PDA

View Full Version : Economics Why did we bail out the banks?


banyon
08-18-2009, 08:27 PM
Why Did We Bail Out the Banks?
by: Harry Tuttle August 18, 2009 | about: C / GS

Almost a year ago, in the aftermath of the Lehman debacle, Secretary Paulson asked the American Congress for $700 million to relieve "our banks" (the meaning of the term was and is highly dependent on the user) of their "toxic assets" (his words). As Congress first said no, Paulson (aided by Bernanke) pretty much told us that failure to give him the money would mean the end of life as we knew it (another highly context dependent definition).

The American Congress, after consulting their oracle (aka "The Dow Jones Industrial Average") acquiesced under proclamations of better regulations that would ensure that "this will never happen again." Even those who knew that the mess had been bipartisan (the Glass-Steagall Act was repealed during the Clinton administration) believed that some regulation would be coming. After all, that is what normally happens in politics after the horses have left the barn.

I retrospect the appointments of Tim Geithner, who was involved in all the bailouts and other interventions at the NY Fed, and Larry Summers who was the main architect of the "self-regulatory" environment that created the $60 trillion CDS market, should have been enough warning that something wasn't quite the way we had expected.

Last week, Elizabeth Warren, who was appointed by Congress to oversee the banking bailout, said on a TV program that the banks still hold most of their toxic assets. At the same time, we learned that the large banks are not lending much and that Goldman (GS) has not reduced its leverage and is trading as aggressively as ever. In addition, the same compensation schemes that had encouraged the excessive risk taking by these "regulated" institutions are back in vogue and close to their highest levels. If anything, we hear complaints from banks who cannot keep up with the competition. Furthermore, as far as I know, banks are not only still allowed to hold large off-balance sheet items but they continue to be allowed to trade CDS' and other leveraged products. Their own risk profiles are down, however, since we now KNOW that they won't be allowed to fail.

The question I would pose is why did we save these banks? It is clear that they are NOT indispensable as we were told since companies who can get credit seem to find willing substitutes either directly in the market or through smaller and healthier banks. Why should I, as an American taxpayer, have any interest in the existence of a large multinational bank prone to large risky bets that from time to time risk bringing down the whole financial system? Why does our society need to support these large institutions with their internal hedge funds and other operations that seem setup for the sole benefit of their executives?

Banks, which are regulated entities, allegedly exist to facilitate commerce by bringing together savers and borrowers for profit. Why do they need to be regulated? Because our society decided, in the 1930s that it was better to minimize systemic risk. In other words, we allow banks to exist under certain conditions because we think efficient intermediation is essential to our economy. In this model, our society as a whole benefits from having efficient banks as the cost of bringing our aggregate savings to deserving entrepreneurs is minimized. This was the argument used beginning in the Reagan administration to deregulate the banks and thrifts, "let us do business and we will bring borrowing costs down." Nothing wrong in principle as too much regulation can often get in the way of efficiency.

Unfortunately the original idea of freeing up the banks to allow them to compete at the national and global scale was stretched beyond recognition during the Clinton-Bush years. The repeal of the Glass-Steagall Act that separated investment from commercial banking, the conversion of Fannie and Freddie into aggressive for-profit institutions, and the extreme friendliness of government officials who were often regulating their future employers were all celebrated by republican and democrats alike as triumphs of deregulation. As if to add insult to injury, our system was imitated by many around the world.

This is how we ended up with our largest banks filled with toxic assets, off-balance sheet commitments, and in-house hedge funds among other "investments." I mean, who wanted to make money by intermediating savers and borrowers when you could ride the bull market with the bank's money and get paid in stock options? Unfortunately for us, they had it right because we were underwriting the risk. It wasn't the Greenspan or the Bernanke put but the USA put.

The reason this sad story is relevant today, is that this is STILL the model under which Geithner and Summers want to revive the banks. Forget about whether you believe it is possible for the banks to earn their way out of trouble "Japanese style." This is the model for when they become healthy. Lots of complex risk for large personal payout under the friendly eye of someone who will join their club in the not to distant future. If you think I exaggerate, ask yourself what has changed since the pre-Lehman days for those still employed in Wall Street? Not to mention that interest rates are zero again and the stock market is rallying (again) and they are making boat loads of money, again. How long until they decide to take another shot at sub-prime? (this time they will promise to get it right).

I personally have no problem with hedge funds and other speculative clubs, so long as they are not risking taxpayer money, whether directly (like Fannie and Freddie) or indirectly by threatening to bring down the system. On the other hand, since banks are supported by taxpayer money, I think it is fair to have their risk tightly controlled by an external regulator who should never allow them stray into areas unrelated to their core business of intermediating financial products. It is as simple as that. If they want to make money by guessing which way the December oil contract is going they can set up a hedge fund outside the bank and without implicit or explicit government guarantees.

Financial markets are perversely didactical, they will set us up to revise the lesson as often as needed, but learn it we will.


http://seekingalpha.com/article/156907-why-did-we-bail-out-the-banks?source=portfolio_wl

banyon
08-18-2009, 08:29 PM
This article is right, we have very little to show for the trillion we threw at wall St. Not a better balace sheet, not more liquidity, and most importantly, not a better system in place to prevent it from happening all over again. And who loses? We do with massive devaluation of our salaries.

petegz28
08-18-2009, 08:29 PM
cause Paulson, Geithner and Bernanke said we had too

petegz28
08-18-2009, 08:29 PM
This article is right, we have very little to show for the trillion we threw at wall St. Not a better balace sheet, not more liquidity, and most importantly, not a better system in place to prevent it from happening all over again. And who loses? We do with massive devaluation of our salaries.

And we want to trust these morons with our health care on top of it all?

Saul Good
08-18-2009, 08:30 PM
Where would you say the repeal of the Glass-Steagall Act ranks in terms of the most influential acts of the Clinton presidency (in a historical sense)?

banyon
08-18-2009, 08:32 PM
And we want to trust these morons with our health care on top of it all?

Wall St? No, they are already in control of it, and that's the way they want it to stay.

Donger
08-18-2009, 08:33 PM
It was only $700 million? Heck, that's a pittance.

banyon
08-18-2009, 08:34 PM
Where would you say the repeal of the Glass-Steagall Act ranks in terms of the most influential acts of the Clinton presidency (in a historical sense)?

Well there weren't many, so I'd say right up there. Top 5 easy.

petegz28
08-18-2009, 08:34 PM
Wall St? No, they are already in control of it, and that's the way they want it to stay.

Who gave them the bailouts? Sheesh, banyon...are you going to shill now?

banyon
08-18-2009, 08:40 PM
Who gave them the bailouts? Sheesh, banyon...are you going to shill now?

That's the point. In both instances, the moneyed interests won, and regular people get screwed.

petegz28
08-18-2009, 08:41 PM
That's the point. In both instances, the moneyed interests won, and regular people get screwed.

And they will screw the people on health care too. Come on banyon, SS and Medicare are perfect examples of what will happen to our health care.

banyon
08-18-2009, 08:44 PM
And they will screw the people on health care too. Come on banyon, SS and Medicare are perfect examples of what will happen to our health care.

SS and Medicare have ben pretty good and successful programs. Had we not started raiding their trust funds they might be in decent budgetary shape too. Thy need some amendments, but so would any program of that age.

Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

petegz28
08-18-2009, 08:45 PM
]SS and Medicare have ben pretty good and successful programs.[/B] Had we not started raiding their trust funds they might be in decent budgetary shape too. Thy need some amendments, but so would any program of that age.

Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

LMAO...ok.....if you say so...

Saul Good
08-18-2009, 08:59 PM
Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

Let's say that your employer owed you a paycheck of $3,000. Instead of paying you, they went bankrupt and paid you $1,000 instead. It would suck, but that doesn't mean that you would decline the $1,000 knowing that the alternative was nothing.

RINGLEADER
08-18-2009, 09:00 PM
This article is right, we have very little to show for the trillion we threw at wall St. Not a better balace sheet, not more liquidity, and most importantly, not a better system in place to prevent it from happening all over again. And who loses? We do with massive devaluation of our salaries.

It's my understanding that the vast majority of the chunk that was spent by the Bush admin went to pay off the insurance that had been purchased as a hedge against what people refer to as "toxic assets" -- most of it held by foreign banks and institutions. The thinking, probably correctly, was if those losses weren't covered you'd have more lending/institutions writing off more of the (still) toxic assets and have a worldwide collapse of the system.

What has always upset me is that they felt that they couldn't give any of these insured assets a haircut when the money went rolling out. I'm sure Hanky Panky and Co. thought it better to pay out the hundreds of billions rather than even risk having trillions in demands appear. Maybe they were right. But now we'll never know.

As far as what we got for the money some will say we averted the aforementioned worldwide disaster. Some would say you merely kicked the can down the road and we're still participating in a huge ponzi scheme that will eventually collapse. Truth is we'll probably never know what it accomplished.

RINGLEADER
08-18-2009, 09:01 PM
SS and Medicare have ben pretty good and successful programs. Had we not started raiding their trust funds they might be in decent budgetary shape too. Thy need some amendments, but so would any program of that age.

Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

Yeah, because they have no other options. That's the argument that people opposed to Obamacare have been saying from the beginning...

RedNeckRaider
08-18-2009, 09:01 PM
That's the point. In both instances, the moneyed interests won, and regular people get screwed.

This

KILLER_CLOWN
08-18-2009, 09:16 PM
I swear this thread is so 10 months ago, and who came up with the 1 trillion? That number represents a very small portion of it.

Bearcat2005
08-18-2009, 10:01 PM
LMAO...ok.....if you say so...

I was thinking the same thing.

BigRedChief
08-19-2009, 07:37 AM
That's the point. In both instances, the moneyed interests won, and regular people get screwed.
no chit. How are we suppose to trust Paulson and Bush that our economy was on the brink of a depression back in Septemember 08? I thought after the fiasco of the 30's we had rules in place to prevent a run? Am I wrong here?

Simplex3
08-19-2009, 09:02 AM
SS and Medicare have ben pretty good and successful programs. Had we not started raiding their trust funds they might be in decent budgetary shape too. Thy need some amendments, but so would any program of that age.

Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

:spock:

The problems you point out with SS and Medicare *always* happen with government programs. Always.

patteeu
08-19-2009, 09:48 AM
SS and Medicare have ben pretty good and successful programs. Had we not started raiding their trust funds they might be in decent budgetary shape too. Thy need some amendments, but so would any program of that age.

Go take a poll of people over 65 and see who wants their SSA and Medicare taken away.

:spock: That's like polling a welfare recipient or a subsidized industry to see if they want their government funding taken away. How about asking a 20-something or a 30-something how they feel about funding the elder care of today's elderly through a program that is unlikely to have anything left for them when they get old.

patteeu
08-19-2009, 09:50 AM
Yeah, because they have no other options. That's the argument that people opposed to Obamacare have been saying from the beginning...

Yep.

KC native
08-19-2009, 12:23 PM
We bailed them out because Goldman's was in a precarious position. /sarc off

We bailed them out because our policy makers didn't have the stomachs to do what was necessary by nationalizing them and spinning them back out and telling bond holders that they made shitty investments so they have to take the loss.

KC native
08-19-2009, 12:27 PM
no chit. How are we suppose to trust Paulson and Bush that our economy was on the brink of a depression back in Septemember 08? I thought after the fiasco of the 30's we had rules in place to prevent a run? Am I wrong here?

Well, this bank run was something that we didn't have the capability to prevent. This was not a consumer bank run like what was experienced in the 30's. This was a run on the shadow banking industry (not shady but non-traditional banks eg IB's, insurers, mortgage lenders, private equity). You had collateral calls coming and no one wanting to extend credit because of the fear that a firm could fail at any minute.

Many of these firms were not supervised adequately to prevent this.

KC native
08-19-2009, 12:39 PM
It's my understanding that the vast majority of the chunk that was spent by the Bush admin went to pay off the insurance that had been purchased as a hedge against what people refer to as "toxic assets" -- most of it held by foreign banks and institutions. The thinking, probably correctly, was if those losses weren't covered you'd have more lending/institutions writing off more of the (still) toxic assets and have a worldwide collapse of the system.

What has always upset me is that they felt that they couldn't give any of these insured assets a haircut when the money went rolling out. I'm sure Hanky Panky and Co. thought it better to pay out the hundreds of billions rather than even risk having trillions in demands appear. Maybe they were right. But now we'll never know.

As far as what we got for the money some will say we averted the aforementioned worldwide disaster. Some would say you merely kicked the can down the road and we're still participating in a huge ponzi scheme that will eventually collapse. Truth is we'll probably never know what it accomplished.

Don't forget the role that leverage played in this as well.

I agree with you on the fact that none of the contract holders took losses. I have said from the beginning of these actions that they are benefiting the bond holders of these firms at the expense of the tax payer. This has been the most disgusting part of these actions to me. The equity holders of these institutions should have been wiped out and the bond holders should have taken haircuts.

Simplex3
08-19-2009, 01:18 PM
We bailed them out because Goldman's was in a precarious position. /sarc off

We bailed them out because our policy makers didn't have the stomachs to do what was necessary by nationalizing them and spinning them back out and telling bond holders that they made shitty investments so they have to take the loss.

OR secret option B: Let them go bankrupt and let the bondholders liquidate the companies. You know, like the law said it should happen.

KC native
08-19-2009, 01:20 PM
OR secret option B: Let them go bankrupt and let the bondholders liquidate the companies. You know, like the law said it should happen.

And if that would have happened then we would have seen the collapse of the financial system.

memyselfI
08-19-2009, 01:21 PM
Because the Republicans were desperate to do something that would saddle the Democrats with a problem which would ensure their demise seeing the Republicans were not in an position to do it themselves. They needed to create another 9/11 for the Dems to 'fix.' The DEMS willingly walked the plank and took the bait and now are only beginning to see the living hell they've embraced.

It's worked like a charm, IMO. ROFL

banyon
08-20-2009, 10:35 AM
Because the Republicans were desperate to do something that would saddle the Democrats with a problem which would ensure their demise seeing the Republicans were not in an position to do it themselves. They needed to create another 9/11 for the Dems to 'fix.' The DEMS willingly walked the plank and took the bait and now are only beginning to see the living hell they've embraced.

It's worked like a charm, IMO. ROFL

Your glee in our financial malaise is frankly sickening.

HonestChieffan
08-20-2009, 10:46 AM
What did people think it was going to do? If you pay off the debt on the toxic assets the best the bank does is break even, its not a profit.

People are generally ignorant but moreso on issues of money.

memyselfI
08-20-2009, 12:47 PM
Your glee in our financial malaise is frankly sickening.

There is no glee involved in seeing a train wreck BEFORE it happens. The financial mess is not what is funny. What is funny is the number of sheeple who signed on to supporting the legislation and are now Opologizing for Lite.

Fat Elvis
08-20-2009, 12:59 PM
http://www.oldmovies.net.au/userimages/user1367_1175084187.jpg

Harry Tuttle

I'm surprised no one noticed that....

***SPRAYER
09-14-2009, 10:18 AM
But lest we forget, there are still trillions of dollars in bad debt lurking on the ledgers of America's banks. This bad paper is still left over from the mortgage securities debacle of last year - a problem that was supposed to be addressed - we were promised would be addressed - by the $700 billion TARP program.

Of course, first Bush and then Obama used that TARP money not to take the bad assets off the books of major banks, but to bailout the auto industry, take over AIG, and grant short term relief to banks who were swimming in red ink.

As a result, those banks short term prospects improved but the bail outs did nothing to address the underlying cause of the meltdown.

Nobel Prize winning economist Joseph Stiglitz, interviewed by Mark Deen and David Tweed in Bloomberg , notes that the danger has only grown:


"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."

Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.'s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn't force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.


The financial industry has resisted any notion of a "TARP II" that Treasury Secretary Tim Geithner was pushing last spring. The plan called for private equity firms to purchase the bad debt at a guaranteed price.

But the idea that the purchase price would probably be less than the paper value of the securities made the big banks very reluctant. They are hoping that as the recovery proceeds, housing prices will rise and the value of their mortgage securities will rebound.

In short, the banks are playing a game of chicken with the government. At bottom, they want the federal government to buy their bad debt at face value. The government can't afford it. But because they are "too big to fail," if there ever is another meltdown, they will be assured that the government will bail them out again, probably solving their debt problem in the process.

For the administration to allow this situation to fester while seeing the big banks get even bigger is beyond stupid. And we're liable to pay for it somewhere down the road.

http://www.americanthinker.com