Jesse nails it.
After thinking it over, and listening carefully to the discussion on financial television and the news today in reaction to the proposal for a special bank tax, I can come to no other conclusion. Wall Street thinks that the American people, who came to their aid after the collapse of a monumental and most likely fraudulent bubble, are jealous little malcontents.
They believe that the public wants to limit the bonuses paid by Wall Street because they are just jealous. Or stupid and petty. At least they wish to leave their viewers and readers with that impression.
That's the long and short of it. You, average working stiff and retiree, are just a jealous little malcontent who envies the great success of the financial sector, much like some foreign agitator who attacks the West because they envy its freedoms.
And you are seeking retribution, revenge. That is what this bank tax is all about, retribution.
An economics professor just admitted that he too feels a need for retribution at times, as an emotional response, but being a more educated fellow he sees how negative that is. Instead he proposes that if we must have some bank tax that we divert the funds received into a bank holding fund, a kind of a TARP II, to pay for future financial disasters. Forget about reform. The banks are too smart for it.
I would not call it jealousy or a need for retribution.
I would say that the people as a whole have a sense of right and wrong, a sense of fairness and balance, a sense of outrage that is being held in check by patience, a remarkable forebearance, but wish to see justice done for themselves and their children, because it is the right thing, the only practical thing, to do.
But I can also understand why the Wall Street Bankers and the financial elite would see this as jealousy and envy.
Sociopath: (so⋅ci⋅o⋅path) a person, as a psychopathic personality, whose behavior is antisocial and who lacks a sense of moral responsibility or social conscience.
The most amoral, pathological son of a bitch I ever worked with, who by the way was enormously charismatic and charming when on public display, was a big tech entrepreneur from the Boston area. When his grandiose schemes started to fall apart, as much from the impracticality of his ego as from the fact that no one would trust him any longer, having senselessly betrayed everyone including his closest friends, he said to me in all the sincerity he could muster, "I am failing because people want to drag me down to their level."
And I can assure you, the halls of too many corporations and big government are infested with such power needing, neurotically driven personality types.
This is what renders any notion of self-regulation and efficient markets the romantic fantasy that they are. People are not uniformly rational and moderate in their behaviour. All people are not possessed of a natural goodness and a self-effacing moderation.
This is what makes the rule of law, the Constitution, so indispensable.
This is not to say that their enablers, the financial demimonde, are sociopaths. They are doing what enablers too often do; go along to get along, say and do whatever is required for pay. Camp followers, as they used to be called.
And as for what happened, well, as one well-heeled, successful young manager advised, "Older people are easy to handle. You just scare them. Then they do whatever they are told."
In his mind 'older' was anyone over 40. And as for the rest of the people, well, you just play on their other emotions like hatred and greed and prejudice. He saw absolutely nothing wrong with this, and was so straightfoward and unabashed in this view that it made my blood run cold, because it was clear that he was not alone in this perspective. And it is obvious that Tim, Ben, and Hank did exactly this, and it worked.
And so now they hit the theme that if the banks are taxed, they will just find ways around the restrictions, and keep doing what they wish to do with bonuses and speculation, but may stop lending to the people for their commercial and personal needs, to punish them.
So there you have it. You are a jealous, envious, little nobody desiring retribution from your betters in the land that your fathers fought and died for.
And not only that, but many of your middle class fellows would agree. They would not think this about themselves of course, but about you, the other. The lazy stupid one. There is no easier way to elevate yourself in your own mind than to just put down, impoverish, the other.
And the banks and their enablers in the government will use this, and shape your thinking with it.
You cannot say that you have not been warned. Many times. Money is power, and in a free republic power must be restrained with checks and balances, with a continuing effort and vigilance.
"Banks have done more injury to the religion, morality, tranquility, prosperity, and even wealth of the nation than they can have done or ever will do good." John Adams
There can be no easy truce, no peaceful resolution of the current crisis, until the banks are restrained, and the political and financial systems are reformed, and balance is restored to the economy.
"I believe that it is better to tell the truth than to lie. I believe that it is better to be free than to be a slave. And I believe that it is better to know than be ignorant." H. L. Mencken
Never allow yourself to succumb to hatred and a desire for retribution rather than justice. It is always wrong to hate, because the ultimate tragedy is that we become what we hate, we take the shape of that which possesses our passions, thoughts and attention, we adopt its methods and distortions, even if as in a mirror, until we too are misshapen and lost. And that is the real tragedy, how the whole world can descend into a whirlpool of madness, and become blind. So let us appeal to the law, and to justice, at every turn.
Mr. Obama. Reform these banks.
http://jessescrossroadscafe.blogspot.com/2010/01/wall-street-thinks-you-are-envious-and.html
Showing posts with label bailout. Show all posts
Showing posts with label bailout. Show all posts
17 January 2010
27 November 2009
IMF warns second bailout would 'threaten democracy'
The public will not bail out the financial services sector for a second time if another global crisis blows up in four or five years time, the managing-director of the International Monetary Fund warned this morning.
Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.
"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.
"I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future," he said.
Mr Strauss-Kahn said that imposing high capital ratio requirements on banks was one price the financial services sector must pay to prevent the threat of further multi-billion dollar bailouts.
He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years' time.
Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.
In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in "complete denial" over the mounting bill of the financial rescue packages and agreed with Britain's neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.
Mr Strauss-Kahn said that while the global economy had made "remarkable" progress in exiting recession, and was on the cusp of recovery, it remained "highly vulnerable" to shocks.
He said state support for the world's battered economies must remain in place if a smooth recovery is to be achieved.
"We recommend erring on the side of caution as exiting too early is costlier than exiting too late."
Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.
In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.
His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.
The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.
Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will "depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other".
Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.
http://business.timesonline.co.uk/tol/business/economics/article6928147.ece#cid=OTC-RSS&attr=1185799
Dominique Strauss-Kahn told the CBI annual conference of business leaders that another huge call on public finances by the financial services sector would not be tolerated by the “man in the street” and could even threaten democracy.
"Most advanced economies will not accept any more [bailouts]...The political reaction will be very strong, putting some democracies at risk," he told delegates.
"I do believe that the financial sector needs to contribute both to the costs of the financial crisis and to reduce recourse to public funds in the future," he said.
Mr Strauss-Kahn said that imposing high capital ratio requirements on banks was one price the financial services sector must pay to prevent the threat of further multi-billion dollar bailouts.
He pointed to the debate in the US over the Troubled Asset Relief Programme and said that in many countries, including France and Germany, he doubted that politicians would secure the mandate needed to secure any further bail-outs if banks got in to trouble again, in several years' time.
Europe is in dispute over the spiralling cost of the global economic bailout, with Germany and France calling for a reduction in state support as their economies have shown signs of an upturn.
In September, George Osborne, the Shadow Chancellor, sided with Germany and France, accusing Gordon Brown of being in "complete denial" over the mounting bill of the financial rescue packages and agreed with Britain's neighbours that it was time to look for an exit strategy. Countries are recovering from recession at different rates, with Britain lagging behind.
Mr Strauss-Kahn said that while the global economy had made "remarkable" progress in exiting recession, and was on the cusp of recovery, it remained "highly vulnerable" to shocks.
He said state support for the world's battered economies must remain in place if a smooth recovery is to be achieved.
"We recommend erring on the side of caution as exiting too early is costlier than exiting too late."
Mr Strauss-Kahn is one of a series of high-profile speakers at the CBI conference, in Central London. Gordon Brown, David Cameron and Nick Clegg will all speak at the event as they seek to sway influential business leaders before a general election next year.
In his speech, Mr Strauss-Kahn also warned that the huge amounts of capital being pumped into China could fuel a pan-Asian bubble.
His comments come after warnings from economists that the economic conditions in China and the rest of Asia are such that asset prices could rip free of their fundamental values unless the bubble threat is addressed.
The Chinese banking sector is currently the scene of an unprecedented frenzy of new lending, which could reach up to 11,000 billion yuan (£97.7 billion) by the end of this year.
Mr Strauss-Khan said that the old paradigm of growth generation based on households in the US was dead. The future sources of growth and the recovery will "depend on a new balance between the US and deficit countries on one hand and emerging markets and surplus countries on the other".
Emerging markets will provide some of the growth that the US can no longer offer, however he warned that while China and other emerging Asian economies were shifting from exports to domestic demand, they still had some way to go.
http://business.timesonline.co.uk/tol/business/economics/article6928147.ece#cid=OTC-RSS&attr=1185799
22 November 2009
Banks drift toward being part of the problem and not the solution
Repudiating the architects of the faux boom is a necessary but not sufficient condition for world economic recovery.
From Liberal Krugman, "Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust."
http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&sq=%22The%20Big%20Squander%22&st=cse&adxnnl=1&scp=1&adxnnlx=1258773939-FKsmEbG/NnGjwtcOXVjkfg
To conservative Wolf, FT, "Over the past half century, UK bank capital has remained at between 3 per cent and 5 per cent of assets, these assets have risen tenfold, relative to GDP, and returns on equity have averaged 20 per cent. Such high returns, in an established industry, must mean either high barriers to entry or excessive risk-taking. The former are undesirable and the latter terrifying, particularly in view of the huge rise in the state’s exposure to the risks."
http://www.ft.com/cms/s/0/f9d3132c-d55b-11de-81ee-00144feabdc0.html
Buiter, FT, proposing auditing the ECB,
"A comprehensive independent audit of the Fed’s use of what is, in the final analysis, public money and therefore tax payers’ money is long overdue. This is a major victory for democracy and the public’s right to know what those to whom certain public functions have been delegated and entrusted have been doing with the taxpayers’ money.
What’s good for the Fed and for American democracy is equally important for the European Central Bank and European democracy or for the Bank of England and British democracy. It is time for a detailed and comprehensive independent audit of the ECB’s financial transactions since the beginning of the crisis. This should include a close examination of the precise terms and conditions, including valuations of illiquid collateral, on which liquidity support, including enhanced (credit) liquidity support has been made available to the Euro Area banks by the NCBs of the Eurosystem."
http://blogs.ft.com/maverecon/2009/11/auditing-the-central-bank-a-jolly-good-thing/#more-7751
From Liberal Krugman, "Government officials, perhaps influenced by spending too much time with bankers, forgot that if you want to govern effectively you have retain the trust of the people. And by treating the financial industry — which got us into this mess in the first place — with kid gloves, they have squandered that trust."
http://www.nytimes.com/2009/11/20/opinion/20krugman.html?_r=1&sq=%22The%20Big%20Squander%22&st=cse&adxnnl=1&scp=1&adxnnlx=1258773939-FKsmEbG/NnGjwtcOXVjkfg
To conservative Wolf, FT, "Over the past half century, UK bank capital has remained at between 3 per cent and 5 per cent of assets, these assets have risen tenfold, relative to GDP, and returns on equity have averaged 20 per cent. Such high returns, in an established industry, must mean either high barriers to entry or excessive risk-taking. The former are undesirable and the latter terrifying, particularly in view of the huge rise in the state’s exposure to the risks."
http://www.ft.com/cms/s/0/f9d3132c-d55b-11de-81ee-00144feabdc0.html
Buiter, FT, proposing auditing the ECB,
"A comprehensive independent audit of the Fed’s use of what is, in the final analysis, public money and therefore tax payers’ money is long overdue. This is a major victory for democracy and the public’s right to know what those to whom certain public functions have been delegated and entrusted have been doing with the taxpayers’ money.
What’s good for the Fed and for American democracy is equally important for the European Central Bank and European democracy or for the Bank of England and British democracy. It is time for a detailed and comprehensive independent audit of the ECB’s financial transactions since the beginning of the crisis. This should include a close examination of the precise terms and conditions, including valuations of illiquid collateral, on which liquidity support, including enhanced (credit) liquidity support has been made available to the Euro Area banks by the NCBs of the Eurosystem."
http://blogs.ft.com/maverecon/2009/11/auditing-the-central-bank-a-jolly-good-thing/#more-7751
10 November 2009
Financial mess isn't even the end of the beginning.. Halligan
This blogger prefers Liam Halligan to Ambrose Evans-Pritchard, any day....
So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.
Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.
In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.
Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.
Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".
The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.
A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.
Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.
So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.
The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.
This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.
Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.
Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.
The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.
This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.
I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.
http://www.telegraph.co.uk/finance/comment/liamhalligan/6521350/This-financial-mess-isnt-even-the-end-of-the-beginning-for-UK-wealth.html
So terrible was Gordon Brown's economic stewardship during his decade as Chancellor from 1997, and so huge has been his "fiscal stimulus" since, that the UK now has the biggest structural deficit of any major country.
Britain faces a 2009/10 fiscal shortfall equal to 13pc of GDP – the biggest in our peacetime history – with little sign of improvement. The Government will borrow some £200bn on taxpayers' behalf every year until 2012/13 at least – eight times above "normal" levels. In just four years, an extra £32,000 will be added to the existing sovereign debt burden of every British household.
In an admirably frank report last week, the International Monetary Fund singled out the UK as "uniquely vulnerable" to spiralling debt service costs as we deal with the mess left by Brown's fiscal incontinence. In 2007, Britain spent 4.2pc of its tax revenues on debt interest. By 2014, we'll spend almost 10pc of receipts on servicing government loans, before we even start paying them back, as our national debt sky-rockets from 40pc to more than 100pc of GDP.
Just the increase in annual debt service will equal what the Government currently spends on public transport. Thank you, Mr Brown, for your contribution to our country.
Yet Brown didn't do this alone. Most of our political classes have been complicit in this historic policy error. The UK's mainstream parties, having finally admitted our fiscal situation is desperate, have only recently stopped competing on the basis of who can spend more. Public discourse is now starting, very slowly, to recognise that we actually need to spend and borrow much less. But the politicians still claim, sotto voce, that a debt burden equal to 100pc of GDP "isn't all that bad".
The UK's debt stock is accumulating rapidly, though, at a time when tax revenues, used to service that debt, are going through the floor. Government receipts were down 9pc in September, compared with the same month last year. So we're at risk of plunging into a "debt trap" – having to borrow to pay the debt service on existing debt, causing the total debt stock to spiral out of control.
A sharp economic downturn is always bad for tax receipts. But with the City in meltdown and the UK now a net oil importer, two big sources of government cash have been hammered, indeed making Britain's public finance "uniquely vulnerable". And that's before interest rates start rising, cranking up debt service costs even more.
Faced with such realities, rather than telling the public straight that we face the peacetime equivalent of "blood, sweat and tears", and that sacrifices must be made, our so-called leaders keep the Keynesian rhetoric going. Behind the scenes, though, even Brown and Co have grasped that yet another "fiscal stimulus" would see a sovereign debt downgrade, in turn provoking a creditors' strike – under which the UK would be rendered "insolvent", unable to roll-over its debts.
So that leaves "quantitative easing" – or QE – the even more extreme policy where the Bank of England creates electronic money from nothing, apparently in a bid to stimulate the economy.
The Bank has already created £175bn of such "funny money" since March – some 99.7pc of which, in a bizarre example of circular financing, has been spent on government securities. So our central bank prints money and gives it to the Government, which in turn gives it to the banks. This is the economics of Zimbabwe and the Weimar Republic.
This QE money is supposed to boost bank lending. But banks have instead stuffed much of it into shares on their own account, creating yet another asset bubble. Banks say they're lending more – and they are in the sense that they're "lending" to their own off-balance sheet vehicles, in a desperate attempt to shore-up disastrous sub-prime positions and avoid the write-downs and bank restructuring desperately needed to purge the system.
Lending to the non-financial sector, meanwhile, remains in negative territory despite QE – with thousands of viable UK firms, employing millions of people, facing closure due to a lack of working capital.
Last week, the Bank announced that QE would carry-on – with another £25bn being "injected" into the economy. But heavy hints were dropped that this is the end.
The Bank had to hint this. The UK's international creditors are getting nervous. Despite the on-going "deflation" propaganda, there is growing concern that Britain's money-printing will cause not only inflation to spike, but a sterling crisis too. Both would be very bad news for anyone holding sterling-denominated government securities that aren't indexed-linked – as is the case with the vast majority of UK gilts that are sold.
This latest dose of QE isn't the end of this age of deeply-damaging policy-making by the British political elite. It isn't even the beginning of the end of this ghastly episode in our history, in which our leaders throw all caution to the wind, ignoring centuries of accumulated wisdom and make a bad situation even worse.
I fear we have reached, merely, the end of the beginning of an extremely difficult period in our history, when living standards plunge, our public finances deteriorate further and enterprise stagnates. And as a UK citizen and taxpayer, I write that with a very heavy heart.
http://www.telegraph.co.uk/finance/comment/liamhalligan/6521350/This-financial-mess-isnt-even-the-end-of-the-beginning-for-UK-wealth.html
15 June 2009
Socialism For the Rich ~ Stiglitz
June 13, 2009 " The Guardian" -- With all the talk of "green shoots" of economic recovery, America's banks are pushing back on efforts to regulate them. While politicians talk about their commitment to regulatory reform to prevent a recurrence of the crisis, this is one area where the devil really is in the details – and the banks will muster what muscle they have left to ensure that they have ample room to continue as they have in the past.
The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger.
It has long been recognised that those America's banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab.
This is not just theory; it is a lesson we learned, at great expense, during the Savings and Loan crisis of the 1980s. When the ATM machine says "insufficient funds", the government doesn't want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes the government must provide additional funds; sometimes it looks for a new investor to take over the failed bank.
The Obama administration has, however, introduced a new concept: too big to be financially restructured. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, we not only can't touch the bondholders, we also can't even touch the shareholders – even if most of the shares' existing value merely reflects a bet on a government bailout.
I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scaremongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.
Restructuring gives banks a chance for a new start: new potential investors (whether in equity or debt instruments) will have more confidence, other banks will be more willing to lend to them and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.
But what is clear is that the Obama strategy's current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future.
Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. Tearing up the social contract is something that should not be done lightly.
But this new form of ersatz capitalism, in which losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.
Some have called this new economic regime "socialism with American characteristics". But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance too.
America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance and now to cars, with no end in sight. In truth, this is not socialism, but an extension of longstanding corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.
We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don't break them up, then we have to severely limit what they do. They can't be allowed to do what they did in the past – gamble at others' expenses.
This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.
The old system worked well for the bankers (if not for their shareholders), so why should they embrace change? Indeed, the efforts to rescue them devoted so little thought to the kind of post-crisis financial system we want that we will end up with a banking system that is less competitive, with the large banks that were too big too fail even larger.
It has long been recognised that those America's banks that are too big to fail are also too big to be managed. That is one reason that the performance of several of them has been so dismal. Because government provides deposit insurance, it plays a large role in restructuring (unlike other sectors). Normally, when a bank fails, the government engineers a financial restructuring; if it has to put in money, it, of course, gains a stake in the future. Officials know that if they wait too long, zombie or near zombie banks – with little or no net worth, but treated as if they were viable institutions – are likely to "gamble on resurrection". If they take big bets and win, they walk away with the proceeds; if they fail, the government picks up the tab.
This is not just theory; it is a lesson we learned, at great expense, during the Savings and Loan crisis of the 1980s. When the ATM machine says "insufficient funds", the government doesn't want this to mean that the bank, rather than your account, is out of money, so it intervenes before the till is empty. In a financial restructuring, shareholders typically get wiped out, and bondholders become the new shareholders. Sometimes the government must provide additional funds; sometimes it looks for a new investor to take over the failed bank.
The Obama administration has, however, introduced a new concept: too big to be financially restructured. The administration argues that all hell would break loose if we tried to play by the usual rules with these big banks. Markets would panic. So, we not only can't touch the bondholders, we also can't even touch the shareholders – even if most of the shares' existing value merely reflects a bet on a government bailout.
I think this judgment is wrong. I think the Obama administration has succumbed to political pressure and scaremongering by the big banks. As a result, the administration has confused bailing out the bankers and their shareholders with bailing out the banks.
Restructuring gives banks a chance for a new start: new potential investors (whether in equity or debt instruments) will have more confidence, other banks will be more willing to lend to them and they will be more willing to lend to others. The bondholders will gain from an orderly restructuring, and if the value of the assets is truly greater than the market (and outside analysts) believe, they will eventually reap the gains.
But what is clear is that the Obama strategy's current and future costs are very high – and so far, it has not achieved its limited objective of restarting lending. The taxpayer has had to pony up billions, and has provided billions more in guarantees – bills that are likely to come due in the future.
Rewriting the rules of the market economy – in a way that has benefited those that have caused so much pain to the entire global economy – is worse than financially costly. Most Americans view it as grossly unjust, especially after they saw the banks divert the billions intended to enable them to revive lending to payments of outsized bonuses and dividends. Tearing up the social contract is something that should not be done lightly.
But this new form of ersatz capitalism, in which losses are socialised and profits privatised, is doomed to failure. Incentives are distorted. There is no market discipline. The too-big-to-be-restructured banks know that they can gamble with impunity – and, with the Federal Reserve making funds available at near-zero interest rates, there are ample funds to do so.
Some have called this new economic regime "socialism with American characteristics". But socialism is concerned about ordinary individuals. By contrast, the US has provided little help for the millions of Americans who are losing their homes. Workers who lose their jobs receive only 39 weeks of limited unemployment benefits, and are then left on their own. And, when they lose their jobs, most lose their health insurance too.
America has expanded its corporate safety net in unprecedented ways, from commercial banks to investment banks, then to insurance and now to cars, with no end in sight. In truth, this is not socialism, but an extension of longstanding corporate welfarism. The rich and powerful turn to the government to help them whenever they can, while needy individuals get little social protection.
We need to break up the too-big-to-fail banks; there is no evidence that these behemoths deliver societal benefits that are commensurate with the costs they have imposed on others. And, if we don't break them up, then we have to severely limit what they do. They can't be allowed to do what they did in the past – gamble at others' expenses.
This raises another problem with America's too-big-to-fail, too-big-to-be-restructured banks: they are too politically powerful. Their lobbying efforts worked well, first to deregulate and then to have taxpayers pay for the cleanup. Their hope is that it will work once again to keep them free to do as they please, regardless of the risks for taxpayers and the economy. We cannot afford to let that happen.
Bank Rescue Costs EU States $5.3 Trillion, More Than German GDP
June 12 (Bloomberg) -- European governments have approved $5.3 trillion of aid, more than the annual gross domestic product of Germany, to support banks during the credit crunch, according to a European Union document.
The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country’s 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros.
The measures, designed to save banks and revive economic growth, surpass Germany’s $3.3 trillion economy, the region’s biggest. They also helped to widen the Euro area’s budget deficit to the most in three years in 2008. The commission, the EU’s executive arm, is seeking to create the first EU-wide agencies with rule-making powers to monitor risk in the economy after the crisis led to $460 billion of losses and writedowns across the continent, according to data compiled by Bloomberg.
“The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios,” according to the document, produced by the EU’s Economic and Financial Committee. The draft document, partially entitled “the effectiveness of financial support measures,” will be debated at the next meeting of EU leaders on June 18-19 in Brussels.
Government Pledges
EU governments approved about 311.4 billion euros for capital injections, 2.92 trillion euros for bank liability guarantees, 33 billion euros for relief of impaired assets and 505.6 billion euros for liquidity and bank funding support, a total of 3.77 trillion euros, the document shows.
The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.
A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody’s Investors Service.
All together, the EU paper said that 18 member states have introduced bank liability guarantees, 15 have approved recapitalization measures, and 11 have given liquidity support.
The programs have “contributed to a stabilization of the extremely tense financial market conditions that were witnessed in the autumn of last year,” according to the document. Still, there remain “elevated risk premiums in many parts” of the financial markets and this is “likely to remain challenging.”
‘High Risk Premiums’
The decline of lending in Europe “remains mainly demand- driven, but banks’ balance sheet constraints and limited access to medium- and long-term financing” and high risk premiums “may also have contributed,” according to preliminary ECB analysis, the document said.
Government’s attempts to make banks pledge to increase lending as a condition of taxpayer support may “imply that banks lose one of their credit tools to manage credit risk if no safeguards are established to ensure” that loans are made on commercial terms and with “sound risk management techniques.”
The British government this year secured promises of additional mortgage and business lending from Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Northern Rock Plc in return for aid.
Further Disclosure
The document called on European leaders to seek further disclosure on impaired assets and to restore confidence in the industry. New EU guidelines may require banks in receipt of aid to sell branches or units to win approval for restructuring plans, according to the document. These guidelines could be approved as soon as the end of the month.
Banks in Germany received the third-largest amount in aid, the document showed, for a total of 554.2 billion euros. Commerzbank AG, Germany’s second-biggest bank, was told to sell its Eurohypo commercial property unit by the Commission on May 7 to win approval for a second bailout by the German government.
Following is a table of European government’s commitments. All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.
United Kingdom 781.2
Denmark 593.9
Germany 554.2
Ireland 384.5
France 350.1
Belgium 264.5
Netherlands 246.1
Austria 165
Sweden 142
Spain 130
To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net
http://bloomberg.com/apps/news?pid=20601109&sid=aI.TvvSBYXBM
The U.K. pledged 781.2 billion euros ($1.1 trillion) to restore confidence in its lenders, the most of any of the 27 EU members, according to a May 26 document prepared by officials from the European Commission, the European Central Bank and member states and obtained by Bloomberg News. Denmark, where 13 of the country’s 140 banks were bailed out by the central bank or bought by rivals last year, committed 593.9 billion euros.
The measures, designed to save banks and revive economic growth, surpass Germany’s $3.3 trillion economy, the region’s biggest. They also helped to widen the Euro area’s budget deficit to the most in three years in 2008. The commission, the EU’s executive arm, is seeking to create the first EU-wide agencies with rule-making powers to monitor risk in the economy after the crisis led to $460 billion of losses and writedowns across the continent, according to data compiled by Bloomberg.
“The operating environment for banks is likely to remain challenging, in particular in respect of credit losses linked to their loan portfolios,” according to the document, produced by the EU’s Economic and Financial Committee. The draft document, partially entitled “the effectiveness of financial support measures,” will be debated at the next meeting of EU leaders on June 18-19 in Brussels.
Government Pledges
EU governments approved about 311.4 billion euros for capital injections, 2.92 trillion euros for bank liability guarantees, 33 billion euros for relief of impaired assets and 505.6 billion euros for liquidity and bank funding support, a total of 3.77 trillion euros, the document shows.
The U.S. government and the Federal Reserve had spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, as of March 31.
A majority of new member states including Slovakia, the Czech Republic, Estonia and Lithuania have not taken public measures to support their financial markets, the draft said. Many banks in the region are foreign-owned. More than 80 percent of bank loans in central and eastern Europe come from lenders owned by six western European EU countries, according to Moody’s Investors Service.
All together, the EU paper said that 18 member states have introduced bank liability guarantees, 15 have approved recapitalization measures, and 11 have given liquidity support.
The programs have “contributed to a stabilization of the extremely tense financial market conditions that were witnessed in the autumn of last year,” according to the document. Still, there remain “elevated risk premiums in many parts” of the financial markets and this is “likely to remain challenging.”
‘High Risk Premiums’
The decline of lending in Europe “remains mainly demand- driven, but banks’ balance sheet constraints and limited access to medium- and long-term financing” and high risk premiums “may also have contributed,” according to preliminary ECB analysis, the document said.
Government’s attempts to make banks pledge to increase lending as a condition of taxpayer support may “imply that banks lose one of their credit tools to manage credit risk if no safeguards are established to ensure” that loans are made on commercial terms and with “sound risk management techniques.”
The British government this year secured promises of additional mortgage and business lending from Lloyds Banking Group Plc, Royal Bank of Scotland Group Plc and Northern Rock Plc in return for aid.
Further Disclosure
The document called on European leaders to seek further disclosure on impaired assets and to restore confidence in the industry. New EU guidelines may require banks in receipt of aid to sell branches or units to win approval for restructuring plans, according to the document. These guidelines could be approved as soon as the end of the month.
Banks in Germany received the third-largest amount in aid, the document showed, for a total of 554.2 billion euros. Commerzbank AG, Germany’s second-biggest bank, was told to sell its Eurohypo commercial property unit by the Commission on May 7 to win approval for a second bailout by the German government.
Following is a table of European government’s commitments. All figures are in billions of euros and include capital injections, guarantees granted, effective asset relief and liquidity interventions.
United Kingdom 781.2
Denmark 593.9
Germany 554.2
Ireland 384.5
France 350.1
Belgium 264.5
Netherlands 246.1
Austria 165
Sweden 142
Spain 130
To contact the reporter on this story: Meera Louis in Brussels at mlouis1@bloomberg.net
http://bloomberg.com/apps/news?pid=20601109&sid=aI.TvvSBYXBM
19 May 2009
Catastrophic to Awful! - The Banking Spin Cycle ~ Satyajit Das
The recent rally in equity markets – the largest for decades – was predicated, in part, on the improving fortune of banks.
Banks reported better than expected profits. U.S. banks seem likely to pass the "stress" test. Repayment of taxpayers' funds by some institutions, at least, seemed imminent. Scrutiny suggests that the episode reflected Adlai Stevenson's logic: "These are conclusions on which I base my facts."
Banks beat "well managed" low-ball expectations. In the last quarter of 2008, publicly traded banks lost $52 billion. Despite a return to profitability for some institutions, in the first quarter of 2009, banks are still expected to lose around $34 billion. For example, UBS and Morgan Stanley recorded losses.
The quality of earnings was questionable. Core businesses declined 20% to 30%. Trading revenue, especially fixed income, rose sharply at most big banks, reflecting high volumes of bond issuance, especially investment grade corporate issues and government guaranteed bank debt.
Corporate issuance was the result of the continued tightening in credit availability as banks reduced balance sheet. The issuance of government guaranteed bank debt provided underwriters with a "double subsidy" – the government guaranteed the debt but then allowed the banks to earn generous fees from underwriting government guaranteed debt.
High volatility generated strong trading revenues. Key factors were increased client flows and increases in bid-offer spreads (by up to 300% in some products). High trading revenues also reflect principal position taking and trading. It will be interesting to see if trading revenues are sustainable.
Questions remain about the impact of payments by AIG to major banks including Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion). Non-U.S. banks also received substantial payments including Société Générale ($12 billion), Deutsche Bank ($12 billion), Barclays ($8.5 billion) and UBS ($5 billion). Conspiracy theories notwithstanding, it seems likely that these were collateral amounts due to the counterparty or settlement of positions that were terminated. At a minimum, the banks benefited from a one-time increase in trading volume and, reflecting the distressed condition of AIG, larger than normal bid-offer spreads on these closeouts.
The banks also benefited from revaluing their own debt where credit spreads widened. The theory is that the bank could currently purchase the debt at a value lower than face values and retire it to recognize the gain. Unfortunately, banks are not in position to realize this "paper" gain and ultimately if the debt is repaid at maturity, then the "gain" disappears.
Earning also were helped by a series of one-time factors. Bank of America realized a large gain on the sale of its stake in China Construction Bank and also revalued some acquired assets as part of the closing of its Merrill Lynch acquisition. Goldman Sachs changed it balance date, reporting results to the end of March rather than February. Given that its last financials were for the year to the end of November 2008, Goldman separately reported a loss for December 2008. It is not clear how much Goldmans Sachs profit benefited from the change in the reporting dates.
Barclays Bank recently sold its iShares unit (a profitable unit which contributed around 50% of the earnings of Barclays Global Investors) to a private equity firm for $4.2 billion, allowing the bank to book a gain of $2.2 billion that boosted capital ratios. CVC Capital only paid $1.05 billion with the rest ($3.1 billion) being borrowed from Barclays itself. The loan was for five years and Barclays is required to keep the majority of the debt on balance sheet for at least five years. In effect, the gain and capital increase is lower than the cash received (in effect, Barclays is treating part of its loan as profit and capital!). In addition, senior executives of Barclays received substantial gains from the sale under a compensation scheme where Barclays Global employees received shares and options up to 10.3 % of the division's equity.
Effects of changes in mark-to-market accounting standards, which arguably reflected political and industry pressure, are also not clear. New guidance permits banks to exclude losses deemed "temporary" and also allows significant subjectivity in valuing positions. This may improve the financial position and overstate both earnings and capital. Some commentators believe that the changes could increase earnings by up to 10% to 15% and capital by up to 20%.
The market ignored continuing increases in bad debts and provisions. After all, "that's so yesterday!" Further losses are likely in consumer lending (e.g. mortgages, credit cards and auto loans), corporate and commercial lending.
In recent years, it has become an article of accepted faith that corporate debt levels have fallen. In aggregate, that is perfectly true. However, the debt has become concentrated in a number of sectors – commercial property, merger financing, private equity/ leveraged finance and infrastructure and resource financing.
The overall quality of debt has deteriorated significantly. In 2008, more than 70% of all rated debt was non-investment grade ("junk"). This is an increase from less than 30% in 1980 and around 50% in 1990. The debt is also heavily reliant on collateral; the loans are secured against financial assets (shares and property). Reduced ability to service the debt and falling collateral values may prove problematic. For example, the recent distressed sale of the John Hancock Tower produced about half the value paid a few years earlier.
In April 2009, the International Monetary Fund (IMF) estimated that banks and other financial institutions face aggregate losses of $4.1 trillion, an increase from $2.2 trillion in January 2009, and $1.4 trillion in October, 2008. Around $2.7 trillion of the losses are expected to be borne by banks. The IMF estimated that in the United States, banks had reported $510 billion in write-downs to date and face additional write-downs of $550 billion. Eurozone banks had reported $154 billion in write-downs and face a further $750 billion in losses. British banks had written down $110 billion and face an additional $200 billion in write-offs.
Banks may not be properly provisioned for these further write-downs. Recent accounting standards made it difficult for banks to dynamically provision, whereby banks provided in low-loss years for any eventual increase in loan losses when the economic cycle turns. Criticisms regarding income smoothing led to this practice being discontinued. Increasing bad debt will flow directly into bank earnings as credit losses increase as the real economy slows.
Banks may also face write-downs in intangible assets (goodwill or surplus on acquisition) and future income tax benefits. The values of businesses purchased in a more favorable environment will need to be progressively reassessed. The tax benefits of losses can only be carried as an asset where there is a reasonable prospect of utilization in the near future.
In one of his raves on TV, James Cramer, the notorious American commentator, referred to bank accounts as "fiction." He referred to them as the work of Somerset Maugham, William Faulkner or Joseph Conrad. In reality, they are the works of lesser writers – "pulp fiction" or "romantic potboilers.''
The stress tests do not provide comfort regarding the health of the banks. As Nouriel Roubini, chairperson of RGE Monitor, has pointed out, the likely macro-economic environment is likely to be significantly worse than the adverse scenarios used. The Federal Reserve hinted that banks – even banks that passed the "stress test" – would be required to hold extra capital. This is puzzling as surely a bank is appropriately capitalized or it is not. Given that the test is the basis for setting solvency capital requirements, this is hardly reassuring or a guarantee that further taxpayer funded recapitalization of the banking system is not going to be needed.
The proposal floated by some banks to return taxpayer capital misses an essential point. The banks did not offer to waive the government/ FDIC guarantees, which have allowed them to fund in the capital markets. The suspicion is that the proposal had more to do with avoiding close public scrutiny of compensation and hiring practices. Goldman's compensation costs increased 18% in the first quarter while employee numbers were down around 7%, translating into a 27% increase in employee costs.
The reality is that the global economic system is deleveraging and levels of debt must be reduced. As result, asset values are declining and sustainable growth levels have fallen significantly. In this environment, banks are likely to continue to suffer losses on assets (bad debts and further write-offs) and earnings will remain sluggish (lower loan demand and lower levels of financial transactions). Higher funding costs and the need to raise capital compound the difficulties. For the banks currently: "On the liability side, some things aren't right and on the asset side, nothing's left."
Many major global bank shares are still, on average, trading at levels 70% to 90% below their highs. Following the collapse of the "bubble" economy, Japanese banks staged a number of significant recoveries in share price before falling sharply, necessitating government intervention to recapitalize and consolidate the banking system.
Analysis of recent financial performance does not also take into account the underlying favorable current dynamics of the banking industry. Banks are currently beneficiaries of very low and, in some cases, zero cost of deposits. Banks also benefit from a sharply upward sloping yield curve that allows them to generate significant earnings from borrowing short and lending long. Banks have also benefited from subsidies and support from governments; favorable changes in the fair value accounting treatment of securities; and sharply lower competition in most market segments. Adjusting for these factors, it is surprising that banks haven't actually performed better.
The truth is that banks remain in the ICU (intensive care unit). Even after around $900 billion in new capital, the global banking system remains short of capital by $1 trillion to $2 trillion. This translates into an effective reduction in available credit of around 20% to 30% from previous levels. Bank earnings and balance sheets remain under pressure.
The financial system will need continued government support for some time to come, even though the performance of governments trying to rehabilitate the financial system has been problematic. In April 2009, Elizabeth Warren, chairperson of the Troubled Asset Relief Program (TARP) Oversight Panel, questioned the very approach to resolving the problems of the financial system: "Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury's Public-Private Investment Program (PPIP) approach is its belief that the system-wide deleveraging resulting from the decline in asset values'' – thus leading to an accompanying drop in net wealth across the country – "is in large part the product of temporary liquidity constraints [that are a consequence of] non-functioning markets for troubled assets. On the other hand, it is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.''
Two other panel members, New York State Superintendent of Banks Richard Neiman and former New Hampshire Sen. John Sununun, issued dissenting findings, noting: "We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan." Many would question the selection of the words "incorrectly imply."
Constant changes in tack in the dealing with financial system problems do not suggest a consistent and well thought out strategy in dealing with the problem. Less than rigorous stress tests, using the PPIP to leverage FDIC funding into a lopsided subsidy for private investors or converting the preferred stock into shares to avoid having to seek additional congressional mandates also suggest political constraints in resolving the issues.
Evidence of political influence and a palpable lack of transparency in dealing with the problems are emerging. There are allegations that the Treasury may have "pushed" Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. The Treasury secretary at the time, Henry Paulson, is alleged to have suggested that Bank of America's management and board could be removed if it did not proceed. There are also suggestions that both the Treasury and Bank of America decided to avoid public disclosure of these events.
In his books "The Logic of Collective Action" and "The Rise and Decline of Nations," American economist Mancur Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well-funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate, burdening and ultimately paralyzing the economic system, causing inevitable and irretrievable economic decline.
Government attempts to deal with the problems of the financial system, especially in the U.S., Great Britain and other countries, illustrates Olson's thesis. Active well-funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system. Urgent steps are necessary to accurately recognize losses on assets, remove toxic assets from balance sheets, recapitalize the banks and allow normal financial transactions to resume. If such actions are not taken then the broader economy and sustainable growth levels will be adversely affected. There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.
Amusingly, Peter Hahn, a former managing director of CitiGroup and now a fellow at London's Cass Business School, was reported by Bloomberg as saying: "When you look at the income numbers that have been put out by banks recently, they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment."
Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.
Satyajit Das is a risk consultant and author of "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives" (2006, FT-Prentice Hall)
Views are as of May 15, 2009, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security.
Federated Equity Management Company of Pennsylvania.
http://www.prudentbear.com/index.php/guestcommentaryview?art_id=10228
Banks reported better than expected profits. U.S. banks seem likely to pass the "stress" test. Repayment of taxpayers' funds by some institutions, at least, seemed imminent. Scrutiny suggests that the episode reflected Adlai Stevenson's logic: "These are conclusions on which I base my facts."
Banks beat "well managed" low-ball expectations. In the last quarter of 2008, publicly traded banks lost $52 billion. Despite a return to profitability for some institutions, in the first quarter of 2009, banks are still expected to lose around $34 billion. For example, UBS and Morgan Stanley recorded losses.
The quality of earnings was questionable. Core businesses declined 20% to 30%. Trading revenue, especially fixed income, rose sharply at most big banks, reflecting high volumes of bond issuance, especially investment grade corporate issues and government guaranteed bank debt.
Corporate issuance was the result of the continued tightening in credit availability as banks reduced balance sheet. The issuance of government guaranteed bank debt provided underwriters with a "double subsidy" – the government guaranteed the debt but then allowed the banks to earn generous fees from underwriting government guaranteed debt.
High volatility generated strong trading revenues. Key factors were increased client flows and increases in bid-offer spreads (by up to 300% in some products). High trading revenues also reflect principal position taking and trading. It will be interesting to see if trading revenues are sustainable.
Questions remain about the impact of payments by AIG to major banks including Goldman Sachs ($12.9 billion), Merrill Lynch ($6.8 billion), Bank of America ($5.2 billion), Citigroup ($2.3 billion) and Wachovia ($1.5 billion). Non-U.S. banks also received substantial payments including Société Générale ($12 billion), Deutsche Bank ($12 billion), Barclays ($8.5 billion) and UBS ($5 billion). Conspiracy theories notwithstanding, it seems likely that these were collateral amounts due to the counterparty or settlement of positions that were terminated. At a minimum, the banks benefited from a one-time increase in trading volume and, reflecting the distressed condition of AIG, larger than normal bid-offer spreads on these closeouts.
The banks also benefited from revaluing their own debt where credit spreads widened. The theory is that the bank could currently purchase the debt at a value lower than face values and retire it to recognize the gain. Unfortunately, banks are not in position to realize this "paper" gain and ultimately if the debt is repaid at maturity, then the "gain" disappears.
Earning also were helped by a series of one-time factors. Bank of America realized a large gain on the sale of its stake in China Construction Bank and also revalued some acquired assets as part of the closing of its Merrill Lynch acquisition. Goldman Sachs changed it balance date, reporting results to the end of March rather than February. Given that its last financials were for the year to the end of November 2008, Goldman separately reported a loss for December 2008. It is not clear how much Goldmans Sachs profit benefited from the change in the reporting dates.
Barclays Bank recently sold its iShares unit (a profitable unit which contributed around 50% of the earnings of Barclays Global Investors) to a private equity firm for $4.2 billion, allowing the bank to book a gain of $2.2 billion that boosted capital ratios. CVC Capital only paid $1.05 billion with the rest ($3.1 billion) being borrowed from Barclays itself. The loan was for five years and Barclays is required to keep the majority of the debt on balance sheet for at least five years. In effect, the gain and capital increase is lower than the cash received (in effect, Barclays is treating part of its loan as profit and capital!). In addition, senior executives of Barclays received substantial gains from the sale under a compensation scheme where Barclays Global employees received shares and options up to 10.3 % of the division's equity.
Effects of changes in mark-to-market accounting standards, which arguably reflected political and industry pressure, are also not clear. New guidance permits banks to exclude losses deemed "temporary" and also allows significant subjectivity in valuing positions. This may improve the financial position and overstate both earnings and capital. Some commentators believe that the changes could increase earnings by up to 10% to 15% and capital by up to 20%.
The market ignored continuing increases in bad debts and provisions. After all, "that's so yesterday!" Further losses are likely in consumer lending (e.g. mortgages, credit cards and auto loans), corporate and commercial lending.
In recent years, it has become an article of accepted faith that corporate debt levels have fallen. In aggregate, that is perfectly true. However, the debt has become concentrated in a number of sectors – commercial property, merger financing, private equity/ leveraged finance and infrastructure and resource financing.
The overall quality of debt has deteriorated significantly. In 2008, more than 70% of all rated debt was non-investment grade ("junk"). This is an increase from less than 30% in 1980 and around 50% in 1990. The debt is also heavily reliant on collateral; the loans are secured against financial assets (shares and property). Reduced ability to service the debt and falling collateral values may prove problematic. For example, the recent distressed sale of the John Hancock Tower produced about half the value paid a few years earlier.
In April 2009, the International Monetary Fund (IMF) estimated that banks and other financial institutions face aggregate losses of $4.1 trillion, an increase from $2.2 trillion in January 2009, and $1.4 trillion in October, 2008. Around $2.7 trillion of the losses are expected to be borne by banks. The IMF estimated that in the United States, banks had reported $510 billion in write-downs to date and face additional write-downs of $550 billion. Eurozone banks had reported $154 billion in write-downs and face a further $750 billion in losses. British banks had written down $110 billion and face an additional $200 billion in write-offs.
Banks may not be properly provisioned for these further write-downs. Recent accounting standards made it difficult for banks to dynamically provision, whereby banks provided in low-loss years for any eventual increase in loan losses when the economic cycle turns. Criticisms regarding income smoothing led to this practice being discontinued. Increasing bad debt will flow directly into bank earnings as credit losses increase as the real economy slows.
Banks may also face write-downs in intangible assets (goodwill or surplus on acquisition) and future income tax benefits. The values of businesses purchased in a more favorable environment will need to be progressively reassessed. The tax benefits of losses can only be carried as an asset where there is a reasonable prospect of utilization in the near future.
In one of his raves on TV, James Cramer, the notorious American commentator, referred to bank accounts as "fiction." He referred to them as the work of Somerset Maugham, William Faulkner or Joseph Conrad. In reality, they are the works of lesser writers – "pulp fiction" or "romantic potboilers.''
The stress tests do not provide comfort regarding the health of the banks. As Nouriel Roubini, chairperson of RGE Monitor, has pointed out, the likely macro-economic environment is likely to be significantly worse than the adverse scenarios used. The Federal Reserve hinted that banks – even banks that passed the "stress test" – would be required to hold extra capital. This is puzzling as surely a bank is appropriately capitalized or it is not. Given that the test is the basis for setting solvency capital requirements, this is hardly reassuring or a guarantee that further taxpayer funded recapitalization of the banking system is not going to be needed.
The proposal floated by some banks to return taxpayer capital misses an essential point. The banks did not offer to waive the government/ FDIC guarantees, which have allowed them to fund in the capital markets. The suspicion is that the proposal had more to do with avoiding close public scrutiny of compensation and hiring practices. Goldman's compensation costs increased 18% in the first quarter while employee numbers were down around 7%, translating into a 27% increase in employee costs.
The reality is that the global economic system is deleveraging and levels of debt must be reduced. As result, asset values are declining and sustainable growth levels have fallen significantly. In this environment, banks are likely to continue to suffer losses on assets (bad debts and further write-offs) and earnings will remain sluggish (lower loan demand and lower levels of financial transactions). Higher funding costs and the need to raise capital compound the difficulties. For the banks currently: "On the liability side, some things aren't right and on the asset side, nothing's left."
Many major global bank shares are still, on average, trading at levels 70% to 90% below their highs. Following the collapse of the "bubble" economy, Japanese banks staged a number of significant recoveries in share price before falling sharply, necessitating government intervention to recapitalize and consolidate the banking system.
Analysis of recent financial performance does not also take into account the underlying favorable current dynamics of the banking industry. Banks are currently beneficiaries of very low and, in some cases, zero cost of deposits. Banks also benefit from a sharply upward sloping yield curve that allows them to generate significant earnings from borrowing short and lending long. Banks have also benefited from subsidies and support from governments; favorable changes in the fair value accounting treatment of securities; and sharply lower competition in most market segments. Adjusting for these factors, it is surprising that banks haven't actually performed better.
The truth is that banks remain in the ICU (intensive care unit). Even after around $900 billion in new capital, the global banking system remains short of capital by $1 trillion to $2 trillion. This translates into an effective reduction in available credit of around 20% to 30% from previous levels. Bank earnings and balance sheets remain under pressure.
The financial system will need continued government support for some time to come, even though the performance of governments trying to rehabilitate the financial system has been problematic. In April 2009, Elizabeth Warren, chairperson of the Troubled Asset Relief Program (TARP) Oversight Panel, questioned the very approach to resolving the problems of the financial system: "Six months into the existence of TARP, evidence of success or failure is mixed. One key assumption that underlies Treasury's Public-Private Investment Program (PPIP) approach is its belief that the system-wide deleveraging resulting from the decline in asset values'' – thus leading to an accompanying drop in net wealth across the country – "is in large part the product of temporary liquidity constraints [that are a consequence of] non-functioning markets for troubled assets. On the other hand, it is possible that Treasury's approach fails to acknowledge the depth of the current downturn and the degree to which the low valuation of troubled assets accurately reflects their worth.''
Two other panel members, New York State Superintendent of Banks Richard Neiman and former New Hampshire Sen. John Sununun, issued dissenting findings, noting: "We are concerned that the prominence of alternate approaches presented in the report, particularly reorganization through nationalization, could incorrectly imply both that the banking system is insolvent and that the new administration does not have a workable plan." Many would question the selection of the words "incorrectly imply."
Constant changes in tack in the dealing with financial system problems do not suggest a consistent and well thought out strategy in dealing with the problem. Less than rigorous stress tests, using the PPIP to leverage FDIC funding into a lopsided subsidy for private investors or converting the preferred stock into shares to avoid having to seek additional congressional mandates also suggest political constraints in resolving the issues.
Evidence of political influence and a palpable lack of transparency in dealing with the problems are emerging. There are allegations that the Treasury may have "pushed" Bank of America to consummate its controversial acquisition of Merrill Lynch when it sought to withdraw after additional losses came to light. The Treasury secretary at the time, Henry Paulson, is alleged to have suggested that Bank of America's management and board could be removed if it did not proceed. There are also suggestions that both the Treasury and Bank of America decided to avoid public disclosure of these events.
In his books "The Logic of Collective Action" and "The Rise and Decline of Nations," American economist Mancur Olson speculated that small distributional coalitions tend to form over time in developed nations and influence policies in their favor through intensive, well-funded lobbying. The policies result in benefits for the coalitions and its members but large costs borne by the rest of population. Over time, the incentive structure means that more distributional coalitions accumulate, burdening and ultimately paralyzing the economic system, causing inevitable and irretrievable economic decline.
Government attempts to deal with the problems of the financial system, especially in the U.S., Great Britain and other countries, illustrates Olson's thesis. Active well-funded lobbying efforts and "regulatory capture" is impeding necessary actions to make needed changes in the financial system. Urgent steps are necessary to accurately recognize losses on assets, remove toxic assets from balance sheets, recapitalize the banks and allow normal financial transactions to resume. If such actions are not taken then the broader economy and sustainable growth levels will be adversely affected. There seems to be a patent unwillingness to admit to and confront the problems facing the industry. Recognition of the problem is generally a prerequisite to working towards a solution.
Amusingly, Peter Hahn, a former managing director of CitiGroup and now a fellow at London's Cass Business School, was reported by Bloomberg as saying: "When you look at the income numbers that have been put out by banks recently, they contain so much fudge and financial manipulation. You could say that the automobile industry has a clearer future at the moment."
Banks have gone from catastrophic to just awful. By most standards, that condition does not constitute a necessary and sufficient condition for a recovery in the global economy.
Satyajit Das is a risk consultant and author of "Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives" (2006, FT-Prentice Hall)
Views are as of May 15, 2009, and are subject to change based on market conditions and other factors. These views should not be construed as a recommendation for any specific security.
Federated Equity Management Company of Pennsylvania.
http://www.prudentbear.com/index.php/guestcommentaryview?art_id=10228
16 May 2009
Nothing is true until it is pulled off a site ~ US 'sham' bank bail-outs enrich speculators, says buy-out chief Mark Patterson
Background at:
http://www.nakedcapitalism.com/2009/05/thought-police-ii-media-airbrushing.html
http://zerohedge.blogspot.com/2009/05/mark-patterson-its-sham-banks-are.html
The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.
“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.
The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.
Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.
Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.
“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.
Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.
MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.
“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.
“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.
Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.
“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.
Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!
http://www.nakedcapitalism.com/2009/05/thought-police-ii-media-airbrushing.html
http://zerohedge.blogspot.com/2009/05/mark-patterson-its-sham-banks-are.html
The US Treasury’s effort to stabilise the banking system through the TARP programme is a hopelessly ill-conceived policy that enriches speculators at public expense, according to the buy-out firm supposed to be pioneering the joint public-private bank rescues.
“The taxpayers ought to know that we are in effect receiving a subsidy. They put in 40pc of the money but get little of the equity upside,” said Mark Patterson, chairman of MatlinPatterson Advisers.
The comments are likely to infuriate Tim Geithner, the US Treasury Secretary, because MatlinPatterson took advantage of the TARP’s matching funds to buy Flagstar Bancorp in Michigan. His confession appears to validate concerns that the bail-out strategy is geared towards Wall Street.
Under the convoluted deal agreed earlier this year, MatlinPatterson has come to own 80pc of the shares while the US government has ended up with under 10pc.
Mr Patterson said the US Treasury is out of its depth and seems to be trying to put off drastic action by pretending that the banking system is still viable.
“It’s a sham. The banks are insolvent. The US government is trying to sedate the public because they are down to the last $100bn (£66bn) of the $700bn TARP funds. They think they’re doing this for the greater good of society,” he said, speaking at the Qatar Global Investment Forum.
Mr Patterson said it would be better for the US to bite the bullet as Britain has done, accepting that crippled lenders must be nationalised. “At least the British are not hiding the bail-out,” he said.
MatlinPatterson said private equity and hedge funds were deluding themselves in hoping to go back to business as usual after the trauma of the last 18 months.
“This is not a normal recession and there will be no V-shaped recovery. The crisis has destroyed leveraged companies. We’re going to see a catastrophic increase in the number of LBO’s (leveraged buyouts) going into default because they’re knee-deep in debt and no solution exists since they can’t refinance,” he said.
“Alfa hedge funds have been making their money by gambling with excessive leverage, so the knife that cuts off leverage is going to cut off their heads as well,” he said.
Like many bears, Mr Patterson expects the great crunch to end in deliberate inflation, deemed a lesser evil than outright depression.
“The US government has thrown 29pc of GDP at this crisis compared to 8pc in the early 1930s. The Fed’s balance sheet has risen from $900bn to $2.7 trillion to bail out the system. America has to do it because the only way out is to debase the currency, but that is going to lead to some very high inflation three years down the road,” he said.
Matlin Patterson, however, has missed the Spring rebound, the most powerful rise in equities in over 70 years. “We shorted the equity rally because we thought it was lunatic. We’ve kept adding positions seven times, and we’re still holding,” he said. Ouch!
1 May 2009
Cerberus Capital Management suffers total loss on Chrysler holding ~ WP
Chrysler, the country's third-largest auto company, filed today for Chapter 11 bankruptcy protection under a plan that President Obama said will give the troubled automaker "a new lease on life."
"I have every confidence that Chrysler will emerge from this process stronger and more competitive," Obama said at a noon press conference, adding, "This is not a sign of weakness, but rather one more step on a clearly charted path toward Chrysler's revival."
Chrysler, one of the three pillars of the American auto industry, filed for bankruptcy this afternoon after last-minute negotiations between the government and the automaker's creditors broke down yesterday. U.S. officials had offered Chrysler's secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 billion in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal.
An administration official this morning expressed disappointment, saying the holdouts had failed to "do the right thing," but that "their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward."
"I don't stand with those who held out when everybody else is making sacrifices," Obama said at the White House today.
Shortly before the president's remarks, a group claiming to represent the holdouts on the deal released a statement claiming that they had been "systematically precluded" from direct negotiations with the government in favor of creditors who had previously received assistance from the government.
Chrysler chief executive Robert Nardelli announced today that he will return to Cerberus Capital Management as an adviser.
"Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat," said Nardelli in a statement. "I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance."
The company's bankruptcy filing, and the U.S. government's attempt to save it, amounts to another extraordinary intervention in the economy and a landmark event in the history of the American auto industry.
Under the administration's detailed plan for a "surgical bankruptcy," ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.
Company and government officials had feared that a bankruptcy would stain the brand, shake customer confidence and erode sales, but the administration said it would seek to use the process to create a new Chrysler company. Its ownership would be divided, with the company's union retiree health fund receiving a 55 percent stake, Fiat would claim as much as a 35 percent share and the United States would take 8 percent. The Canadian government would receive two percent.
The automaker's current majority owner, the private-equity firm Cerberus Capital Management, would have its holdings wiped out.
During the bankruptcy, the governments would provide $4.5 billion in new funds, with 80 percent coming from the United States and 20 percent from Canada, which hosts a number of Chrysler operations. As the company emerged from its reorganization, the United States and Canada would provide another $5.63 billion, the sources said. The U.S. funds come from the government's Troubled Assets Relief Program.
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/30/AR2009043001639_pf.html
"I have every confidence that Chrysler will emerge from this process stronger and more competitive," Obama said at a noon press conference, adding, "This is not a sign of weakness, but rather one more step on a clearly charted path toward Chrysler's revival."
Chrysler, one of the three pillars of the American auto industry, filed for bankruptcy this afternoon after last-minute negotiations between the government and the automaker's creditors broke down yesterday. U.S. officials had offered Chrysler's secured lenders $2.25 billion in cash if they would agree to writedown the $6.9 billion in secured debt that the company owed. But a small group of hedge funds refused the 11th-hour deal.
An administration official this morning expressed disappointment, saying the holdouts had failed to "do the right thing," but that "their failure to act in either their own economic interest or the national interest does not diminish the accomplishments made by Chrysler, Fiat and its stakeholders, nor will it impede the new opportunity Chrysler now has to restructure and emerge stronger going forward."
"I don't stand with those who held out when everybody else is making sacrifices," Obama said at the White House today.
Shortly before the president's remarks, a group claiming to represent the holdouts on the deal released a statement claiming that they had been "systematically precluded" from direct negotiations with the government in favor of creditors who had previously received assistance from the government.
Chrysler chief executive Robert Nardelli announced today that he will return to Cerberus Capital Management as an adviser.
"Now is an appropriate time to let others take the lead in the transformation of Chrysler with Fiat," said Nardelli in a statement. "I will work closely with all of our stakeholders to see that this new company swiftly emerges with a successful closing of the alliance."
The company's bankruptcy filing, and the U.S. government's attempt to save it, amounts to another extraordinary intervention in the economy and a landmark event in the history of the American auto industry.
Under the administration's detailed plan for a "surgical bankruptcy," ownership of Chrysler would be dramatically reorganized, the leadership of Italian automaker Fiat would take over company management and the U.S. and Canadian governments would contribute more than $10 billion in additional funding.
Company and government officials had feared that a bankruptcy would stain the brand, shake customer confidence and erode sales, but the administration said it would seek to use the process to create a new Chrysler company. Its ownership would be divided, with the company's union retiree health fund receiving a 55 percent stake, Fiat would claim as much as a 35 percent share and the United States would take 8 percent. The Canadian government would receive two percent.
The automaker's current majority owner, the private-equity firm Cerberus Capital Management, would have its holdings wiped out.
During the bankruptcy, the governments would provide $4.5 billion in new funds, with 80 percent coming from the United States and 20 percent from Canada, which hosts a number of Chrysler operations. As the company emerged from its reorganization, the United States and Canada would provide another $5.63 billion, the sources said. The U.S. funds come from the government's Troubled Assets Relief Program.
http://www.washingtonpost.com/wp-dyn/content/article/2009/04/30/AR2009043001639_pf.html
22 April 2009
Global toxic assets could reach $5.7 trillion:IMF~AAP
http://business.smh.com.au/business/world-business/global-toxic-assets-could-reach-57-trillionimf-20090422-ae8l.html
Bank writedowns associated with so-called "toxic assets" clogging up the global financial system could eventually reach $US4 trillion ($5.73 trillion), the International Monetary Fund says.
This is nearly double the amount the IMF predicted in January.
With this in mind, the IMF warns in its latest Global Financial Stability Report that costs to taxpayers could be greater if governments do not continue with policies to restore confidence in the financial system.
The IMF estimates writedowns on US-originated assets since the outbreak of the crisis will increase to $US2.7 trillion from its previous forecast of $US2.2 trillion.
This, it says, is largely as a result of the worsening base-case scenario for economic growth.
"In this GSFR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $US4 trillion," it said.
It said while there had been some improvements in interbank money markets over the last few months, funding strains were persisting and banks' access to longer-term funding had diminished.
"While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large," it said.
"As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields."
Australia's major banks failed to pass on in full this month's 25-basis-point cut in the official interest rate, blaming higher wholesale funding costs.
The IMF says that despite unprecedented initiatives to stop the downward spiral in advanced economies, further policy action would be required to relieve the uncertainties in financial markets that were undermining the prospects for an economic recovery.
However, it said political support for such action appeared to be waning as the public was becoming disillusioned by what it perceived as abuse of taxpayers' funds.
"There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," it said.
It said that without a thorough cleansing of impaired assets on bank balance sheets, accompanied by restructuring and, where needed, recapitalisation, risks remained that problems being experienced by banks would continue to exert downward pressure on economic activity.
A recent IMF analysis showed that past episodes of financial crisis have shown that restoring the banking system to normal operation takes several years, and that recessions tend to be deeper and longer lasting when associated with a financial crisis.
"This same experience shows that when policies are unclear and implemented forcefully and promptly, or are not aimed at the underlying problem, the recovery process is even more delayed and the costs, both in terms of taxpayer money amd economic activity, are even greater," it said.
Bank writedowns associated with so-called "toxic assets" clogging up the global financial system could eventually reach $US4 trillion ($5.73 trillion), the International Monetary Fund says.
This is nearly double the amount the IMF predicted in January.
With this in mind, the IMF warns in its latest Global Financial Stability Report that costs to taxpayers could be greater if governments do not continue with policies to restore confidence in the financial system.
The IMF estimates writedowns on US-originated assets since the outbreak of the crisis will increase to $US2.7 trillion from its previous forecast of $US2.2 trillion.
This, it says, is largely as a result of the worsening base-case scenario for economic growth.
"In this GSFR, estimates for writedowns have been extended to include other mature market-originated assets and, while the information underpinning these scenarios is more uncertain, such estimates suggest writedowns could reach a total of around $US4 trillion," it said.
It said while there had been some improvements in interbank money markets over the last few months, funding strains were persisting and banks' access to longer-term funding had diminished.
"While in many jurisdictions banks can now issue government-guaranteed, longer-term debt, their funding gap remains large," it said.
"As a result, many corporations are unable to obtain bank-supplied working capital and some are having difficulty raising longer-term debt, except at much more elevated yields."
Australia's major banks failed to pass on in full this month's 25-basis-point cut in the official interest rate, blaming higher wholesale funding costs.
The IMF says that despite unprecedented initiatives to stop the downward spiral in advanced economies, further policy action would be required to relieve the uncertainties in financial markets that were undermining the prospects for an economic recovery.
However, it said political support for such action appeared to be waning as the public was becoming disillusioned by what it perceived as abuse of taxpayers' funds.
"There is a real risk that governments will be reluctant to allocate enough resources to solve the problem," it said.
It said that without a thorough cleansing of impaired assets on bank balance sheets, accompanied by restructuring and, where needed, recapitalisation, risks remained that problems being experienced by banks would continue to exert downward pressure on economic activity.
A recent IMF analysis showed that past episodes of financial crisis have shown that restoring the banking system to normal operation takes several years, and that recessions tend to be deeper and longer lasting when associated with a financial crisis.
"This same experience shows that when policies are unclear and implemented forcefully and promptly, or are not aimed at the underlying problem, the recovery process is even more delayed and the costs, both in terms of taxpayer money amd economic activity, are even greater," it said.
19 April 2009
'Too Big To Fail' ~ Bailouts and systemic stability
NPR.org, April 16, 2009 · The following is taken from the opening chapter of Too Big To Fail: The Hazards of Bank Bailouts, by Gary Stern and Ron Feldman, published in 2004 and 2009 by the Brookings Institution. Reprinted with permission.
Despite some progress, our central warning is that not enough has been done to reduce creditors' expectations of TBTF protection. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. Blanket pledges not to bail out creditors are not credible because they do not address the factors that motivate policymakers to protect uninsured bank creditors in the first place. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail or capital markets to cease working efficiently.
Other factors may also motivate governments to protect uninsured creditors at large banks. Policymakers may provide protection because doing so benefits them personally, by advancing their career, for example. Incompetent central planning may also drive some bailouts. Although these factors receive some of our attention and are addressed by some of our reforms, we think they are less important than the motivation to dampen the effect of a large bank failure on financial stability.
Despite the lack of definitive evidence on the moral hazard costs and benefits of increased stability generated by TBTF protection, the empirical and anecdotal data, analysis, and our general impression-imperfect as they are-suggest that TBTF protection imposes net costs. We also argue that the TBTF problem has grown in severity. Reasons for this increase include growth in the size of the largest banks, greater concentration of banking system assets in large banks, the greater complexity of bank operations, and, finally, several trends in policy, including a spate of recent bailouts.
Our views are held by some, but other respected analysts come to different conclusions. Some observers believe that the net costs of TBTF protection have been overstated, while others note that some large financial firms have failed without their uninsured creditors being protected from losses. However, even analysts who weigh the costs and benefits differently than we do have reason to support many of our reforms. Some of our recommendations, for example, make policymakers less likely to provide TBTF protection and address moral hazard precisely by reducing the threat of instability. Moreover, our review of cases where bailouts were not forthcoming suggests that policymakers are, in fact, motivated by the factors we cite and that our reforms would push policy in the right direction.
A second camp believes that TBTF protection could impose net costs in theory, but in practice legal regimes in the United States-which other developed countries could adopt-make delivery of TBTF protection so difficult as to virtually eliminate the TBTF problem.
We are sympathetic to the general and as yet untested approach taken by U.S. policymakers and recognize that it may have made a dent in TBTF expectations. n the long run, however, we predict that the system will not significantly reduce the probability that creditors of TBTF banks will receive bailouts. The U.S. approach to too big to fail continues to lack credibility.
Finally, a third camp also recognizes that TBTF protection could impose net costs but believes that there is no realistic solution. This camp argues that policymakers cannot credibly commit to imposing losses on the creditors of TBTF banks. The best governments can do ,in their view, is accept the net costs of TBTF, albeit with perhaps more resources devoted to super-vision and regulation and with greater ambiguity about precisely which institutions and which creditors could receive ex post TBTF support.
Like the third camp, we believe that policymakers face significant challenges in credibly putting creditors of important banks at risk of loss. A TBTF policy based on assertions of "no bailouts ever" will certainly be breached. Moreover, we doubt that any single policy change will dramatically reduce expected protection. But fundamentally we part company with this third camp. Policymakers can enact a series of reforms that reduce expectations of bailouts for many creditors at many institutions. Just as policy-makers in many countries established expectations of low inflation when few thought it was possible, so too can they put creditors who now expect protection at greater risk of loss.
To many practical people the suggestion that a large bank be allowed to fail may seem to represent dogmatic adherence to standard economic doctrine, a victory of ideology over pragmatic common sense. A pragmatic position is to argue that, yes, business failures do serve a useful function, but in the specific case of a large bank, the costs of allowing failure outweigh the costs of supporting it. After all, the social costs of failure are immediate, while the advantages of permitting failure are indirect and removed into the future. But this pragmatic position should be rejected because it ignores externalities overtime. If we prop up a large bank because the direct costs of doing so outweigh the cost of allowing it to fail, then the next time a large bank is in danger of failing it is likely to be propped up too. But in the future the same benefit will then probably be accorded to medium-sized banks. And from there it is likely to spread to small banks, to other financial institutions, and ultimately to other firms. When one includes the cost of moving down this slippery slope in the cost of saving a large bank, then the costs of allowing it to fail may seem small by comparison. At a time when devotion to pragmatism is so much in the air, it is useful to consider also the benefits of sticking to one's principles even in hard cases.
http://www.npr.org/templates/story/story.php?storyId=103190326&ft=1&f=94427042
Despite some progress, our central warning is that not enough has been done to reduce creditors' expectations of TBTF protection. Many of the existing pledges and policies meant to convince creditors that they will bear market losses when large banks fail are not credible and therefore are ineffective. Blanket pledges not to bail out creditors are not credible because they do not address the factors that motivate policymakers to protect uninsured bank creditors in the first place. The primary reason why policymakers bail out creditors of large banks is to reduce the chance that the failure of a large bank in which creditors take large losses will lead other banks to fail or capital markets to cease working efficiently.
Other factors may also motivate governments to protect uninsured creditors at large banks. Policymakers may provide protection because doing so benefits them personally, by advancing their career, for example. Incompetent central planning may also drive some bailouts. Although these factors receive some of our attention and are addressed by some of our reforms, we think they are less important than the motivation to dampen the effect of a large bank failure on financial stability.
Despite the lack of definitive evidence on the moral hazard costs and benefits of increased stability generated by TBTF protection, the empirical and anecdotal data, analysis, and our general impression-imperfect as they are-suggest that TBTF protection imposes net costs. We also argue that the TBTF problem has grown in severity. Reasons for this increase include growth in the size of the largest banks, greater concentration of banking system assets in large banks, the greater complexity of bank operations, and, finally, several trends in policy, including a spate of recent bailouts.
Our views are held by some, but other respected analysts come to different conclusions. Some observers believe that the net costs of TBTF protection have been overstated, while others note that some large financial firms have failed without their uninsured creditors being protected from losses. However, even analysts who weigh the costs and benefits differently than we do have reason to support many of our reforms. Some of our recommendations, for example, make policymakers less likely to provide TBTF protection and address moral hazard precisely by reducing the threat of instability. Moreover, our review of cases where bailouts were not forthcoming suggests that policymakers are, in fact, motivated by the factors we cite and that our reforms would push policy in the right direction.
A second camp believes that TBTF protection could impose net costs in theory, but in practice legal regimes in the United States-which other developed countries could adopt-make delivery of TBTF protection so difficult as to virtually eliminate the TBTF problem.
We are sympathetic to the general and as yet untested approach taken by U.S. policymakers and recognize that it may have made a dent in TBTF expectations. n the long run, however, we predict that the system will not significantly reduce the probability that creditors of TBTF banks will receive bailouts. The U.S. approach to too big to fail continues to lack credibility.
Finally, a third camp also recognizes that TBTF protection could impose net costs but believes that there is no realistic solution. This camp argues that policymakers cannot credibly commit to imposing losses on the creditors of TBTF banks. The best governments can do ,in their view, is accept the net costs of TBTF, albeit with perhaps more resources devoted to super-vision and regulation and with greater ambiguity about precisely which institutions and which creditors could receive ex post TBTF support.
Like the third camp, we believe that policymakers face significant challenges in credibly putting creditors of important banks at risk of loss. A TBTF policy based on assertions of "no bailouts ever" will certainly be breached. Moreover, we doubt that any single policy change will dramatically reduce expected protection. But fundamentally we part company with this third camp. Policymakers can enact a series of reforms that reduce expectations of bailouts for many creditors at many institutions. Just as policy-makers in many countries established expectations of low inflation when few thought it was possible, so too can they put creditors who now expect protection at greater risk of loss.
To many practical people the suggestion that a large bank be allowed to fail may seem to represent dogmatic adherence to standard economic doctrine, a victory of ideology over pragmatic common sense. A pragmatic position is to argue that, yes, business failures do serve a useful function, but in the specific case of a large bank, the costs of allowing failure outweigh the costs of supporting it. After all, the social costs of failure are immediate, while the advantages of permitting failure are indirect and removed into the future. But this pragmatic position should be rejected because it ignores externalities overtime. If we prop up a large bank because the direct costs of doing so outweigh the cost of allowing it to fail, then the next time a large bank is in danger of failing it is likely to be propped up too. But in the future the same benefit will then probably be accorded to medium-sized banks. And from there it is likely to spread to small banks, to other financial institutions, and ultimately to other firms. When one includes the cost of moving down this slippery slope in the cost of saving a large bank, then the costs of allowing it to fail may seem small by comparison. At a time when devotion to pragmatism is so much in the air, it is useful to consider also the benefits of sticking to one's principles even in hard cases.
http://www.npr.org/templates/story/story.php?storyId=103190326&ft=1&f=94427042
18 April 2009
Politics of the bailout ~ Deepcaster
Simon Johnson, former Chief Economist at the IMF and current professor at MIT’s Sloan School of Management identifies The Root Cause:
“The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government…recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.” (emphasis added)
There is a Strategy which enables Investors to Prevail in their struggles for Protection and Profit, notwithstanding the endless stream of Outrages.
But in order to fully appreciate that Strategy it is important to understand key characteristics common to many of the Outrages. So lets consider certain recent ones.
Frank Rich in the New York Times writes:
“Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs.
Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration.”
[http://www.nytimes.com2009412opinion12rich.html?_r=2&th&emc=th]
And as Chris Martenson in his superb article “America is Being Looted” quotes and notes:
“Rahm Emanuel, the current White House Chief of Staff, comes similarly burdened:
…the banking industry recently paid Rahm Emanuel $16 million for about two years of work. That investment was recently paid back when, as President Obama's chief of staff, Emanuel led the January campaign to release another $350 billion in bank bailout funds.”
[http://http:/www.sfgates.com/cgi-bin/article.cgi?f=/c/a/2009/04/09/ED2F1700DD.DTL]
But it goes deeper than that. Rahm Emanuel also took what I consider to be a lot of money serving on the board of Freddie Mac, a company that is certain to cost taxpayers hundreds of billions of dollars.
Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.
One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.”
[http://www.chicagotribune.com/news/politics/Obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story]
[http://www.chrismartenson.com/blog/america-being-looted/16444]
Chris Martenson, April 14, 2009
The fundamental cause of the ongoing Financial and Economic crises is the policies of the private for-profit U.S. Federal Reserve
http://www.financialsense.com/fsu/editorials/deepcaster/2009/0417.html
“The crash has laid bare many unpleasant truths about the United States. One of the most alarming, says a former chief economist of the International Monetary Fund, is that the finance industry has effectively captured our government…recovery will fail unless we break the financial oligarchy that is blocking essential reform. And if we are to prevent a true depression, we’re running out of time.” (emphasis added)
There is a Strategy which enables Investors to Prevail in their struggles for Protection and Profit, notwithstanding the endless stream of Outrages.
But in order to fully appreciate that Strategy it is important to understand key characteristics common to many of the Outrages. So lets consider certain recent ones.
Frank Rich in the New York Times writes:
“Lawrence Summers, the president’s chief economic adviser, made $5.2 million in 2008 from a hedge fund, D. E. Shaw, for a one-day-a-week job. He also earned $2.7 million in speaking fees from the likes of Citigroup and Goldman Sachs.
Those institutions are not merely the beneficiaries of taxpayers’ bailouts since the crash. They also benefited during the boom from government favors: the Wall Street deregulation that both Summers and Robert Rubin, his mentor and predecessor as Treasury secretary, championed in the Clinton administration.”
[http://www.nytimes.com2009412opinion12rich.html?_r=2&th&emc=th]
And as Chris Martenson in his superb article “America is Being Looted” quotes and notes:
“Rahm Emanuel, the current White House Chief of Staff, comes similarly burdened:
…the banking industry recently paid Rahm Emanuel $16 million for about two years of work. That investment was recently paid back when, as President Obama's chief of staff, Emanuel led the January campaign to release another $350 billion in bank bailout funds.”
[http://http:/www.sfgates.com/cgi-bin/article.cgi?f=/c/a/2009/04/09/ED2F1700DD.DTL]
But it goes deeper than that. Rahm Emanuel also took what I consider to be a lot of money serving on the board of Freddie Mac, a company that is certain to cost taxpayers hundreds of billions of dollars.
Before its portfolio of bad loans helped trigger the current housing crisis, mortgage giant Freddie Mac was the focus of a major accounting scandal that led to a management shake-up, huge fines and scalding condemnation of passive directors by a top federal regulator.
One of those allegedly asleep-at-the-switch board members was Chicago's Rahm Emanuel—now chief of staff to President Barack Obama—who made at least $320,000 for a 14-month stint at Freddie Mac that required little effort.”
[http://www.chicagotribune.com/news/politics/Obama/chi-rahm-emanuel-profit-26-mar26,0,5682373.story]
[http://www.chrismartenson.com/blog/america-being-looted/16444]
Chris Martenson, April 14, 2009
The fundamental cause of the ongoing Financial and Economic crises is the policies of the private for-profit U.S. Federal Reserve
http://www.financialsense.com/fsu/editorials/deepcaster/2009/0417.html
Stiglitz Says Ties to Wall Street Doom Bank Rescue
April 17 (Bloomberg) -- The Obama administration’s bank- rescue efforts will probably fail because the programs have been designed to help Wall Street rather than create a viable financial system, Nobel Prize-winning economist Joseph Stiglitz said.
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”
Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.
Nobel Prize
Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database.
Financial shares have rallied in the past month as Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. all reported better-than-expected earnings in the first quarter. The Standard & Poor’s 500 Financials Index has soared 91 percent from its low of 78.45 on March 6.
The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.
Bailing Out Investors
“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.
Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.
“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.
Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.
Redistribution
“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”
Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.
“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.
Critical of Stimulus
Stiglitz was also critical of Obama’s other economic rescue programs.
He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”
“It’s really a peculiar policy, I think,” he said.
The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.
Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.
Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.
Recreating Bubble
“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.”
While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”
Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.
“They haven’t thought enough about the determinants of the flow of credit and lending.”
To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Matthew Benjamin in Washington at Mbenjamin2@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahnPchOxZMh8&refer=h
“All the ingredients they have so far are weak, and there are several missing ingredients,” Stiglitz said in an interview yesterday. The people who designed the plans are “either in the pocket of the banks or they’re incompetent.”
The Troubled Asset Relief Program, or TARP, isn’t large enough to recapitalize the banking system, and the administration hasn’t been direct in addressing that shortfall, he said. Stiglitz said there are conflicts of interest at the White House because some of Obama’s advisers have close ties to Wall Street.
“We don’t have enough money, they don’t want to go back to Congress, and they don’t want to do it in an open way and they don’t want to get control” of the banks, a set of constraints that will guarantee failure, Stiglitz said.
The return to taxpayers from the TARP is as low as 25 cents on the dollar, he said. “The bank restructuring has been an absolute mess.”
Rather than continually buying small stakes in banks, the government should put weaker banks through a receivership where the shareholders of the banks are wiped out and the bondholders become the shareholders, using taxpayer money to keep the institutions functioning, he said.
Nobel Prize
Stiglitz, 66, won the Nobel in 2001 for showing that markets are inefficient when all parties in a transaction don’t have equal access to critical information, which is most of the time. His work is cited in more economic papers than that of any of his peers, according to a February ranking by Research Papers in Economics, an international database.
Financial shares have rallied in the past month as Goldman Sachs Group Inc., JPMorgan Chase & Co., Citigroup Inc. all reported better-than-expected earnings in the first quarter. The Standard & Poor’s 500 Financials Index has soared 91 percent from its low of 78.45 on March 6.
The Public-Private Investment Program, PPIP, designed to buy bad assets from banks, “is a really bad program,” Stiglitz said. It won’t accomplish the administration’s goal of establishing a price for illiquid assets clogging banks’ balance sheets, and instead will enrich investors while sticking taxpayers with huge losses, he said.
Bailing Out Investors
“You’re really bailing out the shareholders and the bondholders,” he said. “Some of the people likely to be involved in this, like Pimco, are big bondholders,” he said, referring to Pacific Investment Management Co., a bond investment firm in Newport Beach, California.
Stiglitz said taxpayer losses are likely to be much larger than bank profits from the PPIP program even though Federal Deposit Insurance Corp. Chairman Sheila Bair has said the agency expects no losses.
“The statement from Sheila Bair that there’s no risk is absurd,” he said, because losses from the PPIP will be borne by the FDIC, which is funded by member banks.
Andrew Gray, an FDIC spokesman, said Bair never said there would be no risk, only that the agency had “zero expected cost” from the program.
Redistribution
“We’re going to be asking all the banks, including presumably some healthy banks, to pay for the losses of the bad banks,” Stiglitz said. “It’s a real redistribution and a tax on all American savers.”
Stiglitz was also concerned about the links between White House advisers and Wall Street. Hedge fund D.E. Shaw & Co. paid National Economic Council Director Lawrence Summers, a managing director of the firm, more than $5 million in salary and other compensation in the 16 months before he joined the administration. Treasury Secretary Timothy Geithner was president of the New York Federal Reserve Bank.
“America has had a revolving door. People go from Wall Street to Treasury and back to Wall Street,” he said. “Even if there is no quid pro quo, that is not the issue. The issue is the mindset.”
Stiglitz was head of the White House’s Council of Economic Advisers under President Bill Clinton before serving from 1997 to 2000 as chief economist at the World Bank. He resigned from that post in 2000 after repeatedly clashing with the White House over economic policies it supported at the International Monetary Fund. He is now a professor at Columbia University.
Critical of Stimulus
Stiglitz was also critical of Obama’s other economic rescue programs.
He called the $787 billion stimulus program necessary but “flawed” because too much spending comes after 2009, and because it devotes too much of the money to tax cuts “which aren’t likely to work very effectively.”
“It’s really a peculiar policy, I think,” he said.
The $75 billion mortgage relief program, meanwhile, doesn’t do enough to help Americans who can’t afford to make their monthly payments, he said. It doesn’t reduce principal, doesn’t make changes in bankruptcy law that would help people work out debts, and doesn’t change the incentive to simply stop making payments once a mortgage is greater than the value of a house.
Stiglitz said the Fed, while it’s done almost all it can to bring the country back from the worst recession since 1982, can’t revive the economy on its own.
Relying on low interest rates to help put a floor under housing prices is a variation on the policies that created the housing bubble in the first place, Stiglitz said.
Recreating Bubble
“This is a strategy trying to recreate that bubble,” he said. “That’s not likely to provide a long-run solution. It’s a solution that says let’s kick the can down the road a little bit.”
While the strategy might put a floor under housing prices, it won’t do anything to speed the recovery, he said. “It’s a recipe for Japanese-style malaise.”
Even with rates low, banks may not lend because they remain wary of market or borrower risk, and in the current environment “there’s still a lot of risk.” That’s why even with all of the programs the Fed and the administration have opened, lending is still very limited, Stiglitz said.
“They haven’t thought enough about the determinants of the flow of credit and lending.”
To contact the reporter on this story: Michael McKee in New York at mmckee@bloomberg.net; Matthew Benjamin in Washington at Mbenjamin2@bloomberg.net
http://www.bloomberg.com/apps/news?pid=20601087&sid=ahnPchOxZMh8&refer=h
6 April 2009
The Shell Game
In my previous article I warned that the greatest transfer of wealth in recent history was about to get underway, with the announcement by Treasury Secretary Geithner of the so called Public-Private Investment Program, the PPIP, which aims to rid banks and markets of the distressed assets and toxic loans still ticking away like an inevitable time bomb on the balance sheets of major institutions.
The Shell Game in its original form involved 3 Walnut shells, under one of which a pea was hidden. Sleight of hand whilst the shells were swiftly moved around resulted in the other player, the punter, becoming confused as to where the pea lay and this game became a popular form of wagering and entertainment for the masses.
The modern version of the Shell Game, as used by the leaders of the Government’s financial team uses a much more sophisticated version but the basic purpose is the same. By homologating a number of government agencies together under the shells, the punters, in this case US taxpayers are prevented from seeing either the whereabouts or the size of the pea hidden within. For the average punter, the various rapid fire announcements of bailouts, transfers and recourse plans emanating from several Federal agencies together with an almost total lack of Congressional oversight have muddied this particular playing field, mightily.
$12.8 Trillion so far
If you think you have been keeping track of the various sums of bailouts and industry specific assistance handed out by the US Government and its various functionaries so far you are almost certainly wrong. I stated in an earlier article that the nexus between Treasury, the Fed and other government servants was muddying the waters, and obscuring the extent of the taxpayers’ largess to almost exclusively financial institutions. Bloomberg data now shows that the government and Fed have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s. Did you get that number? That’s Trillion with a “T”. Bloomberg News 04/02/09
Internationally the world’s largest institutions have only written off $1.3 Trillion (“only” is a very relative concept here), so where has the rest gone? I have no reason to doubt Bloomberg’s data, indeed they are one of a very few who have the resources to collate the myriad of transactions that make up this total, but given the angst and gnashing of teeth that accompanied the TARP and other Congress mandated bailouts, you can see that like an iceberg, the vast bulk of these facilities are undertaken other than in the light of day and under Congressional supervision. A nice example of how these things happen is in the adventures of Maiden Lane LLC, an entity formed to fund JP Morgan’s liquidation of Bear Stearns. Now that entity is to be assumed by Treasury, from the Fed who used a doubtful legal authority to create and fund it initially, so the round robin, devoid of oversight, has accomplished the purpose of Fed and Treasury largely out of sight.
You recall that Treasury and the Fed have refused to disclose the details and circumstances of the payouts to AIG counterparties. Against this background of fiscal tricks, legerdemain and non disclosure, Geithner’s planned PPIP is going to make AIG’s antics look positively prudent.
The PPIP is a many headed monster in the cast of the mythological Greek figure Medusa. It seeks to do many things, but mainly to give the Treasury and US Government cover, as it again undertakes what Hank Paulson quailed at; the purchase by the public purse of toxic securities from banks and other institutions at many times their true value. Last September in my article “The Tinkerbell Treasurer” written exclusively for Financial Sense, I set out for you the simplicity of the proposition that Paulson faced and which eventually he failed to tackle, probably fuelled by a well honed sense of preservation.
That article argued that there were only two alternatives to the massive losses racked up by the marketers, primarily of mortgage backed securities although other asset classes found a place in the packaged CDOs that were cousin to the mortgage backed securities. Those alternatives were to allow the losses to be realised which was politically unacceptable as it would finally lay bare the true insolvency of numerous big name banks and other financial institutions; or for the US Government in one guise or another to purchase those toxic securities at many times their market value, thus handing a “get out of jail free” card to these already loathed institutions. At that realisation, even a giant of a man and Wall Street legend, Hank Paulson’s courage failed him. And thus it was left to the hapless Timothy Geithner to undo the gorgonian knot.
There is more than a touch of irony that this duty fell to Geithner, who as Governor of the NY Fed was the supervisor most absent from duty when these farces were being staged and played out, but in furtherance of the aims of his constituency, the major banks, Geithner has cobbled together a series of measures that aim to artificially inflate the price of residential housing, purchase the distressed assets from the chosen players at many times their market value and provide a screen behind which the Government can fudge accountability for this massive economic transfer which is just econospeak for “gift”.
While this is being trumpeted as no less than a win-win-win situation by Bill Goss of PIMCO, one of Treasury’s anointed, it is highly likely to be yet another loss-loss-loss for the US public, and that means you, sport.
The PR version of the game goes like this:
April 2 (Bloomberg) Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Geithner’s plan encourages investors to buy as much as $1 trillion of real-estate assets by using $75 billion to $100 billion provided by the Treasury and government loans. The goal of the Fed and the Treasury since September has been to cleanse banks of troubled assets. The Treasury would match the money asset managers raise to join them in public-private funds. The Federal Deposit Insurance Corp. would guarantee borrowing offered to funds buying loans, while the Treasury and Fed would offer financing to mortgage- securities buyers. The Fed loans may be made available to investors that are not part of the public-private funds.
The real world version has a number of less palatable levers that are telling because they continue to highlight the mindset that leverage is the best tool and crony capitalism the best way to dispense patronage. Just the mindset that the myopic Greenspan and Bernanke relied on in their belief that major banks and other financial institutions were smart, trustworthy corporate citizens who knew how far they could push the accelerator. Consider some of the less reported features of the PPIP:
Purchasers will contribute very little equity or “skin”. Perhaps as little as 3% of the purchase price.
Purchasers will be paid unspecified fees for bidding, cynically perhaps close to the equity value they provide.
Sellers will be paid fees for selling, cynically perhaps as much as their realised losses on the transaction in one guise or another. The stated aim, after all, is to make these institutions whole and replenish capital so nothing is off the table.
95% of the purchasers’ obligations in buying these assets will be provided by Treasury on a non-recourse basis. That means that any losses, and there will likely be plenty of those, are for your account as taxpayers; no risk to the purchasers.
Unlike Geithner’s plan for loans, the public-private funds for securities will be limited initially to only five managers, such as Pimco and BlackRock, already overseeing $10 billion of the assets targeted. That program will buy securities from holders of toxic assets other than banks.
With recourse loans, “toxic” mortgages which have a hypothetical 40 percent annual default probability and only 10 percent expected recoveries, would be worth only 19.7 cents. The type of loans that may be sold, New York-based Citigroup analyst said in a March 27 report, include $93 billion of commercial mortgages that are probably carried on the books of banks at 65 cents to 75 cents on the dollar because they were meant to be packaged into bonds.
As usual the sensible calls of alarm from knowledgeable dissenters only made the fine print. Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success. “The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”
The valuations of these securities with or without recourse funding is stupefying and doesn’t advance the argument. In essence what Geithner has constructed for his mates, is a premium free option on a bunch of toxic assets if they will but warehouse them to get them off the banks’ books. That mechanism allows vastly inflated prices to be paid which enhances the fiction that the bank losses are far less than reality. And it gives the anointed players a risk free carry that may well pay off and at any rate earns substantial fees.
Hidden quietly in the middle of the AIG shouting match was the quiet roll over of the Financial Accounting Standards Board to the demands of House Democrats:
March 30 (Bloomberg) -- Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent. The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of write downs they must take on so-called impaired investments, including mortgage-backed securities. FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania.
Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent.
So if you are wondering what is inspiring the present US Equities rally, look no further. A little massaging of balance sheets and the transfer of shareholders’ losses to the American public will always be looked on as a good deal for Wall Street. Assurances that the same old Shell Game will continue as before, were of course heart warming news to the same old players who but for the Government’s insistence in avoiding the intended consequences of the bankruptcy laws would long ago have departed.
America, UK, Europe and the great Lands Down Under enjoy characterising themselves as countries of laws. Indeed the Rule of Law is the backbone of civilised nations. That the laws are selectively applied at the highest levels is one of the principal understandings of promoters of the Shell Game. Despite protestations to the contrary, the game never changes. Just shells and a pea.
Charts
The Shell Game in its original form involved 3 Walnut shells, under one of which a pea was hidden. Sleight of hand whilst the shells were swiftly moved around resulted in the other player, the punter, becoming confused as to where the pea lay and this game became a popular form of wagering and entertainment for the masses.
The modern version of the Shell Game, as used by the leaders of the Government’s financial team uses a much more sophisticated version but the basic purpose is the same. By homologating a number of government agencies together under the shells, the punters, in this case US taxpayers are prevented from seeing either the whereabouts or the size of the pea hidden within. For the average punter, the various rapid fire announcements of bailouts, transfers and recourse plans emanating from several Federal agencies together with an almost total lack of Congressional oversight have muddied this particular playing field, mightily.
$12.8 Trillion so far
If you think you have been keeping track of the various sums of bailouts and industry specific assistance handed out by the US Government and its various functionaries so far you are almost certainly wrong. I stated in an earlier article that the nexus between Treasury, the Fed and other government servants was muddying the waters, and obscuring the extent of the taxpayers’ largess to almost exclusively financial institutions. Bloomberg data now shows that the government and Fed have spent, lent or committed $12.8 trillion, an amount that approaches the value of everything produced in the country last year, to stem the longest recession since the 1930s. Did you get that number? That’s Trillion with a “T”. Bloomberg News 04/02/09
Internationally the world’s largest institutions have only written off $1.3 Trillion (“only” is a very relative concept here), so where has the rest gone? I have no reason to doubt Bloomberg’s data, indeed they are one of a very few who have the resources to collate the myriad of transactions that make up this total, but given the angst and gnashing of teeth that accompanied the TARP and other Congress mandated bailouts, you can see that like an iceberg, the vast bulk of these facilities are undertaken other than in the light of day and under Congressional supervision. A nice example of how these things happen is in the adventures of Maiden Lane LLC, an entity formed to fund JP Morgan’s liquidation of Bear Stearns. Now that entity is to be assumed by Treasury, from the Fed who used a doubtful legal authority to create and fund it initially, so the round robin, devoid of oversight, has accomplished the purpose of Fed and Treasury largely out of sight.
You recall that Treasury and the Fed have refused to disclose the details and circumstances of the payouts to AIG counterparties. Against this background of fiscal tricks, legerdemain and non disclosure, Geithner’s planned PPIP is going to make AIG’s antics look positively prudent.
The PPIP is a many headed monster in the cast of the mythological Greek figure Medusa. It seeks to do many things, but mainly to give the Treasury and US Government cover, as it again undertakes what Hank Paulson quailed at; the purchase by the public purse of toxic securities from banks and other institutions at many times their true value. Last September in my article “The Tinkerbell Treasurer” written exclusively for Financial Sense, I set out for you the simplicity of the proposition that Paulson faced and which eventually he failed to tackle, probably fuelled by a well honed sense of preservation.
That article argued that there were only two alternatives to the massive losses racked up by the marketers, primarily of mortgage backed securities although other asset classes found a place in the packaged CDOs that were cousin to the mortgage backed securities. Those alternatives were to allow the losses to be realised which was politically unacceptable as it would finally lay bare the true insolvency of numerous big name banks and other financial institutions; or for the US Government in one guise or another to purchase those toxic securities at many times their market value, thus handing a “get out of jail free” card to these already loathed institutions. At that realisation, even a giant of a man and Wall Street legend, Hank Paulson’s courage failed him. And thus it was left to the hapless Timothy Geithner to undo the gorgonian knot.
There is more than a touch of irony that this duty fell to Geithner, who as Governor of the NY Fed was the supervisor most absent from duty when these farces were being staged and played out, but in furtherance of the aims of his constituency, the major banks, Geithner has cobbled together a series of measures that aim to artificially inflate the price of residential housing, purchase the distressed assets from the chosen players at many times their market value and provide a screen behind which the Government can fudge accountability for this massive economic transfer which is just econospeak for “gift”.
While this is being trumpeted as no less than a win-win-win situation by Bill Goss of PIMCO, one of Treasury’s anointed, it is highly likely to be yet another loss-loss-loss for the US public, and that means you, sport.
The PR version of the game goes like this:
April 2 (Bloomberg) Geithner’s Public-Private Investment Program, or PPIP, promises to boost prices enough to encourage banks, insurers and hedge funds to sell their mortgage holdings, freeing them to make loans while creating a potential windfall for investors. Geithner’s plan encourages investors to buy as much as $1 trillion of real-estate assets by using $75 billion to $100 billion provided by the Treasury and government loans. The goal of the Fed and the Treasury since September has been to cleanse banks of troubled assets. The Treasury would match the money asset managers raise to join them in public-private funds. The Federal Deposit Insurance Corp. would guarantee borrowing offered to funds buying loans, while the Treasury and Fed would offer financing to mortgage- securities buyers. The Fed loans may be made available to investors that are not part of the public-private funds.
The real world version has a number of less palatable levers that are telling because they continue to highlight the mindset that leverage is the best tool and crony capitalism the best way to dispense patronage. Just the mindset that the myopic Greenspan and Bernanke relied on in their belief that major banks and other financial institutions were smart, trustworthy corporate citizens who knew how far they could push the accelerator. Consider some of the less reported features of the PPIP:
Purchasers will contribute very little equity or “skin”. Perhaps as little as 3% of the purchase price.
Purchasers will be paid unspecified fees for bidding, cynically perhaps close to the equity value they provide.
Sellers will be paid fees for selling, cynically perhaps as much as their realised losses on the transaction in one guise or another. The stated aim, after all, is to make these institutions whole and replenish capital so nothing is off the table.
95% of the purchasers’ obligations in buying these assets will be provided by Treasury on a non-recourse basis. That means that any losses, and there will likely be plenty of those, are for your account as taxpayers; no risk to the purchasers.
Unlike Geithner’s plan for loans, the public-private funds for securities will be limited initially to only five managers, such as Pimco and BlackRock, already overseeing $10 billion of the assets targeted. That program will buy securities from holders of toxic assets other than banks.
With recourse loans, “toxic” mortgages which have a hypothetical 40 percent annual default probability and only 10 percent expected recoveries, would be worth only 19.7 cents. The type of loans that may be sold, New York-based Citigroup analyst said in a March 27 report, include $93 billion of commercial mortgages that are probably carried on the books of banks at 65 cents to 75 cents on the dollar because they were meant to be packaged into bonds.
As usual the sensible calls of alarm from knowledgeable dissenters only made the fine print. Nobel prize-winning economists Paul Krugman, a professor at Princeton University in Princeton, New Jersey, and Joseph Stiglitz, a professor at the Business School of Columbia University in New York, blasted Geithner’s plan for putting the taxpayer on the hook for losses with what they say is little likelihood of success. “The Geithner plan works only if and when the taxpayer loses big time,” Stiglitz wrote in the New York Times this week. “With the government absorbing the losses, the market doesn’t care if the banks are ‘cheating’ them by selling their lousiest assets, because the government bears the cost.”
The valuations of these securities with or without recourse funding is stupefying and doesn’t advance the argument. In essence what Geithner has constructed for his mates, is a premium free option on a bunch of toxic assets if they will but warehouse them to get them off the banks’ books. That mechanism allows vastly inflated prices to be paid which enhances the fiction that the bank losses are far less than reality. And it gives the anointed players a risk free carry that may well pay off and at any rate earns substantial fees.
Hidden quietly in the middle of the AIG shouting match was the quiet roll over of the Financial Accounting Standards Board to the demands of House Democrats:
March 30 (Bloomberg) -- Four days after U.S. lawmakers berated Financial Accounting Standards Board Chairman Robert Herz and threatened to take rulemaking out of his hands, FASB proposed an overhaul of fair-value accounting that may improve profits at banks such as Citigroup Inc. by more than 20 percent. The changes proposed on March 16 to fair-value, also known as mark-to-market accounting, would allow companies to use “significant judgment” in valuing assets and reduce the amount of write downs they must take on so-called impaired investments, including mortgage-backed securities. FASB’s acquiescence followed lobbying efforts by the U.S. Chamber of Commerce, the American Bankers Association and companies ranging from Bank of New York Mellon Corp., the world’s largest custodian of financial assets, to community lender Brentwood Bank in Pennsylvania.
Former regulators and accounting analysts say the new rules would hurt investors who need more transparency, not less, in financial statements. Companies weighed down by mortgage- backed securities, such as New York-based Citigroup, could cut their losses by 50 percent to 70 percent.
So if you are wondering what is inspiring the present US Equities rally, look no further. A little massaging of balance sheets and the transfer of shareholders’ losses to the American public will always be looked on as a good deal for Wall Street. Assurances that the same old Shell Game will continue as before, were of course heart warming news to the same old players who but for the Government’s insistence in avoiding the intended consequences of the bankruptcy laws would long ago have departed.
America, UK, Europe and the great Lands Down Under enjoy characterising themselves as countries of laws. Indeed the Rule of Law is the backbone of civilised nations. That the laws are selectively applied at the highest levels is one of the principal understandings of promoters of the Shell Game. Despite protestations to the contrary, the game never changes. Just shells and a pea.
Charts
5 April 2009
Bailout CSI
William K. Black suspects that it was more than greed and incompetence that brought down the U.S. financial sector and plunged the economy in recession — it was fraud. And he would know. When it comes to financial shenanigans, William K. Black, the former senior regulator who cracked down on banks during the savings and loan crisis of the 1980s, has seen pretty much everything.
Now an Associate Professor of Economics and Law at the University of Missouri, William K. Black tells Bill Moyers on the JOURNAL that the tool at the very center of mortgage collapse, creating triple-A rated bonds out of "liars' loans" — loans issued without verifying income, assets or employment — was a fraud, and the banks knew it.
And while there is no law against liars' loans, Black points out that there are, "many laws against fraud, and liars' loans are fraudulent. [...] They involve deceit, which is the essence of fraud."
Only the scale of the scandal is new. A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis. The difference between now and then, explains Black, is a drastic reduction in regulation and oversight, "We now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80."
BILL MOYERS: Welcome to the Journal.
For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.
WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.
BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.
The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.
Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."
Bill Black, welcome to the Journal.
WILLIAM K. BLACK: Thank you.
BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?
WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.
BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.
BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?
WILLIAM K. BLACK: Yes.
BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?
WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.
BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?
WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.
BILL MOYERS: Yeah. Liars' loans--
WILLIAM K. BLACK: Liars' loans.
BILL MOYERS: Why did they call them liars' loans?
WILLIAM K. BLACK: Because they were liars' loans.
BILL MOYERS: And they knew it?
WILLIAM K. BLACK: They knew it. They knew that they were frauds.
WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.
BILL MOYERS: You think they really said that to borrowers?
WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.
BILL MOYERS: Ninja?
WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.
BILL MOYERS: You're talking about significant American companies.
WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.
BILL MOYERS: Which company?
WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.
BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?
WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.
BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?
WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."
BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.
WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.
BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.
WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...
BILL MOYERS: But you're saying our system became a Ponzi scheme.
WILLIAM K. BLACK: Our system...
BILL MOYERS: Our financial system...
WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."
BILL MOYERS: Is there a law against liars' loans?
WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.
BILL MOYERS: Because...
WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.
BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?
WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...
BILL MOYERS: Who did?
WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?
WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...
BILL MOYERS: That's right.
WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.
BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?
WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?
BILL MOYERS: And why...
WILLIAM K. BLACK: How mad is this?
BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?
WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.
TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.
WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.
BILL MOYERS: How is this happening? I mean why is it happening?
WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.
BILL MOYERS: What facts?
WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?
BILL MOYERS: You--
WILLIAM K. BLACK: Taking away people's bonuses?
BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.
WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.
BILL MOYERS: In other words, they could have closed these banks without nationalizing them?
WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.
BILL MOYERS: And that's a law?
WILLIAM K. BLACK: That's the law.
BILL MOYERS: So, Paulson could have done this? Geithner could do this?
WILLIAM K. BLACK: Not could. Was mandated--
BILL MOYERS: By the law.
WILLIAM K. BLACK: By the law.
BILL MOYERS: This law, you're talking about.
WILLIAM K. BLACK: Yes.
BILL MOYERS: What the reason they give for not doing it?
WILLIAM K. BLACK: They ignore it. And nobody calls them on it.
BILL MOYERS: Well, where's Congress? Where's the press? Where--
WILLIAM K. BLACK: Well, where's the Pecora investigation?
BILL MOYERS: The what?
WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?
What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: You are.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.
BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?
WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.
BILL MOYERS: A.I.G. did?
WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.
Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.
BILL MOYERS: Even though Goldman Sachs had a big vested stake.
WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.
BILL MOYERS: Yeah, like a conflict of interest, it seems.
WILLIAM K. BLACK: Massive conflict of interests.
BILL MOYERS: So, how did he get away with it?
WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.
BILL MOYERS: Who's going to get the facts?
WILLIAM K. BLACK: We need some chairmen or chairwomen--
BILL MOYERS: In Congress.
WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.
BILL MOYERS: And we have to know that, in order to know what?
WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.
BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?
WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."
BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.
WILLIAM K. BLACK: Yes.
BILL MOYERS: Why?
WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.
BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?
WILLIAM K. BLACK: Right.
BILL MOYERS: It was relatively a handful of people.
WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.
BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?
WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."
Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.
So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.
BILL MOYERS: William Black, thank you very much for being with me on the Journal.
WILLIAM K. BLACK: Thank you so much.
Now an Associate Professor of Economics and Law at the University of Missouri, William K. Black tells Bill Moyers on the JOURNAL that the tool at the very center of mortgage collapse, creating triple-A rated bonds out of "liars' loans" — loans issued without verifying income, assets or employment — was a fraud, and the banks knew it.
And while there is no law against liars' loans, Black points out that there are, "many laws against fraud, and liars' loans are fraudulent. [...] They involve deceit, which is the essence of fraud."
Only the scale of the scandal is new. A single bank, IndyMac, lost more money than the entire Savings and Loan Crisis. The difference between now and then, explains Black, is a drastic reduction in regulation and oversight, "We now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80."
BILL MOYERS: Welcome to the Journal.
For months now, revelations of the wholesale greed and blatant transgressions of Wall Street have reminded us that "The Best Way to Rob a Bank Is to Own One." In fact, the man you're about to meet wrote a book with just that title. It was based upon his experience as a tough regulator during one of the darkest chapters in our financial history: the savings and loan scandal in the late 1980s.
WILLIAM K. BLACK: These numbers as large as they are, vastly understate the problem of fraud.
BILL MOYERS: Bill Black was in New York this week for a conference at the John Jay College of Criminal Justice where scholars and journalists gathered to ask the question, "How do they get away with it?" Well, no one has asked that question more often than Bill Black.
The former Director of the Institute for Fraud Prevention now teaches Economics and Law at the University of Missouri, Kansas City. During the savings and loan crisis, it was Black who accused then-house speaker Jim Wright and five US Senators, including John Glenn and John McCain, of doing favors for the S&L's in exchange for contributions and other perks. The senators got off with a slap on the wrist, but so enraged was one of those bankers, Charles Keating — after whom the senate's so-called "Keating Five" were named — he sent a memo that read, in part, "get Black — kill him dead." Metaphorically, of course. Of course.
Now Black is focused on an even greater scandal, and he spares no one — not even the President he worked hard to elect, Barack Obama. But his main targets are the Wall Street barons, heirs of an earlier generation whose scandalous rip-offs of wealth back in the 1930s earned them comparison to Al Capone and the mob, and the nickname "banksters."
Bill Black, welcome to the Journal.
WILLIAM K. BLACK: Thank you.
BILL MOYERS: I was taken with your candor at the conference here in New York to hear you say that this crisis we're going through, this economic and financial meltdown is driven by fraud. What's your definition of fraud?
WILLIAM K. BLACK: Fraud is deceit. And the essence of fraud is, "I create trust in you, and then I betray that trust, and get you to give me something of value." And as a result, there's no more effective acid against trust than fraud, especially fraud by top elites, and that's what we have.
BILL MOYERS: In your book, you make it clear that calculated dishonesty by people in charge is at the heart of most large corporate failures and scandals, including, of course, the S&L, but is that true? Is that what you're saying here, that it was in the boardrooms and the CEO offices where this fraud began?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: How did they do it? What do you mean?
WILLIAM K. BLACK: Well, the way that you do it is to make really bad loans, because they pay better. Then you grow extremely rapidly, in other words, you're a Ponzi-like scheme. And the third thing you do is we call it leverage. That just means borrowing a lot of money, and the combination creates a situation where you have guaranteed record profits in the early years. That makes you rich, through the bonuses that modern executive compensation has produced. It also makes it inevitable that there's going to be a disaster down the road.
BILL MOYERS: So you're suggesting, saying that CEOs of some of these banks and mortgage firms in order to increase their own personal income, deliberately set out to make bad loans?
WILLIAM K. BLACK: Yes.
BILL MOYERS: How do they get away with it? I mean, what about their own checks and balances in the company? What about their accounting divisions?
WILLIAM K. BLACK: All of those checks and balances report to the CEO, so if the CEO goes bad, all of the checks and balances are easily overcome. And the art form is not simply to defeat those internal controls, but to suborn them, to turn them into your greatest allies. And the bonus programs are exactly how you do that.
BILL MOYERS: If I wanted to go looking for the parties to this, with a good bird dog, where would you send me?
WILLIAM K. BLACK: Well, that's exactly what hasn't happened. We haven't looked, all right? The Bush Administration essentially got rid of regulation, so if nobody was looking, you were able to do this with impunity and that's exactly what happened. Where would you look? You'd look at the specialty lenders. The lenders that did almost all of their work in the sub-prime and what's called Alt-A, liars' loans.
BILL MOYERS: Yeah. Liars' loans--
WILLIAM K. BLACK: Liars' loans.
BILL MOYERS: Why did they call them liars' loans?
WILLIAM K. BLACK: Because they were liars' loans.
BILL MOYERS: And they knew it?
WILLIAM K. BLACK: They knew it. They knew that they were frauds.
WILLIAM K. BLACK: Liars' loans mean that we don't check. You tell us what your income is. You tell us what your job is. You tell us what your assets are, and we agree to believe you. We won't check on any of those things. And by the way, you get a better deal if you inflate your income and your job history and your assets.
BILL MOYERS: You think they really said that to borrowers?
WILLIAM K. BLACK: We know that they said that to borrowers. In fact, they were also called, in the trade, ninja loans.
BILL MOYERS: Ninja?
WILLIAM K. BLACK: Yeah, because no income verification, no job verification, no asset verification.
BILL MOYERS: You're talking about significant American companies.
WILLIAM K. BLACK: Huge! One company produced as many losses as the entire Savings and Loan debacle.
BILL MOYERS: Which company?
WILLIAM K. BLACK: IndyMac specialized in making liars' loans. In 2006 alone, it sold $80 billion dollars of liars' loans to other companies. $80 billion.
BILL MOYERS: And was this happening exclusively in this sub-prime mortgage business?
WILLIAM K. BLACK: No, and that's a big part of the story as well. Even prime loans began to have non-verification. Even Ronald Reagan, you know, said, "Trust, but verify." They just gutted the verification process. We know that will produce enormous fraud, under economic theory, criminology theory, and two thousand years of life experience.
BILL MOYERS: Is it possible that these complex instruments were deliberately created so swindlers could exploit them?
WILLIAM K. BLACK: Oh, absolutely. This stuff, the exotic stuff that you're talking about was created out of things like liars' loans, that were known to be extraordinarily bad. And now it was getting triple-A ratings. Now a triple-A rating is supposed to mean there is zero credit risk. So you take something that not only has significant, it has crushing risk. That's why it's toxic. And you create this fiction that it has zero risk. That itself, of course, is a fraudulent exercise. And again, there was nobody looking, during the Bush years. So finally, only a year ago, we started to have a Congressional investigation of some of these rating agencies, and it's scandalous what came out. What we know now is that the rating agencies never looked at a single loan file. When they finally did look, after the markets had completely collapsed, they found, and I'm quoting Fitch, the smallest of the rating agencies, "the results were disconcerting, in that there was the appearance of fraud in nearly every file we examined."
BILL MOYERS: So if your assumption is correct, your evidence is sound, the bank, the lending company, created a fraud. And the ratings agency that is supposed to test the value of these assets knowingly entered into the fraud. Both parties are committing fraud by intention.
WILLIAM K. BLACK: Right, and the investment banker that — we call it pooling — puts together these bad mortgages, these liars' loans, and creates the toxic waste of these derivatives. All of them do that. And then they sell it to the world and the world just thinks because it has a triple-A rating it must actually be safe. Well, instead, there are 60 and 80 percent losses on these things, because of course they, in reality, are toxic waste.
BILL MOYERS: You're describing what Bernie Madoff did to a limited number of people. But you're saying it's systemic, a systemic Ponzi scheme.
WILLIAM K. BLACK: Oh, Bernie was a piker. He doesn't even get into the front ranks of a Ponzi scheme...
BILL MOYERS: But you're saying our system became a Ponzi scheme.
WILLIAM K. BLACK: Our system...
BILL MOYERS: Our financial system...
WILLIAM K. BLACK: Became a Ponzi scheme. Everybody was buying a pig in the poke. But they were buying a pig in the poke with a pretty pink ribbon, and the pink ribbon said, "Triple-A."
BILL MOYERS: Is there a law against liars' loans?
WILLIAM K. BLACK: Not directly, but there, of course, many laws against fraud, and liars' loans are fraudulent.
BILL MOYERS: Because...
WILLIAM K. BLACK: Because they're not going to be repaid and because they had false representations. They involve deceit, which is the essence of fraud.
BILL MOYERS: Why is it so hard to prosecute? Why hasn't anyone been brought to justice over this?
WILLIAM K. BLACK: Because they didn't even begin to investigate the major lenders until the market had actually collapsed, which is completely contrary to what we did successfully in the Savings and Loan crisis, right? Even while the institutions were reporting they were the most profitable savings and loan in America, we knew they were frauds. And we were moving to close them down. Here, the Justice Department, even though it very appropriately warned, in 2004, that there was an epidemic...
BILL MOYERS: Who did?
WILLIAM K. BLACK: The FBI publicly warned, in September 2004 that there was an epidemic of mortgage fraud, that if it was allowed to continue it would produce a crisis at least as large as the Savings and Loan debacle. And that they were going to make sure that they didn't let that happen. So what goes wrong? After 9/11, the attacks, the Justice Department transfers 500 white-collar specialists in the FBI to national terrorism. Well, we can all understand that. But then, the Bush administration refused to replace the missing 500 agents. So even today, again, as you say, this crisis is 1000 times worse, perhaps, certainly 100 times worse, than the Savings and Loan crisis. There are one-fifth as many FBI agents as worked the Savings and Loan crisis.
BILL MOYERS: You talk about the Bush administration. Of course, there's that famous photograph of some of the regulators in 2003, who come to a press conference with a chainsaw suggesting that they're going to slash, cut business loose from regulation, right?
WILLIAM K. BLACK: Well, they succeeded. And in that picture, by the way, the other — three of the other guys with pruning shears are the...
BILL MOYERS: That's right.
WILLIAM K. BLACK: They're the trade representatives. They're the lobbyists for the bankers. And everybody's grinning. The government's working together with the industry to destroy regulation. Well, we now know what happens when you destroy regulation. You get the biggest financial calamity of anybody under the age of 80.
BILL MOYERS: But I can point you to statements by Larry Summers, who was then Bill Clinton's Secretary of the Treasury, or the other Clinton Secretary of the Treasury, Rubin. I can point you to suspects in both parties, right?
WILLIAM K. BLACK: There were two really big things, under the Clinton administration. One, they got rid of the law that came out of the real-world disasters of the Great Depression. We learned a lot of things in the Great Depression. And one is we had to separate what's called commercial banking from investment banking. That's the Glass-Steagall law. But we thought we were much smarter, supposedly. So we got rid of that law, and that was bipartisan. And the other thing is we passed a law, because there was a very good regulator, Brooksley Born, that everybody should know about and probably doesn't. She tried to do the right thing to regulate one of these exotic derivatives that you're talking about. We call them C.D.F.S. And Summers, Rubin, and Phil Gramm came together to say not only will we block this particular regulation. We will pass a law that says you can't regulate. And it's this type of derivative that is most involved in the AIG scandal. AIG all by itself, cost the same as the entire Savings and Loan debacle.
BILL MOYERS: What did AIG contribute? What did they do wrong?
WILLIAM K. BLACK: They made bad loans. Their type of loan was to sell a guarantee, right? And they charged a lot of fees up front. So, they booked a lot of income. Paid enormous bonuses. The bonuses we're thinking about now, they're much smaller than these bonuses that were also the product of accounting fraud. And they got very, very rich. But, of course, then they had guaranteed this toxic waste. These liars' loans. Well, we've just gone through why those toxic waste, those liars' loans, are going to have enormous losses. And so, you have to pay the guarantee on those enormous losses. And you go bankrupt. Except that you don't in the modern world, because you've come to the United States, and the taxpayers play the fool. Under Secretary Geithner and under Secretary Paulson before him... we took $5 billion dollars, for example, in U.S. taxpayer money. And sent it to a huge Swiss Bank called UBS. At the same time that that bank was defrauding the taxpayers of America. And we were bringing a criminal case against them. We eventually get them to pay a $780 million fine, but wait, we gave them $5 billion. So, the taxpayers of America paid the fine of a Swiss Bank. And why are we bailing out somebody who that is defrauding us?
BILL MOYERS: And why...
WILLIAM K. BLACK: How mad is this?
BILL MOYERS: What is your explanation for why the bankers who created this mess are still calling the shots?
WILLIAM K. BLACK: Well, that, especially after what's just happened at G.M., that's... it's scandalous.
BILL MOYERS: Why are they firing the president of G.M. and not firing the head of all these banks that are involved?
WILLIAM K. BLACK: There are two reasons. One, they're much closer to the bankers. These are people from the banking industry. And they have a lot more sympathy. In fact, they're outright hostile to autoworkers, as you can see. They want to bash all of their contracts. But when they get to banking, they say, ‘contracts, sacred.' But the other element of your question is we don't want to change the bankers, because if we do, if we put honest people in, who didn't cause the problem, their first job would be to find the scope of the problem. And that would destroy the cover up.
BILL MOYERS: The cover up?
WILLIAM K. BLACK: Sure. The cover up.
BILL MOYERS: That's a serious charge.
WILLIAM K. BLACK: Of course.
BILL MOYERS: Who's covering up?
WILLIAM K. BLACK: Geithner is charging, is covering up. Just like Paulson did before him. Geithner is publicly saying that it's going to take $2 trillion — a trillion is a thousand billion — $2 trillion taxpayer dollars to deal with this problem. But they're allowing all the banks to report that they're not only solvent, but fully capitalized. Both statements can't be true. It can't be that they need $2 trillion, because they have masses losses, and that they're fine.
These are all people who have failed. Paulson failed, Geithner failed. They were all promoted because they failed, not because...
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: Well, Geithner has, was one of our nation's top regulators, during the entire subprime scandal, that I just described. He took absolutely no effective action. He gave no warning. He did nothing in response to the FBI warning that there was an epidemic of fraud. All this pig in the poke stuff happened under him. So, in his phrase about legacy assets. Well he's a failed legacy regulator.
BILL MOYERS: But he denies that he was a regulator. Let me show you some of his testimony before Congress. Take a look at this.
TIMOTHY GEITHNER:I've never been a regulator, for better or worse. And I think you're right to say that we have to be very skeptical that regulation can solve all of these problems. We have parts of our system that are overwhelmed by regulation.
Overwhelmed by regulation! It wasn't the absence of regulation that was the problem, it was despite the presence of regulation you've got huge risks that build up.
WILLIAM K. BLACK: Well, he may be right that he never regulated, but his job was to regulate. That was his mission statement.
BILL MOYERS: As?
WILLIAM K. BLACK: As president of the Federal Reserve Bank of New York, which is responsible for regulating most of the largest bank holding companies in America. And he's completely wrong that we had too much regulation in some of these areas. I mean, he gives no details, obviously. But that's just plain wrong.
BILL MOYERS: How is this happening? I mean why is it happening?
WILLIAM K. BLACK: Until you get the facts, it's harder to blow all this up. And, of course, the entire strategy is to keep people from getting the facts.
BILL MOYERS: What facts?
WILLIAM K. BLACK: The facts about how bad the condition of the banks is. So, as long as I keep the old CEO who caused the problems, is he going to go vigorously around finding the problems? Finding the frauds?
BILL MOYERS: You--
WILLIAM K. BLACK: Taking away people's bonuses?
BILL MOYERS: To hear you say this is unusual because you supported Barack Obama, during the campaign. But you're seeming disillusioned now.
WILLIAM K. BLACK: Well, certainly in the financial sphere, I am. I think, first, the policies are substantively bad. Second, I think they completely lack integrity. Third, they violate the rule of law. This is being done just like Secretary Paulson did it. In violation of the law. We adopted a law after the Savings and Loan crisis, called the Prompt Corrective Action Law. And it requires them to close these institutions. And they're refusing to obey the law.
BILL MOYERS: In other words, they could have closed these banks without nationalizing them?
WILLIAM K. BLACK: Well, you do a receivership. No one -- Ronald Reagan did receiverships. Nobody called it nationalization.
BILL MOYERS: And that's a law?
WILLIAM K. BLACK: That's the law.
BILL MOYERS: So, Paulson could have done this? Geithner could do this?
WILLIAM K. BLACK: Not could. Was mandated--
BILL MOYERS: By the law.
WILLIAM K. BLACK: By the law.
BILL MOYERS: This law, you're talking about.
WILLIAM K. BLACK: Yes.
BILL MOYERS: What the reason they give for not doing it?
WILLIAM K. BLACK: They ignore it. And nobody calls them on it.
BILL MOYERS: Well, where's Congress? Where's the press? Where--
WILLIAM K. BLACK: Well, where's the Pecora investigation?
BILL MOYERS: The what?
WILLIAM K. BLACK: The Pecora investigation. The Great Depression, we said, "Hey, we have to learn the facts. What caused this disaster, so that we can take steps, like pass the Glass-Steagall law, that will prevent future disasters?" Where's our investigation?
What would happen if after a plane crashes, we said, "Oh, we don't want to look in the past. We want to be forward looking. Many people might have been, you know, we don't want to pass blame. No. We have a nonpartisan, skilled inquiry. We spend lots of money on, get really bright people. And we find out, to the best of our ability, what caused every single major plane crash in America. And because of that, aviation has an extraordinarily good safety record. We ought to follow the same policies in the financial sphere. We have to find out what caused the disasters, or we will keep reliving them. And here, we've got a double tragedy. It isn't just that we are failing to learn from the mistakes of the past. We're failing to learn from the successes of the past.
BILL MOYERS: What do you mean?
WILLIAM K. BLACK: In the Savings and Loan debacle, we developed excellent ways for dealing with the frauds, and for dealing with the failed institutions. And for 15 years after the Savings and Loan crisis, didn't matter which party was in power, the U.S. Treasury Secretary would fly over to Tokyo and tell the Japanese, "You ought to do things the way we did in the Savings and Loan crisis, because it worked really well. Instead you're covering up the bank losses, because you know, you say you need confidence. And so, we have to lie to the people to create confidence. And it doesn't work. You will cause your recession to continue and continue." And the Japanese call it the lost decade. That was the result. So, now we get in trouble, and what do we do? We adopt the Japanese approach of lying about the assets. And you know what? It's working just as well as it did in Japan.
BILL MOYERS: Yeah. Are you saying that Timothy Geithner, the Secretary of the Treasury, and others in the administration, with the banks, are engaged in a cover up to keep us from knowing what went wrong?
WILLIAM K. BLACK: Absolutely.
BILL MOYERS: You are.
WILLIAM K. BLACK: Absolutely, because they are scared to death. All right? They're scared to death of a collapse. They're afraid that if they admit the truth, that many of the large banks are insolvent. They think Americans are a bunch of cowards, and that we'll run screaming to the exits. And we won't rely on deposit insurance. And, by the way, you can rely on deposit insurance. And it's foolishness. All right? Now, it may be worse than that. You can impute more cynical motives. But I think they are sincerely just panicked about, "We just can't let the big banks fail." That's wrong.
BILL MOYERS: But what might happen, at this point, if in fact they keep from us the true health of the banks?
WILLIAM K. BLACK: Well, then the banks will, as they did in Japan, either stay enormously weak, or Treasury will be forced to increasingly absurd giveaways of taxpayer money. We've seen how horrific AIG -- and remember, they kept secrets from everyone.
BILL MOYERS: A.I.G. did?
WILLIAM K. BLACK: What we're doing with -- no, Treasury and both administrations. The Bush administration and now the Obama administration kept secret from us what was being done with AIG. AIG was being used secretly to bail out favored banks like UBS and like Goldman Sachs. Secretary Paulson's firm, that he had come from being CEO. It got the largest amount of money. $12.9 billion. And they didn't want us to know that. And it was only Congressional pressure, and not Congressional pressure, by the way, on Geithner, but Congressional pressure on AIG.
Where Congress said, "We will not give you a single penny more unless we know who received the money." And, you know, when he was Treasury Secretary, Paulson created a recommendation group to tell Treasury what they ought to do with AIG. And he put Goldman Sachs on it.
BILL MOYERS: Even though Goldman Sachs had a big vested stake.
WILLIAM K. BLACK: Massive stake. And even though he had just been CEO of Goldman Sachs before becoming Treasury Secretary. Now, in most stages in American history, that would be a scandal of such proportions that he wouldn't be allowed in civilized society.
BILL MOYERS: Yeah, like a conflict of interest, it seems.
WILLIAM K. BLACK: Massive conflict of interests.
BILL MOYERS: So, how did he get away with it?
WILLIAM K. BLACK: I don't know whether we've lost our capability of outrage. Or whether the cover up has been so successful that people just don't have the facts to react to it.
BILL MOYERS: Who's going to get the facts?
WILLIAM K. BLACK: We need some chairmen or chairwomen--
BILL MOYERS: In Congress.
WILLIAM K. BLACK: --in Congress, to hold the necessary hearings. And we can blast this out. But if you leave the failed CEOs in place, it isn't just that they're terrible business people, though they are. It isn't just that they lack integrity, though they do. Because they were engaged in these frauds. But they're not going to disclose the truth about the assets.
BILL MOYERS: And we have to know that, in order to know what?
WILLIAM K. BLACK: To know everything. To know who committed the frauds. Whose bonuses we should recover. How much the assets are worth. How much they should be sold for. Is the bank insolvent, such that we should resolve it in this way? It's the predicate, right? You need to know the facts to make intelligent decisions. And they're deliberately leaving in place the people that caused the problem, because they don't want the facts. And this is not new. The Reagan Administration's central priority, at all times, during the Savings and Loan crisis, was covering up the losses.
BILL MOYERS: So, you're saying that people in power, political power, and financial power, act in concert when their own behinds are in the ringer, right?
WILLIAM K. BLACK: That's right. And it's particularly a crisis that brings this out, because then the class of the banker says, "You've got to keep the information away from the public or everything will collapse. If they understand how bad it is, they'll run for the exits."
BILL MOYERS: Yeah, and this week in New York, at this conference, you described this as more than a financial crisis. You called it a moral crisis.
WILLIAM K. BLACK: Yes.
BILL MOYERS: Why?
WILLIAM K. BLACK: Because it is a fundamental lack of integrity. But also because, if you look back at crises, an economist who is also a presidential appointee, as a regulator in the Savings and Loan industry, right here in New York, Larry White, wrote a book about the Savings and Loan crisis. And he said, you know, one of the most interesting questions is why so few people engaged in fraud? Because objectively, you could have gotten away with it. But only about ten percent of the CEOs, engaged in fraud. So, 90 percent of them were restrained by ethics and integrity. So, far more than law or by F.B.I. agents, it's our integrity that often prevents the greatest abuses. And what we had in this crisis, instead of the Savings and Loan, is the most elite institutions in America engaging or facilitating fraud.
BILL MOYERS: This wound that you say has been inflicted on American life. The loss of worker's income. And security and pensions and future happened, because of the misconduct of a relatively few, very well-heeled people, in very well-decorated corporate suites, right?
WILLIAM K. BLACK: Right.
BILL MOYERS: It was relatively a handful of people.
WILLIAM K. BLACK: And their ideologies, which swept away regulation. So, in the example, regulation means that cheaters don't prosper. So, instead of being bad for capitalism, it's what saves capitalism. "Honest purveyors prosper" is what we want. And you need regulation and law enforcement to be able to do this. The tragedy of this crisis is it didn't need to happen at all.
BILL MOYERS: When you wake in the middle of the night, thinking about your work, what do you make of that? What do you tell yourself?
WILLIAM K. BLACK: There's a saying that we took great comfort in. It's actually by the Dutch, who were fighting this impossible war for independence against what was then the most powerful nation in the world, Spain. And their motto was, "It is not necessary to hope in order to persevere."
Now, going forward, get rid of the people that have caused the problems. That's a pretty straightforward thing, as well. Why would we keep CEOs and CFOs and other senior officers, that caused the problems? That's facially nuts. That's our current system.
So stop that current system. We're hiding the losses, instead of trying to find out the real losses. Stop that, because you need good information to make good decisions, right? Follow what works instead of what's failed. Start appointing people who have records of success, instead of records of failure. That would be another nice place to start. There are lots of things we can do. Even today, as late as it is. Even though they've had a terrible start to the administration. They could change, and they could change within weeks. And by the way, the folks who are the better regulators, they paid their taxes. So, you can get them through the vetting process a lot quicker.
BILL MOYERS: William Black, thank you very much for being with me on the Journal.
WILLIAM K. BLACK: Thank you so much.
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