naked capitalism

Mogden says:

The latest EconTalk (Best Podcast 2008) is worth a listen.

Allan Meltzer is interviewed on Fed policy. The summary:
- current policy is disastrous
- expect huge inflation a few years out
- we need regulatory certainty
- we are getting the reverse

All in all, rather depressing. But worth it for some truthful discussion (so rare and difficult to find).

Meltzer on Inflation

Roger Bigod says:

Currently, the major U.S. banking institutions have capital in excess of the amounts required to be considered well capitalized.

Currently, the interpretation of your biopsy is that it’s considered to be benign.

HoosierDaddy says:

Any government capital will be in the form of mandatory convertible preferred shares, which would be converted into common equity shares only as needed over time to keep banks in a well-capitalized position…

Does this mean the Citi conversion story is true? That seems to fit ominously with:
In Citigroup’s case, converting a significant portion of the government’s preferred stock into common shares would help lift the company’s TCE ratio, perhaps to as high as 4%, according to a person familiar with the company’s thinking.
I certainly hope that is not the intent. A $45 billion investment becoming a 2.5 to $4 billion investment would make a rather nasty sound bite.

gordon says:

Maybe it’s time to look again at the creation of a new Government bank.

ruetheday says:

Rule #1 – Anytime someone goes out of their way to tell you not to be afraid, you should be very afraid.

Early Withdrawal says:

Yves – isn’t this the statement we started the day off with? I think the market and blogland has weighed in on this one as worthless.

Anonymous says:

The entire government approach is random. 2 weeks ago deficits did not matter as we were force fed $800 billion in “stimulus” and $250 million in mortgage mess. Today, apparently deficits do matter, so our fearful leaders want to make sure we know they are going to cut the deficit in half in 4 years. That means higher taxes and less “stimulus” into the middle of this unwind.

At least we can count on deficits not mattering again later this week when we pump up a bunch of insolvent banks . . . .

Anonymous says:

Hey, I too would like a cushion against larger than expected future losses such as losing my job or the value of my housetrap falling off a cliff
The big banks are insolvent and only need a cushion while the euthanasia drugs take effect

Anonymous says:

This is the most succinct description of the problem and the problem with the solution I’ve read:

“The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.”

Amen.

joebhed says:

I’m sorry, Yves, but we are still a long stone’s throw away from reality with ALL of these qualified reassurances from the nation’s monied-interests.

It’s NOT the financial System.
Irt’s NOT the banking system.
It’s NOT the economy.
Each of those have systemic maladies that result from the real problem.

The real source of all this systemic conflagration is the monetary system.

The debt-money system of the private federal reserve bankers is broke. We have an insolvent money system. Period.

It has FAILED to produce enough money in quantity and quality to make the debt service payments on the debt-money issued as the principal amount of ALL the loans made via the FED’s pro-cyclical, mechanized money-creation system.

The debt-money system is broke.
Gerrymandering around tax, fiscal and monetary policy WITHIN the debt-money system is a fool’s errand.
The sooner we get on the track of the new monetary system, debt-free at issue by the government, the sooner we will all start to get back to work.
And realize our proper, though somewhat reduced, standard of living in this country, and the world.
Greenbacks ‘09 !

MyLessThanPrimeBeef says:

Make that arguing, instead of argue.

MyLessThanPrimeBeef says:

What if Madoff has a twin who is employed at the Treasury or the Social Security administration right now? What if the lock box is empty, with no money ever invested there? Let’s worry about things we can do something do and let the dying blood-sucking vampire banksters and their zombie banks go.

DanyBoy says:

All of the above comments have validity. Current policy can be criticized from many points of view.

One thing stands out for me:

The American taxpayer has been buffered from the pain of actually repaying the national debt for a long time now.

The message this week
from an Administration under austerity pressure from “The Management” is glaringly clear:

“You’ve been living in a dream world, Mr Taxpayer. Welcome to higher taxes!”

And in a perfect Hooveresque move, as if on cue, we squeeze money out of the anemic economy and turn a recession into a depression.

Happy New World, Mr and Ms America

alex black says:

“Who do they think the audience for this is, morons?”

Yes.

And they are right.

This is a message to most Americans, who don’t have the time, education, or intelligence to realize that they are being raped. These words will soothe those people. They will not understand, but will come away with a fuzzy feeling that someone iw working very hard to solve this problem that they do not comprehend. So they will go about their business and create no trouble.

AND they will keep their money in the stock market, having been told for years that “they should always be in it for the long run, and stocks ALWAYS do well in the long run.” These are the only people keeping it from plunging, rather than sliding.

This is a statement designed for morons, and it will serve its purpose. No one ever lost a dime underestimating the American public.

DanyBoy says:

The Obamatrons seem to be maintaining their awe of banksters, like royal subjects did for a time in certain countries well after a republic was established and being a scycophant no longer got you anything.

The goals of the new policy directive are 2 fold:
-Disguise and play down “Nationalization” so that the ugly N-word can be avoided in press conferences.
-Give ‘em more taxpayer cash to burn and survive another day but demand nothing in return (save vague assurances of “profits” if everything works out and in the future, no downside mitigation however).

So once again we’re being scammed:
-Not the slightest modicum of thought or effort has been expended to ensure that this calamity doesn’t repeat!!! No change in policies, methods or personnel is being demanded. Perhaps they believe that “Creative Financial Engineering” did not go far ENOUGH!
Maybe CDO-cubed need to be deployed to cover the underwater CDOs and CDO-squareds.

Anonymous says:

Just like Obama as in trying to talk your way out of everything.

lineup32 says:

Yves, you are in rare form today!

“The markets want action, not more words, I doubt anyone with an operating brain cell will take much comfort from this.”

Anonymous says:

The markets want action, not more words.

The economy deserves action. The markets are happy to speculate on the rumors.

DanyBoy says:

As the markets and world economy circle the drain, our government is calling for austerity.

Tonight I note a collective state of denial over the seriousness of this situation. Austerity in the middle of a recession is a repeat of Hoover’s folly of 1930.

There is unfortunately no other way to interpret the intent to shrink the federal budget deficit except this:

“Save the banks, screw the people”

There’s an ongoing welfare program for failed bankers despite ongoing negative performance. It’s the deluxe plan.

But there will be no quarter for the US taxpayer. That stimulus and tax cut? Now you see it now you don’t. Might pay for the toll on your next commute.

Next year and over the next four expect the living marrow to be sucked out of your dessicated wallet. Taxes? To pay off the $550Billion that the president assumes will be half the deficit (today alone it increased by ~$60 Billion courtesy of AIG), the bill will be hefty. In a shrinking economy and given the cost of service on US debt in the trillions, every tax return in the US would have to be submitted with a check for at least $10,000. And that’s not factoring in unemployment, furloughs and decreased hours worked etc…That’s also assuming bankers have been honest and revealed the full extent of their losses and that they and the auto industry don’t have any sudden need for cash for operations.

Federal savings? Turning to the humorous side of the crisis, Obama mentioned $7million saved at one Government agency. Turning the lights out and lowering the heat won’t pay for the crushing . We have to presume a TOTAL exit from Iraq where a US troop reduction could trigger civil war.

Summing it up, if everything goes well, the rate of contraction of the economy should slow in 4-5 years when we can start paying the next half.

Axel says:

Yves here. Who do they think the audience for this is, morons?

when was the last time you watched NBC Nightly News or CNN -

YK says:

“Yves again. The boldface verges on comedy. The financial firms HAVEN”T been well managed, but evidently you’ve been asleep for the past six plus years. And there is no acknowledgment of what you intend to do about deficient private management, save throw more money at it, which does not sound reassuring.”

My understanding is that the bull market of 2002-2007 was a form of “helicopter money.” Bankers (at least the top ones) always knew that they were inflating the real estate bubble on behalf of the government. This was a form of stimulus. The fact that they were making a lot of money in the process is irrelevant. The point is that banks have not been private institutions for some time now. Whether the nationalization takes place or not is also irrelevant. It doesn’t change anything. The crisis we are dealing with is a consequence of de-facto nationalization of the banks that took place some time in the past.

DanyBoy says:

WSJ(2/24) AIG Seeks To Ease Its Bailout Terms
(From THE WALL STREET JOURNAL) By Matthew Karnitschnig, Liam Pleven and Serena Ng

American International Group Inc. is seeking an overhaul of its $150 billion government bailout package that would substantially reduce the insurer’s financial burden, while further exposing U.S. taxpayers to its fortunes, people familiar with the matter say.
Under the plan, the government loan of up to $60 billion at the heart of the bailout would be repaid with a combination of debt, equity, cash and operating businesses, such as stakes in AIG’s Asian life-insurance arms. AIG and the government have been discussing the changes since December and plan to announce them by Monday when the insurer is expected to report fourth-quarter results, the people said.
The earnings report is expected to underscore AIG’s worsening condition with its total loss for the quarter likely to top $60 billion, according to people familiar with the matter.
One of the restructuring plan’s central goals is to safeguard AIG’s credit ratings, which, if cut, would force it to make billions of dollars in payments to its business partners, further weakening its already precarious financial position. The new plan is being structured in close consultation with major credit rating agencies.
AIG’s talks with the government are ongoing

Under the new structure, AIG’s interest burden on the government money would be reduced. It currently pays 3% plus the London interbank offered rate, or Libor, a common benchmark interest rate, on a loan of up to $60 billion that it gets from the government, and also pays 10% annual interest on a separate $40 billion investment by the government in the company.
One major sticking point is how to value the assets, especially because prices are in rapid decline. Similarly, the government could end up the outright owner of certain businesses, which presents myriad issues, both operational and regulatory.

Richard says:

I do wonder about the e-mails going from Geithner and Summers to Rubin these days. Last summer, when writing for the FT, it appeared that Summers recognized that his friend Bob and his cohorts in financial engineering had built the biggest pile of shit since 1929. But apparently, he sold his soul back to Rubin in order to get back into office again. And Obama, much as he wanted to get out of the Senate, has relied on his colleagues there for a lot of personnel decisions. I believe when the transition history is written we will find that Senator Schumer persuaded Obama that he had had to have a safe “Wall “Street” guy in Treasury who could hit the ground running. We will have to see what happens. Washington, Lincoln, FDR, Truman, and Eisenhower all made mistakes. But they would recognized them, correct them, and cut their losses (good-by Generals McClellan, Burnside and Buell, hello Generals Grant, Sherman, Thomas, and Sheridan; good-by Henry Wallace, hello Harry Truman). Obama has been in office just a month, the pressure must be tremendous, and the reasons for the current sell-off is more all the bad news late last week that started coming in from Eastern Europe and the realization that banks will be taking huge losses there as well as in the U.S. The market is realizing that the administration is not going to be able to wave a magic wand and make this Minsky moment disappear. It will take time to heal individual and corporate balance sheets, for the banks to write off the bad loans, and for the securitization market to start believing that banks are not selling them triple AAA shit anymore. The only thing the Government can do to speed things along is take debt from individuals and businesses and put it on its own long term and far more credit worthy balance sheet (individuals and corporations default everyday, but the United States has paid its debts since Alexander Hamilton through Civil War, Great Depression, World War, and the Cold War when the debt burden major against the whole economy was a whole lot greater then wit will be after 4 years of Obama).

Anonymous says:

Yves,

This is simply one of your most lucid, to the point posts.

It was a pleasure reading it.

D

doc holiday says:

The Banks Are All Bluffing!

alex black says:

To Viking –

I just read about the AIG-China connection elsewhere before i read your comment. Am still picking my jaw up off the ground.

Guess it’s no coincidence that the day after Hillary is in China begging for money, AIG drops the bomb that unless the US gov’t gives them more money and better terms on their old money, they’ll declare bankruptcy next week.

Interesting to think that maybe Treasury isn’t getting its marching orders from Obama or Wall Street, but from China.

doc holiday says:

Amazing new vintage valuations, i.e, future value has no correlation with reality; simply amazing!

Re: Japanese Finance Minister Kaoru Yosano said the government was studying measures to support the stock market, while the Nikkei briefly fell as low as 7,155.16, breaking below the Oct. 27 closing level of 7,162.90, its lowest finish since October 1982.

How do you value future value when stocks have retreated backwards 27 years?

Justin says:

@Viking,

do you have sources for the China/AIG connection? Sounds interesting but I can’t find any substantiation on this. I would think China would be in a better position to bail their own pension funds out than we are anyway.

John N. Winn says:

Much of this Treasury statement is a recycling of the Bush Treasury’s pablum. The mandatory conversion of Treasury preferred to common–i.e., its further subordination to the most junior unsecured debt and to even to private preferred–is an eye-popper. Even Paulson was not so audacious.

If the Treasury maintains any capital ownership interest in these black holes at all–itself a very dubious proposition–then that position should be (a) superior to all unsecured debt– including deferred compensation and bonus polls–with (b) a status comparable to debtor-in-possession financing, with (c) interest rates that are punitive compared to current credit spreads on these entities (say current debt cost + 7%), and with (d) at-will loan call provisions (payable in full after 30 days notice) at any point after, say, 3 months.

(e) Non-payment of the loan after call is a default event enforceable in court via (i) mandatory Chapter 11 filing for the bank holding company and (ii) FDIC seizure of the commercial banking subsidiary (if it is not stand-alone solvent per bank examiners) and (iii) automatic state guaranty fund/insurance department take-over of insurance subsidiaries (think of AIG) if they are stand-alone insolvent.

(f) No worthless warrants, preferred, common, or other “ingenious” financing schemes to be used in any circumstances: straight callable debt as outlined in (a) to (e).

Items (a)-(f) constitute what is technically known as a short leash. It would enable the USG to pull the plug on a non-performing institution at any time after 3 months if it did not meet credit terms. With that option, multiple “TBTFs” could in fact fail, but the bankruptcies could be staggered.

d4winds says:

Well done–and excellent work generally.

Your blog and the one by Barry Ritholtz (The Big Picture) are the only ones I consider must read, i.e., on par with NYT and WSJ.

Anonymous says:

“FED statements are not really aimed at the people who come onto this blog, they are aimed at institutional investors. Reading between the lines it is not unreasonable to suggest that the FED will try to put a bottom into bank share prices by over capitalising based on some stress test and taking a proportion of the bank in shares to compensate the tax payer.”

It is impossible to put a floor on the prices of stocks and bonds issued by banks as long as they have prices vastly higher than those of bank assets.

The hedgies will short bank stock and bonds, and go long bank assets (loands, ABS, etc), and force the prices to converge. The government can’t do much about this unless they ban stock shorting of banks, and ban CDS on bank debt.

And if someone does that, why pray tell, shouldn’t all companies get those special favors? Car companies? Wax museums? Fast food chains? Etc.

Swedish Lex says:

I just saw this in the NYT:

“We absolutely believe that our private banking system is best off being in private hands and we are trying our best to keep it that way,” said one senior administration official, who spoke on condition of anonymity. But, he continued, the government is already deeply involved in propping up the banking system and may have no choice.”

The Administration will hopefully begin to make sense soon.

Anonymous says:

“Yves here. Who do they think the audience for this is, morons?”

Yves … sorry … but … they DO know who the audience is …

Its the same bunch of loser morons that obediently and ignorantly voted their disingenuous non responsive asses into office in a no real choice, crooked electoral process, rigged election. When you vote in such a debacle — once every few years — you only serve to validate their corruption, give up your power, and earn the title of moron. Election boycotts would be a good opening salvo in a demand for a reset of the now obviously scam ‘rule of law’. But that won’t happen until folks work through the illusionary culture that has been knowingly, willfully, incrementally, and surreptitiously created to envelope them and shape them into the timid, ignorant, twits that they are. People that have been lulled into believing that politics is a once every few years event ARE morons. All life is politics, it is a 24/7 process!

This is not a financial crisis, it is a political crisis of major proportions. We have had the vanilla greed government hijacked by the black greed elite crowd. The ‘rule of law’ is now almost non existent in scamerica and these more vile gangsters are now operating free form while running rough shod over their ignorant brain washed public. It is very sad. It kind of looks like the annual baby seal harvest.

The main difference is that the baby seals do not keep sending elaborate plans to their killers representatives telling them how they could stop the killing, nor do they vote their killers into their killing positions. Or fawn over the killers news outlets like the New York Slimes and Wall Street Urinal -YUK!!!

The marks need to unite and seize the power of their unity, but first they must see that they are marks.

Deception is the strongest political force on the planet.

I on the ball patriot

mft says:

anonymous@4:41 – great comment.

As for walking the knife edge – the answer is levitation, e.g. by means of hyperinflation. Wipe out everyone’s savings, the funds stay ok. Got it?

Eric L. Prentis says:

Geithner/Summers/Bernanke use an incorrect assumption when making decisions because they evidently fervently wish it to be true, i.e., if they paper over the banking crisis using taxpayer money it will buy enough time so that a semblance of the previous financial system can be restored which will save large bank and AIG directors/managers/stock and bond holders, thereby, lifting the US economy out of recession. Their argument is fallacious because the previous financial system of selling toxic assets was unsustainable and all faith in this unregulated, self-defeating system is now entirely lost, i.e., collateralized debt obligation (CDO) securitization and credit default swaps (CDS) based on sub-prime mortgage loans leveraged 30-to-1 leading to home prices down 20 percent resulting in CDOs falling by 80% to100%; consequently, CDOs and CDSs are now worthless making many banks and AIG insolvent. Nothing even remotely resembling this completely discredited securitization system can be restarted, no matter what they do. The only question remaining is who pays for the financial ruling class’s sins: those responsible or the people. Since the plutocracy controls the Federal Reserve, Treasury, US regulatory agencies and Congress, it seems that the rich will win out in the end; of course, I’m rooting for the underdog.

Anonymous says:

GREAT blog, Yves! …sure wish it would print better though, in Firefox (v2) — I often print your posts to read offs-creen, but they rarely lay out correctly.