naked capitalism

Anonymous says:

“Can’t I just eat my waffle?”

Richard Smith says:

Geithner is in, the TARP money is released: 100Bn of margin money to buy opaquely priced assets at 10x gearing.

Obama is making a few noises about executive comp.

All looks just horrible.

Anonymous says:

The base problem continues to be valuation. No investor in their right mind will bid on any of the toxic MBS without knowing what they are as a first step toward valuation.

The banks and investors have been allowed to hold out for the government bailout. The government should begin forcing the worst ones into the marketplace so they can be evaluated. The market would begin clearing the deadwood, a process that none of the programs have even begun.

I imagine that “investors” sitting on currently worthless securities, waiting for a bailout, would find a way to allow an unwind if they had a gun to their pointy little heads.

The government money is being wasted by continuing the secrecy. What is different about the government accounting fraud and the banking accounting fraud is that the government has the ability to force the taxpayer to buy the crap.

There is just enough information available for people to realize that all investments may be fraudulent and one better not put a penny into anything except guaranteed cash.

The government has made the situation worse in its efforts to protect the few at the expense of the many. It is time to excise the cancer rather than treat the symptoms.

Anonymous says:

“The plan would be to leverage this amount up 10-fold, using the Federal Reserve’s balance sheet, so that the banking system could be relieved of up to $1,000bn (€770bn, £726bn) worth of bad assets…..”

I don’t understand why a 10x leveraging of the bad bank capital would necessarily be sustainable. There would be a significant risk that the gov’t would be asked to pump more equity into the bad bank after further asset write-downs. So this is another backdoor subsidy, just like that FDIC guarantee of secured debt issued by banks.

I’ll also make a more general point – if the US debt load is unsustainable, what good will it do to get the banks lending again? That isn’t a solution – it’s a procrastination device.

jult52

Anonymous says:

I’m reluctantly coming to the POV of Sheila Bair that keeping the homeloaners in their house is the best solution, recognizing that even doing that will be difficult.

The government could get more bang for a buck by simply helping distressed buyers stay current on their loans even if that means paying the shortfall. By doing so the house is not foreclosed upon reducing the number of distressed/foreclosed properties thrown onto a saturated market and the bank/MBS does not register a loss. It doesn’t solve the situation but it does kick the can down the road and time is not a bad thing to buy.

Anonymous says:

Hello Yves
Please excuse my ignorance but could you (or anyone else for that matter) please explain to me why the taxpayers be held accountable for leveraged losses. Why can’t the government, instead of nationalizing the distressed banks, simply let them go through due liquidation process and start the bond markets and loan markets in their own right through an entity that could eventually be floated on the market when the dust has settled. In other words rather than be a “lender” of last resort the Government would become “lender” of first resort.

Richard Smith says:

Anon 6:55 yes, if it's feasible, that is potentially a cheaper (& certainly kinder) way to buy time.

That's all we get out of it, though.

Having bought the time, what actions can you then take to create the info that would (ideally) drive policy?

That takes you straight back to the asset valuation question of course; and the continuing policy vacuum.

Anonymous says:

A simple self-executing solution to the toxic mortgage assets would be a fee based program of federal mortgage insurance. For a fee of 1%of the face value of the mortgage any existing mortgage would be able to be guaranteed up to 30%; if the mortgage holder wished to go to 40%, it would be required to reduce principal by 10%; if the mortgage holder wished to procure a 50% guarantee, it would be required to reduce the principal amount by 20% and 60% for a 30% reduction. This approach would provide a floor value for mortgage assets and perhaps a market for the mortgage backed assets. The principal reduction combined with lowered interest rates would permit homeowners to stay in their homes. The lender would calculate the optimum guarantee/principal reduction formula to protect its interest thus limiting the government’s potential exposure. This would stretch TARP dollars- insurance has more leverage [bad word] than buying assets. The principal reduction amounts might vary based on regional basis – e.g. Los Angeles 12.5%/ Cleveland- 10%,

Gentlemutt says:

Yves,
There really is no point in trying to “find ways to make banks lend again.” Banks, big and small, will happily lend right now to reasonable credits. They may wish to make smaller loans or to syndicate the loans, but good credits are welcomed and it makes no sense to wring our hands about a newfound and overdue unwillingness to lend to bad credits.

Now that the Securitization market is dead bank credit officers are doing what they should have been instructed to do for lo these many years. New loans are evaluated for their impact on the lender’s own balance sheet.

So, if few individuals or companies who are decent credits are getting turned down, what is the problem? The problem is that the vast majority of good credits have quite reasonably pulled in their horns and are not eager to borrow to start new projects. Why not wait things out and see evidence of a turn for the better before risking one’s precious capital? This is what Irving Fisher figured out and you posted about so eloquently not long ago. This is not going to go away by itself.

What should be done, aside from formalizing the fait accompli of nationalizing big banks so we can drive a stake through the corrupt heart of modern finance? Imho it is simple. The government, via federal, state, and local entities, needs to start buying things and ordering projects done, so US companies can accumulate new orders and then take proof of those orders to their banks for new working capital.

The only sector the government(s) should generally avoid is Housing. That is so egregiously over-supplied that no amount of “stimulus” will revive that corpse until time and demographics do their work.

Much of the rest of what has been proposed by our politicians and talking heads is no more than various flavors of icing on the cake, with various degrees of unnecessary complexity that reflects the current social penchant for apparent sophistication in lieu of robustness.

And, oh, just to be sure the vampire stays dead, outlaw Credit Default Swaps where no insurable interest exists….heh, heh. That was really a dumb invention for society, but not for a few thousand now-very-wealthy banker types.

Alfred says:

I admit becoming somewhat paranoid in the last couple of years (who can blame me?), but here is a thought:
What if the bailout money (aka taxpayer money) its only intention is to buy the corporate elite (Wall street comes to mind) time to retire (mostly with golden parachutes). Once enough time has passed the ship will sink like the Titanic with all the lifeboats gone. Prima facie is the lack of cooperation from those who receive taxpayer monies to limit cooperate payouts, eliminate new bonuses and reimburse past one’s .
Fraud marches on and the CHANGE the new president is talking about is indeed very fragile and suspicious.

Anonymous says:

A modest proposal. Divide the $100 billion into three or four pools. Invite a similar amount of private equity to join each pool. Investing in one pool means private cannot invest in other pools, at least for a time. Back pools with Fed Res. funds, say 6 or 8 to one. Have pools bid against each other for toxic assets. Voila, a market value of some sort. Pools get some equity kicker in selling institutions. Perhaps Pools are eventually listed. Pools work out toxic assets.

Anonymous says:

Excuse me if this has been coverd before, but wouldn’t any effort to “nationalize” the banks trigger a “credit event” and the settlement of trillions in Credit Default Swaps.

It seems that this is the 64,000 pound elephant in the room, and that the government would have nationalized the banks already if it was deemed to be advantageous to do so.

In the case of nationalization, who is responsible for settling up the CDS? Seems no one is talking about this.

Anonymous says:

Pinning the tail on the Jenny
Yves:
I think it neglectful to put all of the Emergency Economic Stabilization Act of 2008 (TARP act) blame on Paulson as Soros does.
Remember it was a bill strongly supported by Pelosi. She seems scared by the still mysterious private phone call by Paulson to Congressional leaders. (Which kind of briefing when done by Bush for FISA we all decried)
She could have reined in Paulson more but was either beguiled by his brilliance or baffled by his bullshit.
Anyway Madame Speaker is still insisting in putting her fine Italian hand into the new Bailout).
I do hope that some timely remembrance of her role in passing a faulty Tarp bill will limit her meddling now
plschwartz

doc holiday says:

The focus for saving banks must be a very clear matter of a plan that is transparent, i.e, obviously you don’t give retarded crooked bankers large scoops of TARP and then walk away and then pretend that these people are honest — because they are not and they have not been held accountable for their actions which placed them into this position of insolvency. Bankers that should be in jail, should not be managing tax payer revenue! This is a matter of re-organizing structures and re-inventing long-term financing related to future cash flow — not bailing out crooks!!!!!

IMHO, The Swedish Plan will not work anywhere at this point, because the toxic waste in the banks has never been fully disclosed and no one understands how BIG the problem is, thus, the current solution hinges on giving infinite bailout cash to people that have offered nothing less than false and misleading financial information. No plan will be effective until the good managers are separated from the crooks, and the good banks have to be sifted and sorted from the burning financial fires.

I must go back to my friend Mr. Einstein who screams at us from space, suggesting that you can’t solve a problem on the same level it was created, i.e, he seems to suggest that keeping things the way they are, bailing out the banks and then trusting them to produce cash flow, is a retarded idea that will fail for decades to come.

The Swedish Plan, a nice idea in retrospect, but will it work in the country I live in? A brief history:

1. 1985-1989: One of the most important causes of the financial crisis was the deregulation of the Swedish credit market in November 1985. The regulated market for credit was considered part of the structural problem in Sweden at the time and by abolishing the ceiling for how much the banking system could lend,the economy was given a very strong expansive pulse.

The increased amount of non-performing loans on the balance sheets of the finance companies also concerned the market and most of their lines of credit were cut off. The government’s opinion, however, was that no systemic crisis was threatening the financial system, and there was no bail out of the finance companies.

1991: One year after the finance company crisis, Sweden was in a deep recession and it was clear that many banks had severe problems. The overall returns on assets in the banking sector declined even further and most of the major banks presented negative numbers; in the case of Nordbanken the return on assets was -30% (Lybeck (2000). The banks were facing steadily increasing amounts of non-performing debt and their credit losses as a proportion of their total outstanding debt was approaching alarmingly high levels.

In order to defend the Swedish krona the central bank raised interest rates to never before seen levels (in September the over-night rate was as high as 500% for a couple of days), further aggravating the banks’ problems. The defense turned out to be pointless, and when eventually the confidence in the Swedish krona was completely lost in November 1992 nothing could stop the floating and devaluation of the krona.

And to quote Ingves and Lind (1998): ”From our point of view the financial systemin Sweden was on the brink of a collapse in September 24th, 1992”.

The Swedish government was eventually forced in September 1992 to give a general guarantee for all deposits in the whole banking sector, as opposed to their original case-by-case treatment. The level of the commitment was at the time equal to 6% ofthe GDP.

1993: To say that the worst was over is not the same as to say that the health of the banking system, or of the Swedish economy in general, was in order. In order to handle th eproblem-banks and to anchor the state bank guarantee, an independent committee for bank restructuring, ”Bankstödsnämnden” ( Bank Support Authority) was established in 1993.

Under the guidance of the government, the banks merged to a new Nordbanken. In addition, two asset-management institutions, Securum and Retriva, were also formed to take care of the claims with worst perspectives for Nordbanken and Gotabanken, respectively. In 1995, Securum acquired Retriva, and in 1997, Securum was purchased by a state-owned company and had by then finished the job it was set to do. Other banks followed the example and set up their own asset-management firms. In total, five banks actively applied for funds from the government.

The Finnish government was forced to take similar steps as in Sweden, but the actual approach was somewhat different. The Bank of Finland took extraordinary measures in saving the SKOP bank in September 1991 , but this was just a panic move. The year after, the crisis had grown even more and the Government Guarantee Fund was thereby formed.

Later, GGF sold in their turn the two asset-management companies to the Swedish commercial bank Svenska Handelsbanken.

For the savings banks, the process was even more drastic. Due to a mutual solvency scheme, which connected many savings banks, a total of 41 banks were merged into the Savings Bank of Finland under the ownership of the GGF.

1994: The situation in the banking sector as a whole was slowly getting better, and no more financial support from Bankstödsnämnden was given to the banks after 1993. Still, however, the amount of credit losses had not come down to reasonable levels and the profitability of the major banks was still lower than before the crisis.

By 1996, the total public cost of the banking crisis was FIM 88.6 billion (US$ 19.29 billion 53 ), that is, the banking crisis being far more expensive for Finland than for Sweden.

Already in 1993, the trend of negative or zero GDP growth was broken, and the management of the credit losses and the bad loans were handed over to institutions specially set up for this purpose. By 1994 (for Sweden) and 1996 (for Finland), the bad loans were written off and having got rid of all bad loans, the banks increased their profitability dramatically.

In retrospective, Sweden was the most successful in handling the crisis among the Nordic countries. In comparison with Finland, a few factors were in Sweden’s favor. First, there was a broad political consensus about the measures to take in order to cleanse the banking system of bad loans. Second, the authority supervising the restructuring, the Bank Support Authority, was set up from the very beginning as an authority independent from the Ministry of Finance and the Bank of Sweden. Third, the role of the new authority was clearly spelled out in its statutes. Thus, the responsibility of all the administrative institutions such as the government, the parliament, the Ministry of Finance, the Bank of Sweden and the Bank Support Authority was clearly set and went out of the crisis stronger than ever.

The above has been borrowed primarily from: THE BIG CLEANSE:THE JAPANESE RESPONSE TO THEFINANCIAL CRISIS OF 1990′S SEEN FROM ANORDIC PERSPECTIVE
I ♥ Sweden

Also see: Moreover, a crisis management authority, bankstödsnämnden, was set up and a number of coercive regulations were introduced so that the bank guarantee would not expose the state to extortion. these regulations included a law whereby bankstödsnämnden in principle would be entitled to take over a bank’s executive by means of state expropriation if the bank’s capital ratio fell below two per cent. these temporary regulations, as well as the general bank guarantee, were terminated in 1996. bankstödsnämnden was then transformed into insättningsgarantinämnden, with the more limited function of managing the deposit guarantee and investor protection.

Also: Several of the banks were by then under new managements, which were working on programmes of restructuring; among other things these included the creation of “bad banks” . These measures, in combination with a dramatic decline in interest rates during 1993, eventually improved the situation of the banks, the long-term financing.

THE INVISIBLE HAND SHAKING THE VISIBLE HAND

.. There, I feel better now, hope this long post doesn’t piss anyone off!! And another thing, I’m not going back to proof this .. let er rip…

doc holiday says:

Ok, a little more crap to ponder:
The need for a strengthened insolvency and resolution framework for banks – A central banker’s perspective

… One means is to fix a system that enables the authorities to take control over the bank and to write down not only capital but also claims in an orderly manner,while extending a guarantee to the new financing needed when the bank is under public control. The payments needed to maintain the stability of the financial system would be effectuated, while other payments could be temporarily stopped. A draft model for such a system was presented by the Banking Law Committee in Sweden in 2000 and the proposal is currently being considered by the Swedish Government. As I understand it, there is also work being done in other countries to bring about solutions that would mean that the authorities could claim in all credibility that it was possible to reduce claims even in more complex cases, where there was a risk to financial stability. Ideas that have been put forward include immediately being able to impose a partial payment stop on certain claims, haircuts, in connection with the authorities taking control over the bankand transferring the assets to a temporary bank, known as a bridge bank.

It is not without controversy that the government is given the right to nationalise a bank. It may be particularly sensitive in countries that have a recent history of state ownership. But I believe that the possibility for compulsory acquisition of the shares is a proper tool. Again, the owners enter into the business knowing that a serious breach of the supervisory regulations should result in the revocation of the licence and the loss of control over the bank. The fact that an expropriation may be an alternative to the revocation of the licence in such a situation when financial stability is at risk is important to restore a proper balance of powers. As long as these powers of the state are clear beforehand, this should be acceptable to the shareholders. Returning again to the Swedish crisis, I believe that it was a decisive factor that the banks realised early on that the government support measures were no free lunch. When this was made clear, the owners had strong motives to recapitalise the banks themselves.

doc holiday says:

A word in closing here, after looking back at history: Banks at this stage of the crisis in America have no fear and they have not been weaned from Paulson & Bernanke thinking and policy, which is that the banks will get a free ride and not be held accountable for fraud or mis-management. We see that with bankers that apparently have unlimited funds to redecorate and we saw it with AIG getting lavish vacations and infinite cash to burn.

We have Bernanke ready at the helm, ready to print as much money as it takes to hit some philosophical bullshit positive inflation value that he dreams will be stimulating to the dead economy. Between that dumbass policy, corruption throughout wall street and the worst congress in American history, along with a highly inexperienced president — we are indeed in a hell of a crappy mess, which has no end in sight!

Giving more tax payer cash to anyone at this point of the crisis, is simply a waste of money, which adds fuel to deflationary pressures; instead of burning more cash with TARP, there needs to be regulation in place to to force banks to disclose their fraud and their losses, then management involved in this mess has to be replaced immediately. Wall Street talks about needed to reward their own with massive compensation, because the people in the system now are so valuable, so educated, so experience — and full of shit. The bankers that run Wall Street need to be taken off their watch ASAP and replaced by less experience people that want careers, where their honesty will provide them with fair and honest compensation.

Surely, an average college graduate with no experience can do a better job than the the thieves that are robbing us blind now!

And finally, Obama and his team of congressional retards and advisors just simply don't get it and I seriously doubt they will — because it seems that instead of allowing banks to burn tax revenue, it looks like the mortgage and housing industry will have a shot at stealing the rest of the dough — and then when that fails, TARP 2.1 and 3.2 and 4.5 will be done deals and then, no doubt, Obama will come up for election and offer hope and change…. disgusting! I wish I could be positive, but these morons piss me off:

Obama also said that any legislation governing the use of an additional $350 billion in financial industry bailout money must include new measures to ensure accountability and transparency.

After the meeting, House Republican Leader John Boehner said he and his colleagues told Obama they feel the stimulus package is too expensive and too slow. He said Republicans told Obama of their own plans to "get fast-acting tax relief in the hands of American families and small businesses, because, at the end of the day, government can't solve this problem."

Republicans have been seeking deeper tax cuts and have said there was no reliable estimate of the bill's impact on employment.

Democrats tried to mitigate the impact of a Congressional Budget Office study that questioned administration claims that the money could be spent fast enough to reduce joblessness quickly.

>> I think I finally cleared out the cobwebs, have a nice day!

cap vandal says:

If you pay market price (or the “marked” price, which is in all likelihood somewhat finessed, since a fair bit of this paper traded only by appointment even in normal times), you have not helped the banks, merely ratified the status quo (although one has removed the fear that the crap investments could go lower, so that is a benefit of sorts).

Right now the banks aren’t insolvent on paper — their own financial statements. I think it would be a huge benefit to the banking system to buy the toxic assets @ market price and put a floor under the asset.

A lot of the stuff started with 20% subordination and has already taken a fifty percent haircut, so is booked @ less then 50% of par.

In general, the banks thought they were keeping the best stuff, so they have so called “super senior” CDO’s. There is simply no market for this because the only people that could buy it have stressed balance sheets.

It’s not clear to me that the government would be ripped off by this, although it is possible.

The most likely scenario is deflation followed by inflation. If you think about it, what you want NOT to happen is for temporary asset price deflation to blow up the financial system, then reinflate when we are dealing with the charred ruins of our former financial system in the broadest sense — not just banks, but all the downstream entities — pension funds, insurance companies, endowments, etc.

Look at the damage from the run up in gasoline prices followed by a crash. This took a fragile domestic auto industry and put the final dagger into it. They had a bullet or two left, but their product mix was wrong for $5 gas and by the time they had attempted to change the mix, like at the auto shows with hybrid after hybrid, no one cared since gas is down to $1.75.

Basically, the government allowed a “shadow” banking system to develop and it has collapsed. This has resulted in a huge decrease in credit. One way or another, the government has to step in and prevent a disorderly unwind. This means that the fed has to fatten up its balance sheet to partially compensate for the deleveraging going on everywhere else. I personally don’t care too much about the details of how this is accomplished. The common shareholders are pretty much wiped out regardless. The government can either backstop the assets in situ — on the bank balance sheets. Or they can move them into a SPE and let them amortize. Or some combination.

Allowing assets to go into free fall will give us Irving Fisher’s deflationary spiral and the paradox of deleveraging — where the more asset an entity sells, the worse their ratios become.

Every single “bailout” to date hasn’t been about the entity that got bailed out but those downstream. My current concern are non bank financials, which will tank under extreme stress if asset prices go into free fall. Since these include things like pension funds, downstream from there are the firms and governments that fund them and downstream from there you find the public.

There has to be rapid action on the demand side from fiscal stimulus. I would prefer something immediate — like this week — involving either taxes or money pumped into state governments — money that will get spent. The more nuanced stimulus takes more time.

ruetheday says:

We are stuck in a vicious cycle.

Step 1: As Yves describes, policymakers decide to buy troubled assets. They quickly realize that this will only work if they pay well above the values booked for these assets. This is essentially just a direct subsidy. They abandon the idea for…

Step 2: Direct capital injections to banks. Much simpler and faster acting than buying assets. Except they soon realize that even as they’re injecting capital, banks are losing more and more on their toxic assets. And so they move to…

Step 3: Combine capital injections with purchasing toxic assets. Problem solved. Except they realize that this is going to cost many trillions of dollars. They have not the political will to do this. And so…….

In Groundhog Day-like fashion, back to step one.

Break the cycle. Nationalize the banks. Sell the assets. Have new strong banks emerge.

Yves Smith says:

cap vandal,

The stuff that has everyone worried are the Level 3 assets, and I assure you, the value of those ARE highly finessed. For Goldman and Morgan Stanley, the value of Level 3 assets is considerably in excess of their net worths.

And the other big banks also have substantial off balance sheet exposures, Citi in particular. which we know are economically really on balance sheet, and those also render the public financials highly questionable. For Citi, the OBS assets are over $1 trillion.

Joe P. says:

Make Fannie and Freddie the ‘bad bank’ or ‘bad investor’. Next, create an auction process where banks can exchange bad assets for good assets by cherry-picking the inventory of Fannie and Freddie. The auction process will create a price (and hopefully floor price) for good and bad assets. Fannie and Freddie would no longer be allowed to buy assets and would be phased out over time as banks bought out all of the assets. Hopefully, most of the bad assets are better in 10+ years. Of course some assets will be lost causes. In addition, through investor reporting, banks in servicing would be able to provide a fair and transparent accounting of the bad and good asset exchanges. Again, 1. banks get rid of bad assets, 2. a market is created, 3. Fannie and Freddie are phased out over time, and 4. there is already a mechanism for reporting assets through servicers.

DanyBoy says:

There must be a plan for significant reform to accompany any proposed taxpayer-based relief.

Otherwise like pouring water into a bucket with holes, the entire effort will lead nowhere except back to square one.

Reforms must include restructuring the governance of banks, replacing all top level execs and of course oversight and monsitoring mechanisms.

We can’t allow wholesale transfer of wealth to the Ken Lewis’ and all the baby Lewis’

Anthony J. Alfidi says:

George Soros has a ton of common sense. Unfortunately that disqualifies his ideas from being taken seriously in the United States.

Let’s meet him half way. Just drop the bad bank concept and write off the bad assets. Americans will howl at a 30% GDP drop but the pain will be worth it.

Anonymous says:

Meanwhile, across the scum filled pond:

n Tuesday’s speech, the minister also said that there is “no question of moving the bank into a wind-up scenario which would create the potential for an under-priced realisation of the loans and other assets held by Anglo”.

I take this to mean that the minister, rightly, does not want to take actions that would cause a fire sale of Anglo’s assets, whereby the bank’s loans and the collateral underlying those loans would be liquidated at prices far below their fair market value to achieve a quick sale.

But putting the bank’s bad loans into a bad bank avoids such fire sales.

The objective of the bad bank would be to maximise the value of the distressed assets. It would do this by selling the assets back into the market in an orderly manner.

Anonymous says:

We are trying in vain to fix something which cannot be fixed. Playing Humpty Dumpty will not work in the real world. All that can be done is try to minimize the damage and not let it happen again.

We had a cheap money-created problem and we are still trying to solve it by cheap money. Foolish! We are not addressing the aggregation of too much risk in one place, which we MIGHT consider doing to try to immunize the system for the future.

For example, we are giving BofA tens of billions of dollars more than before and back stopping a few hundred billion of assets. Why? They have proven inept at controlling both risk and Ken Lewis’ ego, and they have 11 percent of total US bank deposits. Eleven percent! Break them up. Spread that risk. And mete out their mortgage loans to small regional and local banks, who undoubtedly know their local markets/borrowers much better and don’t know MBS’ from DVDs, and who are also in much better financial shape. Give THEM the TARP money if we are wont to hand out free money.

Or we can reward BofA for its failure, continue to allow them to imperil the financial system, and waste taxpayer money ad infinitum.

As for marked-to-market, allowing smoke and mirrors based on bank CEO’s claim that realized returns at expiration will be far better than current market is a joke. If any of the CEO’s really believed this dribble then they would be taking all of that TARP money and loading up on their competitors’ toxic waste. They are not, which says rather loudly what they truly think their own waste is worth.

The only thing we know for sure is that given the chance, major bank CEO’s will screw things up again. To reward them or to create a middleman to loan to consumers with taxpayer money is inefficient, wasteful, and doomed to failure.