One of the premises of the bailout bill is that the banking industry must have government help to get back on its feet.
A banking industry expert, Bert Ely, who has a stellar track record in predicting crises and calling false alarms says that the banking industry can handle this mess internally and does not need subsidies.
The comments from Bert come in an interview at Institutional Risk Analytics (the entire newsletter is wide-ranging and very much worth reading), First, IRA’s recap of Ely’s qualifications:
To get some perspective on the evolution of the last remaining large investment banks into commercial banks, we now turn to Bert Ely, one of the leading experts on banking and finance in the Washington policy community. An accountant by training, Ely has specialized in deposit insurance and banking structure issues since 1981. In 1986, he became an early predictor of the S&L crisis and a taxpayer bailout of the FSLIC. In 1991, he was the first person to correctly predict the non crisis in commercial banking. In 1992, he predicted an eventual taxpayer bailout of the Japanese banking system.
Here are the excerpts that relate to whether the banks need government intervention:
The IRA: And if our internal estimates at IRA are correct about the magnitude of the losses facing the industry, then the banks may not have the resources to deal with the problems alone. What then?
Ely: That is of course the trillion dollar question. I have run the numbers looking at the capacity of the industry to pay the tab. Assuming that bank insolvency losses don’t get way out of line, which I don’t think they will, then the industry can handle it. It’s not going to be cheap, but the banks can handle it and clean up their own mess. The losses will feed back through the industry to depositors and borrowers in the form of lower rates on deposits and higher cost of loans….
The IRA: So you oppose the idea of the government putting preferred equity into solvent but troubled banks that cannot raise capital on reasonable terms?
Ely: Yes, it is not necessary, even now. There is absolutely no need for the Treasury to have the authority, as you suggested, to “inject capital into solvent banks that are temporarily unable to raise new capital.” If a bank truly is solvent, it can raise additional capital or sell itself, if its present owners are realistic about what their bank is worth. The reason solvent banks have a problem raising capital, or selling themselves to a stronger bank, is that they set their price too high, as did AIG. As an aside, I am glad to see AIG’s shareholders getting whacked by the warrants associated with the Fed’s taxpayer’s loan to AIG. There is absolutely no need for the taxpayer to subsidize banks so they can stay independent, provided no barriers are erected to prevent new entrants into bank or specific banking markets.
The IRA: Agreed. We were referring to banks that could not be recapitalized or sold. A sale is obviously the first, best choice. So you would let the banks resolve their problems privately. Would you agree with Ernie Patrikis (‘A Change in Bank Control: Interview With Ernest Patrikis’, July 9, 2008′) that the Fed needs to loosen the restrictions on bank ownership in order to facilitate this process?
Ely: I fully agree that restrictions limiting investors from taking significant positions in banks should be lifted. Not only is the belief in separating banking from commerce invalid in an open, competitive economy, but we need to get ruthless investors inside troubled banks to get these banks and their bad assets cleaned up and/or sold. That is what should have happened at AIG, but unfortunately did not.
The IRA: Precisely. We want to see the bad assets remain in private hands, not in a government warehouse for toxic waste. But why then should anyone support Paulson’s proposal to place these toxic assets in the hands of the government? Chairman Frank seems to want to declare the jubilee and engage in mass loan forgiveness in order to ensure his permanent re-election. Maybe we can just all stay home instead of going to work and Barney Frank will just mail everyone a check.
Ely: Look, all of the fallout we are seeing in the markets today is part of clearing the detritus from the last speculative bubble. The housing bubble has to be allowed to collapse in order to clear the markets. We have a very necessary correction process underway. But this process creates a lot of pain and loss. I don’t like that, but we have to clean up the mess and take the pain in order to get the economy back into balance. In collapsing bubbles you have collapsing companies. Japan tried to muddle through and they had a lost decade. I hope we are not going to do that…
The IRA: But that is precisely the point. Why should Washington use taxpayer funds to rescue people who deliberately made bad business decisions?
Ely: This is the question that comes up frequently about Dick Fuld at Lehman and Kerry Killinger at WM. When these guys were contemplating life, did they have any second thoughts, any doubts about these decisions? Did hushed discussions among the top folks in their organizations, with the senior managers and directors, include deliberations such as these or were they too arrogant, too isolated from reality?…
The IRA: How do you see the Paulson plan unfolding? What should the markets expect in the next couple of weeks and months?
Ely: It is likely that Congress will not pass the Paulson bailout legislation this week. However, whenever it is passed, it will be much more complex, and incorporate unwise punitive terms and conditions that will seriously impede the intent of the Paulson plan. Further, I believe the process of pricing the assets purchased under the legislation will be much more complex and contentious than many appreciate at this time, which means that this program will get off to a much slower start than many anticipate, just as the RTC started quite slowly. If the Paulson plan starts slowly, market forces may sweep past the plan. It will be extremely interesting to see how this plan evolves over the next year, particularly given that a new Administration will come to power on January 20.
There is a lot of meaty stuff in this article.
Note that this analysis, even if correct, does not conclusively disprove the need for a bailout bill. The Paulson proposal, as revised over the weekend, now extends to foreign banks and hedge funds. A hedge fund crisis, which Nouriel Roubiini says is the next shoe to fall, would hit prime brokers like Goldman and Morgan Stanley particularly hard. The Lehman bankruptcy nearly deep-sixed the financial system. Goldman and Morgan are bigger firms. If either were to look wobbly, even after their pending capital infusions, it would roil the markets.
But it sure puts a crimp in the thesis.
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Yves,
IMHO, I don’t think it was Lehman that nearly cratered the financial system, it was AIG. As you’ve mentioned before, AIG had many unbalanced CDS contracts, and so a rapid unwind of its positions (or its inability to honor its obligations) in a BK would have put an enormous stress on the financial world.
OTOH, Lehman’s BK seems to have been accepted without as much strife. If that’s the case, the markets may actually be able to handle Goldman or Morgan being impaired in the oncoming hedge fund collapse.
Anyone in the trenches in Wall St care to comment? Which one put more beads of sweat on your forehead last week? AIG or Lehman?
Lune,
Actually, it was the Lehman BK that led the Reserve money market funds to break the buck (they held Lehman commercial paper) and the flight from money funds and commercial paper really almost did take the financial system down.
See http://www.nypost.com/seven/09212008/business/almost_armageddon_130110.htm
(Sorry for being too lazy to do the nice link thingie).
What did Ely say? That the plan is unneeded but it will pass and yet if it `starts slowly, market forces may sweep past it’? So it’s kinda maybe needed? Or maybe not? Or something to talk about, anyway?
Bert Ely is one of the tools at the Cato Institute whose free-market sloganeering and lobbying helped give us this mess.
Steve,
The reason for featuring Ely is at least he appears to have done some sort of analysis and has a track record of being correct on this sort of thing. I hate the Cato crowd as much as you do, but even they can be correct upon occasion. And Paulson’s and Bernanke’s record on forecasting this mess has, by contrast, been awful.
I personally believe some sort of recapitalization is probably necessary. However, the industry now that stock values are depressed, has much to gain by making themselves sound like a basket case so as to garner maximum government goodies. Look at the intensity of lobbying over the weekend. Appalling.
It’s too bad he didn’t mention Credit Default Swaps, as that seems to be the giant elephant in the living room. Doesn’t the thesis about CDS go like this?: they can’t let a huge writer of CDS go under, or that would create a cascading waterfall of counter-party risk? Is this the real reason why the banks are getting bailed out?
Mike
Today at 1 A.M. Eastern Time The Fed made an infusion of $30B to the Central Banks of four countries:
$10B each to Australia and Sweden
and $5B each to Denmark and Norway. This comes across as a healthy move and well timed. It is similar to other standard co-infusions within the group of seven members.
I think this guy has the right end of the stick.
http://www.voxeu.org/index.php?q=node/1691
Face up to it, the banks have to be socialized and sold back in better times.
Yves,
Thanks for the link. But I’m curious: now that those money market funds have had their near-death experience, I expect they’re rapidly taking all their money out of whatever commercial paper they’re holding and putting it in liquid t-bills. Because even a govt guarantee doesn’t fully protect you against a run, especially in these jittery times. This isn’t necessarily a bad thing to do, since their first priority is maintaining that $1 NAV and being able to meet redemptions.
If that’s the case, does the Fed intervention really do anything but buy an extra week or so? Are money markets actually going to roll their commercial paper as it comes due? And if they don’t, Armageddon will be coming soon regardless of the Fed…
Looking at failing financial firms, there are two classes of problems, and they are significantly different. In one class, we have essentially solvent firms who are having trouble rolling over short term debt and raising capital. In the other class, we have firms which have such massive locked in losses on their books that they are either already insolvent or will all but certainly become so.
I find it interesting that Bert Ely says of the first class, “Let ’em swim for it, they’ll make it.” He’s in a better position to know, and so the idea of lending in return for equity may actually _prevent_ those firms from selling themselves to private capital in the wings. I’d like to think he’s right on that.
What Ely does not seem to well address is the problem of the second class, those firms which really _are_ insolvent, and which aren’t going to make it in any form. Unfortunately, many of the big, bad problems we have seen so far reflect really-o, truly-o BK lenders. As has been mentioned elsewhere, these failed firms failed because they had severely excessive leverage, and have failed very nearly in order of the scale of their leverage, so really this should make for no surprises. And what we do NOT need for insolvent firms are debt-for-equity infusions, because if they go broke their equity is as worthless to the public as it would be to the private capitalists who are refusing to hazard their wealth presently.
What we need to resolve the latter class is a rapid seizure of over-leveraged and insolvent firms. The problem with Lehman wasn’t really letting it fail in terms of its losses, but that the failure was disorderly, with sidewise impacts. It would be better for here on out if the firms are simply seized and the wrap ups supervised by a public authority: that is a far better guarantee to avoid market panics than post facto heaving of money bales at shrieking banks and funds which is what Paulson is good for (*yechhh*). —And it is _exactly_ such a procedure which is completely absent from the Paulson Proposal, the Dodd Proposal, or public debate, other than Hussman’s Open Letter which may be beginning to get some traction.
Soooo all of our present proposals fail to focus on the one form of intervention which is _most_ needed to avoid systemic crisis and sudden illiquidity. How smart is that?
AIG has locked on the $85B. Now we need to get her well and shipped home for R&R and then marry her off so she can get working again.
We do not need to be in the insurance or banking business.
“The IRA: So you oppose the idea of the government putting preferred equity into solvent but troubled banks that cannot raise capital on reasonable terms?”
“Ely: Yes, it is not necessary, even now. If a bank truly is solvent, it can raise additional capital or sell itself …”
“Yves Smith: If [Goldman or Morgan] were to look wobbly, even after their pending capital infusions, it would roil the markets.”
Goldman is not looking wobbly this morning, with the shares up on Buffett’s equity infusion. But his terms are stunning: a ten (10) percent dividend on the perpetual preferred, and instant dilution via common share warrants with a BELOW MARKET strike price.
Are these not DESPERATION terms? Is Goldman in THAT much trouble?
I mean, even today, I can borrow on a mortgage, a HELOC, or even a credit card at lower rate than that, and without ceding an equity stake. So I’m a stronger credit than Goldman Sachs? Man, are we in trouble now. Because like Goldman, I’ve got some criminal tendencies.
Like Ely, I resolutely oppose the bailout plan. But if they’re gonna do it, the Buffett-Goldman deal suggests that similar terms should apply to any entity availing itself of the TARP: namely, a grant of below-market strike price warrants which provide an instant profit to the Treasury, plus the appreciation potential to cover the amount exchanged, even if the toxic assets go to zero.
Punitive? Sure. But Goldman Sachs voluntarily entered into these terms. And many of the supplicants are going to be more troubled credits than Goldman.
Me so bearish …
美元貶值、金融危機與房地產
潤濤閻
這個系列是談論美國金融危機的根本原因以及後果，也就是「前因後果」。以及美國房價暴跌的內在原因和房市前景。這個系列的內容不僅僅在美國的華人在探討，也對中國國內的經濟走向有啟發。
（一） 第一次貨幣戰爭
美國這次的美元貶值以及金融危機，中國損失慘重。其實早在鴉片戰爭以前，大清都明白如何避免西方金融危機給清朝帶來損失。
英國跟大清的貿易是「不對稱」貿易，而且和現在一樣是大清有大量順差。由於大清有順差，這就必然導致貨幣結算和貨幣儲備問題。清朝朝廷自以為是用白銀或黃金來結算，但英國提出用英鎊結算。
道光皇帝問那英鎊是啥東西，是銅？是金？是銀？大臣答覆：既不是銅也不是金也不是銀。那是啥東西？答覆：是紙票子。
道光皇帝問英國大臣：你們以後印刷多少紙票子是否要通過我們大清同意？英方答覆：那是英國的主權，不得侵犯。印多少，是英國的事。
道光皇帝哈哈一笑，說你這不是明擺著玩人嗎？你把擦屁股紙印成票子換我們的茶葉、瓷器、絲綢，那不是拿我們當傻子玩嗎？
英國大臣說，英鎊與白銀可以隨便兌換，是流通貨幣。你留著英鎊跟留著白銀是一樣的，你可以用英鎊到任何國家買東西啊。
道光皇帝說這個我知道。可等我們儲存了足夠多的你們的紙票子後，你們就隨便加印，那我們不就慘了？
英國人反覆說英國哪能隨便加印票子？國家信用不是鬧著玩的。咸豐皇帝說，在大量的金錢面前，信用算什麼？親哥倆為了銀子還大打出手呢。國家一旦有了難處的時候，就顧不上信用不信用了。
清朝政府堅持說，既然你說英鎊紙票子跟白銀是一樣的，那你就付白銀好了。按照你說的，紙票子可以隨便兌換成白銀，反正是一碼事，你就兌好了。英國人說那白銀比紙票子重太多，運輸不方便啊。
不管怎麼嘮叨，大清只有一句：你們的紙票子我們不收。
這樣，英國人無法駁倒自己的理論也就只好用白銀付賬。可是英國人終於發現如果大量印刷紙票子必然導致白銀升值，這就極大限制了英國印刷英鎊的數量。等到英國國庫裡的白銀全部用完，英國人明白了：即使不加印英鎊，用英鎊換白銀由於供求關係的原理也會導致白銀升值。
冥思苦想，英國人終於想到了另一途徑把付給中國的白銀換回來：在英國殖民地印度和阿富汗種植鴉片，賣給中國，換回白銀，空手套白狼。這個東東不能在英國種，而且印度和阿富汗跟中國是鄰居，鴉片的運輸費就省了一大筆。結果，鴉片戰爭爆發了。
今天看來，如果我們認同有「貨幣戰爭」這碼事，潤濤閻認為：鴉片戰爭就是第一次貨幣戰爭。這場戰爭以中國慘敗而告終。究其原因，不是道光不懂得貨幣戰爭的性質，而是槍炮和軍事力量太落後了。如果大清當年同意以英鎊紙票子結算，得到的紙票子就會設法購買英國以及其它國家的工業產品甚至裝備，從而加速中國工業化的步伐。更重要的是：英國不會處心積慮煞費苦心地考慮如何把白銀換回去，也就不會想到去種鴉片。也就自然沒有了鴉片戰爭了。但不管怎麼說，大清要白銀不要紙票子的防備心理是對的。
（二） 尼克松是怎麼玩弄全世界的？
二次大戰以後，美國成了龍頭老大，各國都記得由於白銀引發的鴉片戰爭的教訓，便紛紛要求美國的美元與黃金掛鉤。 1944年7月，44個國家的代表在美國新罕布什爾州「佈雷頓森林」開會，通過了《國際貨幣基金組織協定》等一系列文件，統稱《佈雷頓森林協定》。根據協定，一盎司黃金兌35美元。這樣，美國不能隨便印刷美元，有多少黃金就印刷對應的美元數量。各國貿易等於是黃金對黃金付賬，只圖紙幣比金屬用起來方便。
這樣一來，大家都儲備美元，因為那等於儲備黃金。這也就是美元稱為「美金」的原因。而其它國家的貨幣，只有瑞士法郎內含四成黃金。所以，自從二戰後的佈雷頓森林協定以後，最保值的貨幣是美元和瑞郎。
一代梟雄尼克松上台後，決定打破佈雷頓森林協定，讓美元與黃金脫鉤。美國印多少美元紙票子，是美國的內政，別國無權干涉。這一步，立刻導致黃金暴漲。美元暴跌一發不可收拾，美元與黃金的比價暴跌24倍，從一盎司35美元一下子到了800美元以上。那時，儲備美元越多的國家輸得越慘。此時中國沒有外匯儲備，也就沒有任何損失。
當時全世界人民只看到了美國讓美元與黃金脫鉤後便會大量印刷美元紙票子，便慌不擇路地把綠紙換成黃金，以黃代綠。然而，梟雄就是梟雄，牛逼不是吹的。
當各國包括台灣都把美元換成黃金後，美國與沙特簽訂了只能用美元定油價的協議。由於沙特是最大產油國，美國一方面不到沙特搞民主而幹掉沙特王室制度，另一方面釀造第一次石油危機，讓產油國受益。典型的雙贏。這裡的雙贏是指：產油國由於油價暴漲而得益；美國可以大量印刷美元而得益。這個世界是零和遊戲，有贏的就有輸的。那美國和產油國「雙贏」的結局必然是其它國家的慘輸。
這樣，美元剛剛與黃金脫鉤，立刻就跟石油掛鉤。各國為了買油，不得不把黃金換成美元。然後，美國成功地主導了第一次石油危機。石油漲價，美元的需求量劇增，美國便可大量印刷綠色紙票子。從此，美元又變成了「油元」而被各國儲備起來。
從此以後，美元的印刷增長量遠遠超過擠兌屁（GDP）的增加量。美國終於實現了隨便印刷紙票子的夢想。
（三）中國是怎麼被宰割的？
中國在改革開放之初最缺乏的就是美元外匯。為了發展經濟，需要購買最基本的工業設備，中國政府便想到了國際貨幣基金組織。申請貸款需要有CREDIT,可剛剛改革開放，CREDIT都是過去的。共產黨得到天下後，立刻沒收了外國資本包括鐵路。美國建立的鐵路本錢還沒收回，就被共產了。所以，信用不好，申請貸款的難度可想而知。經過了8年，蓋了80個章，發了80封保證信，得到了國際貨幣基金組織的8億美元貸款。這個數字剛好是現在一天中國外匯儲備增加量，可在那時候，可樂壞了鄧小平趙紫陽。
中國從此便以增加外匯儲備為榮耀。各部之間各省之間互相攀比，看誰有本事增加外匯儲備。
等到外匯儲備超過萬億美元，美國宣佈不再公佈M3，別說美國印刷多少紙票子別國管不著，就連印刷多少，也成了最高國家機密。僅僅從過去10年美國多印刷的紙票子數量看，至少也在8萬億之上。
那麼，美國每天要多印刷至少38億美元的紙票子，你一定會納悶：美國的通貨膨脹率怎麼沒有跟貨幣供應增加量同步？對於這個問題，其實道理很簡單，簡單到了連潤濤閻都一清二楚了，那就是：不許中國和中東產油國到美國投資！不許購買美國的公司企業，只能購買美國的債券！這就是為何美國國會干預不許海爾吞併美泰的原因。
美國的債務是什麼意思？說穿了就是：你的產品名義上是廉價賣給美國，實際上是白白送給美國，因為美國多印刷的紙票子遠遠夠你的。反正美國有的是紙張，你來多少貨物，我給你印多少紙票子就是了。
但多印刷出來的紙票子絕不能回到美國。如果回到美國，那就會引發美國國內的通貨膨脹，對美國來說，那數以萬億記的紙票子就不能算是白印給其它國家了。
美國是世界唯一的一分美元儲備都沒有的國家，所以，大量印刷美元必然導致美元貶值。而美元貶值受害者便是美元儲備國。儲備的越多，損失越大。這個道理當年的慈禧太后都一清二楚。美元貶值導致中國過去的一年裡外匯損失以千億為單位。當年慈禧太后都懂得的簡單道理，全世界人民包括中國央行的權貴們要麼不懂，要麼不相信。你查查中國央行有誰預測過美元會貶值這麼多？有人預測過中國投資美國投行的錢會一夜間付諸東流？
（四） 美國金融危機的本質
很多人都認為這次美國五大投資銀行中的三家已經倒下了為標誌的金融危機原因在於房市泡沫的破滅。其實，以潤濤閻本人的觀點來看，房市泡沫的破滅只是金融危機的表現形式，而非本質。沒有房市泡沫，一定會有其它泡沫。
那麼，這次金融危機的本質是什麼呢？究其原因，還是上面所說，是美國大量印刷美元紙票子造成的。您要是搞不明白，您仔細聽我把個中道理一一道來。
美國現在到底印刷多少紙票子已經是機密了，但在成為機密以前的10年所印刷的鈔票，已經超過了再往前40年的總和。
由於美國政府不讓這些專門印刷給中國和中東產油國的鈔票進入美國本土以防止美國國內的通貨膨脹，等到一定程度後，必然導致兩種情況發生：要麼美國不得不允許這些紙票子回到美國（不是以債券而是以開辦工廠的方式）來引發美國的通貨膨脹，就是美國自己在本土大量印刷紙票子給美國國內，來引發美國的通貨膨脹。
為何會有這種結局呢？
您可能說，你潤濤閻又不是學經濟的，你這不是瞎掰嗎？然而，潤濤閻告訴您：如果您聽經濟學家的那些理論，三大投資銀行根本就垮不了，因為三大銀行裡經濟學家成堆成堆的。
「大道至簡」讓我們用最簡單的例子來說明。如果海水蒸發到上空後經過大氣環流把水分降雨到陸地，陸地流向大海的河流被堵上。其結果，一個可能是河流最後衝垮堤壩而將水流入大海。如果堤壩牢不可破，那就是陸地的水經過地下水的流動，最終導致水從海底冒出來。除非你相信海水會幹枯。前者，就是美國最終擋不住給外國印刷的大量紙票子進入美國而導致美國國內通貨膨脹；後者，就是美國自己印刷大量的鈔票給美國國內，用行話說就是：注資或救市。
什麼叫注資？什麼叫救市？
說穿了就是美聯儲大量印刷鈔票給美國國內的銀行。
在這之前，布什政府已經用另一種方式大量印刷鈔票給美國國內了，名稱是：退稅。加上這次的救市、注資，政府說總數計劃是7000億美元。但我們知道，計劃永遠小於最後的真實數據。看看剛打仗時說的打伊拉克需要的計劃，看看最後的真實數據就一清二楚了。各國都這樣，比如三峽計劃是多少億，最後實際數字是多少億。奧運也是如此。我今天把話放在這裡，美國這次金融危機救市分兩部分：一是美國給自己印刷的紙票子；另一是允許當年印刷給中國等外國的大量紙票子進入美國。這兩項加起來，至少也是7000億美元的一倍，甚至數倍。
那結局是什麼？從長遠看，必然是引發通貨膨脹，而且是全球性質的通貨膨脹。那麼，這次金融危機到底要多久？隨後的通貨膨脹會是什麼樣的結局？
為了說明這些，必須先探討這次金融危機的「表現形式」：美國的房地產。關於美國房地產的過去、現狀和未來。
Can’t the Treasury get the same terms for their shareholders as Buffet does for his???
The main argument for the bailout is that it will prevent a recession. Why is it necessarily a good thing?
The root of all this mess is not as much the housing bubble but the credit bubble, which allowed the American consumer spend more than he earned almost indefinitely. This has to change, and for that one needs a recession! I understand the argument of not falling into a great depression, but it does not mean avoiding a recession at all costs.
When a person is sick, his body temperature is raising as the immune system goes into overdrive. Yes, too high a fever is dangerous, but keeping the temperature artificially low is also bad.
Whoah! Time to fire up my Systran language translator….
What’s confusing to me is Ely’s opposition to the Treasury Slush Fund coupled with his criticism that Congress will make it so onerous that it will not be used.
Being onerous and unused should be a good thing. What should we do, give them a free toaster with every billion dollar bailed out?
This is the first I’ve heard that the bill is going to include hedge funds. That’s really the last straw. Those 2 and 20% guys have made themselves obscenely rich in the last decade, and THEY’RE going to be helped out? That’s not moral rot, that’s insanity. I truly hope this bill does not pass.
“Can’t the Treasury get the same terms for their shareholders as Buffet does for his???”
Well, Warren Buffet does work for his shareholders.
Who does Paulson work for? Really? Since he is so willing to put forth taxpayer’s capital before the capital of the bondholders troubled firms , one has to give this question some serious consideration, no?
Everyone seems to agree this bailout was begun on Wall St. I am not so sure. Wall Street is just a transmission belt for Washington to world capital markets.
This is about protecting the empire, and that requires a fall in American standards of living. The other alternative is the dismantling of most of the US military.
This bailout is being sold just as NSC-68 was sold: with the use of language that is “clearer than truth.” I suggest you read this document by Steven Casey: http://www.lse.ac.uk/collections/CWSC/pdf/selling_nsc_68.pdf
Note how on message Schumer has been. He has adopted the silly analogy of Paulson – “the credit market is clogged and the patient will have a heart attack” – on CNBC this morning. All the central players have used this language – Frank, Dodd, Schumer, etc.
This is being oversold, and the talking points are clearly designed to strike fear into middle America, who they believe are stupid, untutored, and easily panicked.. Just how the credit markets are “clogged” is never explained, nor is it explained how they can be “unclogged” by stuffing $700Bn in new capital into them.
We are being scammed, brothers and sisters!
In addition to many of the concerns listed here and elsewhere, I have three concerns that have not received much, if any, attention.
First, if anyone at a securitizing firm, let’s call the fictitious firm Silverman, knew of fraudulent activity anywhere in the pipeline, would the investor that purchased the security have legal recourse against Silverman? Could the hedge funds and other investors that purchased Silverman mortgage backed securities force them to purchase the securities back at par because they had knowledge of fraudulent activities? Would this problem disappear if Treasury purchased these securities at inflated prices from everyone?
Second, did Silverman market these securities to investors while taking opposite positions for the institution? As we saw with auction rate securities, some investment banks were selling the securities to customers while the banks liquidated their own positions. Once that was apparent, the investment banks were forced to buy the securities back due to the misrepresentation. So, did Silverman sell these securities to investors at the same time as they were shorting, liquidating, or purchasing CDSs on these same securities? If so, would the investor have legal recourse?
Third, would banks and other financial institutions be allowed to act as conduits to hedge funds selling these securities? If the bill had an equity position or limits on executive compensation, the conduit scenario would be less likely and would therefore be opposed if the intention was to include hedge funds (or any investor anywhere).
It seems like Paulson could have chosen a much more efficient path to achieve the same result. This inefficient path may produce the same result at the end of the day but cost the taxpayer three times as much. Could there be any motivation to choose the inefficient path?
Paulson/Bernanke have been shot down by Berkshire’s buy in to Goldman.
Once the banks gets into serious trouble they will start shopping for private bail out money and offer terms that the market requires to get a deal done. The alternative for the bank is BK. BK means no possible chance for big paydays for bankers going forward.
Isn’t it amazing how fast a deal was done with Berkshire once it became apparent to Goldman that a bailout was not going to happen this week?
River
Reserve Funds of NY broke the buck when they went after paper-something they never traded in before 2006. They went from $86B to $8B in a few days. They notified the big investors in time. Everyone else is frozen in place. Lehman cost them 785M and that was what broke the buck.
I just wonder. Do any of you folks have any idea what you are talking about or do you just sit and BLOG all day?????????
Ano from Japan:
My Japanese is not that good but the comment about Silver amd Gold in the Qing Dynasty Imperial Court caught my attention.
Ano9:01:
Provided Yves permits me to say so, being naked without being offensive is more like an art:
http://www.sailingissues.com/wallpapers/nudist_1280.html
I came to a similar conclusion after contemplating the LTCM vs. Bear unwindings: “But, enough with the prelude: Why have we put up any public funds whatever to financial firms? (Short answer: It is not clear.)”
Matthew Dubuque
Nice post Yves, from a worthwhile source.
It is true that the money market funds situation has been stabilized over the shorter term.
However, there is another sector about which the authorities seem to be quite worried.
Yet NOBODY in the financial press is reporting it, for some unknown reason.
The Pension Benefit Guaranty Corporation. This is a biggie.
You heard it here first.
Matthew Dubuque
mdubuque@yahoo.com
check out this post on jeff matthews:
http://jeffmatthewsisnotmakingthisup.blogspot.com/
“how is it that Warren Buffett can cut a better deal with the best-run financial company in America than the U.S. Treasury can ask from the worst-run financial companies in America?”
Can we ask Burt if the GSE bailout was necessary? Bet he says no.
Buffett coming into GS with a second $5B for warrants. first $5B covered GS $5B write down.
Sumitomo Mitsui Japan may be coming into GS soon.
Buffett wants The PP.
I was only kidding yesterday when I posted this:
Here’s an idea – why does Paulson have to worry about whether the banks will be willing to sell the assets at a price that makes sense for taxpayers? MAKE THEM DO IT, Hank! Take Ben with you and walk into C headquarters and tell Vikram Pandit that he is fired and that C is now under government supervision. THe government has decided that C will sell all its problem assets to Treasury for next to nothing. In exchange for this “rescue” of C, the government will also take 80% of the equity in C.
That’s nuts! The government can’t do that, can it?
Sure it can. Ask FNM and FRE shareholders.
***
But today the WSJ is calling for the FDIC to take over banks that have NOT failed, inject public money into them, throw out management, and take preferred equity or warrants. This is from the WSJ, whose motto is “Free Markets, Free People”???
If even the WSJ is urging hasty, ill-considered government bailouts on a massive scale, I have to believe Paulson is going to get what he wants, or something close to it.
We will look back later and wonder why we acted in such a panic and why the media failed us with a lack of skepticism.
In 2001, administration asked for war authorization, media reported WMD were certainly in Iraq, and Congress gave the ok. Supposedly some in congress thought the administration would not really use the authority it had been given.
Summer 2008, administration asks for a bazooka to use against GSE panic, but leaves question about whether it will use it. Media reports this is essential, GSEs are failing, no doubt about it. A few weeks later Paulson uses the bazooka, and congresspeople express surprise that he pulled the trigger.
Fall 2008, Paulson now wants nukes instead of a bazooka. Media is certain major action of this scale is necessary. Gotta do it fast, just like with Iraq, just like with the bazooka. Paulson says he might not have to use most of the nukes…
Haven’t we already spent something in the neighborhood of 700 bil already (according to a republican senator yesterday)And it just bought a little time. That seems to be an empirical test of throwing money at the problem.
As mentioned above the housing market is going to fall. So the inflated mortgages will never be worth nearly as much as Frank etc fantasize. Paulson etc et remind me of King Canute telling the tide not to come in.
Maybe he should reread Humpty Dumpty
The Treasury would have to sell 700 billion in bonds to raise cash for their purchases. The buyer I assume would be the Fed. Then could the Fed exchange these bonds with banks for more junk? Then wouldn’t the total stimulus be 1.4 trillion?
“Fratto insisted that the plan was not slapped together and had been drawn up as a contingency over previous months and weeks by administration officials. He acknowledged lawmakers were getting only days to peruse it, but he said this should be enough.”
http://www.rollcall.com/news/28599-1.html?type=printer_friendly
FYI, related to taxpayers being treated as if they have preferred share ownership in a bailout:
The core right is that of preference in the payment of dividends and upon liquidation of the company. Before a dividend can be declared on the common shares, any dividend obligation to the preferred shares must be satisfied.
Almost all preferred shares have a negotiated fixed dividend amount. The dividend is usually specified as a percentage of the par value or as a fixed amount. For example Pacific Gas & Electric 6% Series A preferred. Sometimes, dividends on preferred shares may be negotiated as floating i.e. may change according to a benchmark interest rate index such as LIBOR.
Like the common, the preferred has less security protection than the bond. But the potential of increases of market price of the common and its dividends paid from future growth of the company is lacking for the preferred. One big advantage that the preferred provides its issuer is that the preferred gets better equity credit at rating agencies than straight debt, since it is usually perpetual. Also, as pointed out above, certain types of preferred stock qualifies as Tier 1 capital. This allows financial institutions to satisfy regulatory requirements without diluting common shareholders. Said another way, through preferred stock, financial institutions are able to put on leverage while getting Tier 1 equity credit.
“Note that this analysis, even if correct, does not conclusively disprove the need for a bailout bill.”
The burden of proof lays with those calling for the bailout, not on those of us who oppose it.
There is no authority in the constitution for the Federal government to be in the business of rescuing incompetent businessmen. Mr. Paulson and his cronies can go to hell.
Surely Buffett is only investing due to the Bail out money guarenteeing him a great return with almost no risk. what happens if the bail out doesnt happen berkshire is on the hook.Buffett must be sure it is happening
Ano:
What’s the purpose of this revelation?
If Yves wants to make certain issues public, certainly Yves can do so within this blog’s dedicated space. Otherwise, I believe we need to respect the reasons for doing otherwise.
Anon of 9:45 PM,
I suggest you do your homework before making baseless insinuations.
Being a speaker at the Milken Institute Global Conference does not mean one supports their policies or their views. For instance, one of the speakers was Lisa Randall, a world-renown physicist, who is just about as uninvolved in economics as they come. Another speaker was the head of the biggest labor union in the world.
I was on a panel with Mark Thoma, Felix Salmon, and Paul Kedrosky on econoblogging. None of us are advocates of the Milken conservative party line. For instance, Thoma is at least as liberal as I am. But rather than looking further at the website which described our talk, at the video of our session, or my own posts on the conference, you jump to a conclusion.
And I made myself persona non grata there with this post, “Hubris, Denial, and the Financial Services Culture,” and this follow up. “Milken Institute Takes Issue With My Post.” I assure you I will never be invited there again.
Fascinating that the ethical question of taking $10,000 from each American household to fix the recklessness of private greed was never raised.
I guess that’s an implicit recognition that such a munificent piece of arm-twisting has no merit – but would be acceptable anyway.
I like the Warren Buffett-style solution for fixing the financial mess. Instead of a taxpayer bailout, let private investors infuse cash and try to turn these financial institutions around and make them profitable. Then give them a capital gains tax break for their services.
7 trillion or so knocked off the global market. No accountant willing or able to tell where it went.
ask only one question and one question only until it has been answered…..
WHERE’S THE MONEY????
Why do we need these highly paid “experts” being given outrageous bonuses for destroying a lot of great businesses and countries when an idiot could have done it for half the price??