Obama is Bush part 3

Furthering the Discussion on Bank Nationalization

..." My question is: What happens to the taxpayer investment so far, estimated to be as much as $8.5T in equity investment, loans, loan guarantees and bailouts? A list of these exposures..."

This is more than disturbing. Bailout advocates are now arguing we have to double down on a terrible investment in order to bail out the previous bailout?

I am very happy that bank nationalization is now being debated, rather than rammed down our throats by an unelected Treasury Secretary... but one argument that has ZERO validity is the claim that we have to make more foolish moves because we already made foolish decisions.

The unfortunate reality that nationalization advocates won't admit to is that the banks (in aggregate) are too big to save. The trillions it would take to prop up poorly run businesses would devastate the US government's financial position.

Further, a nation filled with zombie banks would not possess the tax base needed to keep Uncle Sam in business going forward.

Too many people cite the (isolated incident) of the Chrysler bailout as evidence of bailout "success". One success, if it really is a success, does not prove a idea is sound.

Was Chrysler a success? The company is back for more handouts, so at best Chrylser can be called a delay of death, not a save. While government accountants have stated that the US government "got all its money back" -- this is an incomplete accounting. If Chrysler had been allowed to fail, what other businesses would have been created in its place? How much taxes would those other businesses have paid while Chrysler was paying none?

Further, if Chrysler had been allowed to fail, would that have been the kick in the pants needed to get GM and Ford to implement reforms? How much extra taxes would have been paid by a more healthy car industry? And fast forward to today, how many more billions will the "successful" Chrysler bailout cost taxpayers to bail out Chrysler (again) as well as GM?

With success like that, who needs failure?

Banks are poorly run businesses -- they have proven that beyond any doubt. Plenty of writers have talked about financial disintermediation -- banks are no longer really needed to perform many of the functions they used to. Indeed, it was bank's efforts to branch out into businesses they didnt know and didn't understand that got them in trouble.

New financial institutions, based on a different business model, are needed. Bailing out poorly run banks is unaffordable (even if it was a good idea) and delays the needed reforms in the industry

Consumers Confident Wells Fargo Will Survive

Wells Fargo's assets are concentrated in California -- but supposedly Wells Fargo was infinitely more conservative than any of its competitors. At the same time, Wells supposedly made similar returns to its more risky competitors. I for one do not believe there is such a thing as a free lunch

Now Wells has merged with Wachovia, paying whatever positive nominal sum for a bank with a negative net worth. Wachovia comes with the disaster that finished it off -- Great Western Savings ... whose underwater assets are based in California.

Even if Well's asset mix was markedly better than the market average before (which is hard to swallow) -- they now must add in all the garbage they got from Great Western via Wachovia. There is no way asset quality could possibly be anything but worse following the merger

And as Bank America has learned, if you pay a positive amount for an asset worth less than zero -- you will have future losses

How Wall Street Keeps Dooming Itself

We should really look at the foxes guarding the hen house... Over the last 40 years, Congress has been controlled (at different times) by both major political parties. Both major political parties have controlled the White House. Both major political parties have controlled both Congress *AND* the White House.

They have never once run balanced spending. Yes, I am sure someone will whine that that so-and-so cooked the books and produced balanced "budgets" -- but no one ran balanced spending.

No one produced an energy policy beyond Jimmy Carter suggesting we all wear a sweater. No one properly funded infrastructure like railways and highways. Adjusted for purchasing power parity, the US spends more per student on education than any other country on Earth -- but I would suggest our schools do not reflect that. While administrators sit in newly refurbished offices, teachers are forced to buy their own supplies.

For this "public service", government bureaucrats (both elected officials and career bureaucrats) have enjoyed pay raises that exceeded CPI. While stated salaries are generally less than the private sector, productivity is WAY WAY less than the private sector -- adjusting for lower productivity, public sector workers get paid LOTS more than the private sector.

And that is before we take into account benefits that are much better than almost all private sector workers

These underworked, overstaffed and overpaid bureaucrats are the ones who are (and were) supposed to be regulating all these banks.

What right do voters have to whine about bank bonuses (which are admittedly obscene) when we have been tolerating the "pay for lack of performance" compensation of our so-called public servants?

Thinking the Impossible: Could Bank of America Go to Zero?

Bank America is already worth zero and has been for some time. As one of the largest mortgage underwriters in the country, it is insane to figure they would not be effected by the credit collapse... then they overpaid for Countrywide (which had significantly negative net value) and then they overpaid for Merrill (whose brokers will never tolerate the bureaucracy of a big bank and who have plenty of alternatives).

Like many other banks, BofA's stock is an option that the government will shift the losses to the taxpayers and leave the equity holders with something economically relevant. Under the previous crony Hank Paulson regime, that was possible -- albeit unlikely since Uncle Sam could not afford to take on the debts of FNMA and FHLMC. Even with a tax cheat in the Treasury, the odds are now even lower.

BofA (and JPM and Citi) are too big to save

Three Financial Stocks Worth Holding

Another "me too" set of stock recommendations that sound disturbingly like the ones I get from every single sell side analyst on the street. You picked the same three political winners (not economic winners) as Henry Paulson.

WFC, like every other bank, claims to have (say it together now) "a very conservative loan portfolio". Whoopee, so did everyone else. Unless and until WFC publishes for more details on their loan portfolio, we have to assume this is on par with Dick Fuld telling us Lehman is solvent. We all know that WFC's loan portfolio is heavily concentrated in California (where home prices have fallen more than the national average). On that basis alone, real analysts (not the ones on Wall Street) would be worried about any company with a heavy California concentration.

I know in my state WFC sent out **UNSOLICITED** home equity checks through the US mail. Presumably, these went to people with high credit ratings -- meaning the loans will goose up Wells' statistics. But sending unsolicited loans through the mail (only requiring a scribble / signature to start?) is hardly a bank you can call "conservative". I think its more accurate to say WFC knows how to manipulate average portfolio statistics.

As pointed out by another commenter, JPM runs the largest derivative book in the country. I doubt Jamie Dimon fully understands all the risks on (well, really off) his balance sheet -- and I am positive that the author has no clue.

BAC overpaid for Countrywide and Merrill. Ken Lewis is already backpedaling on whether BAC stands behind CFC debt -- its clearly not worth par, and probably not worth much at all. But since he bought CFC under the cover of darkness (and probably with the Fed's gun to his head), its not clear he can legally walk away. On Merrill, Lewis has stated unequivocally that he will shut the trading desks and focus on wealth management -- meaning the traders who actually know the risks on Merrill's books have zero reason to stay. Merrilll brokers can easily go into a private practice and outsource record keeping to Schwab, eTrade, Interactive Brokers, etc... its far from obvious why any of them want to deal with the bureaucracy of a mega bank.

And all three banks you mention face massive integration risks-- the corporate cultures of WFC / JPM / BAC do not match those of any of the companies they are acquiring. Risk systems (such as they are) are incompatible.

And all three banks are likely to face Citi's problem -- being too big to manage. I know CEOs are supposed to be able to leap tall buildings in a single bound and all that -- but the reality has fallen far short of that.

The management style needed to be a successful mortgage underwriter is not the same as the one needed to be a good wealth manager... A bank's best **trading** client might easily be a really bad mortgage risk. Having the same clients borrowing money and investing money is very obviously a doubling down of risk (from the bank's standpoint).

The Credit Bubble: Deregulation Gone Wild

Deregulation is the big lie here. Government is MUCH bigger now than when Reagan took office. The Fed knew perfectly well what was happening, and on several occasions issued warnings. They had, and still have, the authority to regulate lending practices at the money center banks (and the little banks tend to follow). The other lending is done by FNMA and FHLMC, which are completely government controlled.

Before you start expanding regulatory power, you need to ask why the regulators made almost no use of their existing powers. You need to establish that existing powers are insufficient -- as opposed to just unused.

Even if you make the Fed into an absolute dictator, what good would it do if they don't use their powers (for good)?

The problem isn't deregulation (which never happened except on paper). The problem is the regulations we already have were not enforced.

The government had to choose between collecting higher taxes on bubble homes, or enforcing the existing rules. The government repeatedly chose higher taxes by turning a blind eye to a problem they knew about all to well.