read a viable alternative solution. For those repulsed by the concept of nationalization I simply ask what is your solution especially one that is not merely socializing all the losses while in form avoiding nationalization.
From Nate Silver:
"...I'm sorry, but somewhere between 99.9% and 99.999999% of us are severely underqualified to be making policy recommendations on this particular issue. And I'm certainly in the majority on this one. My anecdotal experience for the past several months has been that the more someone knows about the economy, the more they know (or at least are willing to admit to) what they don't know. Anyone who is professing with certainty that this or that will work -- nationalizing the banks, for instance -- is an idiot.
...Nobody, absolutely nobody, has more incentive to get this right than the Obama Administration. If the economy collapses -- well, more than it already has collapsed -- then the Democrats get slaughtered in 2010, Obama is a one-termer, health care doesn't happen, the poverty rate increases by a couple orders of magnitude, and the imperative to fix the environment gets put on the backburner. To suggest that Obama or Geithner are tools of Wall Street and are looking out for something other than the country's best interest is freaking asinine. Maybe their ideas are wrong -- but their hearts are in the right place."
http://www.fivethirtyeight.com/2009/02/give-geithner-break.html
Thursday, February 12, 2009
Pick Your Dictators Wisely (Sept 21, 2008)
TW: As we embark on another massive bank bailout, I reprint something I posted the last time we headed down this path of bank bailouts. These type bailouts of folks who have seemingly screwed up royally yet inhabit businesses whose failure would hurt us greatly perhaps massively are inherently unpopular. Despite the messiness of TARP I we at least (for now) have a functioning financial system. I assure you, one would not want to live in a world without a functioning financial system.
From the White House blog Sept 21, 2008:
TW: We are in some deep doo doo economically. So deep that dictatorial powers are likely to be extended with bi-partisan support. I am not qualified to judge the actions (who is?) and therefore not qualified to suggest alternatives. But the US financial markets will be ruled with dictatorial powers for some period of time (and I suspect it will be longer than one thinks). All I will say is that there are benevolent dictators and malevolent dictators; competent dictators and incompetent dictators. Lets hope for the benevolent and competent.
Obviously the Bush Administration assuming additional radical powers is disconcerting, despite my respect for Paulson. But the next President will inherit not only this mess but these powers. Keep that in mind when you vote.
Sept. 21 (Bloomberg) -- The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''
From the White House blog Sept 21, 2008:
TW: We are in some deep doo doo economically. So deep that dictatorial powers are likely to be extended with bi-partisan support. I am not qualified to judge the actions (who is?) and therefore not qualified to suggest alternatives. But the US financial markets will be ruled with dictatorial powers for some period of time (and I suspect it will be longer than one thinks). All I will say is that there are benevolent dictators and malevolent dictators; competent dictators and incompetent dictators. Lets hope for the benevolent and competent.
Obviously the Bush Administration assuming additional radical powers is disconcerting, despite my respect for Paulson. But the next President will inherit not only this mess but these powers. Keep that in mind when you vote.
Sept. 21 (Bloomberg) -- The Bush administration sought unchecked power from Congress to buy $700 billion in bad mortgage investments from financial companies in what would be an unprecedented government intrusion into the markets.Through his plan, Treasury Secretary Henry Paulson aims to avert a credit freeze that would bring the financial system and the world's largest economy to a standstill. The bill would prevent courts from reviewing actions taken under its authority.``He's asking for a huge amount of power,'' said Nouriel Roubini, an economist at New York University. ``He's saying, `Trust me, I'm going to do it right if you give me absolute control.' This is not a monarchy.''
Thursday, February 5, 2009
The Banking System Is a Problem...
TW: The economic blogosphere is over-run with commentary regarding what to do with our banking system. This piece seems to address it as succinctly as any but most of all makes no false or ill-informed claims regarding a solution. There are hundreds of billions of overvalued assets (probably in excess of a trillion perhaps a couple of trillion or more) polluting our nation's and the world's banks. Somehow those asset values must be addressed without sending the banking system into a truly scary infarction.
The best solution will require partisanship to be minimized domestically while cooperation with our international partners needs to attain new levels of effectiveness. Two very tall orders, the latter more likely than the former.
From Baseline Scenario blog:
"I don’t envy President Obama’s economic team. When it comes to fixing our banking system, there is no easy solution.
...Assume for the sake of argument that all of our major banks are insolvent if they have to mark these assets down to market value. The crux of the issue is that any scheme in which the banks receive more than market value is a gift from taxpayers to bank shareholders, and any scheme in which they are forced to take market value is one that the banks will not participate in. [TW: in other words either the government overpays or "pays cash for trash" as certain pundits say or the government nationalizes the banks blowing out both equity and bondholders at least partially or the banks try to remain independent but since they are insolvent once they actually mark to market values they will collapse leading to a truly nasty credit crisis]
Let’s look at a few possibilities:
The government forces banks to write down their assets to reflect worst-case scenarios (unless they do this, no one will have confidence that the asset values won’t fall further), and then recapitalizes them to make them solvent. This is a desirable outcome, but bank shareholders won’t go for it because they will be mostly wiped out. This is roughly what Sweden did with two banks, but Sweden nationalized them first, so the shareholders didn’t matter.
The government creates an aggregator bank to buy up toxic assets. If the aggregator pays market value, no bank will sell; if it pays above market value, it’s a gift. The current idea I’ve heard is that the aggregator will only buy assets that have already been significantly marked down, but that doesn’t really help the banks any.
Another idea is having the government guarantee toxic assets, as it did for Citigroup and Bank of America so far. But this doesn’t solve the problem. There is already a market to insure toxic assets - it’s called the credit default swap market. If the government provides insurance at existing market prices, no bank will buy it, because the cost of the insurance would make it insolvent. If the government provides cut-rate insurance, as it almost certainly did for Citi and B of A, then it is a gift. The only “benefits” of an insurance arrangement are: (a) it’s much less obvious that the government is giving bank shareholders a gift; and (b) the way Citi and B of A were structured, it wouldn’t require a lot of cash from Treasury (and hence from Congress), because most of the guarantee was provided by the Fed.
Meredith Whitney thinks that the banks should sell their “crown jewel” assets - presumably, businesses they have that are still in good shape - to private equity firms, and use the cash to repair their balance sheets. This would be a nice solution, but I don’t foresee it happening. Given the choice between selling the good operations and being left with barely-solvent portfolios of runoff businesses, or holding onto the good operations and hoping for a government bailout, I think all the Wall Street CEOs are betting on the latter.
I think there are two possible outcomes to all of this: (1) the government makes a gift to bank shareholders and justifies it on the grounds that there was no other choice; or (2) the government forces the banks to sell assets at market value and accept a government recapitalization program - either by exercising its regulatory authority (similar to an FDIC takeover) or by just buying out all the common shareholders at their current low prices. In option (2), the government would then re-privatize the banks at some point. But there’s no easy solution."
http://baselinescenario.com/2009/02/03/searching-for-a-free-lunch/
The best solution will require partisanship to be minimized domestically while cooperation with our international partners needs to attain new levels of effectiveness. Two very tall orders, the latter more likely than the former.
From Baseline Scenario blog:
"I don’t envy President Obama’s economic team. When it comes to fixing our banking system, there is no easy solution.
...Assume for the sake of argument that all of our major banks are insolvent if they have to mark these assets down to market value. The crux of the issue is that any scheme in which the banks receive more than market value is a gift from taxpayers to bank shareholders, and any scheme in which they are forced to take market value is one that the banks will not participate in. [TW: in other words either the government overpays or "pays cash for trash" as certain pundits say or the government nationalizes the banks blowing out both equity and bondholders at least partially or the banks try to remain independent but since they are insolvent once they actually mark to market values they will collapse leading to a truly nasty credit crisis]
Let’s look at a few possibilities:
The government forces banks to write down their assets to reflect worst-case scenarios (unless they do this, no one will have confidence that the asset values won’t fall further), and then recapitalizes them to make them solvent. This is a desirable outcome, but bank shareholders won’t go for it because they will be mostly wiped out. This is roughly what Sweden did with two banks, but Sweden nationalized them first, so the shareholders didn’t matter.
The government creates an aggregator bank to buy up toxic assets. If the aggregator pays market value, no bank will sell; if it pays above market value, it’s a gift. The current idea I’ve heard is that the aggregator will only buy assets that have already been significantly marked down, but that doesn’t really help the banks any.
Another idea is having the government guarantee toxic assets, as it did for Citigroup and Bank of America so far. But this doesn’t solve the problem. There is already a market to insure toxic assets - it’s called the credit default swap market. If the government provides insurance at existing market prices, no bank will buy it, because the cost of the insurance would make it insolvent. If the government provides cut-rate insurance, as it almost certainly did for Citi and B of A, then it is a gift. The only “benefits” of an insurance arrangement are: (a) it’s much less obvious that the government is giving bank shareholders a gift; and (b) the way Citi and B of A were structured, it wouldn’t require a lot of cash from Treasury (and hence from Congress), because most of the guarantee was provided by the Fed.
Meredith Whitney thinks that the banks should sell their “crown jewel” assets - presumably, businesses they have that are still in good shape - to private equity firms, and use the cash to repair their balance sheets. This would be a nice solution, but I don’t foresee it happening. Given the choice between selling the good operations and being left with barely-solvent portfolios of runoff businesses, or holding onto the good operations and hoping for a government bailout, I think all the Wall Street CEOs are betting on the latter.
I think there are two possible outcomes to all of this: (1) the government makes a gift to bank shareholders and justifies it on the grounds that there was no other choice; or (2) the government forces the banks to sell assets at market value and accept a government recapitalization program - either by exercising its regulatory authority (similar to an FDIC takeover) or by just buying out all the common shareholders at their current low prices. In option (2), the government would then re-privatize the banks at some point. But there’s no easy solution."
http://baselinescenario.com/2009/02/03/searching-for-a-free-lunch/
Wednesday, January 7, 2009
The Fall Of GM On One Page
Click on image for larger viewTW: This one page encapsulates the plethora of arguments and factors impacting the decline of GM and really all of the domestic automakers. The fact that there are so many factors provides everyone with a reason to dislike the automakers. It also provides cover for anyone with an ideological bent to claim moral highground when attacking the automakers. The reality is the demise of the domestics is a complex result of many variables.
With sales decreasing for all automakers including the transplants at 30%+, clearly one or more will be gone by the end of the year. The question is only how to facilitate the consolidation.
Saturday, December 6, 2008
The Bailout Paradox
TW: Robert Reich has been coming up with some good stuff. Unfortunately I do not think he has answer for the paradox. I know I do not.
From Reich:
"As a condition of getting a federal bailout, the Big Three are promising, among other things, to cut costs. Among the costs to be cut will be jobs. This is paradoxical, since the reason Congress is considering bailing them out in the first place is to preserve jobs and avoid the social costs of large-scale job loss (unemployment insurance, lost tax revenues, pension payments that have to be picked up by the Pension Benefit Guarantee Corporation, and so forth) .
We should take a lesson from the Chrysler bailout of the early 1980s. The ostensible reason Congress voted for it was to preserve Chrysler jobs. Yet once the bailout was underway, in order to generate the money it needed to restructure itself, Chrysler laid off more than a third of its workforce. Most of these jobs never came back.
And it's much the same with the mammoth bailout of Wall Street. Absent an explicit understanding of why public money is needed and what it's to be used for, taxpayer dollars end up bolstering executives, creditors, and shareholders rather than the workers and communities that need the most help."
From Reich:
"As a condition of getting a federal bailout, the Big Three are promising, among other things, to cut costs. Among the costs to be cut will be jobs. This is paradoxical, since the reason Congress is considering bailing them out in the first place is to preserve jobs and avoid the social costs of large-scale job loss (unemployment insurance, lost tax revenues, pension payments that have to be picked up by the Pension Benefit Guarantee Corporation, and so forth) .
We should take a lesson from the Chrysler bailout of the early 1980s. The ostensible reason Congress voted for it was to preserve Chrysler jobs. Yet once the bailout was underway, in order to generate the money it needed to restructure itself, Chrysler laid off more than a third of its workforce. Most of these jobs never came back.
And it's much the same with the mammoth bailout of Wall Street. Absent an explicit understanding of why public money is needed and what it's to be used for, taxpayer dollars end up bolstering executives, creditors, and shareholders rather than the workers and communities that need the most help."
Stewart Reconciles the Bailouts
TW: I have posted on how the automaker bailouts seem to be getting alot more grief than the financial bailout. Stewart explains...
Friday, December 5, 2008
Financial Capital v. Human Capital
TW: The automakers continue to be pilloried in the media. The automakers have basically been reduced to overt begging at this point. I suspect the automakers are suffering from being an easy outlet for many people to express their collective frustration with our current economic predicament. The automakers worst mistake was likely not figuring out how to get "bailout" money approved quickly before the backlash could build. The financial firms have been able to do so by basically blowing up over the course of several days (remember Bear Stearns on Wednesday was business as usual, publicly at least, by Saturday night it was burnt toast) as opposed to the relative prolonged agony experienced by the automakers.
Reich brings up another issue requiring reconciliation. One of the first public services to contract during a recession is education as local funding is derived partially from property taxes which are declining rapidly. Reich asks the simple question does it make sense to let public education spending, a good almost all regard as a crucial investment for our future, fall precipitously while billions are spent "bailing out" financial firms or even automakers.
From Robert Reich:
"Education is largely funded by state and local governments whose revenues are plummeting. As consumers cut back, state sales and income taxes are shrinking; three quarters of the states are already facing budget crises. On average, state revenues account for half of public school budgets, and most of the funding of public colleges and universities. On top of this, home values are dropping, which means local property taxes are also taking a hit. Local property taxes account for 40 percent of local school budgets.The result: Schools are being closed, teachers laid off, after-school programs cut, so-called “noncritical” subjects like history eliminated, and tuitions hiked at state colleges.It's absurd. We’re bailing out every major bank to get financial capital flowing again. But we’re squeezing the main sources of our nation's human capital. Yet America's future competitiveness and the standard of living of our people depend largely our peoples’ skills, and our capacities to communicate and solve problems and innovate – not on our ability to borrow money...
I’m not saying funding is everything when it comes to education. Obviously, accountability is important. But without adequate funding we can’t attract talented people into teaching, or keep class sizes small enough to give kids a real chance to learn, or provide them with a well-rounded curriculum, and ensure that every qualified young person can go to college.So why are we bailing out Wall Street and not our nation’s public schools and colleges? Partly because the crisis in financial capital is immediate while our human capital crisis is unfolding gradually. But maybe it's also because we don’t have a central banker for America’s human capital – someone who warns us as loudly as Ben Bernanke did a few months ago when he was talking about Wall Street's meltdown, of the dire consequences that will follow if we don’t come up with the dough."
http://robertreich.blogspot.com/2008/12/of-financial-capital-and-human-capital.html
Reich brings up another issue requiring reconciliation. One of the first public services to contract during a recession is education as local funding is derived partially from property taxes which are declining rapidly. Reich asks the simple question does it make sense to let public education spending, a good almost all regard as a crucial investment for our future, fall precipitously while billions are spent "bailing out" financial firms or even automakers.
From Robert Reich:
"Education is largely funded by state and local governments whose revenues are plummeting. As consumers cut back, state sales and income taxes are shrinking; three quarters of the states are already facing budget crises. On average, state revenues account for half of public school budgets, and most of the funding of public colleges and universities. On top of this, home values are dropping, which means local property taxes are also taking a hit. Local property taxes account for 40 percent of local school budgets.The result: Schools are being closed, teachers laid off, after-school programs cut, so-called “noncritical” subjects like history eliminated, and tuitions hiked at state colleges.It's absurd. We’re bailing out every major bank to get financial capital flowing again. But we’re squeezing the main sources of our nation's human capital. Yet America's future competitiveness and the standard of living of our people depend largely our peoples’ skills, and our capacities to communicate and solve problems and innovate – not on our ability to borrow money...
I’m not saying funding is everything when it comes to education. Obviously, accountability is important. But without adequate funding we can’t attract talented people into teaching, or keep class sizes small enough to give kids a real chance to learn, or provide them with a well-rounded curriculum, and ensure that every qualified young person can go to college.So why are we bailing out Wall Street and not our nation’s public schools and colleges? Partly because the crisis in financial capital is immediate while our human capital crisis is unfolding gradually. But maybe it's also because we don’t have a central banker for America’s human capital – someone who warns us as loudly as Ben Bernanke did a few months ago when he was talking about Wall Street's meltdown, of the dire consequences that will follow if we don’t come up with the dough."
http://robertreich.blogspot.com/2008/12/of-financial-capital-and-human-capital.html
Saturday, November 15, 2008
GM et al: What To Do? (Part 2)
TW: I posted earlier on this topic.
http://treylaura.blogspot.com/2008/11/gm-what-to-do-part-1.html
I am going to post at least a couple of more over the next day or so, as I find this topic demonstrative of the choices our government faces in its epic battle to avoid GD 2.0. My question for this post is why is it that the conservatives are seemingly so quick to dismiss a "bailout" of the automakers whilst having generally (obviously a strain of free-market purists attempted to grab political points by opposing parts of the TARP but I believe they were mainly political cynics) strongly supported the multi-tiered bailouts of the financial industry. I would be interested to hear a reconciliation of the two positions- automakers drop dead v. Wall Street we feel your pain.
From my favorite conservative blowhard Steve Calabresi:
When responding to a Politico Arena question regarding the TARP bill-
"The lame-duck Bush Administration has done a masterful job of responding to the financial crisis..."
Opining on a potential automaker "bailout"-
"The question whether to bail out the big three automakers is a defining moment on whether we are going to go down the road of corporate welfare..."
TW: ps- in looking through some old Arena quotes to find the TARP quote I found some great gems from this genius, am going to have to post a best of Calabresi...
http://treylaura.blogspot.com/2008/11/gm-what-to-do-part-1.html
I am going to post at least a couple of more over the next day or so, as I find this topic demonstrative of the choices our government faces in its epic battle to avoid GD 2.0. My question for this post is why is it that the conservatives are seemingly so quick to dismiss a "bailout" of the automakers whilst having generally (obviously a strain of free-market purists attempted to grab political points by opposing parts of the TARP but I believe they were mainly political cynics) strongly supported the multi-tiered bailouts of the financial industry. I would be interested to hear a reconciliation of the two positions- automakers drop dead v. Wall Street we feel your pain.
From my favorite conservative blowhard Steve Calabresi:
When responding to a Politico Arena question regarding the TARP bill-
"The lame-duck Bush Administration has done a masterful job of responding to the financial crisis..."
Opining on a potential automaker "bailout"-
"The question whether to bail out the big three automakers is a defining moment on whether we are going to go down the road of corporate welfare..."
TW: ps- in looking through some old Arena quotes to find the TARP quote I found some great gems from this genius, am going to have to post a best of Calabresi...
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