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February 04, 2009

The Time is Now

Friedrich von Blowhard writes:

Dear Blowhards,

I was going to do an analysis of the Obama Administration bank bailout plan as revealed in this Washington Post story, Bank Rescue Would Entail Triage for Troubled Assets, but I looked around the web and decided that more articulate (and credible) voices than my own have spoken. I’ll limit myself to asking three questions.

Question #1: will it work? Is the bank rescue plan likely to succeed or make our situation worse?

Yves Smith, former investment banker and financial consultant, comments in her post, The Bad Bank Assets Proposal: Even Worse Than You Imagined:

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that: (1) Has nothing substantive in common with any of the "deemed as successful" financial crisis programs, (2) has key elements that studies of financial crises have recommended against, and (3) consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.


Why is this a bad idea? Let's turn to a study by the IMF of 124 banking crises [warning, PDF]. Their conclusion: "Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance."

In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked.

Question #2: Who will this proposal benefit?

Mike (“Mish”) Shedlock, investment adviser, sums that up in his post, Triage for Troubled Assets:

Here's the deal. The government will buy the worst assets, dramatically overpay for them, stick taxpayers will the losses, and only reduce bonus pools of the banks by 40%. It's a great deal for those in the bonus pools. It's a horrid deal for everyone else.

Per the Washington Post story, the Obama Administration is trying to pretty up the horrible optics of this rescue by imposing salary caps on financial institutions receiving extraordinary assistance under this plan. Mish has a blunt rejoinder to that one, too:

For the record, I am not in favor of salary caps, especially caps imposed by the government. I am in favor of letting the free market work. What would happen under a free market approach is these executives would be out on their ass and their companies bankrupt and sold off in pieces.

Question #3: What does this deal say about the current nature of the USA as a political entity?

Yves Smith doesn’t mince too many words:

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

I’ll give Jesse at Jesse’s Café Americain post on Life Insurance Companies Braced for Heavy Losses the last word:

Having the public bad bank buy the bad assets of the big money center banks and financial ponzi schemes and take all the losses is a thinly disguised act of theft and injustice on an almost incomprehensible scale…We cannot continue to subsidize a few big money center banks from their losses, and call anything in our government a republican democracy of the people, by the people, and for the people. [emphasis original]

The time to protest is now.



posted by Friedrich at February 4, 2009


Did you look to see if anyone was in support of the idea, or did you just look for positions that supported your own? Did you review the opposing opinions at all? Honestly, I haven't had a chance to review both sides of the issue, but I'm not writing a blog and expressing a single-sided opinion to the world.

Posted by: Upstate Guy on February 4, 2009 9:57 AM

They'd be none the worse of a hanging.

Posted by: dearieme on February 4, 2009 10:27 AM

"Did you look to see if anyone was in support of the idea, or did you just look for positions that supported your own? Did you review the opposing opinions at all? Honestly, I haven't had a chance to review both sides of the issue, but I'm not writing a blog and expressing a single-sided opinion to the world."

You haven't had a chance to "review" the issue? What's to review? But hey, you're in good company, the people pushing for this "bailout" haven't either. And do regular people count? You know, the ones who will pay for it...

PS start your own blog and enlighten us!

Posted by: Anonymous on February 4, 2009 12:08 PM

One-sided is our middle name.

Posted by: Michael Blowhard on February 4, 2009 12:46 PM

A lot of Democrats are leary of Obama right now. Two kinds of Democrats, actually, for opposed reasons. The Blue Dogs are talking about wasteful spending like Republicans. Liberals are saying that Obama is too close to finance and too timid in what they're planning.

I don't think very many people have any idea how bad that this is going to get, and almost everyone is playing business as usual. That especially includes the Republicans, who are just repeating the same "lower taxes" line they've been parroting for 100 years. (And they're also trying to forget Bush after slavishly supporting him for most of eight years.)

This could completely change the political landscape during the next 5 years or so. I expect it to get ugly, though, and there are a lot of players out there who are utterly clueless.

Posted by: John Emerson on February 4, 2009 4:16 PM

Seems like the consensus of the bloggers quoted and of FvB is to have the government do nothing. If that's the plan, then we have to go all the way. We can't say to the banks, "sorry, fellas, you're on your own" while simultaneously tying their hands with onerous rules like FAS 157 (mark-to-market), retail lending requirements (CRA), Basel II (which history proved was too little, too late anyway), the 15% voting share (33% of equity) restriction on private equity, etc. Without giving them at least a fighting chance, we'll wind up without a banking system.

Posted by: Bill on February 4, 2009 4:42 PM

John E. -- Not enough has been made of the fact that Obama's a prep-school / Ivy league kid, IMHO. As someone who went thru that wringer myself, I know the type pretty well. And, assuming he conforms to type, I'm betting that we aren't going to be seeing much coming from him that'll be too surprising. You don't excel in prep school and at HLS by doing a lot of independent thinking. You do it by dazzling the establishment.

Posted by: Michael Blowhard on February 4, 2009 4:48 PM

This could completely change the political landscape during the next 5 years or so. I expect it to get ugly, though, and there are a lot of players out there who are utterly clueless.

Correction: All of the players are "utterly clueless."

Posted by: Shouting Thomas on February 4, 2009 5:50 PM

"Without giving them at least a fighting chance, we'll wind up without a banking system."

Sounds fine to me:


No banking system can't be any worse than what we've got now.

Posted by: Anonymous on February 4, 2009 6:13 PM

Actually, being without a banking system is kind of icky. Think several thousand percent inflation and the collapse of the US economy when no-one will ship it fuel and there's danger of starvation as the food distribution system requires 6-12 months to adjust...

Of course, that total collapse of the banking system is unlikely to occur even without the bailout. But the simple *possibility* of its occurrence is the main motivation behind spending the money on bailing out the banks.

As to the odds of it occurring? Nobody knows, which is why you have economists lined up on opposite sides - there is no consensus. But when the possibility exists that not doing anything may spell the economic demise of the US, a lot of people are willing to take a huge hit to lessen the perceived chance.

You really don't have to attribute malice to those in favor of the bail-out. There's enough uncertainty in the current situation for good men to have vastly different opinions of what should be done.

(Quite frankly, even if we could quantify the odds, the dispute would still be going. How much is it worth to reduce the possibility of a true catastrophic outcome from 1% to 0.5%?)

Posted by: Tom West on February 4, 2009 9:13 PM

The "bailout" of the banking system is a one-for-one payoff to Obama's cronies. Think dumping public financing so that he could raise 3/4 billion. I don't think that Obama even considers this "malice." Grabbing payoffs, primarily from the racial quota system, has been his political career. As a product of the Daley machine (which has learned how to milk the racial quota system like a fat cow), Obama views payoffs as the ordinary way to do business.

The skids were greased for this thievery when Bush introduced us to "bailout" mania. Bush, likewise, was paying off his cronies.

We're not talking "malice," Tom. We're talking bald, outright thievery... "right in front of our faces," as the Karaoke Queen characterizes it. "Malice" isn't the right word. Try "corruption." We are the U.S. of Thieves.

Posted by: Shouting Thomas on February 4, 2009 10:22 PM

This could split the Democratic Party. I'd jump yesterday except it pisses me off so much seeing the Republicans repeating the same old slogans and trying to sabotage Obama.

Dozens of people, Republicans and TV people, have said "This isn't a stimulus bill, it's a spending bill". That's incredibly stupid. Every stimulus bill is a spending bill, and while some are better than others, almost every spending bill is a stimulus bill. Pure make-work would be a stimulus.

So if they want to say "We don't think a stimulus bill is a good idea", they can, but what they're saying is unbelievably stupid. I actually can't tell whether they're playing games or whether they just have no idea what's going on.

Also, the stimulus bill and the bank bailouts are two completely different things, and I support some version of the stimulus. Both Bush and Obama mishandled the bailout for the reasons people have said -- they're listening to finance people. Summers and Geithner are disasters.

For the record, Liberals have been linking to Yves Smith for most of a year. She's at the top of everyone's list, up there with Krugman and probably above him.

Posted by: John Emerson on February 5, 2009 8:58 AM

Bill - there are functioning banks out there. And even if there weren't, banks are not handed down by God. They are ordinary, non-magical institutions established by human beings, and sometimes their governments, all the time. There is no stark choice between bending over for the Big Pigs and "not having a banking system".

Look folks, the "banking problem" is not at its root a banking problem. The "banking problem" itself arises from attempts to fix the unfixable mess that is our tottering, grossly unbalanced, globo-rific economic system. Shoveling money to the same set of people (sometimes the exact same people), who have been assiduously constructing the disaster, brick by brick, for the last several decades, ain't gonna fix anything. Any bailout or "stimulus" that is not directly targeted at rebuilding the productive capacity of this country (and that appears to be the last thing the bailout and stimulus enthusiasts are interested in) is just more rape and pillage.

Tom - Tom. Tom Tom Tom. Tom Tom Tom Tom Tom Tom Tom. You're the sort of person, if, if you were a chick, people would walk away shaking their heads and muttering, "Why did we ever give women the vote?"

Posted by: Moira Breen on February 5, 2009 10:08 AM

What's to review?

Uh, Congress deciding what to do with $900 billion dollars, perhaps? And/or what they're planning on doing with it. Who's for it? Who's against it? Why are they for? Why are they against? What are the pros? What are the cons? What kind of effect is it going to have on the economy? How screwed am I with it? How screwed am I without it? You know, basic questions. Right now, all I see are some people screaming against and some people screaming for it. Without knowing some of the basics, I can't make an informed decision.

I did a small amount of research last night, and from the "conservative" side, the biggest complaints seem to be a) the size, b) they're not getting money for their churches or religious agendas (duh!) or c) that there's any spending at all. On the lib side, most seem to be in favor of it, aside from the consessions made to make the 'pubs happy. I see a number of columnists (like those listed above) saying they don't like it, then I see a list of 200 economists (quite a few of which have won the Nobel price in economics) supporting it. Both have good reasons and analysis for and against.

So, the biggest complaint that I can find is that it's a spending bill, which I don't have a problem with. I've reviewed what the spending is for, and I can get behind most of it. For example, some 45% of the bridges in NYS were called unsafe to drive over, so I'm all for road projects...Unemployment's on the rise and going to explode, so I can get behind extending benefits. The biggest issue I have with is how much is going to the banks and/or there being no restrictions on the money being given to them...but I can't get a picture of how much of this $900 billion is going to them.

Posted by: Upstate Guy on February 5, 2009 11:09 AM

$5 Billion for ACORN, $400 Million to study global warming, money for dog parks...What's not to like?

And what churches would the Republicans give the money to?

If you haven't figured what this "stimulus" bill is about, you're an idiot.

Posted by: Send the Check on February 5, 2009 12:00 PM

Moira - When you say "there are functioning banks out there", what do you mean? Small regional banks that, even if they worked in concert, would have no impact on the frozen credit markets?

I agree the system is a mess and TARP was an awful idea. But it will be the banks, providing needed capital to business, that will pull us out of this mess. All I'm saying is, fine, stop "shoveling money" to the banks, but also suspend some of the restrictions that are impediments to their recovery, and hence, the economy's recovery.

Posted by: Bill on February 5, 2009 12:35 PM

As far as I know, none of the stimulus is going to banks, but (unfortunately) most or all of the bailout is. Two different things. I absolutely support the stimulus.

Posted by: John Emerson on February 5, 2009 12:37 PM


You state "every stimulus bill is a spending bill" and "every spending bill is a stimulus bill." Are you coming to this conclusion through logic or observation?

If through logic, your thinking is fallacious. For example, while all whales are mammals, NOT all mammals are whales.

If through observation, please explain to me how a foreign aid bill (a spending bill) for say, Ethiopia, helps to stimulate the US economy and create US jobs?

Posted by: Bill on February 5, 2009 12:53 PM

There's a bit of an easy assumption being made by some people, it seems to me. It's that, if we just throw enough money at them, the big in-peril banks will be able to relax, exit "panic" mode, and start making loans again. Life will return to normal.

But is that the way life really works? Reality check time: Despite all the moolah that's been thrown at them so far, the big in-peril banks aren't making loans anyway.

So why do we assume that if only sufficient dough is created and steered their way that they'll behave any differently? How many trillions of made-up money will it take to get things moving? And, given the state of things, is it even possible that "normal" can even be returned to?

If not, perhaps other options ought to be considered ...

Posted by: Michael Blowhard on February 5, 2009 1:01 PM

Spending money overseas would not be a stimulus, granted. But saying "We want a stimulus bill, but let's be frugal" makes no sense. Spending money is the purpose.

Posted by: John Emerson on February 5, 2009 1:23 PM

$5 Billion for ACORN, $400 Million to study global warming, money for dog parks...What's not to like?

Agreed, it's going to be used where it's been needed for far too long.

And what churches would the Republicans give the money to?

There was some article on a conservative site about how provisions for charities or schools specified the funds couldn't be used to refurbish or upgrade religious infrastructure (so, a school couldn't use the money to refurbish their chapel, but could use it to upgrade their computer labs). They also had their panties in a twist about getting only sex ed programs that worked...they wanted only ones that advocated abstinence-only. We've wasted enough money on those programs, thank you.

If you haven't figured what this "stimulus" bill is about, you're an idiot.

I know what it's about, I'm trying to find out what the effects are going to be. I was also trying to find out why everyone was talking about rules for the banks in conversations about the package when I didn't see any money going to the banks. And, jitbag assmunches such as yourself who answer honest questions with statements like that only cloud the issue. But, since you bring nothing of value to the conversation, I suppose we can only expect attacks.

As far as I know, none of the stimulus is going to banks, but (unfortunately) most or all of the bailout is. Two different things. I absolutely support the stimulus.

Thank you, I guess at the base of it all, that was the answer I needed. I got the impression we were discussing two different things, but couldn't find anything to verify that.

Posted by: Upstate Guy on February 5, 2009 2:48 PM

Did you look to see if anyone was in support of the idea, or did you just look for positions that supported your own?

LOL, yeah seriously. Why not just quote Joe the Plumber?

Posted by: JewishAtheist on February 5, 2009 2:56 PM

Some of the stimulus spending, if there is any, is going to be on stuff the Republicans don't like. Those guys should figure out that they lost the House, the Senate, and the Presidency, and they also should think about how badly GWB messed up when the Republicans had total control. They had their chance and they struck out.

Posted by: John Emerson on February 5, 2009 3:50 PM

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