The Five Worst Bailouts 35 comments
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Has anything good come from $3 trillion worth of bailouts over the last 18 months? To be fair, probably. After Lehman Brothers failed in September 2008 and other Wall Street firms began to founder, urgent government intervention forestalled a deeper financial panic and perhaps even a depression. Instead of talking about a recovery today, we could be facing steep double-digit unemployment and many more months of misery.
But the Year of the Bailout also entailed some disturbing moments, and there may still be unhappy consequences. Here's my list of the worst bailouts:
AIG. Did the Federal Reserve know what it was getting into on Sept. 16, 2008? That's the day AIG would have collapsed if the Fed hadn't issued $85 billion in credit to the huge insurance company in exchange for a 79.9 percent ownership stake. The problem wasn't AIG's insurance units, which constitute most of the firm, but an internal hedge fund, AIG Financial Products, that was basically backing huge gambles with solid insurance assets. When the hedge fund bet wrong on billions in mortgage-backed securities, it imperiled the entire company.
The Fed's intervention may have prevented deep losses throughout the banking system, but it also committed the government to a tawdry, open-ended bailout that's easily the single-biggest corporate rescue in U.S. history. The March 2009 revelation that AIG paid $165 million in bonuses to executives at the same Financial Products division that sank the firm became the hottest flash point in the Year of the Bailout and the darkest stain on bailout architects like Treasury Secretary Tim Geithner and Federal Reserve Chairman Ben Bernanke. Barry Ritholtz, author of Bailout Nation, contends that the government could have taken over the Financial Products division and treated it as a failed bank, imposing losses on every firm that did business with the unit. "You're supposed to suffer pain and agony when you put money into a company that's as corrupt as that AIG hedge fund," Ritholtz says. The insurance units, he argues, could have been spun off as a new stand-alone company, freed from the albatross of Financial Products.
Bernanke has argued that since AIG wasn't a bank, the federal government lacked a legal and practical mechanism for taking over and dismantling the company. That's why the Obama administration wants Congress to grant the Fed new powers to take over "systemically significant" institutions like AIG when they fail. Meanwhile, the AIG bailout could wind on for another three or four years, and there's a good chance taxpayers will never get all their money back.
Citigroup (C). When other banks become insolvent, the Federal Deposit Insurance Corp. swoops in, fires management, zeroes out the stock, pays bondholders a portion of their investment, and either sells off the bank in pieces to other banks or runs it until a buyer is found. But not Citigroup. This lumbering giant would have collapsed on its own, but instead of a takeover, Citigroup got $25 billion in bailout funds in October 2008, then another $20 billion three months later. Plus taxpayers are on the hook for a big chunk of $301 billion in mortgage-backed securities and other dodgy assets on Citigroup's books. It could be years before Citigroup is healthy. CEO Vikram Pandit has said that the fazed bank will pay back the taxpayers in full. But there's no deadline, and Pandit himself could be long gone before taxpayers get a dime back.
Bank of America (BAC). If this North Carolina-based bank hadn't picked up ailing brokerage firm Merrill Lynch in September 2008, it might be out of the woods by now. But the Merrill acquisition saddled BofA with billions in losses and made CEO Ken Lewis a corporate pariah. One of the most tawdry episodes in the Year of the Bailout was the battle between Lewis, who reportedly wanted to renege on the Merrill acquisition when he learned that the brokerage would post a $28 billion loss for 2008, and Bernanke, who threatened Lewis with the disapprobation of the Fed if he backed out, which basically equates to death by bank examiner. Lewis caved. Then a couple months later he got to explain why Merrill executives earned $3.6 billion in bonuses while taxpayers were providing $45 billion to keep the firm afloat. Go ahead. Scream.
Goldman Sachs (GS). Wall Street's toniest firm got $10 billion in TARP money in October 2008, along with eight other big banks that got government checks. Eight months later, Goldman was the first big bank to pay back its bailout money, with interest. Hooray for them. But Goldman also got a stealth bailout that will never be returned to taxpayers, courtesy of AIG. When the feds propped up AIG last fall, that allowed Goldman to ease its way out of nearly $6 billion worth of deals with AIG that could have been worth pennies on the dollar in a normal bankruptcy case. And later, Goldman got almost $14 billion of bailout money that went to AIG's trading partners, effectively redeeming Goldman's trading bets with AIG at 100 percent of their face value.
Other banks got a 100 percent redemption out of AIG too, but Goldman got the most. And the fact that Henry Paulson, who was treasury secretary during the first four months of the meltdown, had come straight from a stint as CEO of Goldman Sachs raised the awful prospect that billions in taxpayer money was going to favored Wall Street fat cats. Nobody has ever offered a convincing explanation for the delicate treatment Goldman received, which fuels the worst kind of speculation. Please, say it ain't so.
Bear Stearns. Nobody knew how momentous it was at the time, but the $30 billion deal in March 2008 to keep Bear from completely imploding set the stage for every bailout that followed—and some other disasters as well. Bear was one of the biggest players in the market for mortgage-backed securities, and it fell first when that market began to crumble. The Fed brokered a deal in which JPMorgan bought most of the firm for $1.2 billion, a fraction of Bear's former value, with the Fed taking on $29 billion worth of toxic securities nobody else would touch. The bailout helped calm markets at the time—partly because it created the expectation that the government would rescue any other Wall Street firm that got into trouble.
That led Lehman Brothers to turn down financing offers from Warren Buffett and others when it needed cash, presumably because the firm felt it could hold out for a better deal—from the government, if necessary. When the feds let Lehman fail in September 2008, the chaos that followed partly stemmed from deep confusion over who deserved a bailout and who deserved a bullet. In retrospect, it's plausible that if the feds had let Bear Stearns fail outright, they could have done a better job of forcing Wall Street to work out its own problems—while saving taxpayers several hundred billion dollars. Of course, we'll never know. You only get one chance to get an epic bailout right.
Disclosure: no positions
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This article has 35 comments:
Why bail out BAC? After all, BAC should never have taken over those two cripples. They should have just turned to the government and the taxpayers and said, "Hey, they're not our problems"! Then, instead of "bailing out" BAC, thus giving it the time to; a) eventually absorb CF and ML, (after tens of billions of losses to BAC and its shareholders), b) raise new capital, (which dilutes existiing BAC shareholders), c) save thousands of CF and ML jobs, (which would have greatly impacted the nation's unemployment rate even further), d) help avoid a global financial calamity, (that clearly would have occurred if ML was allowed to go down in flames), and e) enable the Government to eventually generate a substantial profit, (from the LENDING of TARP funding at rates of 5% and 8% p.a. - - far above the Government's own COF - - as well as from the eventual sale of BAC warrants, and, let's not forget, an extra $500MM for an used, unsigned backup guarantee), the Government and the taxpayers could simply have handled the CF and ML collapses themselves!
See? No BAC bailout would have been necessary! BAC's initial TARP funding would have been only $15BN, (since they were to receive another $10BN, IF/WHEN they closed the ML deal), and they probably would have been able to pay that off by now - - unless the entire US financial system was in complete collapse, as the government struggled to deal with CW and ML on its own, and tried to convince the world that "everything's being handled".
Then, again, maybe the BAC "bailout" actually made a lot of sense, compared to the alternatives. Maybe the ability of this maligned "too big to fail" bank to help the Government survive the "perfect storm" that formed about a year ago. If the "bailout" of BAC now makes you scream, think of the screaming that you'd still be doing, if they weren't involved in the CF and ML debacles.
Disclosure: Former BAC employee (retired 2000) and current BAC shareholder.
> jack
On Sep 06 10:12 AM questioner5000 wrote:
> You're absolutely right about the BAC bailout. Bank of America, (which,
> itself, exited the "sub-prime market" in 2001), was bailed out to
> enable it to deal with its acquisitions of Countrywide Financial
> and Merrill Lynch. The bail out of BAC was, in essence, a bailout
> of the BAC shareholders, who've lost tens of billions in their BAC
> share price and dividends, in order to accomodate these "somewhat
> encouraged/enforced" purchases.
>
> Why bail out BAC? After all, BAC should never have taken over those
> two cripples. They should have just turned to the government and
> the taxpayers and said, "Hey, they're not our problems"! Then, instead
> of "bailing out" BAC, thus giving it the time to; a) eventually absorb
> CF and ML, (after tens of billions of losses to BAC and its shareholders),
> b) raise new capital, (which dilutes existiing BAC shareholders),
> c) save thousands of CF and ML jobs, (which would have greatly impacted
> the nation's unemployment rate even further), d) help avoid a global
> financial calamity, (that clearly would have occurred if ML was allowed
> to go down in flames), and e) enable the Government to eventually
> generate a substantial profit, (from the LENDING of TARP funding
> at rates of 5% and 8% p.a. - - far above the Government's own COF
> - - as well as from the eventual sale of BAC warrants, and, let's
> not forget, an extra $500MM for an used, unsigned backup guarantee),
> the Government and the taxpayers could simply have handled the CF
> and ML collapses themselves!
>
> See? No BAC bailout would have been necessary! BAC's initial TARP
> funding would have been only $15BN, (since they were to receive another
> $10BN, IF/WHEN they closed the ML deal), and they probably would
> have been able to pay that off by now - - unless the entire US financial
> system was in complete collapse, as the government struggled to deal
> with CW and ML on its own, and tried to convince the world that "everything's
> being handled".
>
> Then, again, maybe the BAC "bailout" actually made a lot of sense,
> compared to the alternatives. Maybe the ability of this maligned
> "too big to fail" bank to help the Government survive the "perfect
> storm" that formed about a year ago. If the "bailout" of BAC now
> makes you scream, think of the screaming that you'd still be doing,
> if they weren't involved in the CF and ML debacles.
>
> Disclosure: Former BAC employee (retired 2000) and current BAC shareholder.
The FDIC fund is now facing record draw downs, funds which are paid by the banks who didn't partake in the high risk activities. As more and more risky bank go under, the conservatives banks will be forced to pay more to cover the losses of those who took deposits to the casino. Does this seem right?
This means that bailouts are just beginning and will require bigger and bigger sums of taxpayer money as time goes on. The government will resort to borrowing more and more and eventually to printing money when treasury debt auctions start failing. The end result of this path is a currency collapse and probably total chaos as expected by gold bugs.
One other way to deal with this issue is to stop the bailouts and let the dominoes fall. Defaults and cross-defaults will cause many, many depository institutions (even very large ones) to collapse leading to extreme decrease in money supply as bank deposits are destroyed. Deposits of failed banks cannot be used to pay bills, make purchases and/or service debts.
Which will probably lead to even more defaults as unemployment increases and debtor's are unable to service their debts. This process will probably cause extreme deflation as businesses lower prices in a bid to survive. This will also lead to wage cuts, increased unemployment and a deflation spiral and much chaos. But probably less chaos than a currency collapse.
Is there a better way?
Here is my idea:
1) We essentially need an orderly bankruptcy and liquidation of the United States' financial system.
2) I suggest we create a government owned bank and transfer all deposits of the private commercial banking system to the new government owned bank. This "transfer" is really just new money creation. This new money will be digital cash (electronic version of physical paper cash). Very much like reserves at the FED.
3) Note that the plan will not create net new money since we will be destroying all deposits of the commercial banking system in the process.
4) All assets of the commercial banking system will be transferred to the government and auctioned off in an orderly manner over the next 10 years. The proceeds from the sale would go the United States treasury and not the commercial banks. The assumption here is that commercial banks deserve nothing since the entire industry would have been most likely destroyed any way. Even good banks would have been destroyed due to bank runs and defaults if the government had allowed the dominoes to fall. Of course bank shareholders, bank bond holders and counter parties of bank derivatives would not receive anything.
5) After the transfer FDIC protection will be removed for any private bank which wishes to remain in business or any new private depository institution or bank. From that point on the government should make it absolutely clear that there will be no more bailouts and no more conversions. This will discourage (but not completely eliminate) fractional reserve deposit banking and private money creation that results from pyramiding of government created money. This will also limit debasement of the currency that results from fractional reserve deposit banking. In fact, we can have "free banking" from that point on and not even have reserve requirements or capital requirements. All depositors who use private banks will be fully at-risk. The industry will have to set the interest rate high enough to attract depositors.
6) The new government bank will act as an electronic "piggy bank" only. All deposits will be 100% reserve and it will not make any loans. Loan making will be left to the private banking system (with no deposit insurance or a possibility of a future bailout). The new government owned bank exists only as a "safe" money storage and a payment clearing system so the public does not have to carry around physical paper cash to make purchases and pay bills.
6) Of course this plan is not without pain or cost. Cost of funds for banks and borrowers will probably rise as bank deposits are a source of very low cost money for the banks. Nothing is free. We are just exchanging higher cost of funds for removal of systemic failure risk. Economically we are recognizing that when money is loaned there is always credit risk.
7) We are just separating the payment and clearing transaction system which is absolutely necessary for day-to-day commerce (no credit risk) from the loan banking and investment system (has credit risk).
back the sorry 45 billion fron the Government. None of that money
helped in the stress test. If Bac wrote a check tomorrow it's Tier 1
would be 9% which is better than Wells today before they pay back their 25 billion. By the way BAC is already ahead $ 7 billion onthe aggressive loss assumptions in adverse stress test scenario ( which
by the way the assumption was the worst two year commercial
bank loan loss rate in history). BAC didn't need the money and you
Rick Newman as a taxpapyer are going to get a great return on your money.
By that measure if we were to take the Q1 2009 reported US GDP of $14,097.2 billion and divide Q1 2009 total US debt level of $60 Trillion by that GDP number we would get an astonishing record Debt to GDP ratio of 425%.
This is unprecedented and is showing that the US economy is being crushed by the debt that is growing in absolute terms thanks to all kinds of US Government and privately owned Federal Reserve’s liquidity injection and asset prop-up schemes while at the same time the GDP is shrinking. Hence the conclusion is logical that these efforts are not working while they are piling on unprecedented levels of debt outstanding that are not possibly going to be payed back, and therefore will be defaulted on by definition. This is going to blow up in a quite dramatic deflationary bust event soon enough. One can only surmise whether it will be some kind of a credit event such as default by major US coroporation(s) or fear driven bond price drop that may lead to jump in interest rate. But in any case this is going to be deflationary as debt bubble begins to crack at the seams in earnest. It is only a matter of time. By the way, in the week before Labour Day of 2009 gold prices spiked up to nearly $1000 which is indicative of credit stress as investors flee to safety of gold from even the safest U.S. Treasuries. Gold as we know is nobody’s liability and therefore rises during credit stress situation in the economy. Surely this spike was not caused by rising inflationary expectations as gold performs abysmally during periods of inflation as any one can verify it by looking at the gold price decline since 1980 through early 2000’s when economy was in its boom years.
As a side note, the above mentioned Federal Reserve spreadsheet pegs U.S. Federal debt only at $6.7214 Trillion which is obviously excluding the Treasury debt that various Agencies of the Federal Government are holding and therefore make it appear as if the Government ows it to itself. The $60 Trillion figure is therefore a conservative estimate.
Government intervention is playing with fire. A much hotter fire than we started out with. Rick Newman is right that we would have saved ourselves a lot of pain if we just let the brokerages eat crow. For one thing the survivors would have a lot of banking carcass to feed on which is better than asking the taxpayers to bleed themselves for the sake of the banking sector. If it wasn't for deficit spending and it came out of taxes both the Republicans and Democrats would be out of office today.
On Sep 06 10:12 AM questioner5000 wrote:
> You're absolutely right about the BAC bailout. Bank of America, (which,
> itself, exited the "sub-prime market" in 2001), was bailed out to
> enable it to deal with its acquisitions of Countrywide Financial
> and Merrill Lynch. The bail out of BAC was, in essence, a bailout
> of the BAC shareholders, who've lost tens of billions in their BAC
> share price and dividends, in order to accomodate these "somewhat
> encouraged/enforced" purchases.
>
> Why bail out BAC? After all, BAC should never have taken over those
> two cripples. They should have just turned to the government and
> the taxpayers and said, "Hey, they're not our problems"! Then, instead
> of "bailing out" BAC, thus giving it the time to; a) eventually absorb
> CF and ML, (after tens of billions of losses to BAC and its shareholders),
> b) raise new capital, (which dilutes existiing BAC shareholders),
> c) save thousands of CF and ML jobs, (which would have greatly impacted
> the nation's unemployment rate even further), d) help avoid a global
> financial calamity, (that clearly would have occurred if ML was allowed
> to go down in flames), and e) enable the Government to eventually
> generate a substantial profit, (from the LENDING of TARP funding
> at rates of 5% and 8% p.a. - - far above the Government's own COF
> - - as well as from the eventual sale of BAC warrants, and, let's
> not forget, an extra $500MM for an used, unsigned backup guarantee),
> the Government and the taxpayers could simply have handled the CF
> and ML collapses themselves!
>
> See? No BAC bailout would have been necessary! BAC's initial TARP
> funding would have been only $15BN, (since they were to receive another
> $10BN, IF/WHEN they closed the ML deal), and they probably would
> have been able to pay that off by now - - unless the entire US financial
> system was in complete collapse, as the government struggled to deal
> with CW and ML on its own, and tried to convince the world that "everything's
> being handled".
>
> Then, again, maybe the BAC "bailout" actually made a lot of sense,
> compared to the alternatives. Maybe the ability of this maligned
> "too big to fail" bank to help the Government survive the "perfect
> storm" that formed about a year ago. If the "bailout" of BAC now
> makes you scream, think of the screaming that you'd still be doing,
> if they weren't involved in the CF and ML debacles.
>
> Disclosure: Former BAC employee (retired 2000) and current BAC shareholder.
The real problem is that we have moved capital out of the market away from well-run banks to feed the zombie banks. As Buffett noted in his latest annual report, that all of the government intervention has raised the cost of funds for every day banks. That higher cost of funds will translate into more bank failures and fewer loans. The latest numbers I have seen on projected bank failures goes between 500 and 1000 banks.
On Sep 06 07:06 PM Bill L. wrote:
> Rewarding bad behavior coninutes still...
> The FDIC fund is now facing record draw downs, funds which are paid
> by the banks who didn't partake in the high risk activities. As more
> and more risky bank go under, the conservatives banks will be forced
> to pay more to cover the losses of those who took deposits to the
> casino. Does this seem right?
But I quarrel with the idea that GS or BAC were really bailouts, properly construed.
GS didn't need the capital, and had just demostrated the ability to raise private capital (from none other than Buffett) just a month before Paulson forced them to take TARP funds.
BAC was never at risk of failure, what the government really bailed them out from was the dilution shareholders would have absorbed had they been forced to raise capital in the markets.
I'd substitute Fannie and Freddie for GS and BAC on the list of most outrageous bailouts.
I am not sure why the financial products group should have become a ward of the state. It could be set-up as a stand alone company, and its claimants could have dissolved the company themselves. The government probably would have had to add some money to the pot, but at least we would have been spared the whole "GS wasn't bailed-out". It would have been very clear how much money was transferred from the taxpayer to the shareholders of GS.
On Sep 07 03:24 AM Sean J. Ryan wrote:
> Agreed on AIG; I have yet to hear any actual evidence supporting
> the thesis that its failure would have caused a cascade of failures.
> In asserting that it must be so, the bailout advocates sound like
> medieval ship captains who pointed to the edges of the map and said
> "There be dragons."
>
> But I quarrel with the idea that GS or BAC were really bailouts,
> properly construed.
>
> GS didn't need the capital, and had just demostrated the ability
> to raise private capital (from none other than Buffett) just a month
> before Paulson forced them to take TARP funds.
>
> BAC was never at risk of failure, what the government really bailed
> them out from was the dilution shareholders would have absorbed had
> they been forced to raise capital in the markets.
>
> I'd substitute Fannie and Freddie for GS and BAC on the list of most
> outrageous bailouts.
On Sep 06 10:09 PM is3089 wrote:
> It seems like everyone likes to trash Bank of America and Citigroup.
> I don't think either one was ever in any real danger of failing.
> The government offered them funds for the purpose of boosting the
> economy. As far as I can see the tarp monies have been well spent.
> Citi is one of the largest international financial institutions in
> the world and the stock is a tremendous bargain right now. Bank of
> America, which dropped to single digits is now in double digits and
> climbing. Citi, which is more globally diversified, will soon follow
> suit. For all the naysayers, it's time you focused your criticism
> elsewhere; these 2 banks are here to stay whether you like it or
> not.
On Sep 06 07:06 PM Bill L. wrote:
> Rewarding bad behavior coninutes still...
> The FDIC fund is now facing record draw downs, funds which are paid
> by the banks who didn't partake in the high risk activities. As more
> and more risky bank go under, the conservatives banks will be forced
> to pay more to cover the losses of those who took deposits to the
> casino. Does this seem right?
Welcome to the New Capitalism.
On Sep 06 03:34 PM RECESSIONPROOF wrote:
> bail outs dont work, you cant cure the dead
My real concern is what I call moral hazard. I define moral hazard as a state of mind that says there is really no risk because someone will provide an eleventh hour safety net. Therefore, the only risk with "risk" is that if you do not walk the tight rope your competitor will and you will find yourself eating his dust.
Bottom line, it may have been necessary to bail out some if not many financial institutions, but did the senior management learn anything or will they and our government commit similar errors in the future? Was there any criminal or civil liability on the part of those who reaped unjustified compensation in view of their poor decisions at the expense of investors and taxpayers?
Finally, I believe that Goldman Sachs did profit unfairly from the bailouts thanks to Paulson's involvement.
But the scale of liquidation is so much larger than the liquidation of the real estate investment trusts in the 1970s. Back then, REIT's that specialized in mortgages and project financing took on projects and customers that banks had turned down. The REIT's were funded by the banks and paid them interest, then turned around and lent money to the banks rejected applicants with a higher interest spread.
Projects that seemed shaky at conventional rates became more so at higher rates, especially since more and more competitors were piling into meeting the real estate needs of the boomer generation.
(It always bothered me that just when the baby boomers were generating huge pressures for capital formation domestically that the money center banks diversifed into foreign lending and subsequently took huge losses overseas - remember the last time that books were claiming Chase Manhatten and City bank were bankrupt and should have been liquidated in the '80s?).
The collapse of the real estate boom back in the '70s resulted in the failure of Continental Mortgage Investors and Diversified Mortgage Investors, as I recall. The CMI list of walking dead companies were slowly put into bankruptcy or reorganization over a 10-year period
I worked for one of the companies that owed something like $50 million to CMI. The company sputtered along for about 10 years, continuing to develop properties and sell land so that a flow of some money would continue to come in.to deveolop projects like The Woods on Red Cedar Lake that singer Pat Boone had started in Wisconsin but the overhang of debt was unsolveable and the company, which had been at the end of the line for liquidation, finally had its number come up.
A consortium of bankers behind CMI took over much of the assets of Terracor and the Terracor CEO caretaker took a few assets and, together with other assets, went on to take over Talcott and morph it into Leucadia.
But I wonder if Chase and Citi had been shut down in the 1980s would the banking industry have learned a lesson that would have prevented the current financial meltdown?
The CMI real estate fiasco was something like $850 million of stranded and lost capital. DMI was in the same ballpartk. In the ensuing decades the Fed was able to inflate the dollar and create truly stunning loss totals in the current financial criisis.
The current list of failed banks should have been put onto a quiet list for orderly liquidation over the next 10 years. And at the very least the huge too big to fail banks should each be broken into a hun dred pieces that do not exceed their executives' ability to manage and oversee.
Dinosaurs became too big for a changing environment to sustain them. Even the Soviet Union had to downsize.Why would essentially collectivist, socialized banks be any different?.
On Sep 06 07:13 PM Mansoor H. Khan wrote:
> The core problem of the United States' banking system (and maybe
> the world's banking system) is not liquidity but insolvency. The
> liabilities of the United States' banking system exceed the value
> of its assets. The issue is not only the toxic assets (toxic mortgage
> backed securities, toxic commercial real estate loans, sub-prime
> mortgages, alt-A loans, adjustable loans likely to go bust, increase
> in prime mortgage default rates, etc) but also off-balance sheet
> liabilities (such as expected huge unaccounted for future derivatives
> losses).
> This means that bailouts are just beginning and will require bigger
> and bigger sums of taxpayer money as time goes on. The government
> will resort to borrowing more and more and eventually to printing
> money when treasury debt auctions start failing. The end result of
> this path is a currency collapse and probably total chaos as expected
> by gold bugs.
> One other way to deal with this issue is to stop the bailouts and
> let the dominoes fall. Defaults and cross-defaults will cause many,
> many depository institutions (even very large ones) to collapse leading
> to extreme decrease in money supply as bank deposits are destroyed.
> Deposits of failed banks cannot be used to pay bills, make purchases
> and/or service debts.
> Which will probably lead to even more defaults as unemployment increases
> and debtor's are unable to service their debts. This process will
> probably cause extreme deflation as businesses lower prices in a
> bid to survive. This will also lead to wage cuts, increased unemployment
> and a deflation spiral and much chaos. But probably less chaos than
> a currency collapse.
> Is there a better way?
> Here is my idea:
> 1) We essentially need an orderly bankruptcy and liquidation of the
> United States' financial system.
> 2) I suggest we create a government owned bank and transfer all deposits
> of the private commercial banking system to the new government owned
> bank. This "transfer" is really just new money creation. This new
> money will be digital cash (electronic version of physical paper
> cash). Very much like reserves at the FED.
> 3) Note that the plan will not create net new money since we will
> be destroying all deposits of the commercial banking system in the
> process.
> 4) All assets of the commercial banking system will be transferred
> to the government and auctioned off in an orderly manner over the
> next 10 years. The proceeds from the sale would go the United States
> treasury and not the commercial banks. The assumption here is that
> commercial banks deserve nothing since the entire industry would
> have been most likely destroyed any way. Even good banks would have
> been destroyed due to bank runs and defaults if the government had
> allowed the dominoes to fall. Of course bank shareholders, bank bond
> holders and counter parties of bank derivatives would not receive
> anything.
> 5) After the transfer FDIC protection will be removed for any private
> bank which wishes to remain in business or any new private depository
> institution or bank. From that point on the government should make
> it absolutely clear that there will be no more bailouts and no more
> conversions. This will discourage (but not completely eliminate)
> fractional reserve deposit banking and private money creation that
> results from pyramiding of government created money. This will also
> limit debasement of the currency that results from fractional reserve
> deposit banking. In fact, we can have "free banking" from that point
> on and not even have reserve requirements or capital requirements.
> All depositors who use private banks will be fully at-risk. The industry
> will have to set the interest rate high enough to attract depositors.
>
> 6) The new government bank will act as an electronic "piggy bank"
> only. All deposits will be 100% reserve and it will not make any
> loans. Loan making will be left to the private banking system (with
> no deposit insurance or a possibility of a future bailout). The new
> government owned bank exists only as a "safe" money storage and a
> payment clearing system so the public does not have to carry around
> physical paper cash to make purchases and pay bills.
> 6) Of course this plan is not without pain or cost. Cost of funds
> for banks and borrowers will probably rise as bank deposits are a
> source of very low cost money for the banks. Nothing is free. We
> are just exchanging higher cost of funds for removal of systemic
> failure risk. Economically we are recognizing that when money is
> loaned there is always credit risk.
> 7) We are just separating the payment and clearing transaction system
> which is absolutely necessary for day-to-day commerce (no credit
> risk) from the loan banking and investment system (has credit risk).
On Sep 06 10:09 PM is3089 wrote:
> It seems like everyone likes to trash Bank of America and Citigroup.
> I don't think either one was ever in any real danger of failing.
> The government offered them funds for the purpose of boosting the
> economy. As far as I can see the tarp monies have been well spent.
> Citi is one of the largest international financial institutions in
> the world and the stock is a tremendous bargain right now. Bank of
> America, which dropped to single digits is now in double digits and
> climbing. Citi, which is more globally diversified, will soon follow
> suit. For all the naysayers, it's time you focused your criticism
> elsewhere; these 2 banks are here to stay whether you like it or
> not.
i dont where discussing bailouts will lead us anymore
basically, i think its a dead issue, (for good or worse) its over.
now.. just cross your fingers and pray and wait for the payback time.. if it ever comes.
The Chairman of the Board of Governors Bernanke holds that the bailouts prevented a depression, but do these bailouts have a limit, and do these bailouts set a precedence for the future?
I really doubt that the govt will be able to get its money back from Fannie, Freddie, GM and Chrysler, I mean I am having trouble to see how these company will be profitable again.
As opposed to the arrogent execs of 2008, who showed up fresh from their private jets, with not so much as a plan scribbled on a cocktail napkin, demanding money pretty much because they deserved it, in their eyes. There was no contrition, no shame. Just entitlement. I think this is greatly illustrative of the sea change in corporate culture which started during the Reagan years. That greed was good. This has been completely enabled by the average Americans, to our collective shame.
Part of the auto industry bailout included some rather serious penalties and mandatory changes in the way things work at the companies-as there should be! I think that money will come back eventually. Looking at the details, Obama actually managed it well.
I'm not so sure about the banks. Why exactly was GS given such kid glove treatment? Why aren't the depression era banking regulations being put back in force? Why were these execs allowed bonuses at all?! Much less, not summarily fired? Dodd got a pretty sweet two percent mortgage on his multi million dollar home, for starters. Why is he still in office? And, even though Obama inherited a shit sandwich, why didn't he use that management prowess and government power to smack some errant corporations back in line like he should have? Heads should have rolled, instead they all got new Mercedes Benzes.
We absolutely should be marching on Washington, and on every big bank building. We should be dragging these guys out of their cushy offices, and there should be tar and feathers involved. I wouldn't advocate actually harming anyone, but I think it would be a good way to knock some folks down a peg. It won't happen..
Did Congress borrow $85 Billion from the private owners of the Federal Reserve Bank or did the private owners of the Federal Reserve Bank go into their own pockets to give $85 Billion to buy 79.9% of AIG???
These are all good questions that need to be answered by somebody who knows what's going on!
We have a very influential Senator, but...because of Lobbyist's we have battalion chiefs making over $500,000.00 a year and EMT supervisors making $250,000.00! The stupidity of our politicians never stops! My nieces are in overcrowded schools w/ under paid teachers! Our city councils are corrupt (from inside land deals to liquor licensing)!
VOTER REVOLUTION!!!
I am VOTING EVERY INCUMBENT OUT OF OFFICE! On both State and Fed. levels...IT MUST START SOMEWHERE!
Follow or Watch as our BS IGNORANT "politicians" buckle again to reward, and allow the same insolvent banks to keep making markets in derivatives (a very profitable part of their 'banking').
And what about allowing shareholders the chance of cutting pay for our Multi-million dollar 'executives'...before I get any replys...read a book by Taleb "Fooled By Randomness" (just so you understand how stupid these pay packages are)!
I'm SO PISSED I can hardly type............
On Sep 07 03:16 PM jayminho wrote:
> honestly ?
> i dont where discussing bailouts will lead us anymore
> basically, i think its a dead issue, (for good or worse) its over.
>
>
> now.. just cross your fingers and pray and wait for the payback time..
> if it ever comes.