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US Negotiating to Backstop BofA Purchase of Merrill

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Now we know why John Thain was so eager to sell Merrill.

That comment isn’t entirely fair (the deterioration in the securities firm took place in the fourth quarter, while the sale was negotiated in September). But directionally, the former Merrill chief saw the downside risks and did what was best for the firm.

The problem, of course, is that Merrill is a systemically important player (readers may not like hearing that, but the Bank of England listed 16 “large complex financial institutions” in April 2007 that it deemed essential to global financial intermediation. Merrill was on that list). So letting the deal with BofA “fail” is a non-starter. BofA is not in a posiiton to take a big balance sheet hit to take over Merrill, now that the 4Q results are in.

From the Wall Street Journal:

The U.S. government is close to committing billions in additional aid to Bank of America Corp. as the nation’s largest bank by assets tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation.

The discussion began in mid-December when Bank of America, already the recipient of $25 billion in federal rescue funds, told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill’s larger-than-expected losses in the fourth quarter, according to a person familiar with the talks.

Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets, agreed to work with the Charlotte, N.C. lender on the “formulation of a plan” that includes new government capital. The terms are still being finalized, this person said, and details are expected to be announced with Bank of America’s fourth-quarter earnings, due out Jan. 20.

Any possible arrangement might protect Bank of America from losses on Merrill’s bad assets. There would be a cap on the amount of losses the bank would have to absorb with the federal government being on the hook for the remainder, according to one person familiar with the matter.

The possible deal is further evidence of the banking system’s delicate condition and its hunger for more capital, despite billions of dollars already invested in financial institutions by the federal government. Thus far, Bank of America has received $25 billion in federal rescue aid, including $10 billion Merrill Lynch would have received if the sale to Bank of America had not closed.

The Treasury has committed the entire first half of its $700 billion Troubled Asset Relief Program, although some funds remain unspent, and Congress has yet to release part two. The Federal Reserve also has wide ranging powers to intervene to aid financial institutions, as does the Federal Deposit Insurance Corp.

The talks with Bank of America were driven by Treasury Secretary Henry Paulson, people familiar with the matter said, because he was concerned that without help the deal wouldn’t close, leaving Merrill adrift. The merger did close Jan. 1 with the understanding the two sides would hammer out a plan, said a person familiar with the talks.

I must confess not to be a reader of either Merrill or BofA press releases. How could the deal close with a backstop hanging in the air? The need for government support is a material fact, and failure to report on a material fact is an SEC violation.

And we also have the not pretty fact of Paulson promising more TARP funds without clear authorization, in effect making commitments he was in no position to make, and de facto dumping them on Obama.

And we have the further fact of the BofA board approving the deal with no backstop in place, even though the claim is now made that one was needed.

This all stinks to high heaven.

And if one really wants to be conspiratorial, we have the long proven view in banking, “if you are going to have a bad year, have a really really bad year and write off everything, including the kitchen sink.” The losses are so bad that banks are not operating on that theory, but I wonder if the Merrill payoff will be made larger than necessary to hide the fact that it is also to shore up other BofA trouble areas, such as its credit card operations.

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49 comments

  1. ndk

    Now we know why John Thain was so eager to sell Merrill.

    This was arguably the best dump I’ve ever seen, even better than Zell’s unloading of EOP(did you see the recovery on Tribune? 1.5 cents!). I can’t even be critical of the decisions made by the BofA board, Thain, or even Ken Lewis here.

    This was simply theft from the taxpayers by they who held MER equities, debt, and derivatives thereupon, facilitated by BofA in “good faith.” They were just doing what the government wanted them to do. It’s the Bill Gross shake-hands-with-the-Feds excuse for looting, and it’s vile, but from a cynical, profit-minded, selfish viewpoint, they’ve all done precisely the right thing.

  2. tompain

    Wasn’t this also an enormous gift to MER shareholders? BAC would not need a backstop, or would need less of one, if it hadn’t paid so much for MER. Recall that after the announcement of the deal, MER stock fell and fell, and eventually people were saying Ken Lewis blew it. Now we know (apparently) that he knew all along the government was going to help him out. But from news reports, it appears that in the absense of gov’t help, BAC upon due diligence would have backed out of the deal. Then the gov’t would surely have had to step in, but MER shareholders would surely have been wiped out or nearly so, no?

    WB shareholders had to sell for next to nothing. WM shareholders got nothing NCC shareholders got killed in sale to PNC. CFC same. BSC Every time there has been a forced transaction, the shareholders have gotten creamed. But not this time. Why? Whatever the cost to taxpayers is for this BACkstop, MER shareholders should have been in first loss position.

  3. Patrick Honohan

    Of course Lehmans were also on that 2007 Bank of England list of Large Complex Financial Institutions!

    The others were: ABN Amro, Bank of America, Barclays, BNP Paribas, Citi, Credit Suisse, Deutsche Bank, Goldman Sachs, HSBC, JPMorgan Chase, Morgan Stanley, RBS, Société Générale and UBS.

  4. Anonymous

    That 2007 Bank of England list of Large Complex Financial Institutions wouldn’t have anything to do with credit default swap orgy on CDOs, would it? Both
    CDS IndexCo and IIC International Index Company Limited were created by these usual suspects before being acquired by Markit Group Ltd. which is according to FT 67% owned by these banks and brokerage firms, hedge funds owned 13%, and employees 20%. The firm’s web site currently says it has 16 banks as shareholders, without naming the banks. Nothing more than criminal cartel that figured out how to game the $ystem before it all came back to bite their a$$.

  5. Andrew Bissell

    The problem, of course, is that Merrill is a systemically important player … So letting the deal with BofA “fail” is a non-starter.

    What exactly is the huge event we’re supposed to fear if Merrill or even BofA go down? The brokerage clients have SIPC protection, and the FDIC is backing customer deposits, right? If SIPC and FDIC can’t be counted on to prevent bank runs then what is the point of having them in the first place?

    ML and BAC equity and bondholders should have been writing off total losses in their investments weeks ago.

    There have been times in history when a country’s entire financial sector went bankrupt, and it did not lead immediately to Mad Max Beyond Thunderdome. This sounds more and more to me like, “trust me, there’s WMDs on them there balance sheets.”

    The meek (and bankrupt) shall inherit the earth, I guess.

  6. Greg

    Unbelievable. Ken Lewis is an idiot. He bought Countrywide for $4billion. He thought Merrill was worth $50 billion. The total mkt cap of BAC today is $52 billion. BAC was going to walk away from the deal rather than close in Dec. But they did, why? Were they promised something? Were they armtwisted? In Sept and Dec? Now we know why the Merrill execs. left last week. BAC was going to welch on the deal. Total lack of transparency all around, as usual.This is bizarro world.

  7. john bougearel

    “Now we know why John Thain was so eager to sell Merrill.”

    Not quite accurate, here. Merrill was a shotgun wedding. Thain had to get into the bank because Lewis had cut off their trading lines several days prior, just as had happened According to Bloomberg news, Thain emailed employees telling them Bank of America “had its foot firmly on Merrill’s windpipe”

  8. Anonymous Monetarist

    Yet another taxpayer financed bailout for rich folks’ bad speculative bets.

    Nancy capitalism wins again.

  9. Charles Kiting

    and the FDIC is backing customer deposits, right?

    I don;t even know what the FDIC’s game plan is reagrding the 10bn in bad IndyMac loans Fannie wants them to buy back. Does the FDIC have enough to back BofA deposits AND buy back bad Countrywide loans?

  10. Richard Smith

    An overdose of fun for Ken Lewis.

    In the furtherance of futile speculation, anyone care to guess the size of the black hole they’ve just noticed in Bank of Amerrillwide, two weeks after “closing” the “deal”? Any takers at $50Bn? £100Bn?

    When the history of this inglorious little episode is written, some sort of prize will have to go to BoA for studiously avoiding the worst screw ups until absolutely the last possible moment and then – completely maxing out.

    Still leaves JPM to fess up, but BoA is more than enough to provoke a new outbreak of headless chicken behaviour all by itself, so I suspect I’m going to have to be satisfied with 1 out of 2.

  11. Anonymous Monetarist

    Richard Smith said…’still leaves JPM to fess up’

    The clearing price of cancer

    Judging by the price action today it would appear that folks have come to the conclusion that price discovery might be applied to Citi.

    Well it’s about bloody time.

    The problem with the thesis of ‘the banksters are too broke to go bankrupt’ is that the longer it takes you to liquidate the capital structure of insolvent banks the more probable the chances are that you’ll end up liquidating a good portion of the rest of the economy.

    If we no longer have to imagine, as just one example, what the ~670 billion of off balance sheet mortgage related securities at Citi are worth and in fact, say with a transfer to a ‘bad bank’, get the true value and the requisite writedowns, the clearing price can be realized and applied to the industry as a whole.

    After Citi all eyes will go to JP Morgan, the derivatives king where the trading book is short duration like Citi and full of the same type of junk.

    As posted on November 30th : JP Morgan (with a credit derivatives book of 9.2 trillion) is on one side or another of one out of every six contracts …It has counterparty risk on the contracts it has bought, even with collateral and faces losses on the contracts it has sold.’ – Henny Sender

    Equity is the first loss tranche, what is the value of Citi commons? ZERO. What is the value of JP Morgan commons? ZERO.

    The hope is that with the government’s hand all the way up Citi’s back, we can show the proper clearing price for the cancer and start movin’ on from there….

  12. Anonymous

    “Merrill was a shotgun wedding. Thain had to get into the bank because Lewis had cut off their trading lines several days prior, just as had happened According to Bloomberg news, Thain emailed employees telling them Bank of America “had its foot firmly on Merrill’s windpipe”

    Fair Enough, but then what explains how BAC paid way above market price for MER?
    Really its just a bailout for Merrill shareholders more than anything else. All that talk about ‘systemically important’ sounds like rubbish to me. I think Lehman bankruptcy was the one good that happened in this whole mess.

  13. bg

    “I must confess not to be a reader of either Merrill or BofA press releases. How could the deal close with a backstop hanging in the air? The need for government support is a material fact, and failure to report on a material fact is an SEC violation.”

    And we also have the not pretty fact of Paulson promising more TARP funds without clear authorization, in effect making commitments he was in no position to make, and de facto dumping them on Obama.

    And we have the further fact of the BofA board approving the deal with no backstop in place, even though the claim is now made that one was needed.

    This all stinks to high heaven.”

    Ok, I will play the anti-cynic role here. Forgive me if I stretch.

    From the beginning there was a widespread conspiracy to soft pedal the bad state of the financials balance sheets. The government knew the cost of panic went well beyond the niceties of SEC law.

    Perhaps there was denial on the inevitability of crisis, but I don’t think there was denial that government had to cushion the blow.

    BofA is not as weak as C or the IBs, but would be next in line on the death watch. What business did they have making a play for Merrill? Paulson was tuned into each discussion, and made rapid fire assessments on the bests ways to triage. Merrill needed a home, and I don’t think anyone who reads this blog would disagree that Merrill was next on the Bear, Lehman hitlist.

    So a shotgun wedding was scheduled for December 31. I cannot know if Paulson knew it would continue to get worse, but I suspect he did, and thus had to reassure all the parties.

    The banking system is nationalized, even if the banks aren’t. Treasury gets to decide who survives. Could BofA pulled out on Dec 31? Technically yes, but practically no. No guarantees needed to be made explicitly. BofA will get what they need from the government, and will deliver what is implicitly requested by Paulson.

    So what about Obama, and this niggling issue of the rule of law? Obama must be on board at some level. The words coming out of his mouth say he is. And as bad as Paulson may be, you don’t question the general during battle. Nobody wants to see the dominos start to fall again.

    Legal issues are more interesting, as you can’t (practically) sue a treasury secretary. Fuld should be in hot water, but apparently isn’t. BofA may actually be acting in good faith in a crisis, despite foot faults which can be overlooked at the discretion of federal officials.

    Sorry for going on so long.

  14. Andrew Bissell

    I don;t even know what the FDIC’s game plan is reagrding the 10bn in bad IndyMac loans Fannie wants them to buy back. Does the FDIC have enough to back BofA deposits AND buy back bad Countrywide loans?

    I meant to pose the original question somewhat tongue-in-cheek.

    If a wave of bank runs actually does start, the FDIC has the potential to make it *much* worse. They’ll transfer assets from strong banks to weak banks, thereby spreading that weakness throughout the system and effectively leaving depositors with nowhere to hide. Federal deposit insurance is an interesting gambit … if it works, hey, you’re in the clear. If not, it can make the losses in a bank run situation even worse.

    Unfortunately the FDIC completely removed any incentive for depositors to seek out safe banks, as opposed to the maximum possible yield, so now there are a lot of deposit assets sitting in shaky banks and backed by weak debt.

    Please don’t report me to Sheila Bair.

  15. Richard Smith

    Yes they are fighting over every last inch, Anonymous Monetarist.

    I am using the word ‘inch’ in the extended sense of ‘disclosure of a mindboggling loss that shows the bank’s been insolvent for months’.

    It is very tiresome, especially since actual real companies that do something worthwhile are beginning to get blown up by withdrawal of credit lines.

  16. Anonymous

    Good discussion again.

    Thus far, the taxpayers are helplessly watching each phase of this debacle.

    independent

  17. john bougearel

    Yves,

    I have read plenty of posts on both BofA and MER over the past 17 months.

    Let's tear this WSJ post up a bit.

    BofA "tries to digest its Jan. 1 acquisition of Merrill Lynch & Co., according to people familiar with the situation. Discussion[s]began in mid-December when Bank of America
    told the U.S. Treasury Department it was unlikely to complete its purchase of the ailing Wall Street securities firm because of Merrill's larger-than-expected losses in the fourth quarter, according to a person familiar with the talks."

    This BofA statement is hogwash and a complete misdirect of the truth. Let's start backwards. Between Dec 07 and July 08, MER conducted 8 capital raises, two in July 08, totaling almost $40 billion. Also, in July 2008, Thain sold to Lone Star a huge CDO parcel for 22 cents on the dollar. On top of that, they provided loan star with most of the funding for the purchase. Lone star picked up the CDO for roughly 5 cents on the dollar. In short, Merrill had to pay some one to give it away. But, by that time, they had reduced their cdo exposure. For BofA to say MER had "larger than expected Q4 losses" could be well beyond disingenous ~ I suspect.

    If you want the truth of the matter, the fictitious need for taxpayers is to bailout BofA all points back to CEO Ken Lewis's huge appetite to rope a bum steer going downhill. He simply likes to bet on losing horses, horses that are profusely bleeding. Horses that are dead on arrival.

    Think back to August 2007, when tehy announced an initial stake in CFC at $22 roughly. BofA spokseman Robert Stickler said they had examined the books and told the world that the market was undervaluing CFC's assets and that they were getting a great deal: “we were able…to look at their operations and their books. We determined the value is greater than what the market was giving them credit for.”

    This was after CFC had drawn on all its available lines of credit in order to prepare for a nuclear winter.

    “When a company draws on its bank lines, it just basically gives off the impression that it has run out of options. Typically these bank lines are there but not really meant to be used,” said Christopher Wolfe at Fitch Ratings.

    Did Stickler stress-test the assets on CFC's books, when they ran their valuation models or were they just talking their book because BofA/Ken Lewis believed in the subprime business model still?

    The company reassurances rang false.
    reassurances on November 28, 2007, from Countrywide’s managing director of investor relations, David Bigelow:

    We said it back in August, we said it in September, we said it last week, we’ll say it until we turn blue in the face, but we have ample liquidity to fund our growth and operational needs.
    More denials from the firm; what Bigelow failed to consider was how Countrywide would fund their contracting growth and operational needs. Amidst the declining asset values on its balance sheets, Countrywide would continue to struggle against the headwinds of both accelerating home price declines and defaulting mortgages as it entered the New Year—despite Bigelow’s pronouncements to the contrary.

    At the end of 2007, more than 7% of Countrywide’s $1.5 trillion mortgage servicing portfolio was more than 60 days past due. Taking note of that ominous figure, the once enthusiastic Dick Bove waved the white flag, noting that “there’s a rule of thumb that at the 5% level of delinquencies, you are finished.”

    on Tuesday, January 8, 2007. Countrywide spokesman Rick Simon denied that CFC was finished: “There is no substance to the rumor that Countrywide is planning to file for bankruptcy.

    Simon was right, two days later Mozilo had found his patsy/bagholder: Ken Lewis at BofA.

    “I hope Bank of America isn’t throwing good money after bad. They struck a deal that wasn’t very attractive. Hopefully they can get it right the second time around,” said Eric Schopf, at Hardesty Capital Management.

    The most circumspect comment on this BAC announcement came from Hayman Capital Partners’ Kyle Bass: “The worsening housing market makes BAC’s timing questionable. The collateral for their loans is depreciating at over 20% a year, losses are spiking and there’s a big potential ‘fat tail’ to Countrywide’s legal liabilities.”

    Ken Lewis, in his hubris, had just doubled down on one of the biggest losers of the subprime crisis. Averaging down a loser is a bozo no-no from where I come from: the trading pits of Chicago. It's a game of Russian roulette. Ken Lewis squeezed the trigger of his gun aimed at BofA. The slow motion bullet aimed at Ken Lewis> to BofA> to taxpayer just took oh say another 11 months to blow their brains out.

    Lewis thought he was buying cheap stock and not shaky collateral worth less than nothing. There is a colorful story dating back to 1932 that Jesse Jones had with his old cattleman friend Dick Coon:
    “Dick, I said, “why don’t we buy some of these cheap stocks?” “Hell no,” he said. “Never rope a steer going down hill: he’ll kill you every time.”

    Effectively, Ken Lewis was pulling a Stan O’Neal over at Merrill, who was an advocate of “concentrated risks.” Remember, O’Neal was the CEO who said the smartest thing he ever did for Merrill was make just a few big bets—“frees up time.” So, when Lewis bought CFC and then Merrill, he was concentrating his risks in the most dangerous securities market he possibly could do. So much for any emphasis on non-correlated risk exposures. Lewis wanted risk exposures to the worst securities in the world. And he is overdosing on the crap now and blaming MER.

    I will say it again, this all points directly back to Ken Lewis, Not Merrill!

    On September 14, 2008, BAC bought Merrill Lynch, possibly roping in what would be the second bum steer in a year! Lewis at the time called the purchase of Merrill “the ideal long-term fit.” But, as a former Merrill Lynch broker related a few months later, “There are some hand grenades on the balance sheet that are going to blow up on Bank of America. The cost savings are going to be nowhere near what they’ve already promised.” Looking in the rear view mirror after a year of acquisition binging, Ken Lewis admitted on December 3, 2008, that his “banks outlook was too optimistic. If someone had told me a year ago that things would be worse in December 2008 than in December 2007, I would have thought that person was half crazy.”

  18. Steve

    Call for papers:

    As a matter of economic policy, how does one choose between narcissistic dickhead A (Richard Fuld) and narcissistic dickhead B (Ken Smith)?

  19. Anonymous

    So why are we bankrupting the country to save the banks and the rich? At some point the natives are even going to understand and may want revenge.

    Where are the grownups or at least those with more morals than the blood sucking leeches we have in charge?

  20. john bougearel

    “Treasury, concerned the deal’s failure could affect the stability of U.S. financial markets,”…

    Ya know, 4 months ago, the fear-mongering Treasury was telling us that if we the taxpayers did not bail out the recklessly insolvent banks (preaching non-correlated risks publicly, while concentrating them on balance and off-balance sheets) “the alternative would be far worse.”

    The alternative is financial instability, Hank. And we already have that, your market interventions are not going to make that instability go away. And fishers debt-deflation theory informs us borrowing more money from taxpayers will only make things worse doing things your way, the market interventionist way, at least the way you and the fools on the hill (fed included) are going about it.

  21. Andrew Bissell

    Where are the grownups or at least those with more morals than the blood sucking leeches we have in charge?

    The voters laughed Ron Paul off the stage.

  22. Bob_in_MA

    And the man who will be in charge of looking out for the ordinary taxpayer’s interest? A tax cheat…

    Geithner had been told he was responsible for paying this tax, acknowledged it in writing, and took the extra 7+% the IMF gave him to pay the tax. But it is an honest mistake to then not pay it? Are they serious?

    Out here in the real world, we call people like that cheats.

    From the New York Times:
    “However, the I.M.F. does pay its American workers an amount equal to an employer”s half of the payroll taxes, with the expectation that they will use that to pay the I.R.S.”

    From the Washington Post:
    “Documents released by the Finance committee documented the errors made by Geithner. One showed his signature on a tax worksheet that states that he has an ‘obligation of the U.S. Social Security tax, which I will pay on my fund income.’”

  23. Briangobosox

    Its pretty obvious what happened here, and its probably Ken Lewis’ only good move of 2008. He saw the sweetheart asset guarantee deal the Treasury and, primarily, the Fed handed to Citi and say “hey I gotta git me some o that!”

    Very easy – threaten to blow up the markets heading into Christmas and oh, threaten to hang Hank Paulson’s old Goldman buddy Mr. Thain out to dry at the same time. In return for going through with a deal you just agreed to weeks earlier (thereby also avoiding a face full of egg), you get the patsies at the Fed to step up with an ink-money guarantee of a nice slug of Merrill’s crap assets

    To be sure, this has NOTHING to do with grabbing another 20 or 25 billion in useless TARP money funnelled into preferred stock. ITS ABOUT THE ASSET GUARANTEE FREE LUNCH. Given that BoA is already subject to whatever thread-thin “strings” are attached to TARP money anyway. So why not take the Fed’s free lunch?

    Hopefully, this raises the question about the Citi deal which no one seemed to want to ask: on exactly what authority is the Federal Reserve saddling taxpayers with these massive contingent liabilities? Actually, I’m not hopeful on that point. The sheeple have gotten used to there being no rules when it comes to the boys in Washington and the big banks.

  24. Anonymous

    The funny and obnoxious part is that they plan to announce the capitla injection deal the same day BofA announces its 4Q writedown bloodbath — January 20, Inauguration Day. Welcome to the party, President Obama.

    Here’s a good-bye kiss from Hank to his Wall Street buddies. Good riddance to that obnoxious jerk. I hope Congress subpoenas his phone records and brings them to the SEC — rumor has it they know that he tipped Goldman off to distress at both Lehman and Bear.

  25. Anonymous

    Just for the record guys, BoA used their rapidly depreciating shares as currency for the Merrill purchase. By the time the deal closed, it was worth no where near the original number plastered all over the press.

    That said, the Merrill shareholders did make out better than they would have otherwise. Chicken feed is better than nothing.

  26. Anonymous

    That was a superb post from John Bourearel on Ken Lewis’ activities.

    I recall the initial investment in CFC and thought ‘what is Ken Lewis
    smoking’. When he bought the whole thing it seemed he was acting, perhaps, as an agent of the USG. Who else would jump in with both feet at such a time? Of course there was no TARP at the time but when the Secretary of the Treasury or Chairman of the Federal Reserve asks for a ‘favor’ can you say no?

    Whatever the reasons behind the acquistions of Countrywide and Merrill maybe surely those who have invested in BAC need to know the truth. Did Ken Lewis ‘rope a bum steer’ on his own initiative or was he asked to do so?

  27. Anonymous

    @ndk, is the monkeys arm getting tired yet, the lunatics hurdygurdy is about to explode, can he whittle a new handle, not to worry, with ideological application of new science, the new one will be BIGGER and BETTER, we will just have to grow BIGGER monkey arms. Repeat process until extinction. No wonder the ancestor rages inside me.

    P.S. this may sound vulgar but not in context to the application and consequences of trickle down economics. I have always regarded the term “trickle down” in the Reaganomics phraseology to mean running (WE) down ones (THEIR) leg after they blew their wad having a good time.

    Sorry but the truth is some times vulgar and we must face some truths with out politeness in order to feel and recognize it for what it really is. Dead civilians in Gaza are really dead, crushed, blown to bits, horrific to the mind. Put that on the front of every article on the subject then we can talk about it. Same with the people that got us here with this catastrophic event and all for what?

    skippy

  28. norstadt

    Yves,
    I like your blog, but I think you’re doing everyone a disservice by writing “letting the deal with BofA fail is a non-starter.” Once you buy into that FUD, all of the bailouts become necessary and even make sense.

    We need a real debate about what can still be saved, and what’s worth saving.

  29. Anonymous

    skippy,

    I just want to say that others feel as you do. How we get beyond our feelings is another thing.

    How have so many of us been inculcated to be such heinous examples of humanity’s potential?

  30. S

    And then there is the matter of Bernanke saying he could easly change course by letting the “investments” run off. Such a statement implies that he has short duration protfolio which is clearly a lie. It also assumes the assets are performing. He makes these claims despite the freedom of information request repeated denials. This should be explored.

  31. Anonymous

    I agree with Jojo out with the torches, markets would clear if the politicians let capitalism work. Regretfully, when politicians monkey around and redistribute money the system gets clogged up and stinks to the heavens. These guys in DC are stupid and corrupt, a bad combination.

  32. ndk

    Sorry but the truth is some times vulgar and we must face some truths with out politeness in order to feel and recognize it for what it really is.

    I agree, skippy, and I’m really surprised people have stayed as quiescent as we have. I’m embarrassed by what our government and corporations have done, yet still proud to be American.

    Part of me fears our silence speaks volumes to the rebellious spirit in most being fueled more by basic needs like food and shelter, and less by desire for equality and other much more noble goals. This is close to why I like classical art so much more than modern art. At least people then had a vision of nobility and pride, and highlighted the good side of the human spirit. Maybe someday we will again.

  33. Anonymous

    It’s a little late to get indignant about the banks.

    “This all stinks to high heaven.”

    Oh? You’ve just noticed? Have you also noticed how many people you know have lost their jobs recently? Did you see this yday in the “NYTimes?”

    “Gannett to Furlough Workers for Week
    By RICHARD PÉREZ-PEÑA
    Published: January 14, 2009
    The Gannett Company, the nation’s largest newspaper publisher, said on Wednesday that it would force thousands of its employees to take a week off without pay in an effort to avoid layoffs.”

    That stinks to high heaven too. Is that what you want more of? GM bailout stunk to high heaven but did you really want to see the loss of confidence and loss of jobs that came with it if a bailout didn’t ensue?

    I think a good way to view this is to think of the banks as recidivistic heroin addicts. Now how do you help them? Warm meal and blankets? Needle exchange? Methadone? Of course we hate the fact that there are heroin addicts in our society and we can bleat endlessly about it, but the point now is, how are we going to rehabilitate them?

  34. john bougearel

    Norstadt,

    I want you to be real clear on this point: “all bailouts are necessary when the only goal of monetary and Keynesian policy is to stabilize the zombie banks.” If you haven’t heard by now, “the alternative would be much worse.”

    And Norstadt, I want you to be real clear on another point: wrongheaded policy is wrong, and a bad bank is a bad bank. These are indisputable facts that have been wedded together until death do they part.

    This marriage can not be debated, because it is an open and shut case. Wrongheaded policymakers knows only that it must support bad banks, until death do they part, to stabilize the zombie financial system.

    They hold these twisted principles sacred above all else.

  35. john bougearel

    How do you help the banks? Blankets, yes now there is a slow start to coddling. Why not get busy, and mainline them with trillions of dollars?

  36. Anonymous

    12:35, save your sarcasm for a more deserving target. Yves has been complaining about bad behavior in high places in finance before it was a spectator sport.

  37. Anonymous

    Loosing jobs is bad, but throwing money at zombie banks and corporations doesn’t help workers as much as their cretin CEOs. Sponsoring inapt companies doesn’t work in the long run as the failed Soviet system attests. You may want to help people to get back on their feet but to help “names” just because they are called GM or Citibank is a wasted effort. Wasted means that we could have spent that money on something more worthwhile, it means opportunity lost. Did these bailouts restore ANY confidence in anyone? Look at any economic or confidence indicator and it certainly doesn’t look like it. These bailouts will prolong the pain and cause unintended consequences which may be worse then if markets were allowed to work.

  38. converger

    I especially like the part where it all blows up on Inauguration Day, effectively burying the lede somewhere between page 14 and 18 of the New York Times. By the time anyone realizes how thoroughly we’ve been had, it’s a fait accompli.

  39. Anonymous

    @1:01

    Did the standard of living decline much for the Japanese during their 15+ year recession? Huge level of govt debt hurting their currency today?

  40. cent21

    Anon, in Japan, there is a high savings rate and low consumption. Most of the savings is in low-yielding ‘postal’ bank accounts. So, what isn’t bad for the goose might be bad for the gander, or something like that.

    Anyhow, can anyone tell me the pecking order for various BOFA preferred shares, and how they shake out compared with common equity? Why would the preferreds fall more than the common on this news?

  41. Anonymous

    @cent21– Japanese have a high savings rate because the Govt is spending it for them?

    US low savings rate but the Govt is debt is as much as Japan. And now that we may see US debt to GDP ratio balloon to that maybe of Japan, won’t we see a rebound in savings rates?

    http://blogs.wsj.com/economics/2009/01/06/end-of-the-negative-saving-rate-era/

    “End of the Negative Saving Rate Era?
    Most economists say the personal saving rate, which has been falling for decades, will finally rebound in 2009. (See “Hard-Hit Families Finally Start Saving, Aggravating Nation’s Economic Woes”.)

    The annual personal saving rate (effectively, income minus spending) averaged around 10% during the early 1980s, when the economy was in a severe double-dip recession. It then began to fall steadily, even as the economy weathered two more recessions, averaging about 7% around the time of the 1990-91 recession, then falling below 2% for the first time in 2001. It averaged about 0.6% from 2004-07. (The only time the annual saving rate went negative was in 1932 and 1933, rates of -0.9% and -1.5% respectively.)”

  42. Richard Kline

    BAC should _NEVER_ have been allowed to bid on MER exactly because the former was in a position to survive and the latter had been dead for a year at the time of the deal. The government should have seized MER, and backed it as necessary, but this exactly what Push/Baulson in the now waning Admin couldn’t cotton to. The problem with this country being run by oligarchic fascists like Paulson is exactly that no one thinks that they actually have to plan anything, or think about as exit position. The government “makes its own reality,” right? So rather than seize the firm and manage the implosion, these yabos in sharkskin suits use Uncle Sam’s credit card with no thought to anything beyond today’s political advantage. . . . Which is why these same morons are now agreeing to US technology transfer to China to keep the Chinese from calling our note. Morons. Who think _nothing_ through, but bill the public double for their time.

    Here’s a lesson for those who feel that they are qualified to executor a money center financial administration: you don’t eat the Blob, the Blob eats you. So one had better be sure that one is shaking hands with someone/thing which is _definitely_ NOT a Blob. Lewis twice, _TWICE_ broke that rule, and he has just about killed his firm therefore. A well managed country would make Blod Identification a priority for public regulators rather than Public Regulator irradication a priority for Blobs. We are a country of morons, then.

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