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If you've ever doubted whether Bank of America (BAC) is in serious trouble, this development...

If you've ever doubted whether Bank of America (BAC) is in serious trouble, this development should settle it, says Naked Capitalism's Yves Smith. In a move to reduce the bank's holding company exposure, it recently moved a large tranche of its worst performing derivatives from its Merrill Lynch unit to a subsidiary flush with taxpayer insured deposits. The Fed has signaled it favors the move, but the FDIC, which will have to pay off depositors in the event of a bank failure, objects.
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Comments (99)
  • The Last Boomer
    , contributor
    Comments (1005) | Send Message
     
    Look at BAC stock price. One day 10% up, next day 10% down. Does this give anybody any confidence that the market knows how to value this stock?
    18 Oct 2011, 08:09 PM Reply Like
  • kaa1016
    , contributor
    Comments (176) | Send Message
     
    It's called insolvency in the banking system and the Fed knows it. When the market wakes up to that fact, this will be a $1 stock, at best.
    18 Oct 2011, 08:18 PM Reply Like
  • jschroe36
    , contributor
    Comments (66) | Send Message
     
    Equity holders of this insolvent zombie will be wiped out.
    18 Oct 2011, 08:24 PM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Except for those who live in bathtubs :)
    18 Oct 2011, 09:19 PM Reply Like
  • 7footMoose
    , contributor
    Comments (2266) | Send Message
     
    insolvency n. 1) the condition of having more debts (liabilities) than total assets which might be available to pay them, even if the assets were mortgaged or sold. ............in case you were wondering, in a bank deposits are liabilities and loans are assets
    18 Oct 2011, 08:27 PM Reply Like
  • tommiegun
    , contributor
    Comments (202) | Send Message
     
    Don't hate, congradulate wise investors like myself that bought BAC in te low $6's.
    18 Oct 2011, 08:32 PM Reply Like
  • tommiegun
    , contributor
    Comments (202) | Send Message
     
    We'll see what happens tommorrow at the same bat time on the same bat station.
    18 Oct 2011, 08:35 PM Reply Like
  • jirim
    , contributor
    Comments (19) | Send Message
     
    crazy
    18 Oct 2011, 08:47 PM Reply Like
  • Mkt Trrd
    , contributor
    Comments (513) | Send Message
     
    That is one sick bank run by sick people. I can't imagine anyone approving moving failing derivatives into the same account with taxpayer deposits and then depending on the FDIC for a bailout when the derivatives lose money taking the deposits with them. They are setting themselves up for another bailout right in front of God and Country and letting everyone know they're looking for another bailout. I for one as a taxpayer refuse to allow my taxes to be used for this monstrosity. This demands punishment, at least 1,000 lashes. Let them fail.
    18 Oct 2011, 09:00 PM Reply Like
  • alpharox
    , contributor
    Comments (380) | Send Message
     
    "That is one sick bank run by sick people."

     

    Absolutely. I want my tax money back now.
    18 Oct 2011, 09:34 PM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    You got your tax money back....with interest
    18 Oct 2011, 10:10 PM Reply Like
  • klarsolo
    , contributor
    Comments (707) | Send Message
     
    Exactly. What tools we have on this board. All the money has already been paid back.
    18 Oct 2011, 10:19 PM Reply Like
  • inthemoney
    , contributor
    Comments (981) | Send Message
     
    > Exactly. What tools we have on this board. All the money has already been paid back

     

    Really? What value would you put on a 3 trillion 0% interest loan with no collateral for 2 years that was extended by the FED to the banks?
    The reality is the banks are just extension of the FED and therefore there is no "paying back". The real price is bailing out the borrowers at the expense of the savers that has been going on since 2002. No bank could ever pay back the billions lost by savers due to this policy.
    18 Oct 2011, 11:02 PM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    I would give no value to this. To beat up BAC or any other bank over this makes no sense and is counterproductive to any argument on the banks and their valuations.

     

    We all (Americans) get implicit or explicit backing from taxpayers such as student loans, mortgage interest deductions, dependent deductions, etc...

     

    Call your politician with these problems/concerns, don't confuse this with trying to make money via bank equities or bonds
    18 Oct 2011, 11:22 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    The Fed is really driving down interest rates to make sure the Federal Government can borrow at low rates as the deficit is out of control and spiraling interest rates would cause runaway debt and an economic collapse. Banks benefit also and raise capital to take on future losses which are likely coming so the Fed kills two birds with one stone.

     

    You are looking at the wrong troubled player. If you think BAC has problems look at the Federal balance sheet and annual cash flow projections with all obligations loaded on it. Double WOW!
    18 Oct 2011, 11:35 PM Reply Like
  • bigbenorr
    , contributor
    Comments (891) | Send Message
     
    That's funny, I never got a check.....
    19 Oct 2011, 12:02 AM Reply Like
  • billknowsall
    , contributor
    Comments (275) | Send Message
     
    Karslow say hello to mirror. The gov't has NO right to take my tax money and prop up persons they decide "deserve" it. This country was not built by cronykapitalistasm but by hard working real people who deserve better.
    19 Oct 2011, 01:07 AM Reply Like
  • The Last Boomer
    , contributor
    Comments (1005) | Send Message
     
    Taxpayers got their money back?? Not so fast! How about the continuous almost zero percent interest at which banks can borrow from the Fed? How about the implicit guarantee provided by the government that big banks won't be let down? How about the shenanigans just described in this article allowed by the Fed when bank risk is sneakily transferred to taxpayers? Did we get paid for these goodies? I don't see a dime getting its way back to my pocket. All I get is letters from my bank about higher fees. The financial industry as a whole is a huge drag on the productivity and creativity of this nation. We all pay a hidden bank tax transferred to incompetent fools on Wall Street so they can maintain their lavish lifestyle. Banks should be beaten down like pinatas and going into finance should become something that no sensible and bright young person would ever consider as a career path. Only people who can't find jobs in a productive capacity should be taking jobs in the lowly financial sector. When we get to this point, America will be back on top of the world.
    19 Oct 2011, 06:04 AM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    You are entitled to your own opinions but not your own facts.

     

    Taxpayers got their money back plus interest... FACT.

     

    All these other "shenanigans" are a separate issue.

     

    A quick example. You're are a farmer who owes the IRS for back taxes of $10. You give them their $10 plus $1 in interest. You have paid the "american taxpayer" back for the money you owed them.

     

    The fact that you can now go to a supermarket and buy oranges for $5 instead of $25 because the farmers in Florida get (from your tax dollars):

     

    1. Tax break on accelerated depreciation for farm equipment
    2. Below market rates for water
    3. The ability to pay lower than minimum wage and hire illegal immigrants during the picking season
    4. Tax breaks on land and structures on their land
    5. Low interest loans subsidized by the american public
    6. etc...

     

    Doesn't mean you haven't paid back what you owe.

     

    Still don't get it? Read a book and educate yourself
    Still mad? Write and call your representative
    19 Oct 2011, 08:53 AM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    ItsAME,

     

    "Still don't get it? Read a book and educate yourself"

     

    I suggest you do the same start with Michael Lewis's "The Big Short".

     

    Considering we are still on the hook for AIG, Fannie, and Freddie, I don't think we got our money back - hundreds of billions of dollars of exposure at the least.

     

    Here's a link from ProPublica on the bailout recipients and what they received:

     

    http://bit.ly/nWSGgH

     

    Using Government accounting we got our money back on a particular portion of the investment but we as a taxpayer's are responsible for the exposure in total on all of the bailouts. Saying we didn't lose money on AIG, Fannie, GM, and Freddie because we own them is absurd.

     

    We should own none of these. Don't you remember how loud the public outcry was back in the 80's when we bailed out Chrysler for about $1.2 billion. Now apparently hundreds of billions produces a yawn.

     

    The idea that BAC would have succeeded without AIG's bailout is absurd. AIG was the key bailout mechanism as they paid 100% on the CDS's held by the major players.

     

    This was financial sleight of hand committed by our Leaders to bail out their buddies.
    19 Oct 2011, 09:49 AM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    You are right to be mad about Fannie, Freddie and AIG but that doesn't mean BAC hasn't paid back their TARP money which is what my reply was about to an earlier poster.
    19 Oct 2011, 09:55 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    Interesting how as our financial sector struggles so does our economy. Let's just keep beating on our jugular vein and hope it all works out.
    19 Oct 2011, 10:21 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    CW

     

    Agree with you that the USG should not be owning companies. So blame WDC for Fannie and Freddie. They created those monsters and were warned for decades that their government control really implied they were on the government balance sheet. When the crap hit the fan they finally had to take responsibility for them.

     

    BAC's problem is really CountryWide which they should have never bought. They should have made the Feds take it over and put it directly on their balance sheet.

     

    AIG is an insurance company so it does not really reflect on the banks. They created their own poison. Once they wrote those contracts they would have to claim BR to releive the obligation. That would have put every part of their insurance commitments up for grabs which is millions of consumers and businesses. Chaos!
    19 Oct 2011, 10:27 AM Reply Like
  • klarsolo
    , contributor
    Comments (707) | Send Message
     
    inthemoney, to stay with the way you see things, tell me then, how much did the taxpayer lose so far because of these loans?
    19 Oct 2011, 01:37 PM Reply Like
  • jackooo
    , contributor
    Comments (1709) | Send Message
     
    You wanted change and you got it....lol
    19 Oct 2011, 01:49 PM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Tomas,

     

    The "insurance" that AIG was writing was to protect BAC, CITI, Goldman and everyone else that bought coverage from them for their CDS's. This wasn't "insurance" it was gambling.

     

    The $165 billion or that AIG received from our government was used to pay 100 cents on the dollar for these insurance contracts - in other words they gave taxpayer money to the banks to bail them out on contracts that were written between two private parties.

     

    If AIG had in fact gone into bankruptcy they would not have paid 100 cents on the dollar to the likes of Goldman who got $12 billion of the payout.

     

    We the taxpayer using AIG as our middleman/smokescreen bailed out the banks and we are on the hook for those losses - we socialized their losses and privatized their profits.

     

    I am not surprised that most people are unaware of how screwed they were by Hank Paulson, Geithner and the FED as frankly it was not easy to follow the money given how secretive they were in the payouts.
    19 Oct 2011, 02:16 PM Reply Like
  • hksche2000
    , contributor
    Comments (1002) | Send Message
     
    If the Florida farmer asks $25 for his/her oranges, you would buy oranges from Italy, Spain, Israel or any number of countries. That's what keeps Florida's farmers' prices in line, not gov't subsidies.

     

    BAC is a totally different can of worms. It deserves to be shut down for incompetence, disservice to its customers and crockery. America's taxpayers would be so much better off without this sick institution ("bank").
    19 Oct 2011, 03:25 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    CW

     

    If AIG would have gone into BR they would not get to choose which obligations they paid first and millions of consumers who had insurance policies would be just another obligation of AIG. If the obligations that AIG made to their counterparties were collateralized or in someway above other creditors then those would be paid first and all the consumers would get screwed which is a lot of votes in case you missed it. All of them would have taken some haircut no doubt but this would have brought millions of insurance contracts into play also. Unknown results for the USG and unmanageable.

     

    This does not fit your narrative but occasionally a light comes shining in even when you don't want it.
    19 Oct 2011, 04:07 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    I got a better idea. Sell CountryWide back to the USG with all its bad mortgages and call it a day.

     

    BAC goes away as a problem child and now the USG owns it which is where it belonged in the first place.
    19 Oct 2011, 04:10 PM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Tomas,

     

    That isn't how it works. Read State Laws on life, health, property, and disability insurance. It's a highly regulated industry. The segments affecting consumers would have had their liabilities and assets matched actuarially and the judge in charge would make the appropriate allocations to ensure they were kept whole. Each business component of AIG would have been treated separately.

     

    It would have been complicated but the outcome would have been better, fairer, and most importantly transparent. It would have been painful of that there is no doubt.

     

    The people would have been fine, the banks not so much.
    19 Oct 2011, 04:20 PM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    correct. The $20 spread (not the real number) goes directly into the farmer's pocket.

     

    p.s. I'm not trying to say farmers make a lot of money.
    19 Oct 2011, 05:08 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    CW

     

    You are dreaming up an outcome to fit your narrative. I am not sure why AIG ever needed help given your scenario. Everyone knows that insurance is heavily regulated blah, blah, blah and especially at the state level. However bankruptcy is a federal provision and the unknowns of going into BR with a large insurance company is very long as it has not been done before and how claims would be sorted out, etc.

     

    The discussion at the time of this bailout was that they could not let this financial debacle fall on the states and put all the policies at risk never mind even try to manage it. Consumer confidence was already shaken and if you throw into question their insurance policies then it goes even lower.

     

    You have no idea how the bank contracts were written by the way so you don't know if they would have had a haircut. They might have had a claim on their corporate HQ and so on.

     

    It is also possible that Geithner and Paulson looked at the state level and discovered that they did not have the ability to satisfy claims so rather than exposing that mess they swept it under the rug by bailing out AIG overall.

     

    My experience is that I have worked for companies and read about us in the paper and the gap between what is reported and what was going on was laughable. Likewise I am sure there are plenty of gaps in these narratives but they sell books and make a lot of money for their authors.
    19 Oct 2011, 05:11 PM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    CW,
    Insurance is only regulated on a state by state basis, there is no federal regulatory agency for insurance. The feds had to step in on AIG or the Texas state regulators were going to move in on American General (which is a subsidiary of AIG), and liquidate to try to protect the policyholders. If that had been done millions of retirement funds, and policies would have been wiped out. Granted, it was the banks who forced the government's hand by demanding their money from AIG in the first place. There is plenty of blame to go around,
    20 Oct 2011, 12:24 AM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    Actually, at the consumer level, AIG operates under numerous wholly owned subsidiaries in each state in which it is licensed to sell insurance. Those states have guarantee funds to cover a bankrupt insurance company's indemnification obligations. Or are the guarantee funds just another mechanism whereby the 99% pay for something that really does not exist? So bringing in the "consumer" is just another Red Herring and diverts attention away from the core issue of extreme malfeasance and psychopathic arrogance at the Federal Reserve and US Treasury.

     

    (Psychopathy (/saɪˈkɒpəθi/[1][2]) is a mental disorder characterized primarily by a lack of empathy and remorse, shallow emotions, egocentricity, and deceptiveness. Psychopaths are highly prone to antisocial behavior and abusive treatment of others, and are very disproportionately responsible for violent crime. Though lacking empathy and emotional depth, they often manage to pass themselves off as normal people by feigning emotions and lying about their pasts. http://bit.ly/nu08Xy
    23 Oct 2011, 03:57 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Amazing. That derivatives should have some type of priority over deposits, which is what the article claims, is just amazing. No wonder the FDIC is opposed. As should be any bank customers and depositors. Just another strong argument that investment banking should be separated from commercial banking.
    18 Oct 2011, 09:10 PM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    Derivatives do not have priority. SA should have posted the original Bloomberg piece that this article was based off of. The only reason they are transferring the derivatives, is to avoid having to put up more collateral. Not because of an imminent bank failure. Chase does the same thing btw. Where were all the articles when they transferred derivatives to their FDIC insured depository? The simple fact is Bank of America draws attention, page views, and is a hot topic now.
    18 Oct 2011, 11:16 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    AM,
    " Remember the effect of the 2005 bankruptcy law revisions: derivatives counterparties are first in line, they get to grab assets first and leave everyone else to scramble for crumbs. So this move amounts to a direct transfer from derivatives counterparties of Merrill to the taxpayer, via the FDIC, which would have to make depositors whole after derivatives counterparties grabbed collateral"
    = == = = = == = = = = = = = =
    This is what the article says. Sure looks like collateral grabs by the derivative counterparty boys takes precedent over the depositors, as per the article. And that would seem to make sense, otherwise why would the FDIC object.
    18 Oct 2011, 11:48 PM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    Complaining about the unfairness of the press coverage does not mitigate the fact that the TAX PAYER is again bailing out a private company. Let me know which government agency will take my 90+ receivables. Opps, I forgot, I am just a small business owner, my job is to work my ass off and pay half my earnings over to the really important people.
    19 Oct 2011, 01:12 AM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    muchbusiness,
    What bailout are you talking about?
    19 Oct 2011, 04:27 PM Reply Like
  • moneyTalksBSWalks
    , contributor
    Comments (193) | Send Message
     
    Good call out. Turds like Yves and Blodget are always looking for creative ways to blend facts and unfounded views in order to advance their agenda (shorting BAC stock). Yves extrapolates the Bloomberg article and as usual piles on hearsay. I have to admit though that Yves is more convincing than the arse*%le Blodget but we should expect to soon see Blodget spouting some s**t on this too.
    19 Oct 2011, 07:10 PM Reply Like
  • moneyTalksBSWalks
    , contributor
    Comments (193) | Send Message
     
    So why would the FDIC allow Chase to have a 99% ratio in the depository institution?
    19 Oct 2011, 07:12 PM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    Okay. "The Fed, however, has signaled to the FDIC that it favors the transfers. Shifting the derivatives to the commercial lender may let Bank of America avoid collateral calls and termination fees stemming from the rating downgrade. Some Merrill clients may prefer having their contracts with the higher-rated unit. In short, the Fed’s priorities seem to lie with protecting the bank-holding company from losses at Merrill, even if that means greater risks for the FDIC’s insurance fund." http://buswk.co/oy45Sa. Using the tax payer supported FDIC to avoid increased costs due to a credit down grade is a bailout, or perhaps a subsidy. Now, if the counter parties wanted no risk and FDIC insurance they should also take the .05% savings rate. The subsidy is this: I want high rates of return but I don't want risk. Open a derivatives account with Merrill, generate palatable returns then move the portfolio into an FDIC insured bank.
    19 Oct 2011, 10:32 PM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    Haha. Well said. I find Blodget to be a pathetic human being as well. I can't believe his "blog" gets any attention whatsoever. "Yeah, lets pay attention to a criminal who has no morals." He specializes in pushing rational and logical boundaries, while playing to the paranoid conspiracy theorists.
    19 Oct 2011, 11:27 PM Reply Like
  • D. McHattie
    , contributor
    Comments (1844) | Send Message
     
    If the banks hadn't lobbied for the repeal of Glass Steagall way back in the late '90s this never could have happened.

     

    Under Glass Steagall, depository institutions couldn't invest in high-risk assets like derivatives.

     

    Someone should drive a stake through BofA's heart, burn the corpse and scatter the ashes.
    18 Oct 2011, 09:18 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    If Glass Steagall hadn't been repealed the Government would have had to take ownership of Bear Sterns and Merrill after failures, rather than having them bought by large, deposit bearing institutions. MS and GS also would likely not have been allowed to convert to bank holding companies.

     

    The Congress, the regulators, and the industry all share an equal part in the size and scale of US financial institutions. The crisis only added to their heft. That being said it does seem clear that the plan for dealing with problem banks, which up until now has been to make depositors whole and sell the banks' assets to a larger institution, may not be the ideal way to deal with the largest banks in any given country.

     

    What the alternative is, I'm not sure. Since no one can explain the impact that a failure of BAC, JPM, WFC, MS, or GS would have, I'd prefer to have some entity, or combination of entities, attempt to keep the institutions solvent and functioning, rather than simply throwing the company to the wolves, and the global financial markets into duress.
    18 Oct 2011, 09:56 PM Reply Like
  • D. McHattie
    , contributor
    Comments (1844) | Send Message
     
    With all due respect, Mike, to keep these failed institutions alive is to pervert capitalism and perpetuate our enslavement to the kleptocracy.

     

    We need to de-financialize our economy.
    18 Oct 2011, 10:07 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike,
    But there is a very very simple solution. It's called "mandatory convertible bonds". Every TBTF public company should be required to issue MCB, at enough level to totally recapitalize any TBTF entity. Such mandatory conversion to be pre-defined (might totally wipe out existing shareholders) and able to be initiated in the event of total failure by either the Board or the Fed.

     

    There is ZERO justification for taxpayers or the government to ever have to bail out a private corporation. If MCB cannot be mandated, such there is a private sector contingency plan for TBTF, then the answer is that TBTF = to big to exist. As such then TBTF should be broken up until they are no longer TBTF.
    18 Oct 2011, 10:28 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    Mike

     

    You are correct. The FDIC does not want to operate banks nor do they have the skills and the manpower to do it. Doing a forced Lehman like collapse is not an option for anyone knowledgeable enough to understand how interconnected these FI's are with each other. The markets would also collapse as there would be so many unknowns that everyone would pull their liquidity thereby reinforcing a downward spiral of events.

     

    The only alternative I have is to wipe out equity holders and perhaps bond as well and then sell off the business units to the highest bidder through a sealed bid process. This would be a clear message to failed FI's that we will keep you intact only to the extent we sell you off piecemeal. Only problem with this approach is that again the FDIC does not have staff or expertise to do it.
    18 Oct 2011, 11:44 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    UI

     

    Interesting concept but where do these trade and would anyone buy them? Are you really selling a bond or just a call option?

     

    Whatever the case TBTF is not the problem when an entire sector of the economy fails. It is not the banks at that point it is the entire sector that is a problem. As in our latest housing debacle.
    18 Oct 2011, 11:46 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    McHattie,

     

    Im not arguing that bailouts are not interference in capitalism. Bailouts are clearly distortions in the market, allowing for the government to choose winners and losers. I am saying that the solution for failed banks for the last 80 years has been to merge the banks into larger, more stable banks, as the FDIC does almost every weekend. This works well with smaller banks, but clearly not very well with the largest banks in the country.

     

    Untrusting,

     

    So how many mandatory convertible bonds would need to be issued? 10% of assets? 20%? What would the cost of funding be? Less than the nearly 0% banks get at the discount window or the Fed Funds rate?
    I'll repeat my argument that from a strictly economic perspective, too big to fail is the theory that the failure of a company will do much more damage to the economy than the cost of bailing the company out. Explain to me a concrete value, a number of assets, derivative exposure, level of deposits, that makes a financial institution large enough that its failure will have unintended consequences so large that it is less expensive to the economy to bail it out, and I will gladly discuss the merits of keeping the size of banks under that metric. Since it is hard to gauge how big is too big, its a tough thing to argue about when you are looking for concrete metrics.

     

    I don't like bailouts, but I also don't like financial crisis. So if we woke up tomorrow and a systemically important global bank or financial institution was in dire need of capital, I would prefer co-ordinated actions were taken to wind that bank down. The shareholders should be wiped out, and the bondholders should take haircuts, but if a bailout is needed to shore up the finances of that firm before it was put into bankruptcy, so be it. Bailouts are better than collapsing the financial markets, imo.
    18 Oct 2011, 11:51 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    Exactly, wipe out shareholders, sell the business units and wind down everything else. My point is that firms with trillions of dollars in assets can't just declare bankruptcy, the way Solyndra can. There has to be some sort of co-ordinated effort to make sure that the event doesnt bring down the system.
    18 Oct 2011, 11:57 PM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    Why are you blaming BOA. I really do not understand some of you people. IT IS THE FEDERAL GOVERNMENT THAT IS ALLOWING THEM TO USE THE US TREASURY AS A PROVIDER OF AN UNLIMITED, UN-COLLATERALIZE LINE OF CREDIT, FREE OF CHARGE; Well, at no extra charge, since you have to net lobbying fees and political contributions.
    19 Oct 2011, 01:20 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    They don't trade anywhere, because they don't exist. But they should exist, and every TBTF tradable entity should be required to issue them. If they refuse, then they should be broken up into smaller pieces so they are not TBTF. Yes, they would be real bonds, just a special type of bond, that would be "forced/mandated" to be converted to common equity if a TBTF was on the verge of failure. And yes plenty of investors would buy them (lend), because likely they would have higher interest rates attached to them to account for the risk of mandatory conversion, if need be. For example if a bank has 9% common equity, it likely could be regulated to also have 9% MCB or whatever safety level is required (to eliminate any need whatsoever for government or taxpayer bailout).

     

    Yes, TBTF is a problem. If it was not a problem then no private business would have ever required a government or taxpayer bailout. But they did and will again. The entire banking sector did not go down, only the TBTF banks caused the problem There were plenty of regional banks and virtually no credit unions that had any problems. And any of the regional banks that did have problems were pretty easily resolved over the last few years by the FDIC. ie they did not have to be bailed out, they were just allowed to fail.

     

    And the housing sector did not have any TBTF entities. None of the house builders were bailed out, nor were any of the commercial builders either. And none of the insurers were bailed out either save AIG (which was really a backdoor bank bailout).

     

    It should be pretty easy to identify the systemically important TBTF entities in the US and EU. The criterion is pretty simple, if the government would not let them fail, then they are systemically important and by definition TBTF. If they meet that criteria then, they should either be forced to have a contingency plan to prevent failure (MCB is one way), or broken up so they are not TBTF and thus not a threat to the entire economy and the nation.
    19 Oct 2011, 01:51 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike,
    The answer should be pretty straight forward and not too difficult to estimate. If a TBTF bank has say 9% equity capital, then failure would wipe out that 9% equity. So perhaps MCB at an equivalent 9% level to replace all equity would be a sufficient level. But plenty of smart finance guys around that can probably pretty easily calculate a sufficient safety level. It's simply just a pre-set bankruptcy option, with pre-defined and pre-arranged debtor in possession financing and pre-defined implementation rules.

     

    Would it cost more to issue MCB? Likely, yes the interest rates would be higher than standard issue bonds because of the higher risk. But that's what markets do, they evaluate risk and charge for that higher risk. The point is that markets deal with this type of stuff all the time, and much much better than the government or the Fed does. But then again, the cost of standard bonds might also be less as well, because they would likely become less risky.

     

    But you seem to overlook the main point. And that is that it should never to necessary to threaten or collapse the financial markets, nor should it ever be necessary to have the government bailout any private business. All it takes is a little decent planning to prevent that from happening. Simply put contingency structures in place to prevent collapse (ie MCB or something else) or prevent the necessity of bailouts by reducing the size of entities so they are not systemically important and thus cannot claim they need bailouts.
    19 Oct 2011, 02:16 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    I'm not sure that merely matching the equity ratio with an MCB would prevent the need to bail out an institution that was TBTF, since the capital shortage case for each bank would be different. JP Morgan likely did not need as large of an equity buffer as the BAC/Merrill/Countrywide combination, since the former made better loans, and participated in less risky activities. AIG needed $180 billion, nearly double its shareholder equity as reported in its 2007 annual report.
    Also, raising the cost of capital for a bank by making it issue higher yielding bonds threatens its ability to make loans and operate profitably. Banks that hold more money and lend less money will slow the economy, which is the opposite of what the Fed is trying to do.
    19 Oct 2011, 08:25 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    UI

     

    Interesting but by definition MCB's would by definition hasten failure as they are an unnecessary call on earnings which provides equity against losses.

     

    When you have an industry collapse like the housing market did in 2008 and the real estate industry back in the 1980's the players are interesting and colorful but the industry is what is pulling everyone down. Until the industry is brought back to health the players are a distraction but they make better stories and headlines.

     

    A lot of medium sized and small FI's bit the dust in the past 3 years along with big players like Downey, Indy Mac, CountryWide, Lehman, Bear, Merrill Lynch, etc. Carnage was up and down the line. In summary your correlation between size and failure is wrong. Failure is correlated to participation in the housing market.

     

    The government provides bailout in aggregate to other industry participants indirectly through unemployment, write off of losses, driving down interest rates in hopes of driving demand, etc. The only thing they wont do is lower taxes on real estate which might make a big difference.
    19 Oct 2011, 10:38 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike,
    Ok, so you have no solutions ... except privatize profits and socialize losses, for TBTF. You have no free market based solutions, except the government is the backstop via taxpayers to subsidize inefficient TBTF public corporations. You have no answers as to why multiple regional and credit union financial entities did not need government bailouts, but TBTF did. And you have no answers as to why the time tested principles of "let the inefficient fail, and let the efficient take over", could and should be the only operating guidelines.

     

    So, in short your answer must then be to break up the TBTF entities into smaller individual entities that are not systemically important and then could be allowed to go bankrupt if they fail. We have no problem with that solution, and in fact it just might be the best solution overall. Monopoly and near monopoly status of big organizations runs counter to efficient market mechanisms and always over time results in higher costs to society and individuals than would otherwise be the case.

     

    But in the alternative, we would have more faith in the "smart finance geeks" being able to design and implement a capital structure system for TBTF that would totally eliminate the need for government bailouts or guarantees ever being necessary. They do more complex financial engineering every single day of the week and year after year. It's not that they can't, it's that they don't want want to. TBTF is more than happy to take advantage of implicit government and Fed guarantees to shift costs and risks to others and thereby artificially enhance their profitability. Effectively a large subsidy from everyone else in society to a small but powerful and inefficient group of TBTF entities.

     

    But that's OK, you want to quibble about easily solvable details instead of looking for a principled solution that would let the market work in the way that competitive markets are supposed to work.
    19 Oct 2011, 02:44 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    I never claimed to have a solution, I merely wanted to explore your idea of mandatory convertible bonds. Multiple regional and local banks did take TARP money and HAVE NOT paid the money back. Fannie and Freddie have not paid the money back. Explain to me how letting Lehman fail was better for the economy than the Government assistance provided to JPM to acquire Bear and for BAC to acquire Merrill. In times of extreme duress, extreme actions must be taken. Overall, I think higher capital ratios, better oversight, and less leverage will keep our financial system safe. Lehman was levered 40 to 1, and was trying to hide potential losses from Warren Buffet as it was seeking an investment from him. No wonder it failed.

     

    My problem with breaking up the banks is that the solution to bank failures, as per the FDIC, is to combined a failed institution with a larger institution. Its how the system works. So it seems suspect that the solution for bank failures is to make healthy banks bigger, but that the solution for increasing financial stability is to break the banks up. The Fed encouraged BAC to buy Countrywide and Merrill to help protect the taxpayer, but now should break up BAC to help protect the taxpayer? How did the solution become the problem?

     

    As for all the AIG talk, the real question should be why was AIG allowed to write such massive amounts of insurance, and hold no money incase it ever had to pay out? Where was it's risk management team, its regulators, its shareholders?

     

    http://bit.ly/nWSGgH
    19 Oct 2011, 03:34 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    UI

     

    The number of banks receiving TARP is as long as your arm and did involve small and medium sized banks and yes regionals. CU's also had problems.

     

    What's up?
    19 Oct 2011, 04:14 PM Reply Like
  • Leftfield
    , contributor
    Comments (3986) | Send Message
     
    "As for all the AIG talk, the real question should be why was AIG allowed to write such massive amounts of insurance, and hold no money incase it ever had to pay out? Where was it's risk management team, its regulators, its shareholders?"

     

    Where are the prosecutors?
    19 Oct 2011, 04:56 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike,
    MCB is nothing more than a pre-packaged bankruptcy, with pre-defined terms, and pre-defined funding. It all just sits in place, as a contingency plan, never being used, unless and until management fails and the organization fails. Bankruptcy is the accepted solution for organizational failure and has worked in every case to reorganize inefficient and failed businesses. Why should TBTF be exempt or different from the failure methodology that applies to all other business? Our answer is they should not. And if they cannot use acceptable methodology for business failure, then they should be broken up until standard business failure methodology can and will apply to them.

     

    The argument for "bailouts" for TBTF is generally that they cannot be allowed to fail, because to allow failure impacts the functioning of the economy too much (hence systemically important TBTF). But MCB or pre-defined bankruptcy with pre-defined funding negates all of those arguments, and provides for the orderly failure of TBTF and transition to new owners, and negates the need for government to be involved at all. It places all the risk and all the reward exactly where it should be, namely on management, investors, and lenders.

     

    In short it is a relatively simple approach to capital structure that would address and likely provide a decent solution to the multitude of issues that surround a specific type of entity, the TBTF entity. It is a forward looking potential solution, not a backward looking solution. You want to discuss past issues such as Lehman, Bear, or Countrywide. They are simply irrelevant to what could or should be done now. There are reasonable arguments to be made that "bailouts" of systemically important TBTF were necessary and the only "worst" solution available at the time (08/09). We are in fact sympathetic to those arguments, that not much else could be done at the time or the damage may well have been even worse.

     

    But again that is totally irrelevant to forward solutions and alternatives. Forward solutions and alternatives focus on how does one have a better solution for future possible re-occurances of similar problems. Our view is that MCB is an infinitely better forward solution compared to the prior solution of "bailouts".

     

    With regard to the TARP solution and some regional banks being included. It is true that a relatively small number of regional banks were included. But it was a fairly small number, something like 100 or 200 out of maybe 5000+ in total. The FDIC system could easily have handled the regional banks without TARP over time with traditional bankruptcy measures. The real purpose of TARP was to cover for and bailout the top 10 or so banks which would or may have caused a systemic problem including the investment banks which are not banks to begin with and GE finance which also was not a bank.

     

    You mention the regulators. Well the regulators have been dismal failures for a multitude of reasons such as: regulatory capture, crony relationships, political interference, etc. It would simply be so much better and so much more transparent to have a market based (contingency) solution, ie MCB or some similar alternative. The market is so much better at enforcing solutions and particularly when such solutions (bankruptcy) are a recongnized and well understood process that utilizes collective market judgments as opposed to political or regulatory arbitrary measures.
    19 Oct 2011, 07:38 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    What's up is crony capitalism, regulatory capture, and political cronyism, etc. all designed to preference certain private sector groups over others and interfere with normal market processes. That's what's up and has been what's up for far too long. And that's exactly why the US needs to move back to more market based solutions wherever such is practical to do so.
    19 Oct 2011, 07:53 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    My question about MCB's is that how do you know how much money a firm will need, before it fails? How can you predict the size of a capital shortfall before it happens? If that was possible, wouldn't firms raise new capital before the shortfall happened? The idea of prepackaged bankruptcy plans is being implemented as part of the Frank-Dodd act, although to my knowledge there is still no real plan for dealing with a TBTF bank.

     

    Some facts on the number of banks that received bailout funds: According to ProPublica, there were 926 total recipients of TARP. According to the Treasury's website, 450 of these were "small and community banks." According to the 3 year report on TARP, "At the peak of the crisis, the U.S. government had made investments in banks representing approximately 88 percent of U.S. bank holding companies by assets." Also, as of August 31, 2011, TARP still held investments in about 460 banks. That's out of 7,513 banks and savings institutions in the US, and about 1 in 9 of those are on the problem list, according to the FDIC.

     

    Links to the information I cited:
    http://bit.ly/nWSGgH
    http://1.usa.gov/qJ1XWa
    http://1.usa.gov/olyjM9
    http://nyti.ms/o4yvO3
    19 Oct 2011, 08:38 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    Amazing. You somehow claim that my solution is wrong. Yet you say the only alternative is exactly what I posted, a rational and market based solution of exactly what you mention. Namely MCB. Which is nothing but a pre-packed, pre-defined, and pre-funded bankruptcy for TBTF organizations. It can and would work, and is infinitely better than past failed "bailout" solutions. You want to talk about the past. Well the past is irrelevant. What is at issue is the future and how to have a better solution to potential failed TBTF organizations in the future. Bailouts, crony capitalism, failed and captured regulatory intervention, moral hazard, and preferential treatment of connected and inept private TBTF organizations are no solution to anything. These just reward greedy and incompetent TBTF executives and perpetuate the crony capitalist and it's cohorts in political power and failed regulators who bailout the crony capitalists.

     

    And you could not be more wrong about the FDIC. The FDIC has efficiently and effectively handled many hundreds of bank failures. They do not operate banks, never did operate banks, and never will operate banks. Their only function is the orderly bankruptcy and transfer of ownership of failed banks. For which they have done a pretty good job.

     

    And finally, the FDIC does not handle the large and systemically important banks. The Fed does and has. The FDIC may have some relatively minor input, but the Fed controls the process for big banking players and the Fed and US Treasury (politicians) are the ones that bailout the systemically important TBTF entities. The FDIC has virtually nothing to do with this bailout process.

     

    What works is market based solutions and transparency. The collective judgment of millions of market participants, investing and lending their own money, is orders of magnitude better than anything the politicians, regulators, politicians, or crony capitalists can concoct to attempt to skew the system to advantage themselves and their cronies. Which is exactly why something like MCB for TBTF could and would work and is much much better than bailout crisis alternatives and moral hazard associated with the elite power brokers that control the system today.
    19 Oct 2011, 09:33 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike,
    It does not matter whether one can exactly estimate how much money is required to before a TBTF actually fails. The fact is a reasonable estimate can be made to begin with, and initial MCB can be mandated at that level. The fact is that the Fed can and does continually monitor these TBTF entities and can easily increase or decrease the required amounts of MCB from year to year as total assets and risk change. And the final fact is that the Fed can still act as a lender of last resort of debtor in possession financing if and when any minor shortfalls did occur. But it would be relatively trivial amounts compared to the primary MCB's. And the primary MCB's would also likely be more than willing to inject additional funds into a bankrupt entity anyway, if they owned and wanted a viable entity going forward, which they almost certainly would. Investors and new owners will always act in their own best interests to protect and maximize their investments.

     

    The real issue is a pre-planned and orderly process to immediately take TBTF off the table, prevent the necessity of bailouts, and immediately transition the bankrupt TBTF to new operational ownership and have minimal or no effect on the rest of society. If such conditions can be meet then there is no imperative to necessarily break up TBTF. If they cannot be meet, then TBTF=too big to exist, and they should be broken up.

     

    On the "community banks" issue and TARP, you many well be right that maybe there were 1,000 or so of them out of the 7,500 that you note. So what, only the TBTF matter and account for the vast majority of total assets, deposits, and impact on the wider economy anyway. This maybe at the outside would be the top 10-15. Plus the fact that quite a number of the TARP recepients claimed they did not need or want TARP and they did not receive significant amounts of money under TARP anyway. TARP was essentially a smokescreen to bailout out the 10-15 systemically important TBTF banking and finance entities. The entire rest of the TARP list could very likely have been pretty easily handled by the FDIC and normal business bankruptcy procedures where necessary. TARP would never have been conceived or implemented but for the 10-15 large and systemically important financial entities.

     

    Again, the point being that TBTF should be reasonably identifiable by the government, the Fed, and important regulators. A simple question to the Fed, Treasury, and Congressional and Senate oversight committees. Which US companies are too important to overall US economic and national functioning that you would NOT let them fail? They should relatively easily be able to answer that question. What, maybe 25-50 companies in the entire US. Then at that point require and mandate such companies to have a viable market based contingency plan in place to ensure orderly transition to survival in the event such becomes necessary.

     

    In fact, one could even guess that such a MCB process would actually have further benefits to stability in markets, even if only mandated for the 25-50 systemically important TBTF entities. One could guess that other large and mid-tier companies would likely voluntarily follow suit and copy such capital structures, if for no other reason to market and claim they were just as important and critical as their TBTF brethren.
    20 Oct 2011, 12:04 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    IO

     

    I am saying what is up with your perspective? There are not that many regional banks and most if not all of them received TARP funding. Community Banks received TARP funding. It was spread like butter and a lot of them failed.

     

    This is not TBTF companies this was an entire industry going down namely real estate. Size did not have much to do with it. If you were in real estate loans you were in trouble no matter what your size.
    20 Oct 2011, 12:08 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    UI

     

    I am a market guy but when large FI's are going down for whatever reason and they have tentacles deep into the economy the unwinding needs to be orderly not like Lehman Bros. Wipe out the equity holders and chop off the creditors at the knees. I really don't care about them.

     

    I am not convinced your MCB's are the answer but tossing around an idea never hurts. I don't want to argue about FDIC versus Fed roles I have been in this industry over 20 years and it is not really an important point. Only point I have made is the government does not want these banks on their books if they can help it. They don't want ownership or operational control so they look for a stronger bank to take them over immediately.
    20 Oct 2011, 12:15 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    It was not an entire industry and it was nowhere near even as much as 20% of the participants in the entire banking industry. Further many of the forced participants did not even want to participate, they were required to. What was primarily affected was the top 10-15 large players who dominate the vast majority of the assets and deposits of the finance industry.

     

    The vast majority of TARP participants could very easily have gone bust with virtually zero effect on the US economy and would very easily have been absorbed by the finance industry.

     

    Thus, it is only the systemically important TBTF entities that are at issue, and it only the TBTF entities that require special rules and mandates and special capital structure rules.

     

    But we digress. It is not the past that is relevant, it is the future that is relevant. And the only issue that is relevant to the future is how to regulate TBTF, such that they never require a bailout in the future. Any market based solution to that problem, is what the system needs and should be working on getting in to place.
    20 Oct 2011, 12:26 AM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    If the Fed told a bank to issue more MCB, wouldn't that be a signal to the markets that the bank was in danger, and potentially cause a run on the bank? That very phenomenon is the reason borrowing at the Fed's discount window is kept secret.

     

    I will completely disagree that there is a single small bank out there that took TARP that did not want it, or that the dollar amounts were insignificant. I fail to see the benefit of having to pay the government above market interest rates, submit to extra scrutiny on dividends and buybacks, as well as on compensation, and therefore think it is safe to say that any firm that is capable of paying back the TARP would have done so already. I cannot speak to the FDIC's ability to handle dozens of bank failures a week for an extended period of time, but my only concern would be they would be understaffed, should things have gotten there.

     

    As for 25-50 companies in the US that are too big to fail? I think the actual number is closer to 10 (not including Fannie and Freddie). The GM and Chrysler bailouts were only done to help the democrats win union votes, and every other corporation outside of a financial institution should be pretty easy to wall off once things look dire. So the big banks and investment banks (JPM, WFC, BAC, C, MS, GS, maybe PNC and USB) , GE, maybe still AIG, and maybe Berkshire Hathaway and one or two of the other big insurance companies are likely the only firms that are TBTF. As for other companies issuing MCB in order to claim they were critical, I would assume that the companies would issue bonds based on the cost of capital. And there again is the problem of forcing banks to issue a new class of bond, with an unknown cost: the Fed is holding rates at record low rates to stimulate the economy, so forcing banks to issue MCB, and presumably raising the cost of capital, runs counter to the steps the Fed is taking to try to grow the economy.
    20 Oct 2011, 12:35 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Mike
    A)Well you would be incorrect about TARP.
    1)Below is Bank of NY Mellon's selected responses on TARP. In short, they did not need it and immediately moved to repay it as soon as they were permitted to. They participated at the governments request, NOT because they needed it.
    ----------------------...
    "We were surprised to see you on the TARP list.

     

    It was explained in the [Oct. 13] meeting. They felt we are important to the infrastructure of the payments system of the United States and did not want there to be any questions about our financial viability. We had custody of $23 trillion of the world's securities, and a one-third market share of corporate-trustee activity. We clear over half the securities of the U.S. government. We're important to the overall infrastructure of the financial markets, not just in the U.S. but also around the world.

     

    They very much wanted all the major banks to be part of the program. I understand the U.K. government [had] tried to do essentially the same thing with their banks. Some U.K. banks started to back away from it, and it morphed from an industry shoring up or a "recapitalization" plan to a "rescue" plan. I expect the U.S. did not want that to happen here.

     

    Have you paid back your TARP money?

     

    Yes. We raised $1.5 billion in uninsured debt, at a much lower rate than TARP and common equity of $1.4 billion, proving that we could access the capital markets. We reduced our dividend, which provided us with another $750 million per year. The sum of those three things is more valuable than having $3 billion of preferred [equity]. Our balance sheet is stronger today than at the time of receiving TARP"
    ======================...
    2) Other selected entities in effect used TARP to essentially get bank status that they did not have before and thus effectively get access to cheap Fed money. Such included American Express. GE finance, and the investment banks being at least MS and GS. There can be little doubt that American Express did not need TARP and effectively used the program to gain advantages that they likely also could not otherwise have easily obtained. Likewise MS and GS gained significant advantages via access to cheap Fed funds that they could not otherwise have obtained by becoming bank holding companies . UBS was yet another larger financial entity that always claimed they did not need TARP and did not want really want it and repaid TARP at the first available opportunity
    3) Smaller banks - numerous published reports by various smaller banks at the time of TARP claimed that they did not need TARP and that they did not really see the need to participate. But it did provide a reasonably cheap source of funding at the time that money was expensive in the marketplace and not readily available to some institutions. But the smaller banks really make no difference anyway, as the bankruptcy of any or all of them over the succeeding say 12 months would easily have been handled by the markets, just as well over 100+ small bank bankruptcies have been handled by the FDIC without even a ripple to the economy. There are always plenty of private investors with plenty of money willing to take over banks. Wilbur Ross to name just one. In fact Ross has initiated a consortium to take over one of the Irish banks, because he was frustrated in numerous attempts to buy out failed US banks as have been other large private investors.

     

    B) And you likely would also be incorrect about the big companies defined to be systemically TBTF also. One could only guess what the US government would define to be systemically important, but as a guess they would likely include: the big telecom companies such as T and VZ, because if telecom went totally down it would seriously disrupt the national security systems and commerce as well. In addition they would likely include a few key defense contractors such as Boeing, etc. And they likely would include a few key IT providers such as IBM or the like because total failure of them would disrupt virtually the entire government and defense systems. Or perhaps the NYSE and NASDAQ exchanges as the Fed somehow views the markets as one of the cornerstones of the american economy. So, it is not just the financial entities that are systemic TBTF organizations.

     

    C) Incorrect again about "runs" on any banks with MCB. In fact it would be the exact opposite. Any depositors would never have a need to have a run on any TBTF bank, because they would know with certainty that such TBTF bank had a guaranteed survival plan in effect to instantaneously provide for continuity of operations and immediate installation of new funding and new ownership and new management. Runs on banks occur when there is a question about survival and ongoing operations, not when survival is assured and guaranteed.

     

    D) Companies have capital structures for many reasons and many purposes. You could well be quite wrong that companies only issue bonds for the absolute lowest cost of capital. Just the pure safety and marketing hype alone of having a "special capital structure" might well more than offset any small incremental cost of MCB over say non-MCB. Besides, such is irrelevant anyway, because such would be a choice of any non-TBTF entities . Exactly as markets are supposed to work. The only mandate is for TBTF. As to cost, the market would very very quickly move to price cost and risk. They always do and they are actually usually pretty effective at pricing it. Furthermore the cost is there already. It is just not borne by the TBTF entities, but is rather offloaded on to taxpayers and government as an effective subsidy to TBTF entities. The right solution is to have the TBTF entities directly bear the cost as an explicit cost.

     

    In short, TBTF, would likely have very very little problem adapting to a capital structure such as MCB. But I will grant you that they likely would fight it and raise objections, Simply because they always seek to offload whatever cost they can to somebody else. But I would wager you that given the choice between: a) being broken up to smaller non TBTF units, b) absolute promises of no future bailouts under any circumstances whatsoever, and c) MCB ... that TBTF would agree and implement MCB's in a virtual heartbeat with nary a missed executive bonus or any other concern about it.
    20 Oct 2011, 02:48 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    I understand exactly what you are saying. But we are not talking about the past and past crisis management. We are talking about the future and setting future policy in place to provide exactly what you are talking about ... namely orderly unwinding and transfer, should such ever become necessary again. MCB's do exactly that and provide a clear and transparent process for virtual instant ability for orderly unwind and transfer. They may not be the best or only answer, but it sure would be a country mile better than bailouts and the chaos of Fed and government ineptitude, not to mention the moral hazard of politicians and regulators picking winners and losers.

     

    The market always has a better way, and thus market based solutions are infinitely better than crisis management attempts dreamed up by politicians and regulators and cronies at some last minute haphazard meeting.

     

    The FDIC is really nothing more than primarily a bankruptcy trustee with power to enforce bankruptcy on small banks, which they do regularly. They also provide some regulatory oversight and act as insurers for customer deposits, which they charge banks a fee for in order to cover FDIC operations and insurance. But as noted in another post, the FDIC has other options besides just turning over the bankrupt small banks to another existing bank. There are big money interests that bid and are willing to buy bankrupt small banks. The FDIC rarely accepts this option, because it is just simpler to turn bankrupt banks over to another existing bank and roll them in.

     

    The real big kahuna is the Fed though. The Fed effectively controls and regulates all of the major banks and all of the major financial players. It's just the way the system is set up. Not saying that is the way it should be, but that is the way it is.

     

    The point of the discussion is not to argue with you. The point is only to suggest that market based solutions to future crisis eruptions in TBTF can be devised, such as MCB, and that such market based solutions are highly likely to be much more effective and much more transparent than bailouts or past ineffective efforts by the Fed and politicians. Are MCB's the only solution or perhaps even the best solution? Don't know, but they sure seem at lot better and more rational than bailouts and chaos.
    20 Oct 2011, 03:26 AM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    UI

     

    Now you are flat out wrong on your narrative. Anyone lending money in the real estate market took hits the only question was how big was their total exposure and did they have the capital to withstand those hits. It did not matter the size of the bank. For example JPM was the 2nd or 3rd largest bank in the country at that time and they did not have problems because they were not a big real estate lender. They were in fact picking up business as other FI's failed and they had a very strong balance sheet. Therefore the USG turned to them to pick up Bear and Wamu as there was no place else to go with them. The point is that size of FI had nothing to do with potential failure. It all had to do with exposure to real estate.

     

    Moving on from history your idea on bonds is interesting to discuss but I am not convinced for various reasons already spelled out earlier by myself and other people.
    20 Oct 2011, 10:17 AM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    TVP,
    You are correct in that size had nothing to do with failure. What caused failure what greed, fraud, incompetent management, excessive risk taking, etc. That applied to plenty of FI including both large and small FI's.

     

    That's not the issue nor is the past the issue. The issue in the past was "why not let the FI fail"? That is the time accepted solution to failure, go bankrupt, and let others take over and clean up the mess. Yet that is not what happened is it? And the reason it did not happen is because it was argued that TBTF FI's would harm the economy by bringing commerce to a halt and affecting many other businesses and individuals. The small banks and FI's were never an issue. Everyone was willing to let them go bankrupt. It was only the large TBTF banks and FI's that were an issue. So the solution was to bail them out via TARP and many trillions in Fed guarantees of their bad loan paper. Thus preventing bankruptcy of many of the large TBTF banks and FI's. The smaller banks and FI were essentially a smokescreen and political justification for bailing out the TBTF. Nobody ever really cared about the small FI's, and the system could easily handle bankruptcy of them, and in fact did handle bankruptcy of well over 100+ of them. But not one single large TBTF entity was allowed to go bankrupt, except Lehman. All other TBTF were bailed out, guaranteed, and shuffled off to another TBTF entity with plenty of guarantees and bailout funds from the Fed and taxpayers.

     

    So the only issue is not the past. The issue is the future and what to do in order to prevent the need for any future Fed or government or taxpayer artificial intervention in TBTF entities. Because if similar crisis happen, then the same arguments will be used again ... namely we cannot let the TBTF entities bring down the entire economy. And the same artificial solutions will be used again. Namely have the Fed and government and taxpayers subsidize private TBTF entities and bail them out again.

     

    Accordingly the issue should be framed as how, in the future, should the system prevent this dysfunctional and artificial alleged necessity. And the answers were: 1) break up the TBTF such that they can be allowed to go bankrupt as smaller units and not affect the economy, or 2) have a pre-planned and pre-funded capital structure in place (MCB), that applies to TBTF and eliminates the need for any Fed, government, or taxpayer need to even consider bailouts or any artificial intervention.

     

    In short, it's just not that difficult to let the markets work like markets are supposed to work and as capitalism is supposed to work. There is just no need to "privatize profits and socialize losses". But it does require demanding that appropriate capital structures be set up in advance for TBTF entities, such that they cannot "blackmail" the entire economy into artificially bailing out their failures and incompetence. If TBTF is unwilling to do so, then the alternative is to break them up and eliminate the need or threat to the wider economy and individuals and commerce.

     

    You say you are not convinced. But you have no other alternatives. Thus presumably you think the the default alternative of more of the same and more government and Fed artificial intervention to prop up TBTF is the best solution. Which is to argue that the government and regulators are entirely justified in picking winners and losers and subverting the natural market process of bankruptcy that culls out incompetent and mismanaged entities. Well, sorry but we totally disagree with that view.
    20 Oct 2011, 12:08 PM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    It's risk management team is the Federal Reserve. Its cash reserves are in the US Treasury.
    20 Oct 2011, 01:00 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    From my recollection only Lehman went officially BR all the rest of the FI's big or small went through some kind of government process which effectively bankrupted them by cutting equity value close to zero and then merging or selling them to someone else. Seems pretty even handed to me.

     

    My position is that we had systemic failure in the real estate industry which affected all banks exposed to that market. It is not a good argument to say that only TBTF were harmed as the evidence does not support it. If you want to say TBTF are a risk to the economy that is a different argument and could be solved a number of ways. Your idea is one approach but I remain unconvinced at this point although I give you credit for throwing something on the table.
    20 Oct 2011, 04:50 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    Bank of New York Mellon is hardly a small bank, with a $25 billion market cap. My arguement was that no small bank took TARP without needing it.

     

    Goldman and Morgan did not take TARP to become bank holding companies, they became bank holding companies in September of 2008, before TARP was passed, when the plan was still to buy up bad mortgage assets, not invest directly in banks.

     

    A bankruptcy of Verizon, ATT, or IBM would not shut down their services, or networks, since companies continue to operate under bankruptcy protection, their creditors just stop getting paid. MCI-Worldcom went bankrupt, and that large telecom was not deemed systemically important.

     

    FDIC insurance exists to prevent runs on the bank, yet Wachovia saw massive outflows of deposits as rumors surrounding its health began to emerge. People act irrationally in times of fear, so I fail to see how MCB would stem this irrational behavior.

     

    Without knowing the percentage interest that must be paid on a MCB, its impossible to argue how it would effect the capital structure. And how can you say companies wouldnt want the absolute lowest cost of capital? What company would willingly raise their cost of capital? The goal of a corporation is to make as much money as possible. Paying higher interest rates runs counter to that goal.
    20 Oct 2011, 07:13 PM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    Very well said, thank you.
    23 Oct 2011, 03:15 AM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Just proves that if the banks won't mark to market their assets the stock market will.
    18 Oct 2011, 09:21 PM Reply Like
  • alpharox
    , contributor
    Comments (380) | Send Message
     
    This screams "End Section 23 exemptions" and adds a good bit of fuel to the "End the Fed" argument.

     

    I wonder what percentage of B of A the FDIC could actually cover? Fear is bad, but there should be no reason to fear one bank failing. If things were right there wouldn't be.
    18 Oct 2011, 09:40 PM Reply Like
  • Leftfield
    , contributor
    Comments (3986) | Send Message
     
    At what point does someone somewhere in authority find this activity to be criminal? What ever happened to RICO statutes that tripled damages for racketeering? What is this collusion between Wall Street and Washington to dump their garbage onto the American taxpayers, if not racketeering?
    18 Oct 2011, 09:56 PM Reply Like
  • klarsolo
    , contributor
    Comments (707) | Send Message
     
    How is anything being dumped on the American taxpayer so far? BAC paid back all taxpayer money with interest.
    18 Oct 2011, 10:21 PM Reply Like
  • inthemoney
    , contributor
    Comments (981) | Send Message
     
    > How is anything being dumped on the American taxpayer so far? BAC paid back all taxpayer money with interest.

     

    Did you receive the said interest? I don't remember receiving an interest checks from any of the banks in 2009.
    18 Oct 2011, 11:04 PM Reply Like
  • itsAme
    , contributor
    Comments (99) | Send Message
     
    ^^^LOL. You are going to have to write/call Obama about that.
    18 Oct 2011, 11:24 PM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    inthemoney,
    Do you get billed yearly for our deficit?
    18 Oct 2011, 11:27 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    The government got the interest, since they gave your money to the banks. Its very similar to how banks collect deposits, make loans, and profit from the interest, except in this case the government's deposits are called "taxes."
    18 Oct 2011, 11:28 PM Reply Like
  • TomasViewPoint
    , contributor
    Comments (4842) | Send Message
     
    The money is in the Treasury. But don't worry congress spent it before it actually got there.
    18 Oct 2011, 11:47 PM Reply Like
  • Steve 7
    , contributor
    Comments (853) | Send Message
     
    untrusting investor,

     

    Have you read any of my responses to your comments about my comments? Just click on my name and you can scroll to various links...at one point, you claimed I did not realize that retail investors represented a very small portion of money in equities (five percent or less) after I just stated that I knew they represented a very small portion of investments in the stock market...my point in the comments before yours was that the majority of retail investors/traders are wrong or the majority would be millionaires...

     

    Just like the majority of retail investors since the turnaround Tuesday a few weeks ago said at different times, "no - I am defensive - I don't believe in this move" or "it's time to short now...no wait, now...no wait, now..."

     

    Is this because they do not understand volume and price movement and the actions of the primary dealers? I do not know...even recently though, average money professionals have started to move money from bonds to stocks on the recommendations of their clients and on their own as representatives of their clients...which of course makes sense because the average money or the dumb money starts to allocate money to equities after missing a ten percent or more move... or in the case of 2009, after missing a forty to fifty percent move...

     

    Of course, really dumb investing and trading money does not understand how to go with a trend or reversal...for example, on Monday on the slow, methodical selloff this week the volume on the S & P was around 185 million while on the massive, explosive time of buying and buy programs on Tuesday this week the volume was over 300 million...

     

    Guess it speaks volumes about where the market is headed short-term...or - to put it in simpler terms as I might have said in our discussion before - the move with the more volume is where the market is headed...in any case, for those investors/traders who are late to the show, you can be sure they will start to buy just as it is time to short again sometime in the future : )
    18 Oct 2011, 10:50 PM Reply Like
  • Conventional Wisdumb
    , contributor
    Comments (1802) | Send Message
     
    Steve,

     

    This is an interesting comment. I am always confused by how people interpret volume signals.

     

    There was an earlier market current at 3:58 that featured this:

     

    "The pattern of high volume at the lows and low volume at the highs suggests the bottom isn't in yet, BofA's Mary Ann Bartels writes. "Investors are fearful at the lows and not buying into the rallies to the highs - not a positive price and volume pattern.” Driving the recent rally has been more bears covering their short bets than real money coming back to the market, she says. "

     

    Here's a link to the article:
    http://on.wsj.com/naGlyy/

     

    She also says:

     

    "The S&P 500 has rallied back into resistance, but volume continues to dry up on the rallies. Since early August, lower volume days have coincided with the range highs near 1200-1230.

     

    Last Friday was the highest closing price on the S&P 500 within the trading range, but with NYSE consolidated tape volume of only 3.7 billion shares, Friday was the lowest daily volume within the range. This does not support the case for a sustained move higher. The test of the August low on 04 October is a sign of a base, but the lack of volume on the rally suggests more time is needed to build a base."

     

    I don't know anything about her but I am curious if you have an opinion of her comments.

     

    Thanks.
    18 Oct 2011, 11:45 PM Reply Like
  • untrusting investor
    , contributor
    Comments (9964) | Send Message
     
    Steve,
    You don't get it. Most retail investors don't give a crap what the ST traders do.You are basically just a daytrader who thinks they can beat the market pros and trade in and out of the market. The facts show that 99+% of daytraders are bankrupt with a couple of years. But if you somehow think you can beat the odds, go ahead, and maybe you might be that 1%.

     

    We have successfully invested in the market for over 25+ years now and generated well above average market returns the entire time. As such we could care less about ST relatively minor moves in the market. All that matters is what the major trend in the market is and how that is playing out.

     

    For ST trades it is far far easier and much less risky to simply place relatively small option trades and generate very good returns. And that is exactly what we do now. But as noted, you can take all the risk you want. We shall remain defensive, ready for much much better by levels, and yet still continue to generate very good returns with much safer option trades.

     

    All that matters is where an investor is in say 5 years from now and what kind of returns they have been able to generate over that time. We are pretty confident we will be up at least 50-100% from now to then and possibly a lot more, depending on how the market plays out. But even more important, we are 100% certain we will not be down anything between now and then.

     

    So ST trade to your heart's content. It is irrelevant to what we do and how we approach investing and generating returns.
    19 Oct 2011, 12:17 AM Reply Like
  • muchbusiness
    , contributor
    Comments (247) | Send Message
     
    They are moving their liabilities into a wholly owned subsidiary; "If a subsidiary ultimately is forced to file for chapter 11, however, the bankruptcy laws do provide unique procedures to resolve any existing or potential litigation between the parent and the subsidiary’s creditors and to permit the parent to obtain a clean break from the subsidiary’s financial problems." http://bit.ly/qkTr7P
    18 Oct 2011, 11:01 PM Reply Like
  • nightfly
    , contributor
    Comments (1017) | Send Message
     
    Like I needed another reason to yank my deposits there...2 weeks, they are gone!
    18 Oct 2011, 11:06 PM Reply Like
  • Steve 7
    , contributor
    Comments (853) | Send Message
     
    Conventional Wisdumb,

     

    Here is a link to the massive volume on the turnaround Tuesday a few weeks ago...much more volume than almost any day of trading this year...some of the best professional investors shortly after the action took place a few Tuesdays ago made comments going to the idea it might be the low of the year as it seemed sellers dried up...bears of course said it was a massive short squeeze, and since then it is fair to say it seems buyers on the sidelines are waiting for any excuse or evidence they can use to get into the market - the only game in town where they can actually get a return on their money...also, remember - the 22 institutions - the primary dealers - who deal directly with the Fed are getting tens of billions of dollars from the Fed per week as a result of Operation Twist...similar but arguably not as much as they got during QE 2...during the time period of QE 2 - from when the dealers knew they were getting the money until they were no longer getting the money - from the end of August 2010 until June 2011 the market ran up because the dealers took a lot of the money from the Fed and pumped it into equities...now they are getting the same money but not as much through Operation Twist...and of course, the primary dealers are often known as "smart money" - traders/investors who are the first in and the first out...since they are getting a steady stream of money to use right now it is fair to say they might not be the "first out' for a while...

     

    http://bit.ly/qvdbpB
    19 Oct 2011, 12:25 AM Reply Like
  • Steve 7
    , contributor
    Comments (853) | Send Message
     
    untrusting investor,

     

    First let me say I was not saying that you "did not get it" so I do not know why you became defensive in saying I "do not get it"...

     

    I am not a day trader, but I am a trader as opposed to an investor...I am sure I am anonymous on Seeking Alpha for the same reason you might be...because returns I am achieving/the money I manage/what my day job is might not be believable so it is better to remain anonymous...

     

    I have made comments for the past few weeks that the market is clearly in either a rebound bear market rally or a rally into the end of the year...I started to make these comments as the market was up 3 - 4 percent and now it is up 10 - 12 percent...I am confused as to why you say "you" and whoever is supposedly or realistically investing/trading with you is making small options trades as part of a short-term strategy but yet you have never mentioned this before...instead, you have consistently made comments about how you and who you represent are defensive and "waiting for better prices"... have you made money the past few weeks on a whole bunch of short-term options calls? In any case, I enjoy your thoughts and please do not think of this response as criticism...I know sometimes written responses without the hearing of a voice or face-to-face contact can seem more critical than they are...
    19 Oct 2011, 12:52 AM Reply Like
  • Steve 7
    , contributor
    Comments (853) | Send Message
     
    And I should add - to not misrepresent myself - if the situation warrants it I am a day trader...for example, today when the market went positive after being down almost one percent it seemed pretty clear it was a "turnaround day" and the market would end up strongly positive which it did...

     

    I mention "retail investors/traders" often because if you know what the majority of them plan to do, they are often wrong...

     

    Case in point - if you read my comments on Chipotle, it seems it is a momentum stock that will take off after it reports this Thursday...of course, I might be wrong and lose a little capital but if you read on message boards what retail investors have said for weeks now - a person might have used this information to make good money on Octobe calls purchased in the 290's to its current price, and they might make great money after its report this Thursday as the majority of retail investors are excited to be short the stock or plan to short it right before earnings...

     

    Purchasing a bunch of November 345 calls seems very appealing right now....
    19 Oct 2011, 01:00 AM Reply Like
  • mope940
    , contributor
    Comments (42) | Send Message
     
    Buy BAC anywhere under $10, $6 is xlnt. Sit back and rake it in.
    19 Oct 2011, 02:20 PM Reply Like
  • neversink
    , contributor
    Comments (49) | Send Message
     
    The banks may have paid back their TARP and TALP. But that is minor compared to the guaranteed losses the government granted them on the toxic assets the banks have on the books.

     

    And what were those guaranteed losses: The government agreed that individual banks would be responsible for no more than 30 billion dollars of losses from toxic assets totaling in the trillions of dollars. Citi has this deal; Chase has this deal; WFC has this deal, etc....

     

    So what do the banks care? What is amazing is that the reporters / pundits / morons never, ever talk about these losses whenever they applaud the banks for paying back the TARP and TALP.

     

    What a joke!! Unfortunately, the joke is on us, the American people....
    19 Oct 2011, 02:22 PM Reply Like
  • Financial Insights
    , contributor
    Comments (958) | Send Message
     
    This whole argument is pointless. Blame the banks, or blame government they are both equally responsible for the financial crisis. Who really cares anymore? The taxpayers are not bailing out anyone anytime soon.
    19 Oct 2011, 04:18 PM Reply Like
  • Mike Maher
    , contributor
    Comments (2811) | Send Message
     
    Except for Greece, through our contributions to the IMF, but somehow no one seems to care about that.
    19 Oct 2011, 04:23 PM Reply Like
  • Septhaka
    , contributor
    Comments (45) | Send Message
     
    JPM and C already have all their derivatives trading in their banking entities. Where are the stories about them? Oh, you aren't shorting their stock?
    22 Oct 2011, 09:42 PM Reply Like
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