Quelle Surprise! Summers Says Banking Industry May Need More Dough

The Administration has evidently launched a campaign to warn the American public that the black hole banking industry will need more in the way of recapitalization funding than is currently on offer.

Mind you, we are NOT opposed to this sort of thing were it done correctly: tough minded banking industry reforms, seizure of the dud banks, installation of new management (trust me, there are a lot of good bankers over 50 who were cashiered or retired because they were not on board with the credit party). And like it or not, the financial services industry is so badly impaired that more money is almost certainly necessary. But throwing money at sick banks with no plan as to how to shrink and rationalize the industry does not strike us as a sound way to proceed (and the TARP II notion of buying bad assets at certain to be inflated prices is a cosmeticized equity infusion and not a real solution).

Perhaps as important, the public is sufficiently outraged over TARP I that something quite different (as in more punitive to incumbent management, stockholders, and in some cases, bondholders) is required to muster Congressional support. I don’t have the sense that Team Obama fully appreciates that.

From the Financial Times:

Lawrence Summers, head of the White House National Economic Council, said the administration would use the $350bn remaining of the $700bn that Congress provided to start tackling the financial crisis. He suggested, however, that it would later have to assess whether that amount was sufficient to stabilise the financial system.

“We can make important progress and get started with the support that has been provided . . . What ultimately will be necessary is something that will play out over time,” Mr Summers told NBC television.

His comments were made after Nancy Pelosi, the Democratic speaker of the House, suggested that Congress might have to provide more money for the so-called troubled asset relief programme….

Speaking to ABC television, Mrs Pelosi said she was “open to resolving the financial crisis”, explaining that there might be a need for “some increased investment” to shore up the banks. But she stressed that any future funding for the banks would have to be dispersed with more transparency.

“Whatever we have to do will have to be clearly explained to Congress and to the American people as to what the purpose of the money is, why it’s urgent, and then accountability for it as it is distributed,” said Mrs Pelosi…

Asked whether the best way to shore up the financial system was to nationalise US banks, Mrs Pelosi said any future relief programmes should be structured to allow the American taxpayer to benefit from “some of the upside” that arises from the strengthening US banks.

She stressed that she was “not talking about total ownership” for the government but added that the “taxpayer should have equity”.

The last notion is a crock. The scale of the infusions relative to market values of equity DOES put the taxpayer in a control position in any of the seriously flagging banks. And the taxpayer is not getting commensurate rewards for the risk. Given that most banks would be insolvent if there assets were valued realistically (off balance sheet exposures consolidated, tougher marks on Level 2 and 3 assets), Uncle Sam would rightfully own these banks. But no one in power is willing to be honest about what is going on here.

Bloomberg reports on the Summers interview and other Administration efforts to prepare the public for higher government expenditures:

White House officials warned Americans that economic prospects are darkening as they sought to ensure rapid Congressional approval of President Barack Obama’s $825 billion stimulus package.

Vice President Joe Biden told the CBS program “Face the Nation” that “it’s worse, quite frankly, than everyone thought it was.” Larry Summers, Obama’s top economic adviser, said the economy faces “very difficult” months, speaking today on NBC’s “Meet the Press.”…

Yves here. Everyone? Please. “Everyone” clearly is limited to those within the Beltway. He is obviously omitting Nouriel Roubini and George Soros (people like Nassim Nicholas Taleb, Benoit Mandelbrot, Marc Faber, and Jim Rogers don’t even register in Summer’s universe). Back to the piece:

“It’s getting worse every day,” Biden said today. “There’s been no good news, and there’s no good news on the immediate horizon.”….

“The next few months are, no question, going to be very, very difficult and it may be longer than that,” said Summers..

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  1. lucifer

    So they can pull such c**p again and again..

    U.K.’s Myners Tells Times Bank System Nearly Failed on Oct. 10

    By Nicholas Larkin

    Jan. 24 (Bloomberg) — The U.K. banking system was within three hours of collapse on Oct. 10, days before the government announced a bailout for banks, City Minister Paul Myners told the Times newspaper in an interview.

    Major depositors tried to withdraw from a number of large banks, and were willing to pay penalties for early withdrawal, the newspaper cited Myners as saying.

    Myners, who joined the government in October to help rescue the banking system, said he preferred that the U.K. keep strong, independent commercial banks, though he wouldn’t rule out nationalization.

    Banks have been mismanaged and too many top bankers are grossly over-rewarded and have no sense of the society around them, Myners also told the paper.


  2. Red Baron

    The world’s blind faith in Barack Obama–a man who has never run any organization of significance in his life–is stunning to me.

    Right now we have Ben Bernanke, Lawrence Summers, and Timothy Geithner calling the shots. None of these people had a clue what was happening in the past few years. Now people think they are going to save us?

    God help us all.

    Red Baron

  3. Steve

    It’s time for Summers et. al. to admit that with the disappearance of off-balance-sheet vehicles and various kinds of credit enhancements, banks can not earn enough from traditional loan structures to begin to earn their way out of their de-capitalized condition. Is he really surprised that back-filling the hole created by exploded financing methods hasn’t led to needed lending, when the way banks have structured lending for half a generation has gone poof? Perhaps Summers can exercise his self-declared brilliance and tell us what will replace securitization, credit wraps, and off-balance-sheet financing?
    And if the private sector can’t provide needed credit to the real economy, perhaps he can tell us why these institutions shouldn’t be nationalized?

  4. Anonymous

    Really have to wonder if the public
    is aware of, let alone sufficiently
    outraged by TARP 1.

    It’s pin the tail on the donkey in Washington. Can’t gain a purchase
    when the grounds shifting under you.
    They can good bank – bad bank –
    nationalize – Swedish meatball –
    but they have got to get off of the
    their current course. It ain’t
    working. Level 3 is a black hole.

  5. Samuel Fridman

    Who is “George” Mandelbrot? I’ve heard of Benoit Mandelbrot, but no George. (A Google search came up with only one reference to “George Mandelbrot” — today’s blog in naked capitalism.)

  6. Yves Smith

    Anon of 7:51 PM:

    I have name dyslexia when I am stressed (don’t ask why, too boring). I think I once typed Willem Buiter as “Walter”.

    Thanks for the catch, fixing now.

  7. Abbott_Of_Iona

    “The Administration has evidently launched a campaign to warn the American public that the black hole banking industry will need more in the way of recapitalization funding than is currently on offer.”

    Oh dear,

    Europe seems to have the same problem,


    Portugal Ireland Greece Spain


    The Euro, like every other currency, has no divine right to exist.

    Portugal Ireland Greece Spain


    They exist only on the faith of the people who accept the current.

  8. Anonymous

    Anonymous said:

    Really have to wonder if the public
    is aware of, let alone sufficiently
    outraged by TARP 1.


    I keep thinking of the bumper sticker that says “If you’re not outraged, you’re not paying attention.” And I fear, most people are not paying attention. My middle class friends are not. It’s all I can do to stop myself jumping down my friend’s throats when they refer to the present situation as a “recession”.

    I believe people will not wake up to the reality of the situation until a large slice of the population – say 20-30% by U6 measure – is unemployed. Real banking reform may not happen until 2011-2012, long after the rats have left the sinking ship – assuming there’s anything left to reform by then.

    Got food?

    Yves, thanks as always for your superb hard work.

  9. Anonymous

    Summer is a player. Now anybody surprise when he is spinning and playing the game on behalf of banking industry?

    First off, summer have little credibility when it come to tough action against his banking buddies. He is another Paulson. (More free money please, my banking buddies need cash for trash.)

    Second Summer was a crucial player during 90’s deregulation. Not to mention he is citibank insider.

    So, I don’t know. If I were big investor from China, Russia or middle east. I wouldn’t give my money to him. ( I figure those 3 are the only ones left with significant amount of cash to pay for Summer’s scheme.)

  10. Abbott_Of_Iona

    Anonymous said:

    January 25, 2009 8:03 PM

    Got food?


    Got faith in your currency?


    Which would you prefer when

    “long after the rats have left the sinking ship”

    Food or Currency.

    Don’t worry its just a test of faith.

  11. john bougearel


    I saw that post about Summers conclusions and in thorough disgust I said to myself either he is a flipping idiot or he thinks that the majority of us are flipping idiots.

    My guess is he, along with all the other fools on the Hill, is counting on the latter.

    It is a misconception that more taxpayer funding will lead to a strengthening of the banks. More to the point, it is a grave misconception on Pelosi and company’s part that the taxpayer wants anything to do with this sort of risk. It is a further misconception not to recognize that to date there has been nothing but assymetrical risks to the taxpayer to date, all to the downside. Where does the certitude of there being any upside for the taxpayers come from? What ill-conceived notions run around in that idle brain of hers and that of others on the Hill.

    If you want to be brainwashed, go hang out on the Hill. They are all brainwashed walking talking undead zombies. As such they pose the gravest risks of all to the taxpayers who are just supposed to internalize this garbage they spoonfeed us through the major media. What crap!

  12. Anonymous

    btw, Russia just devalued their currency another 10% again.

    China will have to follow soon, since several major low cost manufacturing countries in asia also devalued their currency last week.

    Japan prime minister might not last that much longer… (new economic policy following current high yen policy in half a year?)

  13. john bougearel

    At least John Boehner has had a whiff of the smelling salts:

    House Minority Leader John Boehner, also appearing today on Meet the Press, said the Obama stimulus plan is “a lot of spending that I just don’t think will work.”

    Rather feeble, but an attempt at waking up from the wooziness

  14. Abbott_Of_Iona

    Anonymous said…

    January 25, 2009 8:22 PM

    “btw, Russia just devalued their currency another 10% again.

    China will have to follow soon, since several major low cost manufacturing countries in asia also devalued their currency last week.”

    Sounds like a competitive devaluation of Faith.

    Faith or Food?

    Dry goods sound good.

  15. Anonymous

    “Really have to wonder if the public is aware of, let alone sufficiently outraged by TARP 1.”

    I had breakfast this morning at a neighborhood greasy spoon. My friend and I were talking about bank bailout 2, loud enough it seems that folks in the surrounding booths were compelled to chime in. The anger was startling. Truly. Furloughs, job losses and new mortgage failures scream from the local front page on a daily basis. The folks this morning are feeling the pain directly and they’re wholly pissed about TARP II. Can’t seem them taking passively a TARP III and by the time that rolls around there will be plenty more desperate folks without jobs or working severely reduced hours.

    Long way of saying, I think Yves is exactly right, the Obama folks don’t fully appreciate what’s brewing out there.

  16. john bougearel

    The focus Summers says has shifted from stabilizing the financial system to getting people to spend again.

    “The focus isn’t going to be on the needs of financial institutions,” Summers said. “Of course we need to stabilize financial institutions — without a stable financial system the economy can’t work — but the priority has to be getting credit flowing again so that people can buy cars, so that people can get mortgages, so the economy will operate.

    Summers simply doesn’t get it, if we can believer the crap coming out of his mouth. Summers wants us to drown us with even more debt. Summers is advocating a priority shift to get people repeating the same addictive behaviors that got them into this mess.

    Wonderfully crappy notions. Where do these notions come from? Truly garbage in begets garbage out. Ahh, an epiphany, they simply create it out of thin air at the same time they are printing up all that money/debt. They go hand in hand, and serve each other well. One must have a suitable rationale for creating more indebtedness, no matter how flawed it may be.

  17. john bougearel

    Let’s start spreading the word folk. TARP II is really TARF – a derivative or WMD of BARF.

  18. Lim

    This is looking more and more like a soap drama with predictable plots…and the looting continues…

  19. john bougearel

    I must retract my previous statement about Summers insofar as I suggested this the new TARF plan is a policy shift. It is more an natural progression to return to sickness.

    We should mandate that all legislators and policymakers fully acquaint themeselves Soren Kiekegaard’s Sickness Unto Death, which is marked by the concept of despair leading to spiritual death if not aligned with God’s plan for relating oneself to oneself.

    Intriguingly, Kierkegaard ripped a page out of the bible to begin this book. A reference to Gospel of John 11.4: “This sickness is not unto death.” The quotation comes from the story of Jesus raises Lazarus from the dead.

    Hmmm, how much the story of Lazarus begins to sound like the Treasury raising the zombie banks from the dead.

  20. Krakpotkin

    Bill Seidman this week said that They can’t price the wounded MBS etc, and that therefore a reversion to the original TARP idea (buy the assets from the banks, ala mode Seidman’s old RTC) won’t work.

    BUT further comments showed that what he meant is NOT that a “hold-to-maturity price” (Bernanke’s term) is unfathomable, but, rather, that in October the banks and the feds couldn’t agree on a price.

    That is:

    — Tsy didn’t want to pay best guess hold-to-maturity because that would be assuming all risk and paying all/most value to the miscreant banks.

    — And the banks weren’t willing to take anything in the neighborhood of (non-existent) market value.

    Ie, the problem is NOT that a performance-based price cannot be decently estimated. It’s that nobody wants to TRANSACT today (and this past October) at those prices.

    THUS a fortiori: Instead of BUYING the wounded assets, the feds should prescribe controlled prices for them (segmented demographically across the wounded sectors of the structured finance universe).

    These controlled prices would be based on short-term trailing performance — how much interest is actually being paid and how much principal actually being lost — and best guesses re the housing industry for coming six months or so. Prices would then be adjusted quarter by quarter.

    The banks would get immediate write-ups to something near best guess hold-to-maturity price, while retaining risk going forward.

    The feds would have to do a ton of spreadsheeting and regulating, but would not have to lay out the several trillions more that Paul Volcker spoke of this week while introducing Tim Geithner.

    The market for mortgage bonds and related has been broken for 18 months, and the markets for other structured-finance things like credit card bonds not much better. Broken markets do not always fix themselves. These are not. Time to open the toolbox.

    Price controls WERE in the toolbox during the postwar era (Eisenhower, Kennedy, Nixon) — until the owner-operator class realized in the 80s that globalization was the ticket and got laissez-faire religion.

    People who spent their formative years watching Age of Reagan television have driven the global economy into the ground. It’s time to bench them, and open the toolbox.

  21. Anonymous

    What needs to be done is to NATIONALLY organize. The organization should be called:

    ‘ANGRY TAXPAYERS OF AMERICA (ATA) (This says it all.)

    A coalition of energized taxpayers in every metropolis, every small city, township, and village.

    And this organization should coordinate scheduled pre-packaged talking point protests en masse at city halls on down to city councils as appropriate.

    This is how you efficiently energize the taxpayer citizen and get some mass media attention quickly.

    Anyone with enormous organizational skills here? How about at least some thinking caps turned on as to how this could function?

    Maybe I’ll get to meet some of you at an ATA meeting in a neighborhood close to you.


  22. doc holiday turnarounds

    Summer's is a boob that has no clue where he's at or where he's going, the recovery is at hand and any bailout funds will just be gifts to political friends.

    I think 2009 will see a stealth recovery and most people will miss the opportunity!

    FYI: BDI shows early signs of recovery
    http://thestar.com.my/maritime/s…99& sec=maritime

    The huge volumes involved and the longer voyages required to ship these commodities to China resulted in a huge demand for even larger dry bulkers.

    “This prompted demand for larger iron ore carriers. A 300,000 dead-weight tonne (dwt) bulk vessel – a groundbreaking feat from a technical standpoint – was being ordered by the hundreds by bulk operators like Mitsui OSK Lines from South Korean and Chinese shipyards.

    “An accommodating ship-financing market also helped fuel the order frenzy by providing cheap loan in abundance.

    “Ports went into overdrive to beef up capacity and improve bulk-cargo handling capabilities to handle greater throughput and to lure more bulk vessels,” he told StarBiz.

  23. lambert strether

    Why not turn the banks into regulated public utilities?

    Why shouldn’t access to credit for your house and your car work exactly like access to heat and light from the gas company and the electric company?

    Sure, there won’t be a lot of “innovation.” And?

  24. heinous

    9:55, organizing without action is empty. A tremendous amount of letters and e-mails were sent to Congress against the TARP at the time. But the media fell in line with “the world will end if this isn’t passed” palaver, which gave nervous Congressmen pushed by their leadership (which had been told supposed horror stories in private by Paulson) air cover.

    The ONLY thing that will make a difference in the US is a general strike.

    But Americans don’t do that, so kiss the idea of getting the wishes of the citizenry respected goodbye.

  25. Andy

    It is good to see Obama finally putting words and his political capital into action. We need a clear direction and he is the President for the Job. I have written a number of article on the stimulus package, and it is clear that the longer we wait the more money we will need. Yes, government spending may not be the most efficient way to revive our economy, but what other realistic choices do we have?

  26. john bougearel

    Andy, throw in the towel, please, try to answer your own question. Yeah or nay, but don’t sit on the fence we ain’t got time for that crap.

  27. Anonymous

    Since it doesn’t seem that the US economy will crash on its own we will have to hope that the rest of the world will pull the plug on our stupidity by not buying any more of our debt.

    Thanks Yves for your postings and for all in the comments.

    I ask others to focus on who the enemy really is. This is a class struggle and needs to be addressed as such.

  28. slickvguy

    If these people were not able to see what is happening now, and were wrong throughout the past year+, why should we have any faith in them taking the right actions to fix it?

  29. Richard Kline

    Interesting article in the NYT today regarding whether major US banks ‘will be nationalized,’ worth several points in the context of this post and thread. The fact alone that the option was bluntly discussed in that article is salient news. The putative reasons offered, sources aside, is that with Citi and Bunker of America listing as the sewage in their basements liquifies their foundations the whole money center banking industry will founder if, when, and as they roll over. An important point in this article, true or not, is that though some policy makers are openly advocating this, “the Administration is going in another direction.” Because Larry Summers is opposed to nationalization.

    Summers is not a dope, or ‘out of touch;’ he understands exactly what he is advocating for and against. He has been a major player for at least fifteen years in globalization of the US economy, which requires deregulation of the financial industry among other things, which requires that money center banks stay private and somehow at the apex of the global financial system. If we have an integrated global economy _without_ US financial control from the apex, we get creamed. This was not his plan, the plan he has advocated so hard for. Accordingly, I doubt that he would stop at anything to keep big US financials private and players. The full faith and credit of the Republic is nothing too grand that it not be expended in his cause, hence his determination for TARP II, with III, IV, and however many more as he feels necessary to follow. Inflate the debt away, so long as US banks appear to rule the roost. He knows what he wants.

    This is why bringing Summers into the new Administration was such a rotten idea. Now, I would like to think that his presence indicates less certainly Obama’s own economic agenda then it does Obama’s total lack of experience as a political executive. That is a surmise, but perhaps there is a glimmer of hope there. Looking over who was called for Obama team and how, I get the distinct impression that he chose folks to buy in specific constituencies, or at least buy them off; notably within the Democratic Party, but also within the Other Party. In this, Obama was acting as a politician, looking at factions and constituencies, and working above all to neutralize folks who could hurt him. In that context, Summers has real cred in the Democratic Party. What Obama evidently did not realize having not been a political executive is that these folks arrive with backstories and costs, and the latter have major impact on the results that his Administration can achieve. Clinton, for example, is a terrible choice for state, as he will find. But coming back to the point, Summers brings more liabilities from his past positions then he brings assets from his position in Demo circles. Obama bought Summers’ policy brief whether he intended to or not in buying in the man. We will soon discover whether he did this because he believes in that brief or because he didn’t know any better. I take no pleasure in hoping that Obama was dim rather than determined; Summers, however, is manifestly the reverse.

    One other tidbit from said article in the Times was the observation that if the banks _were_ nationalized, “Who would run them since so many existing executives are tainted by the scandal?” I ’bout held my head in my hands at that one. I mean, so what if all the reporter’s sources would be out on their pinstriped asses if the banks were nationalized? Folks who fail should be removed, or is there something I don’t understand about the word ‘performance?’ The simple fact is that _ANYONE_ would do better; these executive failures are NOT irreplaceable geniuses without which their institutions could not succeed. There are many experienced financial executives who, as mentioned above in this posts, did not go along with the collective madness and who were thus kicked or eased out: there is a talent pool ready made for such executive positions. And the latter folks are likely hungry, too. Most of the behemoth financials need to be broken up, too, in which case the mid-level division heads of the pieces are those best positioned to be the executive heads of the calves following parturition. The point is that socially the reporter is still tied to the plutocratic failures rather than seeing them for the Midas’ Asses that they have been. Otherwise, he would have tracked down a source to give him a quote opining the departure of these Tyhoid Marios as A Good Thing. Didn’t Joe Scribe get the memo?

  30. fresnodan

    “Yves here. Everyone? Please. “Everyone” clearly is limited to those within the Beltway”
    No, replace the quote with “everyone who is an idiot” – there, fixed it.

  31. Anonymous

    @doc holiday,

    I believe the new ships are just more efficient, scrap the rest of the old, just about dead fuel eaters. A large part of the old fleet should have been recycled long ago, but with the boom they made money, now thats gone, its bye bye time for the oldest and bringing in the new flash model.

    Same as most of the airline industry is trying to do.


  32. Anonymous

    Why is Obama letting Geithner’s nomination proceed? Get some cojones Mr. President. Or his staff…or anyone in the Senate!

  33. Richard Smith

    rtah100 – I think gender confusion must be an NC signature. Even the troll gets a bit mixed up sometimes.

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