Geithner's Financial Reform Is Doomed to Fail

Treasury Secretary Timothy Geithner has unveiled his concept for preventing the repeat of the financial system failure which has occurred. It travels the same road of increased and more effective financial system surveillance which has occurred after each failure in the past. This surveillance approach has not worked in the past – and it will not work in the future to prevent the next financial system failure.

When you design a system, you try to make it idiot proof. It always fails at the worst time at the weakest link. The problem, Mr. Geithner, is the system. The system must be designed not to fail in the first place.

You cannot make a rule that says – “You cannot fail”. Nor can you expect audits to uncover deficiencies or wrongdoing. The brightest minds do not become auditors.

The government and Fed officials are fighting fires to keep our banking system intact. Why are we trying to save something that goes into failure mode at times of major economic stress?

One problem with banking is that it does not meet the test of capitalism. Either your money is at risk or it is not at risk. Banks are stuck halfway in between. We are trying to pretend banks are capitalist institutions.

There is a big difference between depositing money (parking money) which you expect back and loaning money. Loaning money is risky and capitalistic. Being given money carries no risk. In most countries in the world, the government is involved in the banking system. In America, the government’s role is to regulate the system and provide guarantees. In other countries, they are a player in the system competing against traditional banks.

The current system which was legislated in 1913 is not working well. Major interventions by government using taxpayers' money occurred during the Great Depression, the Savings & Loan Crisis of the ‘80’s and ‘90’s, and now the Great Recession. Our crisis today added a “too big to fail” ingredient into the pot.

In a capitalistic society – too big to fail is unacceptable. Nothing in Mr. Geithner’s plan addresses this issue because he does not know how to solve it.

A proposed new banking model divides the current banking system into three elements:

1. Banking (guaranteed deposits, home and student loans)
2. Credit Banking (Consumer Loans and business loans)
3. Market Makers (Enterprise Financing and debt purchasing by entities such as BlackRock or PIMCO)

The system revolves around the Credit Banks (pretty much the existing brick and mortar banking system) who make loans and package them for resale to pools of investors (Market Makers). Credit Banks then become only storefronts that turn deposits over to the government (interest rates paid per current treasury rates) and sell loans the Credit Bank has issued to investors (Market Makers).

The deposits to the Government Bank can be commingled with the government’s General Fund (like social security) and used to offset Treasury funding operations (reduce need for Treasury auctions). As there is no need for guarantees anymore – we can eliminate FDIC making the system more efficient. Deposits for the Government Bank can be made at any Credit Bank or Post Office (government would pay a handling fee on money deposited or withdrawn).

Credit Banks would have a relatively small asset base as their function becomes retailers of financial products. Home loans and student loans would be issued against government guidelines, and sold to the government. Other loans would be packaged in a way they would be of value to the Market Makers – and sold off to them.

The Market Makers would market financial packages of loans for investors via mutual funds, ETFs, bonds, or any other investment vehicle. In addition, the Market Makers can put together private pools of money for larger endeavors such as corporate financing. They would specifically be tasked with investing in innovative new companies or technologies which offer employment.

The government (through the Fed) can increase or decrease liquidity in the system by becoming an investor with the Market Makers. To soak up liquidity, they can sell home loans to the Market Makers.

Regulatory Features:

1. The Market Makers must use some of their own funds in each product. There can be no leverage (hedging) as this is part of the banking system. Leveraged products are subject to failure during economic events and do not belong in a banking system designed to withstand economic maelstroms.
2. There is a limit on the fees the Market Makers charge for managing these investments (my opinion is not more than 1%).
3. There will be no Federal Auditing program per se. Monthly, an audited balance sheet will be submitted to the SEC. In the event an irregularity is uncovered, both the auditor and all individuals involved will be subject to criminal prosecution. It will be assumed that the entire chain of the command is guilty of wrongdoing unless reasonable management oversight could not have discovered the wrongdoing. (Management in large companies purposely insulates themselves from day to day knowledge to avoid implicating themselves in wrongdoing.)
4. There can be no common ownership between the Market Makers and the Credit Banks. Transactions between the Credit Banks require government approval. Transactions between Market Makers require government approval.
5. No Credit Bank or Market Maker can grow larger than 1% of the market size.
6. The Credit Banks must repurchase all loans sold where due diligence was not exercised in qualifying buyers or assets being purchased.
7. The Government Bank will provide criteria for lending standards for all loans it purchases. The Market Maker can also provide criteria for lending standards – or can rely on stated standards the Credit Bank used (as the Credit Bank is essentially warranting the standards for the loans as they will be required to repurchase if they do not meet those standards). All bank records (including correspondence) will be on-line, be to an established government standard, and available for government review 24/7.
8. Quarterly, government regulatory authorities will produce a Banking System Risk Report quantifying the risks and trends of the banking system.
9. No lobbying or contact between the Credit Banks or Market Makers and Congress unless it is in an open Congressional hearing. If a congressman receives campaign contributions from any bank, corporate member of any bank, or board member of any bank – the congressman is considered to have a conflict of interest and shall excuse himself from voting.

This model completely changes the relative importance of the banking sector, and removes the systemic risk of a banking failure during economic contraction. In the event of a failure of a Credit Bank, only the employees and owners would feel the pain. The Market Makers are creating “backed” securities (not derivatives) – and in a case of a Market Maker bankruptcy, the role of the market maker would simply be transferred to another company. Investors in Market Maker products would only take a bath if what they purchased turned into crap – this is the risk of all investments. Mark-to-Market debate disappears.

We can have a discussion on the virtues of the phantom money created by the current fractional reserve system. In this new system, the government would have to create real money. But this argument is academic at this point as the massive printing operation by the Fed has proven printing massive amounts of money has little effect on the dollar.

We are spending a lot of money to save a defective banking concept. Is it worth it?

Disclosures: None

Comments

[Chezfrederick:]

Excellent article... I agree wholeheartedly, that the first issue that needs to be resolved is to come up with a regulatory framework that limits/eliminates the "too big to fail" scenarios. Oversight of such large institutions with complex instuments is quasi impossible. And the last thing I would like to see is a bloated army of government agency "experts" (accountants, lawyers, etc...) growing exponentially along with growing pay cheques to match the expertize required. There are limits to the amount of tax subsidies we can afford if we are to thrive.

A cheaper solution is not to allow any one organization to become too big to fail

Mar 27 07:06 AM

[capitalisth...:]

Here's the solution. No FDIC insurance on interest bearing accounts. This will make the depositor perform the necessary due diligence to weed out the bad actors. FDIC insurance will be allowed on checking accounts.

If you want to give the bank a loan so that it can make additional loans then do at your own risk.

Mar 27 07:27 AM

[Lawrence York:]

Bravo and well stated! Banks, with the Fed and Treasury as their salesforce, want to keep the competitive advantage of placing public money at risk to make profits. It is incredulous that Congress can't or won't see this point. We either need to be a capitalistic system or not and the promise of guarantees by the taxpayer has no role.

Mar 27 08:45 AM

[pacman1947:]

Steven,
Your article provides food for thought, and contains worthy ideas. I also like the two ideas many have raised to begin correcting a deeply flawed system:
1) Bring back Glass-Steagall to separate insurance, banking, and brokerage; and,
2) Enforce the anti-trust laws to keep uber companies (so big that they incur systemic risk) from forming.
The first would clarify who is in charge of regulation and what regulations apply. The second would prevent the systemic failures and eliminate the greed opportunities (or at least minimize them) in the future.

Geithner's approach seems overly complicated and is fraught with what I call experimental exuberance. Too much is untried and subject to failure at a colossal scale. His actions to date are characteristically doomed to bankruptcy of the department he runs. We simply cannot afford his mistakes any longer.

Mar 27 08:49 AM

[Jan Baker:]

There is a 'social justice' political party called the American Revolutionary Party (they have a website if you google it) that calls for a kind of taxation platform that penalizes businesses that grow over a certain size. I think the schedule was designed so that the hit would be gentle enough to promote sell-offs over generations, not abruptly. I believe they were speaking of all businesses, not just banks, but I offer the idea here as a way to keep banks from getting so big that they 'cannot fail.' I think this is the heart of the problem over-all.

It is a principle of distributism that ownership (as opposed to income per se) needs to be widely dispersed for healthy capitalism. 'Back in the day' they were speaking of land ownership and had programs to literally move the poor out of cities and onto small farms, but I keep musing that it could apply to anything, and waiting for someone to apply it to more intangible capital.


On Mar 27 07:06 AM Chezfrederick wrote:


>
> A cheaper solution is not to allow any one organization to become
> too big to fail

Mar 27 08:55 AM

[Jan Baker:]

Why aren't all banks cooperative, like my own? (Riverset Credit Union in Pittsburgh, formerly the Pittsburgh Teachers Credit Union--it is small compared to the one in Hillsborough County, Florida.) Does anyone know how a cooperative bank is structured, compared to the plan here? I know they didn't invest in any of the bad mortgage investments--so they told me when I moved my retirement money out of the market and into their cd's.

Steven's scheme here is such a powerful analysis of the problem. He keeps trying to get down to the structure of the problem.

Mar 27 08:59 AM

[morph366:]

I would take issue with one of your concluding remarks..."the massive printing operation by the Fed has proven printing massive amounts of money has little effect on the dollar."
It seems premature to be nonchalant about the consequences of QE for the dollar. Already there are serious discussions going on about a new global reserve currency and who knows what kind of inflationary genie has been let out of the bottle - we have some time to wait before that becomes clear.

Mar 27 09:18 AM

[I am not a ...:]

...And yet, here in OZ we are told by Kevin Rudd,the prime minister of Australia that mr Geithner is the greatest fiscal genius to have ever walked on water and that mr Rudd has the full approval of President Obama.
But isn't Geithner giving the US tax payer( and eventually the OZ citizens) 90% of the risk?.
it all appears to be a a non recourse loan that ,if it goes bad will be bourne by the US tax payer .
Here in OZ we are going to be loaded with a 78 billion dollar loan from the Chinese .A loan Australia really shouldn't need to borrow,and this with the approval of Geithner and Obama ,or so our press tells us. perhaps the loan isn't the only Chinese thing we are getting.

Mar 27 09:29 AM

[Steve in Gr...:]

Thanks, Mr. Hansen, for the helpful and clear write-up, but I'm not sure it gets to the root of the problem which is (as morph alludes to) the ability of governments or quasi-governmental entities (like the Fed) to debase currencies. The current crisis is the result of the Greenspan Fed's USD debasement in response to the dot.com bubble. The next crisis will result from the Bernanke Fed's much more massive debasement.

As long as governments have this power, global economies will move from crisis to crisis.

Mar 27 09:30 AM

[chinooking:]

run and hide,,the king doesn't like to hear he has no clothes

Mar 27 09:30 AM

[Allan Frain:]

Agreed. And these recent Auction Failures are a swift reply from the market. Sovereign debt (aka fiat money) at negative yield won't hold sway for long.


On Mar 27 09:18 AM morph366 wrote:

> I would take issue with one of your concluding remarks..."the massive
> printing operation by the Fed has proven printing massive amounts
> of money has little effect on the dollar."
> It seems premature to be nonchalant about the consequences of QE
> for the dollar. Already there are serious discussions going on about
> a new global reserve currency and who knows what kind of inflationary
> genie has been let out of the bottle - we have some time to wait
> before that becomes clear.

Mar 27 09:36 AM

[Repsonsible...:]

Well Today Obama Meets with Big Bankers to BEG for there forgiveness for that bill Congess passsed trying to STOP those crooks from ripping off MORE of Your Tax money . He'll assure them the Bills dead and his boy Timmy will make sure that they can UNLOAD ALL of there Toxic Loans on the American Tax Payer for WAY more then there worth and then they'll really be able to give out HUGE Bonuses next year !
He'll also promise NOT to Do Or say anything that they might take offense at !
Is this the Change He promised , when he said he was going after the bad actors on WS ?? No this just another slick politcian , once again lying to The People to get elected then doing what evers going to make him Richer when He leaves office ! So there it is all the other stuff is just the usual smoke and mirrows , this guy is out for Himself period . He could care less about the American People ,, Kinda like when Clinton said "I feel Your Pain" while he was really feeling someting else ;) So Its Washington and WS ,, Vs You who do You think will be better off 4 years from now ???

Mar 27 09:41 AM

[PROXIMO:]

Agreed---Geithner's in over his head.

Mar 27 10:01 AM

[User 382113:]

Gentlrmen,
Take a lesson from the Canadian banking institutions.To further understand the monetary system-refer to zeitgeistmovie.com.
You can down load addendum free.

Mar 27 10:03 AM

[mrresponsible:]

It is refreshing to see some ideas come forward. It is the American "way"! Keep it up and take it forward to the administration and your congresspersons as they seem to be open to it! The comments to your article are also worthy.

Mar 27 10:20 AM

[ussmls7:]

Geithner"s " Own Ponzi Scheme" to steal as much of the taxpayers money as possible before taxpayers deside they will no longer "work",because all they earn is going to the goverment! Why work or produce something if it disapears into another goverment black hole? To think this man in charge of the IRS,is like putting Barney Franks in charge of commanding a Sinking Ship!@ Barney would take the only life boat,while all the crew is left to the sharks!

Mar 27 11:02 AM

[Econ 101:]

More regulation? For who? The SEC doesnt do its job and ignores enforcing the rules anyway, so why enact more laws? To better ty up honest citizens and free the big guys to better take our money, thts why!

The way it works is that We The People are bent over a table with our pants pulled down. The guy behind us is crying about how badly we are being raped and promising to find the culpret, surprized OJ isnt in charge of the investigation.

I think that guy is congress

Mar 27 11:02 AM

[Jack Walker:]

Steven,

This is a well thought out article. Now what is the plan to get it communicated to those who could start a meaningful discussion and perhaps get it implemented?

Jack

Mar 27 11:50 AM

[John Lounsbury:]

Steve - - -

Thanks for putting these "outside-the-box" ideas out here for discussion. We need more original thinking on the question of financial system structure.

Mar 27 11:52 AM

[Fighting Yoda:]

The system is completely defective and hence it broke. All current policy is centered on propping up a failed system. It is costing too much and will not work. We still have the same system – the exact same management – CEOs, boards, etc; with the very same perverse incentive structures – golden parachutes, short term profits, etc.

Since the banks were too big to fail so the solution has been lest make them bigger by all these shotgun mergers. Most of these institutions are insolvent and simply too big to succeed (and save). Banks etc have lost touch with reality – their customers. All their business models are centered on quick buck – derivatives etc, and not on giving credit to business for economic growth. GE, with GE capital, is the classic example – 50-60% of its profits come from financing. Now finally Immelt realizes that is the wrong model and they have o revert back to ‘producing things’. Obama is saying the same thing.

G-20 next week all these issues will be front and center, China, Brazil, Russia are making clear they want drastic change, a system led by west and America is unacceptable. Lula (Brazilian president) yesterday said: “Blue eyed white bankers have caused all these problems, they claimed to know everything; facts now show they know nothing”. The only thing western bankers have done last two decades is – create one bubble after another and collect hefty bonuses, with the help of one and the only Greenspan, and now his disciple Bernanke.

Mar 27 12:39 PM

[schazd:]

Well said. Let's not forget Geithner is carrying out policy established by others. I'm afraid they haven't dumped enough gas on the fire to put it out. The Chinese and others have already hinted that they don't like our inflationary policies on the dollar, and deficit spending, and that purchase of treasury bills, notes, and bonds are not automatic. Capital will flow to what works.
Capital will flow to the charts that represent asset classes that move from lower left to upper right. The US Govt bond market is Bubbling up and will burst. The latest round of money printing, tagged to support the US Govt Bond market hasnt moved the needle very much. It's more of a signal to others to sell what they hold, we're here to buy it from you. That could set off an avalanche of selling that will force rates higher and tank the bond market.

Mar 27 01:01 PM

[Kinabalu:]

<<One problem with banking is that it does not meet the test of capitalism. Either your money is at risk or it is not at risk. Banks are stuck halfway in between. We are trying to pretend banks are capitalist institutions.>>


This article is so ridiculous its hard to know where to start my criticism. The concept that a bank is not a capitalist institution is absurd. The author ignores the shadow banking phenomenon of the last 2 decades. The concept that Geithner doesn't know how to solve "Too Big to Fail" is simplistic in the extreme. The fact that the authors sycophants are lined up to praise this dreck is a definitive exhibition of why it is possible for someone like Madoff to "manage" billions of dollars. Are there no longer any critical readers on this site?

The author, and many of the above commenters, need a basic understanding of the natural evolution of an economic cycle. I would suggest they start with Hyman Minsky's Financial Instability Hypothesis recapped by Paul McCulley here:

rolfe.winkler.googlepa...

Mar 27 01:40 PM

[monday1929:]

Beware: many banks state they did not make "sub-prime" loans. That does NOT mean they did not make Alt A "liar loans", various other bad loans and bad Commercial loans which are soon to implode. Ask specific questions, and get the answers in writing from an Officer of the bank. If they refuse to do so, you should wonder why. Check your banks safety rating- not foolproof, but better than nothing.


On Mar 27 08:59 AM Jan Baker wrote:

> Why aren't all banks cooperative, like my own? (Riverset Credit Union
> in Pittsburgh, formerly the Pittsburgh Teachers Credit Union--it
> is small compared to the one in Hillsborough County, Florida.) Does
> anyone know how a cooperative bank is structured, compared to the
> plan here? I know they didn't invest in any of the bad mortgage investments--so
> they told me when I moved my retirement money out of the market and
> into their cd's.
>
> Steven's scheme here is such a powerful analysis of the problem.
> He keeps trying to get down to the structure of the problem.

Mar 27 02:01 PM

[monday1929:]

Is that the Paul MCCulley who works with Billy Gross who got illegal inside information from Hanky Paulson that it was safe to plunge hundreds of Billions into Fannie and Freddie. That's hundreds of billions of pensioners money either risked in a criminally negligent manner or not risked at all do to inside information.
Is that wise Mr. Geithner the same Timmy who was criminally negligent in maintaining the soundness of the NY money Center Banks and got a nice promotion for failing so well? The one who can't figure out Turbo Tax?
If you call the rescue of the Banks "Capitalism", you must be Mr. Geithner himself. Hello, Timmy.


On Mar 27 01:40 PM Kinabalu wrote:

> <<One problem with banking is that it does not meet the test of capitalism.
> Either your money is at risk or it is not at risk. Banks are stuck
> halfway in between. We are trying to pretend banks are capitalist
> institutions.>>
>
>
> This article is so ridiculous its hard to know where to start my
> criticism. The concept that a bank is not a capitalist institution
> is absurd. The author ignores the shadow banking phenomenon of the
> last 2 decades. The concept that Geithner doesn't know how to solve
> "Too Big to Fail" is simplistic in the extreme. The fact that the
> authors sycophants are lined up to praise this dreck is a definitive
> exhibition of why it is possible for someone like Madoff to "manage"
> billions of dollars. Are there no longer any critical readers on
> this site?
>
> The author, and many of the above commenters, need a basic understanding
> of the natural evolution of an economic cycle. I would suggest they
> start with Hyman Minsky's Financial Instability Hypothesis recapped
> by Paul McCulley here:
>
> rolfe.winkler.googlepa...
>
>

Mar 27 02:19 PM

[wavelength:]

User369125, I am a fellow Aussie who now resides in the US. I have noticed other of your comments on the Oz housing bubble, climate change swindle and general perfidy of the Rudd government. What you say here is, as usual, 100% spot on. In risk allocation terms it makes no sense as risk is being imposed on taxpayers who can lose but not not win, instead of being bourne by parties who embrace it voluntarily on the chance of an upside. Are you old enough to remember a Bulletin cover story from the 1970s entitled "Why is this Man Laughing"? It featured a giggling Gough Whitlam during Australia's then economic implosion and has been haunting me since Obama's mirthful appearance on late night tv last week.

Mar 27 02:33 PM

[PainfullyAware:]

Steven - Thanks for being a voice of reason and rational.

Mar 27 02:43 PM

[Walter Finch:]

Most of the concerns here mirror my own, guys. Like you, I see this whole rcovery plan for what it is: Geittner, Obama (who I voted for), and others trying to pawn off all the banks' greed-driven (and politician sponsored) losses on the taxpayers. They keep saying "purge toxic assets" like nobody's going to have to bite the bullet...which is a total crock.

But, the plans and the griping do very little good here. Write your elected representatives. Your letters may not (probably won't) get read, but at least you'll have done something to work towards the solution.

FYI - Yes, the banks are capitalist institutions...until apparently, there are massive losses to be had. The minute we started to this "too big to fail" stuff with the federal government promising unending support to institutions that should have perished months ago and taking majority ownership, we threw Capitalism right out the window. Recommend whatever book you'd like but don't kid yourself.

Mar 27 02:47 PM

[Francisco M...:]

Too big to fail is not an option! If an institution gets to the point where bankruptcy is not an option because it may present a risk to our financial system then our government has not done their job. Free markets are the only solution to this problem.

Mar 27 05:30 PM

[EEB:]

I completely reject this sort of libertarian nonsense. This is analogous to suggesting that we get rid of elevator inspectors. The riders of elevators can weed out the bad actors themselves. For instance, if you ride an elevater and are killed when it fails, then the next time you need an elevator you will know not to take that one.


On Mar 27 07:27 AM capitalisthero.com wrote:

> Here's the solution. No FDIC insurance on interest bearing accounts.
> This will make the depositor perform the necessary due diligence
> to weed out the bad actors. FDIC insurance will be allowed on checking
> accounts.
>
> If you want to give the bank a loan so that it can make additional
> loans then do at your own risk.

Mar 27 11:12 PM

[Ned S:]

The more I read about all of this GFC related CRUD (Credt Related Ultra Deceit perhaps?) the more I become convinced that any system that is fundamentally based on targeting called "healthy" inflation of 2 to 3% pa to specifically encourages its citizens to take on debt and pay through the nose for the privledge is fundamentally anti its citizens long term.
I want a stable monetary system please. No inflation. No deflation.
I want a monetary system that guarentees the dollar I earned last year that would buy a loaf of bread then will also buy a loaf of bread next year. And in 50 years time! No more. But no less.
And if I manage to get togeter a couple of hundred thousand of those dollars and use them to buy a house then I want to know that house will still be worth 200,000 loaves of bread in 10 years time. And even in 50 years time when I die and leave it to my grandkids. No more and no less!
I don't want any freebies. But I also don't want a system that allows a pack of money value destroying free loaders to sponge freebies off me either.
What "I" want is of absolutely no significance of course. But I just felt a very strong desire to mention it.

Mar 27 11:25 PM

[Ned S:]

I really really want a stable world monetary system. And the more I learn; That would seem to make me an anarchist - From world goverments' perspectives?
Fine - I'm a Capital "A" Anarchist - As were a few blokes who tipped some tea leaves into the Boston harbour a few centuries back. Good'o - I'll wear the Anarchist handle MORE than happily.

Mar 27 11:50 PM

[E Nuff Sed:]

A purely capitalistic system is as non-viable as a purely socialistic system. The truth is somewhere in the middle.
We also need to stop pretending that banking is a purely capitalistic enterprise. It is public utility which needs to be closely regulated and controlled.

Mar 28 12:38 AM

[holmesnmanny:]

Here's my plan and it's relatively straight forward.

You don't give any money to the banks. If they banks fail, that's on them. You make them work out their problems. This competition will drive their end of the market.

You give help directly to the homeowners who are affecting everything either directly or indirectly by their continuous foreclosures. You do this, not by "bailing" them out, which screws over the hardworking people that didn't get themselves into this mess. Instead you(the government) take over their risky and costly loan with interest rates of 8 percent, and reduce it to something they can afford and move the money they would otherwise have paid onto the back end of the loan by extending it for 10 years or however much more it takes. By doing this, and by doing it fast, you prevent foreclosures in the immediate future, you don't screw over the hardworking people that didn't get themselves into this mess, and by the workers making payments that are affordable the money will work its way back up to the banks and the securities will gain in value. Of course they won't gain as much as they would if the homeowners were making their 8 percent house payments, but at least the securities will gain some value.

By giving money directly to the banks, they will take that money and do whatever in the hell they want to do with it, as you see happening now. That money will fail to get to the homeowners, instead making into pockets or greedy individuals, imo.

Mar 28 05:13 AM

[Ned S:]

The greatest investor in our lifetimes (Mr Buffet) says cash is a BAD long term investment. (I concur.) But what frustrates the hell out of me is that we all tolerate a system in which cash IS a bad long term investment. Therein lies the MOST rotteness and corruption in the system - Let "Anarchy" reign I say - Which equates to NO inflation and NO deflation! Stable money!!!
Oppose the evil long term money value degrading freeloaders ... Pssst: They are called government. Bush government or Obama government - Equally TOTALLY corrupt in this regard. (The ONLY difference is how they might choose to distribute the few pitiful remaining dregs amongst the populace for their most political gain depending on the broader economy's health while they are in office.) Hell - The economy is good ... GOP reign. Hell ... The economy is bad Democrats reign. The political party in power is a function of the economy rather than vice versa. STABLE MONEY PLEASE!

Mar 28 09:10 AM

[dcb:]

Mr. York,
Congress and the white house both see this. They do not see a problem with this up to and until the point that tyey won't get elected. Even if they don't get elected they are given very nice jobs from the industry the protected. Therefore congress and the white house are not incentivized to act in the public's best interest. They are further incentivized not to act in the public's best interest by the lobby money they receive. Think about this for a while. Do you really think they don't we what is going on. I think it is amazingly simple and clear. They do see, it is exactly what they want. Because like the banks there is a moral hazard with congress. they pass legislation and do not bear the cost of the legislation. The tax payer does.


On Mar 27 08:45 AM Lawrence York wrote:

> Bravo and well stated! Banks, with the Fed and Treasury as their
> salesforce, want to keep the competitive advantage of placing public
> money at risk to make profits. It is incredulous that Congress can't
> or won't see this point. We either need to be a capitalistic system
> or not and the promise of guarantees by the taxpayer has no role.

Mar 28 10:04 AM

[schlumpf:]

poor banks, when they lend, its wrong.
when they dont lent its also wrong.
so lets this missend sermonizer do the job.

Mar 28 11:01 AM

[Robert Mcdo...:]

When the impaired RMBS and structured credit derivatives ($1.4tn current watchlist at top 6 US banks) are write-down discounted by the CDS rates plus haircuts, the yields on these assets rise and are looking good (many of them at 17%). Then when the credit enhancements and standby liquidity is factored in plus the amortization going on that rapidly will improve their quality, plus now too the FDIC, FM&FM, insurance guarantees and loan-contracts restructuring, plus Fed's liquidity window and Geithner Plan deals for $500bn to be auctioned off - then even with further credit defaults in the pipeline the upside opportunity outweighs the downside risk considerably, enough to make this relatively secure vulture territory.
But, I think these risk/reward oportunities should be fed not to 'market-makers' but to the underlying distressed mortgage borrowers by severely cutting their mortgage debt by whatver the RMBS are auction-discounted for. That way the circulation in your graphics above include Main Street.
Hedge funds should get real and go for conventional vulture fund plays and/or look again at the risk/reward of financing big banks' 'funding gaps' by buying MT Notes and Covered Bonds at good interbank rates when the Fed Rate is so low and inflation is heading down. The banks are making enough internal capital despite continuing loss provisions to be sound payers and to guarantee respectable signle-digit returns.
The macro-funds and others are expecting to make 17-25% returns from the Geithner Plan? And that again will make the banks jealous they're not on the buy side, only the sell-side. They'd loan-finance som good margin private deals for asset swap repos in support of medium term financing for their 'funding gaps'.
But while banks and hedge funds may think long term about relationship building for when recovery returns, the banks should be thinking more about how to repair their relationship with Main Street and make sure their distressed customers get some of the payola of these TARP/TALF/Geithner Plan 'save the bank' dealings.

Mar 28 04:30 PM

[Gary Gallo:]

Who lends money in a recession anyways.

Mar 28 05:41 PM

[aarc:]

How about a capital deposit guaranteed and insured by the FDIC with no interest and with a minimum holding period of 5 to 10 years?

Anybody can participate - including those who would like to risk their "extra" cash but without the capacity nor the capability to analyze the whole economy and the stock markets and have no means in order to participate in the potential upside rewards.

An FDIC sponsored Economic Re-investment Bank.

FDIC can use those deposits to bail-out troubled companies not only the financials. No interest, but if and when those trouble companies recover, they will allocate a certain portion of their net profit before tax proportional to FDIC fund vis-a-vis company capital. These profit will in turn be returned to the FDIC Re-investment Fund with each individual depositor or rather "investor" reaping the profits of their risk taking endeavor. The FDIC Fund should also receive dividends as provided by companies to their common shareholders/

Likewise, depositors of the FDIC Economic Re-investment Bank will not be subject to capital gains tax nor dividend tax but a simple 10% surcharge which may be considered as government service fee for the depositors of the Fund.

It is not without risk even with FDIC guarantee and insurance because the whole project might fail and FDIC may even go bankcrupt as a result of this endeavor. We know that the whole economy, capitalism, the government, and even democracy itself are at risk in this unprecedented economic crisis that may or may not result in civil crisis and/or political crisis the US has not experienced in the past.

BUT, without government guarantee, we can be assured that investors, specially the small to medium sized investors are not going to risk their limited capital in bailing out distressed companies specially those in the brink of bankcrupcy.

Likewise, with the government so intent on bailing out distressed companies with reluctant tax payers; the potential for civilian rebellion against the government and it's actions will start escalating as the Fed and the gov't pursues this desperate course of action with more vigor in order to prevent unmanageable economic dislocation.



On Mar 27 07:27 AM capitalisthero.com wrote:

> Here's the solution. No FDIC insurance on interest bearing accounts.
> This will make the depositor perform the necessary due diligence
> to weed out the bad actors. FDIC insurance will be allowed on checking
> accounts.
>
> If you want to give the bank a loan so that it can make additional
> loans then do at your own risk.

Mar 30 01:34 AM