NY Times allegedly has some details:
The Obama administration’s new plan to bail out the nation’s banks was fashioned after a spirited internal debate that pitted the Treasury secretary, Timothy F. Geithner, against some of the president’s top political hands.
In the end, Mr. Geithner largely prevailed in opposing tougher conditions on financial institutions that were sought by presidential aides, including David Axelrod, a senior adviser to the president, according to administration and Congressional officials.
Mr. Geithner, who will announce the broad outlines of the plan on Tuesday, successfully fought against more severe limits on executive pay for companies receiving government aid.
He resisted those who wanted to dictate how banks would spend their rescue money. And he prevailed over top administration aides who wanted to replace bank executives and wipe out shareholders at institutions receiving aid.
Because of the internal debate, some of the most contentious issues remain unresolved.
On Monday evening, new details emerged after lawmakers were briefed on the plan.
It intends to call for the creation of a joint Treasury and Federal Reserve program, at an initial cost of $250 billion to $500 billion, to encourage investors to acquire soured mortgage-related assets from banks.
The Fed will use its balance sheet to provide the financing, and the Federal Deposit Insurance Corporation might provide guarantees to investors who participate in the program, which some people might call a “bad bank.”
A second component of the plan would broadly expand, to $500 billion to $1 trillion, an existing $200 billion program run by the Federal Reserve to try to unfreeze the market for commercial, student, auto and credit card loans. A third component would involve a review of the capital levels of all banks, including projections of future losses, to determine how much additional capital each bank should receive.
The capital injections would come out of the remaining $350 billion in the Troubled Asset Relief Program, or TARP.
A separate $50 billion initiative to enable millions of homeowners facing imminent foreclosure to renegotiate the terms of their mortgages is to be announced next week.
Some of President Obama’s advisers had advocated tighter restrictions on aid recipients, arguing that rising joblessness, populist outrage over Wall Street bonuses and expensive perks, and the poor management of last year’s bailouts could feed a potent political reaction if the administration did not demand enough sacrifices from the companies that receive federal money.
The depressing thing for me about this is that even after spending months reading almost every story I can find about this, after compulsively following Calculated Risk and Naked Capitalism and inviting folks like Nour Rhoubini and others into my home, I still have only a passing understanding of what is going on. I’m not the smartest person on the planet, but I am not Dough Feith stupid, yet every time I look at this stuff it doesn’t take long before I am in over my head. This stuff has become so hopelessly complex, with so many interlocking relationships, that even if you assume everyone is acting in good faith, it is difficult to make sense of it all. Factor in the sad reality that a lot of people in this sector appear to be incapable of acting in good faith, and there is no chance that the average person can understand what is going on.
On the other hand, I do understand this, and it is terrifying:
I was there when the secretary and the chairman of the Federal Reserve came those days and talked to members of Congress about what was going on… Here’s the facts. We don’t even talk about these things.
On Thursday, at about 11 o’clock in the morning, the Federal Reserve noticed a tremendous drawdown of money market accounts in the United States to a tune of $550 billion being drawn out in a matter of an hour or two.
The Treasury opened up its window to help. They pumped $105 billion into the system and quickly realized that they could not stem the tide. We were having an electronic run on the banks.
They decided to close the operation, close down the money accounts, and announce a guarantee of $250,000 per account so there wouldn’t be further panic and there. And that’s what actually happened.
If they had not done that their estimation was that by two o’clock that afternoon, $5.5 trillion would have been drawn out of the money market system of the United States, would have collapsed the entire economy of the United States, and within 24 hours the world economy would have collapsed.
More here, where the possibility of martial law was discussed. The whole thing makes you feel helpless, to an extent. This clearly something that is so important that it could shake the foundation of our society, yet it is so hopelessly complex that you are powerless to understand it, let alone take control of the situation.
*** Update ***
Many folks wonder why I have soured so much on the Republican party (not folks that still read and comment here, mind you, but every other day I get an email from someone wondering why I went “insane” or telling me that I have gone “nuts,”), and this is a good time to explain why. Watch that Kanjorski video, and tell me it does not scare the hell out of you. Then remember that it was in that context, with that in the background, that the then Republican nomineee, with his sidekick Sarah Palin, engaged in a series of stunts regarding the bailout, suspending his campaign, resuming his campaign, babbling about cancelling the debates, all while the House GOP played their little games, ending in this:
Watch the Kanjorski video again, think about that context, then watch John Boehner go in front of the cameras and say they voted against the bailout because Nancy Pelosi was mean. There was a loaded gun pointed at the head of the American economy, and the Republicans were bitching about the color of the uniforms worn by the SWAT team there to rescue them.
I don’t think it is nuts to have soured on the GOP. I think it is nuts to support them.
SalParadise
It looks like this video was posted around 1/30 on youtube – so this story is about two weeks old & this is the first I’m hearing about it.
THAT’s pretty damn scary in itself – the country was hours away from collapse and possible martial law and it’s not the biggest story of the past 30 years….
Of course, I did learn Obama doesn’t always wear a jacket in the Oval Office – lulz…worst president ever!
wilfred
Christ, get a hold of yourself. Can it so fucking bad, can it be such an existential threat if Geithner is opposing severe limits on executive pay? I’ll make a prediction: The rich will get richer and the poor will get poorer. Just like always.
Besides, what about global warming? Isn’t that the biggest problem of the human race? Or is that all ok now?
More crisis bullshit, more politics of dilemma.
gbear
The Republican plan is much simpler.
John Cole
@wilfred: Yes. it is all just a scam, Wilfred.
slaney black
Dump. Geithner. Now.
El Cid
I don’t know what did and did not happen. I’m sorry, I can no longer stand for even a moment any argument based on trusting the government to act in a gigantically risky, seemingly contradictory manner, based on their possession of secret information they can’t disclose to us.
Maybe it happened. If so, I want it proven based on evidence, not some story told to a Congressman. If this is ‘out there’ and I haven’t seen it, fine.
Accepting such stories without strong and skeptical verification is the same type of thinking that leads people to accept an overtly idiotic war on the basis that "the gubmit" knows things we don’t, we’re in imminent danger, and we must let it act as it sees fit.
So far to me the Geithner hinting gives not the slightest reassurance that it’s anything more of the bubble scam nonsense we’ve played for the past 30 years. Sorry. I’d like to feel differently about it, but whereas they seem to feel they’re exhibiting strong rationality, it seems more ‘best and brightest’ avoidance.
But I’m not an economist, I’m just going on the same sense and intuition which have been pretty damn right over the past generation even when others were sneering that I was among the loonie fringe and didn’t understand the ‘new economy’ or whatever.
Ram111
"me hair tis all burnéd off. o woes till may…"
fooksike, man. Get a grip.
liberal
Stimulus plan: necessary, if regrettable.
Free money for bank fraudsters: outrageous.
I gave a lot of money to Obama. If he insists on giving all this free money to insolvent banks, then he’s going to have trouble from his liberal wing. And he’ll deserve it, given that giving money to the banks is neither equitable nor an efficient way of shoring up the financial system.
This summary by Barry Ritholtz is good.
Robin G.
I know what you mean about having a hard time getting the complexities of this whole mess (which I’ve been trying to do and not really succeeding — which annoys the hell out of me). That video is damn worrisome. If even half of what he’s saying is true… and it nearly happened with Bush still in office. If that doesn’t give you cold chills all over, then nothing will.
robertdsc
This is one of the few times where I’ll say David Sirota and his band of nutcases at OpenLeft were right.
Timmy done kilt us all with this fucked up plan.
wilfred
No, it’s not a scam – just the latest in a long series of crises that have always accompanied capitalism.
But you’re right, John. It would be silly to remain calm in a situation that calls for panic. Silly to question whether or not things are as bad as they are said to be and, God forbid, wait a moment or two before committing what’s left of the country’s future to making decisions that actually should be weighed and reflected upon.
Nah, it’s a goddamned catastrophe -WE CAN’T WAIT!. Buy now, or lose this opportunity.
You should list
Phaedrus
You make things as complex or simple as you want. Your relationship with your cat can seem hopelessly complex if you over analyze. This is where basic principles help guide the way through a morass.
The US Government’s job is to look out for the nation as a whole, not the financial sector. Previously we had the fox guarding the hen house, Obama has chosen to continue that model, and so the interests of Wall St are trumping Main St. Obsfucation helps these people get away with their stunt, so the problem becomes hopelessly complex.
We are giving money to prop up poorly run institutions, so we should get value for that – but it goes against ideology (again, Wall St’s) that it is wrong to nationalize banks, even temporarily.
Finally, all of this hullabaloo distracts from the discussion about reforms needed to prevent a repeat. Who’s interest does this serve?
The problems don’t have to be complex, but the complexity hides the scam – ironically, the same tactics that got us into this mess. Don’t be fooled, and while the Reps are evil the Dems are useless – which is pretty much equivalent. Quit trying to pretend that there is more than a hairs breadth of difference.
bartkid
>even if you assume everyone is acting in good faith
Assume the opposite and things begin to make a lot more sense.
John Cole
Wilfred, I am not sure how much clearer I can be. I just wrote a long post saying I have followed this obsessively, and still can not make sense of the plan Geithner is advancing or the situation, yet you are acting like I wholeheartedly endorse it. I DON’T. I have not advocated ANY course of action, because I simply don’t know what the right response is.
However, if it makes you feel better to wage your war on straw here, have at it.
max
This clearly something that is so important that it could shake the foundation of our society,
Yes.
yet it is so hopelessly complex that you are powerless to understand it, let alone take control of the situation.
Do you understand the specific chipmask of a given CPU? Of course not, you’ve never seen it. Can you grasp how that CPU interlocks with the rest of the system? Sure.
In that context, a CPU is a black box and (just like in math) a simplification. None of these guys are engaging the complexity directly, they deal with it using a series of proxy approximations. Just like you. You will never understand it directly, in all its glorious and tedious detail because no one does… and no one needs to, as it’s just a long series of endless repetitions. Financial collapse, even if it had occurred, would not have been nearly as bad as they make out. (George Bush thought Saddam was going to kill us all, but he tends to exaggerate like that.) People need food and water, so they’ll trade (they have to), and the money would start moving again.
Martial law comes into it when they’re trying to protect the bankers… people enduring such a collapse might blow off their debts for awhile and then the bankers have no money and we can’t have that, now can we?
max
[‘Chill.’]
Michael D.
The fundamentals of the economy are
strongstrange!skeeball
if there is no executive pay cap, hopefully all banks receiving money have to ditch their entire board and get it replaced by government choices. those people did a terrible job and got tons of money for it. also we then have someone representing the people when it comes time to decide executive pay
Napoleon
Any plan short of zeroing out existing investors is a complete rip off of the American taxpayer, and apparently that is what they plan.
slaney black
Wilfred, I am not sure how much clearer I can be. I just wrote a long post saying I have followed this obsessively, and still can not make sense of the plan Geithner is advancing or the situation, yet you are acting like I wholeheartedly endorse it. I DON’T. I have not advocated ANY course of action, because I simply don’t know what the right response is.
It’s actually pretty simple.
1. Treasury makes guaranteed loans to hedge funds.
2. Hedge funds use loans to buy bad debt.
3. If they make money, Treasury gets its loans back plus a fixed percentage.
4. Hedge funds pocket anything above that.
5. If they don’t make money, Treasury writes off the loan and hedge funds walk away.
From a hedgie’s perspective, you either make money or lose nothing. You get all the excess upside and no downside.
From the Treasury’s perspective, you get all of the downside and only a fixed percentage of the upside – if the bonds perform way better than expected, you don’t see any of the excess return.
BUT you buy some insulation. You let the hedge funds decide what the bonds are worth. That way you’re insulated from public pressure to pay low, and industry pressure to pay too much. The hedgies work out for themselves what the debt is worth.
So…on balance it’s a bad deal…on the other hand you avoid pressure from Chucky Schumer and K Street to buy into an even worse deal.
I agree with the guy above who wants to wipe out existing investors. Of the plans that don’t do that, this isn’t the worst. But Geithner seems determined to protect his Wall Street pals, so we’ll see how it’s implemented..
wilfred
@John Cole:
I’m not picking a fight with you, John. My point is that if you, a reasonably intelligent person who follows things as closely as possible, does not understand what’s going on then there exist other possible explanations than some inherently ‘mysterious’ complexity of the problem.
My wife can explain Maxwell’s equations to me with relative ease. If you don’t understand what’s going on it’s because a) the situation has not been explained properly (thus begging other questions or b) it really is so fucking complicated.
But if it’s so complicated then why is the solution so apparently simple, i.e., massive economic stimulus plans?
I’m in another country and from where I sit I see a lot of chicken little panic – all of which can be remediated with oceans of cash being handed out to people whose accountability for said cash remains suspect.
So, yeah, I’m suspicious.
Comrade Scrutinizer
@slaney black: Learn. To. Punctuate.
sparky
i’m with the group that says this is not complex. the only thing making it complex is the ideology: because people are unwilling to face reality they are coming up with byzantine explanations and byzantine solutions. i feel as if i’m watching a hollywood movie about ancient priests and ritual sacrifices: ultimately they will not work, but will work more damage in the meantime. we have–knowingly–chosen to hobble ourselves with an ideology that precludes looking at what is really going on. in that sense we are all fundamentalists. there is one important additive, though–it is in the interest of the moneyed classes to keep this form of fundamentalism alive.
http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html
(sorry about the screwed up linky)
JL
DeMint’s plan to cut taxes and add 3 trillion to the deficit over ten years, proved to me that repubs are only interested in one thing and it sure isn’t "country first".
4tehlulz
What’s the over/under on this getting blamed on
International JewryGeorge Soros? 24 hrs? 36? If my money’s going o be worthless anyway, I might as well maximize my lulz potential.zzyzx
I don’t see that it’s that obvious things can repair themselves easily. Empires have collapsed before, sometimes quite dramatically. There’s no reason to think that the US is somehow completely immune from that potential.
Yes, eventually some sort of structure would reemerge, but speaking as someone who likes the Internet and sitting in a climate controlled house and being able to spend his time arguing about things that don’t affect him directly, I happen to like the current system.
JL
What time is Geithner announcing the plan?
JL
@max: Max, What would happen to the value of the dollar? How much would a can of soup cost?
Reverend Dennis
Hopefully, this is just an inaccurate summary and Geithner really has come up with a dynamite plan. Otherwise, it looks as though the same people who put us into this mess will continue to be handsomely paid as we and our descendants pony up to zero out their balance sheets. If you or I were to screw up so profoundly that our employer was in danger of going under I doubt that we’d get a bonus – or another day’s employment.
gbear
The republican stimulus plan is much less complicated.
Samuel
People need to get a grip. And thanks Congressman Kanjorski for telling us this four months AFTER the fact.
The problem is that the financial system needs to be shored up before any healthy recovery is possible. Actually, the financial system has improved somewhat over the past two months believe it or not and there is not a sense of panic out there. The problem is that the financial supermarket banking institutions are the ones with the cancer, if you will, and they have the most exposure. Here in New Jersey, there are several smaller institutions who stayed out of the real estate boom and maintained a healthy capital position while the rest of them were out making 95% LTV real estate loans on crap property. These banks ARE making loans, and they are being very selective about how they utilize their capital, as they should be.
The bottom line is, shore up the financial system–liquidity is the bloodline of the economy and it will only recover when liquidity recovers. And in order to provide liquidity, the institutions need to be viable.
Geithner’s announcement shouldve been yesterday as planned…it is more urgent.
Napoleon
@zzyzx:
I have had Jared Diamond’s book Collapse
sitting on my bookshelf unread the last year or 2. Perhaps it is the book I should read next, along with a book on how to smoke my own meat and hunt.
TheHatOnMyCat
I think people are missing the point.
I don’t think the TARP, or the new "Geithner Plan," are about "fixing" a problem. If the Kanjorski story is only half true, this is not a problem set that lends itself to "fixing."
What these responses are about is shifting the responsibility for the timbers in the mineshaft from the private to the public sector in an attempt …. just an attempt … to provide enough stability to get through the year without a meltdown.
If the Kanjorski story is literally true, then you can see the gap between the reality, and what the cheeses are telling the public. The cheeses are not just worried, they are scared shitless, and I for one think that that is exactly the right response.
Anyway, the bottom line is, you have basically two choices here, just as you did during the TARP drill last year: Hope to hell that the people in charge make moves that help and don’t hurt, and wear your helmets. All the tried and true political back and forth stuff doesn’t work in this context.
We are in uncharted waters. I am not listening to any guy with a 14 foot boat, and a WiFi connection. I’m …. literally … banking on the ability of the government to keep the boat headed into the waves so that they don’t roll the fucking thing over.
Reverend Dennis
It reminds me of the aftermath of the Kennedy assassination: people could not come to grips with the fact that one deranged person managed to kill the president and so a thousand conspiracy theories grew and flourished. This time it’s the fact that you can’t go on forever borrowing money to buy shit made somewhere else.
Montysano (All Hail Marx & Lennon)
@John Cole:
I think the key thing to understand is "interlocking relationships". The Wall Street Boyz were all excited about swaps as a new and creative way to manage risk. This gave them the confidence to write ever more risky loans, and to lobby for and win the right to leverage at 30 to 1.
The trouble is, there was a huge downside to these interlocking relationships, one that would have been apparent to anyone not blinded by greed. By being so interwoven, especially in an unregulated environment, when one player started to wobble, everyone to which he was connected also wobbled. Or thought they were wobbling. Because they didn’t really know. No one knew, or knows today, who is really sick and who isn’t.
For me, that’s the gobsmacking part: that this was allowed to grow and fester, and no one in the Bush admin did a fucking thing. Was it intentional? Was it incompetence and stupidity? We may never know. But IMHO, it’s the most glaring failure of governance in my lifetime.
zzyzx
@TheHatOnMyCat: As I understand the economy, to a large degree the entire thing depends on faith. I assume that on Friday a sum of money will be deposited into my bank account. My mortgage company assumes that on March 1, there will be a certain amount of money in my bank account to pay them. When I go out to eat, I trust that I can exchange pieces of green paper for food. As long as we all believe in this, things go swimmingly.
The problem is if people stop believing that the banking system will be able to give us money when we need it – something that is true if and only if we don’t actually test it at once – or even that green paper (or a shiny metal) has any value at all. If people start to lose trust in that, we have much bigger problems than a temporary recession.
That’s how I heard that report, that there was a chance that the doubt would grow to the point where there wouldn’t be a functioning economy at all. Give things a year or two to calm down and we still won’t be in a good situation, but it’s nothing like the complete breakdown that could have happened.
Samuel
Thats ridiculous. To place the blame on the greed and recklessness of Wall Street on President Bush is insane. Both parties benefited from the excess of Wall Street and finance. You imply that the Democrats were trying to stop the influence of the bankers on Washington DC for 8 years, when this is simply not the case. Just ask Chris Dodd, John Kerry or Chuck Schumer who REALLY benefits from Wall Street greed and excess.
And please stop with this notion that President Obama will "get the job done" when it comes to corruption and turning the other way when it comes to influence from Wall Street–with his Wall Street donors and his Goldman Sachs alumni littered all over Washington.
Walker
Martin Mayer (h/t Yves) said it best about financial innovation:
A lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology.
PeakVT
@wilfred:
But if it’s so complicated then why is the solution so apparently simple, i.e., massive economic stimulus plans?
You seem to be conflating two things here: 1) the bailout plan du jour, which is aimed at fixing the financial system, and 2) the stimulus bill, which is aimed at preventing the recession in the wider/whole economy from getting worse. John seems to be confused about #1.
The reason John is confused about #1 is that the simple solution – the government taking over banks that are insolvent under small-c conservative accounting standards – is unacceptable to the people that run the banks and own the politicians. Thus various confusing shell games get floated, and in the end one of them will be probably implemented.
bootlegger
@Napoleon: Diamond’s theory is that civilizations collapse when they abuse their natural resources to a point where recovery is impossible given the structure of their society. Both centralized and decentralized structures could collapse if they were not flexible enough to avert the final destruction of their last resources. Barring a massive ecosystem failure, we’re not there yet. Stay tuned.
John S.
Better to have said something 4 months ago and turn a devastating run on the banks into a catastrophic run on the banks!
Does it hurt to be an idiotic partisan, Samuel? Do you have to take pain meds to cope with such blinding stupidity and intellectual incongruity?
Apparently, you do have to take meds.
If we split a dollar and you take $.95 and I get $.05, then we BOTH benefited equally, AMIRITE?
zzyzx
Yeah and that’s what pisses me off when people try to blame this crisis on bad home loans. If all of the swaps didn’t happen, we still would have had a housing bubble. It would still have collapsed. People would have lost their houses. As a result we would have had a downturn. It just wouldn’t have resembled a crisis.
Suppose I go to the beach and build a sand castle. It’s a pretty cool sand castle and so people quit their jobs in order to sell tickets to see it. Others take out huge loans to build hotels in order to accommodate the expected tourist population. A huge industry builds up around this… and then gets destroyed when the tide rolls in. The Republican position in this case is to blame me for building my castle too close to the ocean instead of wondering if so much of the economy should have been built on something that many people thought was an ephemeral situation.
Technically, yes, this crisis was started by the housing market collapsing. However, it’s the people who built the giant structure on top of the bubble who are to blame for the reasons things are so bad now.
bootlegger
@Samuel:
But only one party had political power and only one president had control of the Fed, you know, the folks who are suppose to monitor Wall Street recklessness. So yeah, Democrats filled their coffers too, but they were drunk in the back seat not driving the bus off the cliff.
bootlegger
@zzyzx:
Bingo. And the stoopid fucks who let them put all our eggs into that basket are the one’s who should be put in the stocks as targets for rotten vegetables.
Samuel
The President doesn’t "control" the Fed…
Rick Taylor
I don’t really understand it either, but this pair of videos from Naked Capitalism explains the debate and the competing positions as well as anything I’ve seen.
Brian J
You shouldn’t feel so bad, because it’s not exactly an age old concept. Many of these financial instruments are relatively new, so new that when the crisis broke, a lot of reputable economists were confused about what was going on.
I’m still trying to figure it out myself. I’ve gotten a little bit better about it, but not as good as I’d like. I’ve seen a lot of links, but for some reason, I’ve never bookmarked them. This post looks like it has some good ones that explain it, so I should take a look later today.
ksmiami
Moody’s and Standard and Poor’s are to blame as well since they were the regulators and they knew that the size of the "sandcastle industry" was getting too big relative to the sand castle since they were the ones approving ALL of the securitizations. It was this massive regulatory failure that blew our banking system apart.
Adrienne
I told everyone this last night, but I actually, you know, STUDIED finance and economics (Double major at NYU) and I can tell you that you are wrong. Like he said in the video, "If you don’t have a banking system, you don’t have an economy". If the financial system collapses, that’s the ball game . Knowing what I know, I don’t doubt Kanjorski’s explanation. Not one bit.
If you think Paulson is really *that* nutty to just walk into Congress with a gun and a bag without a good reason you’re nuttier than you think he is. If you think that Chris Dodd would go on t.v. and exaggerate, face white as a sheet, you must have bumped your head. I saw legitimate fear in his eyes in those pressers.
Look, I knew that there had to be SOMETHING hugely wrong when the market tanked by 775+ points in a day. I cried because I knew what that meant. I had to explain to everyone in my office what it meant and I saw the fear develop in their eyes as spoke. I was scared then and I’m still afraid now. We HAVE to do something. Like Obama said, doing nothing is NOT an option. It never has been.
Damned at Random
The one thing I thought would be a no-brainer, and haven’t seen in the original bailout- was "taxpayer" representation on the corporate boards of the entities receiving bailout funds. There should be some Treasury dept functionary keeping track of the decisions made about investments, compensation, etc until such time as the taxpayers receive payback.
That said, a large portion of what remains of the Republican party is siezing the deteriorating financial situation as their best chance of returning to power unless and until the next terrorist attack on the US provides a new opportunity. Obama may be playing chess, but the Repubs are playing Russian Roulette.
4tehlulz
>>Moody’s and Standard and Poor’s
I am fucking shocked that they are coming through this essentially clean. Then again, they could kill any country, city, or company by downgrading their bond ratings, so I can understand the hesitation to do anything to them.
If the revolution comes, and it turns out the only ones strung up are the bond raters and Jim Kramer, I’ll take that as a net plus.
ksmiami
They have to go after the ratings agencies – there is no way they can continue to operate in the same manner. They need to be governmental agencies not paid by the people they are evaluating, it just doesn’t make any sense that this important regulatory position is handled by 2 large private companies in collusion with eachother…
The whole thing is a racket and needs to be recast
srv
This alleged incident doesn’t make any sense until someone can mention who was taking out $550 Billion. And the FDIC bump didn’t come until later, so I call shenanigans.
Montysano (All Hail Marx & Lennon)
@Samuel:
At any point during the last 5-6 years, John Snow or Henry Paulson could have walked into the Oval Office and said "Boss, we’ve got a big problem". The chairman of the Fed or the commissioner of the SEC could have done that same thing. So now we have two possibilities: 1) they never briefed the President; or 2) They decided to let it roll, let their buddies make as much money as possible, and hope for the best.
Did Dems go along for the ride? Of course. But it wasn’t their job to understand the highly complex clusterfuck that was developing. That falls to Paulson, Cox, Greenspan, et al. And it fell to Dubya to exert some leadership. They all failed miserably.
Like every conservative moron on the teevee, you now want to try to hang this cockup around other necks. It’s pathetic.
Prince Reggie
This was a plain and simple bank robbery and the bank was the United States Treasury. For some great insight go to http://www.abmgts.blogspot.com. This George Farrell guy has been spot on calling Ben Bernake a bankrobber. The Bush clan made of like the bandits they are
Martin
Well, it was all an effort to lash yourself to a larger ship. Mortgages were vulnerable if a local disaster hit (think of the bank that loaned money to homeowners in NOLA – they’d be wiped out with one hurricane) so they carved them up and mixed them with mortgages from other areas. Problem solved. But a housing slowdown still made them vulnerable, so they tied the mortgages to other non-housing debt. Problem solved. And on and on, lashing that mortgage to an ever larger ship that was less likely to capsize. Now we’re going to lash all those to the US Govt and hope it can’t be taken down.
The problem with doing this is that there is no real cost to the risk of offering out that mortgage, which isn’t a problem for a few mortgages, but is a huge problem if all mortgages are seen that way – which they were. Obama and Geithner are going to have to find a way to restore that risk. That’s what we were hoping pay caps and nationalization and such were going to accomplish but now I’m not sure. I can’t say I’m happy about this, but Obama hasn’t done anything in one act yet, so I’ll wait and see what comes after the intermission.
The martial law wasn’t a guns on the streetcorners situation shutting down public movement, it was that the govt. was going to shut down the financial system to get the bleeding to stop and would reopen it at their discretion. The people arguing for nationalization (and I’m not opposed to that) are basically walking the economy to that same state in a limited manner. It’s the same type of situation as after 9/11 when the government shut down the airspace for 3 days.
With all the acquisitions, I don’t really see the difference between Geithner making those decisions for us and BofA making those decisions for us, because if BofA wants to take the country down, they have the power to do it – easily. Lehman failing nearly broke the world and BofA is at least an order of magnitude larger. Personally, I feel a lot better with the keys in the hands of elected officials than a board of directors of an institution I ran away from 2 decades ago.
Martin
The hedge funds were taking it out, and large institutional investors. $550B can be moved pretty damn fast. It wasn’t a secret, I talked to my wife to discuss what we should do with our money market funds on the 17th. It was clear that some would break the buck and that was our safe money, like it was everyone else’s safe money.
The FDIC was officially announced later, but the idea was floated on the 17th, I think it was. The problem was that if money flowed out of the money markets too quickly, they’d have to sell off assets to cover the withdrawls, which would knock the stock market down further, which would devalue the funds even more (breaking the buck) which would cause investors to panic and withdraw faster. Behind the scenes the fed was offering to cover the funds that investors were withdrawing with a 0% loan rather than have them sell off assets because the market was plummeting. The FDIC announcement was to convince people to stop withdrawing – there were two separate actions taken.
fledermaus
@Adrienne:
Please. The banking system wasn’t going to fail. Specific large and influential banks were and remain insolvent. Full stop. Of course they are crying doom and gloom and "the end of civilization" because to them it is. FUD is a great way to get what you want.
Notice how this video is just coming out at the same time new estimates for the bailout are topping $1.5 TRILLION. The reason the whole thing is so complicated is that they are selling a bill of goods, they are trying to create their own reality where these large banks are not insolvent and things can continue on the way they were before (6 figure bonuses for everyone!!!!)
Ah and I see Geithner is set to give a bunch more no strings money to the same people who used the last infusion to pay for corporate reteats, million dollar office remodels and billions in bonuses. But I’m sure it will be different this time (/snark)
fledermaus
If this is the case then the problem was solved. Of course the investment banks can’t skim money off such a program since the money would presumably go 100% to cover withdrawls with no opportunity for the bankers to take their pound of flesh.
slag
Any chance someone here could explain–in language for dummies–the pros and cons of nationalizing the banks at this point?
slag
Nevermind: http://www.dw-world.de/dw/article/0,,4005355,00.html
Adrienne
This is correct, but it is inconsistent with your immediately preceding sentence. You said:
And you’d be wrong. IF these large and influential banks just fail without a careful and orderly process, the banking system will cease to function as we know it today. The domino effect comes into play because these institutions are heavily interdependent between each other and they also have entanglements with other countries and banks.
Now, that doesn’t mean that saving insolvent banks are the best way to go. There IS a choice between either 1) Saving the banks we have today or 2) Creating an orderly and careful process for these banks to fail or 3) Nationalizing the banks (which is basically a governmentally centralized hybrid of #1 and #2).
It IS doom and gloom and the end of civilization as we know it today if the financial/banking industry fail. I’m not a doom and gloom person and this is not hyperbole. It’s real. Our way of life is on the line here. It is THAT serious.
Hal
It’s definitely a very complex situation. One that I don’t think anyone is going to be able to get their heads around and fix up there in DC. Mostly because I think they are running scared.
I think the best thing for us average folk to do is do what we can to rid our self of debt and build savings.
I was watching with ExactPrice this morning as Geithner was giving his speech and I noticed that gold and silver were rising. And I read that a lot of rich people are buying gold Bullion sales hit record in rush to safety. So I think a number of investors are in the process of dumping the dollar and getting into the precious metals.
Something I’m going to do on the limited scale I can.
Dave
@bootlegger: Why does everyone seem to forget that the first bill(s) to deregulate the banking system and allow this to happen were signed by President Clinton? If you want to lay blame somewhere, then go all the way to the beginning.
It was also the Democrats that wanted to put everyone that wanted to own a house in one, regardless of their ability to pay the mortgage.
LongHairedWeirdo
I obtained a bit better of an understanding of the financial crisis when I learned a little fact that had been missing.
You understand Credit Default Swaps, right? You’re not sure if some bonds will default, so you pay someone else. They have to pay you the face value of the bond, or the difference between face value and the sale value, if the bonds default.
And it make a kind of sense. You buy a 7% bond, you pay 2% for a Credit Default Swap, and you have a 5% bond that is much, much safer.
Okay, here’s what I learned that changed my understanding of the situation.
People bought Credit Default Swaps on bonds they did not own. Kinda like buying life insurance on people at random, hoping to cash in if someone croaked at the right time.
Now, here’s the other hilarious thing. This, if true, is so blackly humorous I don’t quite believe it, but I’ve seen at least two references to it.
Investment banks took those CDSes, basically bets on bonds issued by companies that they had no control over…
…and bundled them into bonds (just like mortgages) and sold them as collateralized debt obligations.
I reckon some people bought credit default swaps on those bundles, too.
SBW
Adrienne,
Let me understand this correctly. We’re dangerously close to the end of the world — everyone who is financially savvy of course understands this — but punitive actions against incompetent and corrupt financial management cannot be allowed (the temporary, trivial $500,000 limit is worthless), potential clawbacks cannot be allowed, and more taxpayer control cannot be allowed, because then the finance world might not by into the plan.
This was astonishingly asinine when Paulson was hawking it, and nothing, and I mean nothing, has changed with Geithner, Obama’s wonderful choice.
I see you recognize nationalization as a choice. That would be the best course of action, and of course Obama will not take it.
It boils down to the fact that the politically connected wealthy refuse to recognize their tremendous losses, and they will do everything in their power to pass the costs on to the taxpayer.
LongHairedWeirdo
Dave:
Yeah, everyone loves creating programs that cause defaults that get them blamed!
No, wait, that makes no sense… I think I’ll stick with the more sensible explanation, the Democrats wanted people who *could* afford the mortgage, but *were not* traditional borrowers, to get mortgages.
It has the side benefit of being true.
No one was ever forced to make a loan to a borrower without good reason to expect being paid back. Hell, no one was ever forced to make a loan, period.
Dave
@LongHairedWeirdo:
umm…. the Democrat party has a long history of creating programs that fail, cost the tax payers huge dollars and spinning things so that they do not face blame. I haven’t heard one person blaming the Dems.
Traditional borrowers seem to be the only ones getting screwed. I followed the normal process of putting 20% down on my house, saving my money and paying off the mortgage when I could. Now I get the joy of watching my government leaders put the country so deep in debt that my taxes will inevitably be raised and my children will be paying off the debt for most of their lives.
Mortgage lenders may not have been forced to give loans, but there was absolutely zero incentive for them to ensure the viability of the loan. They were free to sell the loan the minute the paper was signed. That led to falsified income documents (proof of this is readily availble), inflated home values, and the pervasive practice of convincing uneducated borrowers (shame on them as well) that there was nothing to fear because if something caused them to be unable to afford their mortgage payments (you know, interest rates climbing, job loss..) they could just sell the house because the value would definitely be higher.
My point is there is plenty of blame to go around, but it all seems to be pointed at one person. No president is that powerful that they deserve all blame for failure or all credit for success. In fact, Congress has a larger role in any of this than any one player. Although Mr. Geithner certainly is trying his best to ruin us all.
Dave
Adrienne
Wow. Are we back to this crap again? Really? I assume you are talking about CRA loans, which actually have a lower level of default than comparable loans. Also, the areas hardest hit by the housing crisis are NOT urban, rural, or poor areas. One of the hotzones of foreclosure was in Orange County, CA.
Whoa. I said no such thing. If you notice, I voiced neither support nor opposition to the Geithner plan as laid out because I have yet to read the entire plan. I’m sure that the plan won’t be exactly what I would have done, but I do understand that they have political limits because of how this has played out so far. I also understand the opposite limits in government intervention into financial markets when it comes to the cooperation necessary from the financial world. I understand that it is a tight rope to walk.
Dave
This is why I usually don’t participate in these "conversations". People pick out one sentence they don’t like and harp on that. Did you even read my entire post? If you did, you completely missed my point. If you didn’t, you’re no better than the political incompetents currently running the ship.
Dave
Zandar
The eventual endpoint of a banking system leveraged 30 to 1?
The banksters get 30 bucks in free government cash for every one taxpayer dollar of yours.
Jesus hell, does anyone here think:
A) This is the last time Geithner will ask for trillions, or
B) The banks will ever pay the taxpayer back?
America’s insolvent. All that matters now is how long it takes for somebody to make that margin call.
gwangung
Given that your point doesn’t flow from the facts you cited, you have no ground to stand on.
Yeah, Democrats share some blame, but you’re foolish to hold that it’s equal to the nimrods who were supposed to be watching and regulating–which is in the executive branch’s area of responsibility.
Faisal
[emphasis mine]
I think that is what’s going on — the system has become so complex that even with full disclosure, no one can figure it out. When things were going good, this was talked up as resilience to shocks. The instant something really went south it started to take a lot of other things with it, and those other things surprised people. The surprise triggered a lot of risk aversion so, now people are not only unsure about what’s going on, but also not willing to gamble on counter-parties, and the entire system is a big question mark.
I’d be interested to see the equivalent of the consumer confidence index, but for large financial parties — a sort of producer confidence index. I imagine right now it would be pretty grim.
chuck
Here’s an inconvenient fact about the CRA: it pretty much does nothing. It’s all carrot, no stick. It has no penalties, just a bunch of guidelines that say "banks should meet the needs of a community".
The law with teeth was the Equal Credit Opportunity Act, which committed the unpardonable act of making it a crime to discriminate on loans based solely on the criteria of ethnicity, national origin, sex, or age. Not one bit about income. The nation was put on a course to disaster because we treated people equally. In 1974. As demonstrated by the obvious lack of any economic booms after 1974. Or maybe those were in spite of that big albatross of civil rights, who knows.
The only people repeating the argument these days are those who already buy into the the deep intellectual dishonesty on the right, and there’s simply no reasoning with them.
J. Effingham Bellweather
the best resource that i’ve found for trying to get a handle on the moving parts of this financial crisis is here:
http://www.khanacademy.org/
look under "Credit Crisis" and make sure you’ve got six or seven hours…
Dave
@gwangung:
Given that I worked in Real Estate and saw first hand how lenders would do anything to gain approval for unqualified purchasers, I think I’m on pretty solid ground with my facts regarding bad loans.
Prior to the election, the news was full of how deregulation of the banks is the root of the current situation. President Clinton started that and President Bush certainly helped it continue and accelerate. That’s why I say all parties are to blame.
My complaint is that nobody seems to care about that little fact.
Have you seen the latest version of the financial plan layed out today? It is almost exactly the same as the first one. No constraints on borrowing banks. No limits on bonuses. No requirements for full disclosure of where the money goes. Sounds like more of the same to me. The stock market closed down 383 points today. Seems to me that I’m not the only that thinks this is not the right plan.
Regarding my foolishness, nowhere did I say there was equal blame. I would say President Clinton was naive and President Bush was wrong to follow the same model. You, on the other hand, appear to fall into the group that wants to blame it all on one person.
I’m done with this interaction as it is clear that nobody is listening objectively and it is a waste of my time and yours.
Good bye and good luck,
Dave