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The Five Worst Bailouts

I agree with Khan's strategy that the banking system should be liquidated to match its downsized aftermath from fraud and corruption.

But the scale of liquidation is so much larger than the liquidation of the real estate investment trusts in the 1970s. Back then, REIT's that specialized in mortgages and project financing took on projects and customers that banks had turned down. The REIT's were funded by the banks and paid them interest, then turned around and lent money to the banks rejected applicants with a higher interest spread.

Projects that seemed shaky at conventional rates became more so at higher rates, especially since more and more competitors were piling into meeting the real estate needs of the boomer generation.

(It always bothered me that just when the baby boomers were generating huge pressures for capital formation domestically that the money center banks diversifed into foreign lending and subsequently took huge losses overseas - remember the last time that books were claiming Chase Manhatten and City bank were bankrupt and should have been liquidated in the '80s?).

The collapse of the real estate boom back in the '70s resulted in the failure of Continental Mortgage Investors and Diversified Mortgage Investors, as I recall. The CMI list of walking dead companies were slowly put into bankruptcy or reorganization over a 10-year period
I worked for one of the companies that owed something like $50 million to CMI. The company sputtered along for about 10 years, continuing to develop properties and sell land so that a flow of some money would continue to come in.to deveolop projects like The Woods on Red Cedar Lake that singer Pat Boone had started in Wisconsin but the overhang of debt was unsolveable and the company, which had been at the end of the line for liquidation, finally had its number come up.

A consortium of bankers behind CMI took over much of the assets of Terracor and the Terracor CEO caretaker took a few assets and, together with other assets, went on to take over Talcott and morph it into Leucadia.


But I wonder if Chase and Citi had been shut down in the 1980s would the banking industry have learned a lesson that would have prevented the current financial meltdown?

The CMI real estate fiasco was something like $850 million of stranded and lost capital. DMI was in the same ballpartk. In the ensuing decades the Fed was able to inflate the dollar and create truly stunning loss totals in the current financial criisis.

The current list of failed banks should have been put onto a quiet list for orderly liquidation over the next 10 years. And at the very least the huge too big to fail banks should each be broken into a hun dred pieces that do not exceed their executives' ability to manage and oversee.

Dinosaurs became too big for a changing environment to sustain them. Even the Soviet Union had to downsize.Why would essentially collectivist, socialized banks be any different?.

On Sep 06 07:13 PM Mansoor H. Khan wrote:

> The core problem of the United States' banking system (and maybe
> the world's banking system) is not liquidity but insolvency. The
> liabilities of the United States' banking system exceed the value
> of its assets. The issue is not only the toxic assets (toxic mortgage
> backed securities, toxic commercial real estate loans, sub-prime
> mortgages, alt-A loans, adjustable loans likely to go bust, increase
> in prime mortgage default rates, etc) but also off-balance sheet
> liabilities (such as expected huge unaccounted for future derivatives
> losses).
> This means that bailouts are just beginning and will require bigger
> and bigger sums of taxpayer money as time goes on. The government
> will resort to borrowing more and more and eventually to printing
> money when treasury debt auctions start failing. The end result of
> this path is a currency collapse and probably total chaos as expected
> by gold bugs.
> One other way to deal with this issue is to stop the bailouts and
> let the dominoes fall. Defaults and cross-defaults will cause many,
> many depository institutions (even very large ones) to collapse leading
> to extreme decrease in money supply as bank deposits are destroyed.
> Deposits of failed banks cannot be used to pay bills, make purchases
> and/or service debts.
> Which will probably lead to even more defaults as unemployment increases
> and debtor's are unable to service their debts. This process will
> probably cause extreme deflation as businesses lower prices in a
> bid to survive. This will also lead to wage cuts, increased unemployment
> and a deflation spiral and much chaos. But probably less chaos than
> a currency collapse.
> Is there a better way?
> Here is my idea:
> 1) We essentially need an orderly bankruptcy and liquidation of the
> United States' financial system.
> 2) I suggest we create a government owned bank and transfer all deposits
> of the private commercial banking system to the new government owned
> bank. This "transfer" is really just new money creation. This new
> money will be digital cash (electronic version of physical paper
> cash). Very much like reserves at the FED.
> 3) Note that the plan will not create net new money since we will
> be destroying all deposits of the commercial banking system in the
> process.
> 4) All assets of the commercial banking system will be transferred
> to the government and auctioned off in an orderly manner over the
> next 10 years. The proceeds from the sale would go the United States
> treasury and not the commercial banks. The assumption here is that
> commercial banks deserve nothing since the entire industry would
> have been most likely destroyed any way. Even good banks would have
> been destroyed due to bank runs and defaults if the government had
> allowed the dominoes to fall. Of course bank shareholders, bank bond
> holders and counter parties of bank derivatives would not receive
> anything.
> 5) After the transfer FDIC protection will be removed for any private
> bank which wishes to remain in business or any new private depository
> institution or bank. From that point on the government should make
> it absolutely clear that there will be no more bailouts and no more
> conversions. This will discourage (but not completely eliminate)
> fractional reserve deposit banking and private money creation that
> results from pyramiding of government created money. This will also
> limit debasement of the currency that results from fractional reserve
> deposit banking. In fact, we can have "free banking" from that point
> on and not even have reserve requirements or capital requirements.
> All depositors who use private banks will be fully at-risk. The industry
> will have to set the interest rate high enough to attract depositors.
>
> 6) The new government bank will act as an electronic "piggy bank"
> only. All deposits will be 100% reserve and it will not make any
> loans. Loan making will be left to the private banking system (with
> no deposit insurance or a possibility of a future bailout). The new
> government owned bank exists only as a "safe" money storage and a
> payment clearing system so the public does not have to carry around
> physical paper cash to make purchases and pay bills.
> 6) Of course this plan is not without pain or cost. Cost of funds
> for banks and borrowers will probably rise as bank deposits are a
> source of very low cost money for the banks. Nothing is free. We
> are just exchanging higher cost of funds for removal of systemic
> failure risk. Economically we are recognizing that when money is
> loaned there is always credit risk.
> 7) We are just separating the payment and clearing transaction system
> which is absolutely necessary for day-to-day commerce (no credit
> risk) from the loan banking and investment system (has credit risk).

Was the AIG Bailout a Goldman Bailout by Proxy?

If AIG and Goldman Sachs had failed, the entire financial system would have collapsed - a very quick adjustment of the books. This is what capitalism calls for. The government then could have spread $2 trillion among every U. S. citizen and gotten a lot of bang for this buck and the economy would have jump started very quickly. Consumers would have kept businesses going with this burst of spendingand debt paydown..

Of course predatory adjustable rate mortgages would have had to be rewritten from 13 percent to 4 or 5 percent. Some of these would still go under, but not as many.

The government would have had to step in as an overseer of the financial system for check clearing, deposts etc., but the middle managers in the financial system would have kept operating as usual while the managers of all the failed institutions found out they are as expendable as all the factory workers whose jobs were callously outsourced to China, India and Mexico. Unpaid bonuses could be retained to raise capital or offset losses.

We would not be still muddling along toward a still unseeable bottom as we are now.

Banks could have been turned loose back into the dog eat dog arena of capitalism as they proved solvency or were transferred to a new bank company with a fresh balance sheet.

The government should have always had an emergency plan like this in place to offset allowing such huge institutions to aggregate in the first place. Knowing this plan was pre-approved would have probably stopped some of the excessive risk taking in the first place.

Too big to fail has turned in to so big the entire system is ruined.

By the way, I have read AIG insured the Congressional and Senate pension system, which operates outside the safety net of Social Security. If this is true, the real instigator of the bailout was not Goldman Sachs but Congress, fearing loss of its lavish pension program.

Disclosure: position in AIB, the irish bank, not a typo.

$10 Trillion in Wall Street Aid and No Investigations?

Excellent rant that comprehensively summarizes the Ponzi scheme pulled off by the Fed, Wall Street and a money-geased Congress and White House.
However there was at least one investigation. The feds pounced on Elliot Spitzer and destroyed him after he publicly complained the federal government would not let the states pursue fraud investigations into what was happening.
I agree with Perry B the uptick rule should have been restored the moment Wall Street began massively short selling the financials and everything else, which accelerated and deepened the damage. And the abolishing of the uptick rule after the "most lexhaustive study" in history should especially be investigated.
If they won't abolish the failed Fed, they should fire Bernanke for not knowing what he is doing, or worse, knowing what he and Greenspan were doing to engineeer this.
I find it interesting that Conde Nast Portfolio did some very insightful reporting of what led to the collapse - and that publication has been closed. But the WSJ goes on, aiding and assisting..
Entire departments in the federal government should be fired for incompetence or complicity and restaffed with people who realize there are consequences.
Bonuses should stop being paid to failed companies that had to be rescued with public money.
Two depressions should have given The Fed enough rope to hang itself.
And if it comes to martial law the Republicrat party should do the honorable thing and step down. Instead, they will likely vote themselves lots of walking money and golden parachutes.
Back to that uptick rule. It will absolutely be maintained even though Enzioi von Pfeil - noting how crashes always seem to happen in October - warns that the investment banking houses - how few are left - have wrung about all the money they can from the current run up and will likely stage massive short selling in autumn because that is the only option left for them to make even more outrageous bonus money. Make that GS, Soros and the more nimble hedge funds.
If they dismantle the U. S. in the process, Wall Street doesn't seem to care. The goose they kill will have already given them quite a few golden (Goldman) eggs..
If only this rant by Nielson could go mainstream and stay on center stage day after day until true reform is accomplished.

'Too Big to Fail' Should Not Exist

Free markets in a America is a myth. We have monopolists who are continuously propped up by government support.
A free market America would have let the money center banks go belly up so the free markets could cleanse themselves.
I recall it was the huge banks in Japan that prompted the U. S. to encourage U. S. banks to merge into unmanageable mega-bigness. Didn't Japan experience a still ongoing economic crush despite having megabanks too?
And now free markets simply means U. S. producers and manufacturers should shut down so companies in second and third world labor markets can become the new monopolists.
It was partly the banks that encouraged the huge concentrations in industry after industry because in their thinking it is easier to make one mega loan - and watch it (fail) - than make many smaller loans. But the megalenders have found out the borrowers are now so big the bank now works for them. Think about it. The borrowers can and do just liquidate and walk away.
The banks have to figure out how to get their huge megaloans back. How to get the mega derivatives unwound. How to make one huge loan to a lot of foreign low wage workers they wanted brought in.
When the banks started favoring a few businesses in each industry in order to consolidate them for lending efficiency they started down the free market path that leads to corporate welfare.

Did Crony Capitalism Lead to Wachovia's $54B Bailout?

Wachovia, WAMU were like large beached whales caught in the outgoing tide.

So bigger whales farther out in the deeper water are taking over their fallen brothers (or sisters, Diane).

But what is the point of creating ever bigger whales, any one of which has the expanded capacity to do even greater harm than the smaller ones they absorbed?

Let's change metaphors now and call these bigger whales in the deeper water ships. How long can these ships continue to take on water before they sink too?

As I have said before, one of the major trends causing the financial calamity - other than fraud and unbridaled greed- is that the investment-bank led destruction of jobs through foreign outsourcing, combined with deliberately open borders to bring in cheap foreign labor, has caused wage stagflation.

But the usury system requires ever inflating wages so that borrowers can keep up with usury payments. Otherwise, the lenders would eventually soak up all the money. That is the role of the "inflation fighting Fed": to continually inflate money supply. It has done so admirably, driving the value of a dollar down to a nickle since 1913. (Don't argue that government causes inflation because it could not do so unless the privately-owned Fed accomodates guvmint and prints the money that the government then borrows, agreeing to pay back interest. Ralistically, the government turned over the money printing operation to the central bank.).

The banking system needs inflation to keep the system running.
But the current wage stagflation has hit that need head on and it was the banks that are caving in, due to the resulting deflation.

The Fed can inflate all it wants and pump that into the lenders - but it does no good. The borrowers wallets have to be inflated and they aren't. so banking appears to be doomed ala 1929 - 1933.

Bank A is not loaning to Bank B because Bank A knows that when Bank B gives the money to Company C to build inventory, Company C's customers can't get money from Bank D to buy the product because of tighter lending standards, so Company C won't be able to pay back to Bank B who will not be able to pay back Bank A.

The situation is so simple to figure out. And impossible to solve without the entire economy shrinking its balance sheets, with all the accompanying pain.