A lot of knowledgeable people point to the bankruptcy of Lehman as the moment when the financial crisis turned into a near-panic. The reason is not that Lehman had a particularly large market cap, but that it controlled over $600 billion in assets and had a similar amount of debt. That meant a fire sale for certain types of assets and a lot of jilted creditors.
The upshot of the jilted creditors was that banks became afraid to loan money to each other because they weren’t sure they could get it back (Lehman’s liquidation was extremely disorganized, as one might expect from a $600 billion fire sale). That’s what freezes credit markets and that’s what makes the government so afraid of other bank failures. As Josh Marshall points out, what “nationalization” might really be about is organized liquidations:
The idea has never been to nationalize the banking sector as a matter of on-going national policy. It’s more like a highly structured and customized form of moving these institutions through Chapter 11 bankruptcy. In fact, we have a whole system in place for how this is done by the FDIC.
A friend of mine who’s a senior manager at a hedge fund wrote to me about this a few weeks ago (this is long, but I found it worth reading):
Imagine the panic among regular consumers if this FDIC insurance did not exist! Bank runs would most likely be weekly in the current environment. The government thought up a solution, and it is working great right now.
The government fixed the bank to consumer confidence issue, now it needs to fix the bank to bank confidence issue. What is effectively happening right now is that the way we are “fixing” the bank to bank confidence issue is we are just giving banks money. It’s moronic and stone-age in its methodology compared to the relative cheapness of the FDIC insurance scheme. We need a way to ensure that if a bank has a dealing with another bank, that a bank CAN go bankrupt and the other banks or hedge funds can quickly regain any assets they had stored with that bank.
The CEOs of a lot of banks oppose this. Why? Well, if your parents decided that your out-of-control spending and poor investment choices were likely to bankrupt you as a person but decided that they should just give you money, would you argue? Would you turn to your parents and say, “look, I don’t think you should give me money, just create an easy way for me to go bankrupt and I’ll be fine.” Of course not. The CEO’s of major banks WANT to be too big to fail, they want the government’s money. They don’t want a way that they can easily go bankrupt, lose their jobs and their pensions and their stocks, and slide into irrelevancy. Yet, this is exactly what taxpayers need. A way that a bank can go bankrupt seamlessly and the financial system stays afloat.
So, how do we ensure that a bank can go under seamlessly? Simple, just look at what happens when a bank goes under. When Lehman went under, every bank or hedge funds suddenly had any asset they had with Lehman effectively seized by an army of PriceWaterhouseCoopers administrators. Would you want your money in their hands? Of course, they immediately took the option that would keep themselves employed and money pouring into the hands of PWC for as long as possible – they tied up all assets and told all hedge funds and banks that they would have to make a legal claim to regain their assets and which assets were returned would be handled in court. Imagine the effects if you banked at Citibank, and if Citibank went under the policy was “you can’t get your money back, and if you want any of it you have to file a court claim.” Well, you can imagine the response, which was that every bank stopped having any difficult transactional dealing with any other bank, and fear gripped the market. Most figure they’ll get 15% of their assets back, and maybe not for years. Hence your current credit crisis.
As soon as a bank goes under, the federal government needs to step in and tell PWC or other consulting firms to go away and try to bill someone else a few million dollars a day. Over the next three weeks, while the federal government is in charge, employees may not leave, they must show to their job, and they must unwind every trade, and that is their only function. Valuations of these trades will be established by a third-party governmental group, which will effectively ask banks to value each other’s positions (without telling each bank which counterparty they are valuing and which way, buy or sell, they are valuing). All unwind transactions will be reported and recorded, collateral will be settled and returned where appropriate, the federal government will daily fund the unwinds and be first in line at the end of the three weeks to get assets.
Is it perfect? No. Is it far better than now? Absolutely. You currently have financial amateurs (PWC) who are also legal experts running a bankruptcy of Lehman. They are concerned with being perfectly fair, all the while they are running up a bill that will be in the hundreds of millions of dollars. Other banks and hedge funds don’t want fair, they want 95% accurate and right now. Which would you rather have if you had $10,000 at Citibank and they went under? Would you rather have a two year legal process that promised that all investors would be treated roughly the same way with whatever was left over while a big consulting firm soaked up millions in fees or would you rather get $9,200 right now and be done with it?
The only way to solve this bank to bank and bank to fund credit crisis is to do what we did many years ago with the bank to consumer crisis – minimize the impact of bankruptcy on the customer. Who cares about the equity or bondholders of the company, they come second. Confidence will return only when the effects of bankruptcy are minimized. Printing money and giving it to banks only means the banks will keep the money for themselves because the core fear – bankruptcy of a counterparty – is still there and hence will only marginally ease the credit crisis.
The unfortunate truth is that: (1) this is not a “liquidity crisis”, these banks aren’t solvent, (2) it’s unlikely that we’ll be able to nationalize them, then sell them back at a profit a la Sweden, and (3) we can’t let a few big banks hold our entire system hostage.
Update: Roubini suggests something similar here except with the banks being stripped of their bad assets (which would be held by the Treasury), made solvent, and then later reprivatized.
Don”t worry. Obama wants to reinflate the housing bubble. That will solve all our problems, right?
The real question: What is to be done?
1. All Executives will be lined up and shot.
2. Fire Sale.
3. Back to work.
I think that’s the idea, minus the shooting. And only at the banks that are insolvent.
I share your concern but isnt it necessary to help the homeowners to some extent? Can we afford a continued landslide of mortgage foreclosures or is there some way to thoughtfully and carefully intervene to some extent?
We have inter-related and complex issues in whether or when the economy and the market revives. Do we just cut off some components (small home owners) and let them go to hell with whatever that means (and remember, this is not evenly distributed across states so will impact some places very accutely and others not so much).
The decision about who to help and how much is important and complicated..being snarky or sarcastic about small homeowners and implying that Obama is reinflating the housing bubble is premature and makes light of the need to offer something to folks who are hurting badly and an economy that needs foreclosures to level off some. Where that line is drawn is important though and I totally understand that not everyone can or should be saved who made a bad economic decision in relation to their property.
Did you all see the second story on 60 Minutes?
I will say this, though- so far there does seem to be unnatural concern for the shareholders/bondholders, and I don’t know what to make of it. is it possible that the powers that be know that so much of retirement portfolios are wrapped up in shares of these companies, that letting them fail would cause an even bigger unraveling? And remember, I am pig ignorant on these things.
IMHO, their total market cap is big enough to warrant that concern with respect to shareholders.
It’s not about market cap, it’s about debt/assets.
There may be some legit concerns on the bond end of things, though. I really don’t know about that.
joe from Lowell
Of course he "wants to reinflate the housing bubble."
Any policy that would result in homes having more value than they do in Feburary 2009 must be aimed at replicating the housing market of 2005-2006.
There is no other possible meaning to the phrase "raising home values." None. Nada.
It is especially important to note this at this particular moment, because home prices at this time reflect the ultimate in rational prices in a normal, properly functioning market.
The answer is clear. Once the Palin/Cantor 2012 ticket is swept into office on a wave of anti-Obama sentiment, after they imprison the CEOs of Fannie Mae and shoot Barney Frank, they can cut capital gains taxes and then privatize social security. Win!
Gotta love this quote from Richardson and Roubini’s op-ed in this morning’s WaPo, advocating large-scale nationalization:
(2) it’s unlikely that we’ll be able to nationalize them, then sell them back at a profit a la Sweden
Which of these can’t we do: nationalize them, or sell them at a profit after nationalization. Seeing a profit would be nice, but the major benefits of nationalization (FDIC-style) are to restore certainty to the system, and to unhobble the banks by cleaning up their balance sheets.
Well, not quite. I can’t remember when he said it, but Atrios said sometime at the top of the market that home prices will decline to a point where a median income will buy a median priced house.
I know where I live, we’re not even close to that yet if you say that a median income should buy a house worth three times that.
Those of us on the West Coast are still two hours away from the start of 60 Minutes. What’s it about?
Well, to some extent, home prices do have to slowly and steadily increase, don’t they? Otherwise, they are a poor investment. There has to, of course, be a balance between increasing home values and the wild bubble we just endured. Again, remember, I am ignorant on these issues, but I just don’t see why anyone would buy a house if it looks like it will be worth less in ten years.
That’s the part we can’t do, probably.
Watch it. All three stories were very good, including the Buy American story and the Pakistan story.
Doesn’t anyone else get the feeling that the insane drive to privatize Social Security a few years ago was driven by the knowledge that some sort of crisis was on the horizon and they needed the injection of capital to avoid it?
To live in. That’s what people used to do with houses until they figured out that it could also be used as an ATM machine.
Japan’s GDP plummeted 12.7 percent last quarter.
Cramdowns. Allow the homeowners to restructure the loan with the lender to relflect market prices.
Keeping prices up, which is what Axelrod says this plan will do, is not the answer.
@calipygian: Yes, but even when you bought a house to live in, it slowly appreciated. My parents bought their house in 1972 for something like 25k, and today it is worth much, much more. Well, much more by WV standards, which actually has a sane and rational housing market.
Interesting. But think if they had succeeded and swallowed all that capital. There is no reason to believe that we still would not have melted down eventually, and then we would really be in a catastrophe…Think of all the folks on social security who would no longer get checks used for food and shelter and necessities — all old or disabled..Lord help us, that was one bullet dodged!
@joe from Lowell:
I am perfectly OK with allowing cramdowns based on current market values, if that’s what it takes to keep people in their houses. The buyers of MBS’s made that bet, and if it blows up in their faces, too fucking bad. I don’t like the idea of eliminating the moral hazard associated with buying more house than you can afford, but I’ll get over it.
That’s my limit, however. Any step that even smells a little bit like artificially propping up the price of the current supply overhang, and I am off the bus.
joe from Lowell
I was being sarcastic.
Home prices are experiencing something best described as the opposite of a housing bubble. Far too little money chasing investments, irrational anti-exuberance, and a financial market that is making lending decisions based not on rational considerations about the ability of applicants to pay, but unrelated fiscal considerations that bear no relationship to the actual supply of and demand for shelter.
Also, "a median income should by a median-priced house" doesn’t mean the house costs one year’s median income. It means about 1/3 of the median family income in a region will cover the mortgage payments of the median-priced home there.
#21 – I see your point…how easy would that be to do? Wouldnt that mean (and I am ignorant on this issue so please forgive me), that the bank holding the mortagage would have to be prepared to accept a lesser valuation of their assets in mortgages? Wouldn’t that exacerbate some of their financial positions and hence wouldnt that be seen as too risky from their perspective? Wouldn’t that just push more banks over the edge leaving us still with instability in the mortgage situation? Isnt there a limit to cramming?
When I left SoCal in 2004 my hair stylist, who was a nice young woman with two small children, bemoaned the fact that she and her husband would never be able to afford a house of their own. They lived in Lakewood, which is a working class neighborhood near Long Beach, built up after WWII and filled with tiny tract homes (around 1000 square feet). In 2004 those houses were selling for half a million dollars. It was insane. I think of her occasionally and wonder if they were ever able to buy a house. Probably not. I believe her husband was a construction worker and they’re not doing so well right now. If it’s not one thing it’s another.
joe from Lowell
Well, the devil’s in the details. I wouldn’t want to see any kind of artificial price-supports, either, but that’s not necessarily what Axelrod means.
He’s a media and political communications guy. The phrase "raising home values" coming from such a person could mean any number of things, including, for example, foreclosure-prevention efforts that would have the effect of reducing the surplus inventory created by so many housed being sold off by banks.
Watching the All-Star game here and I’m wondering, does anyone know who killed Marvin Albert? And who’s the genius who turned his corpse into an almost life-like puppet?
I watched 60 Minutes tonight. While I admire that guy’s efforts to do something about World Savings’ lending practices, he falls rather short of being a hero. If he was so concerned, why didn’t he ever go outside of the Bank to register his concern? He also said that he threatened to tell Wachovia of the ticking time bomb in the bank’s loan portfolio, but then didn’t. Why not? If it had been me, I would have been writing letters to the Senate Finance Committee, the FDIC, to Wachovia, to anyone I thought could have any influence over what was happening at World Savings. Bitching internally doesn’t usually get anywhere.
Homes are a depreciating asset, like cars. Land is the appreciating asset. We lost sight of this fact, which is what made flipping possible. You are never supposed to be able to get back over 100% of your home improvement expenses.
What about the steelworkers/stimulus story? Holy wow is the Republican party fucked.
70s inflation and Bretton Woods II makes any discussion of price comparisons difficult, bordering on worthless. You could also buy a car for $2k in the 70s.
You have to look at housing appreciation over the long term. By that, I mean back to the 19th century. Historically, houses do about 1% annually better than inflation. They are crappy growth investments, but fairly good capital preserves.
And that is the way it is going to be again. 70s housing appreciation is not going to come back in our life-time.
It’s interesting to me that conservatives have so much contempt for whistle blowers. I don’t really understand it.
The description of PWC sounds a lot like the Court of Chancery in Bleak House, where even after the question of how to divide an inheritance is settled, the case stays in the courts mounting up costs until the question of how the costs should be distributed among the inheritors is settled, or the inheritance is completely absorbed by the costs, whichever comes first (with a note that it’s in the interest of the people who are employed in settling the matter of costs not to settle them until the last penny is absorbed).
DougJ – 1. You make the mistaken assumption that I’m a conservative. Your bad. 2. His whistleblowing was limited to internal complaints. Typically, that gets one nowhere, except perhaps unemployed. Whistleblowers are typically thought of as someone who blows the whistle outside, i.e., where it can actually make a difference.
Apparently, there was a weird loophole in the law that said you could do cramdowns on 2nd, 3rd or 4th houses, but not on your primary residence. That seems seriously ass-backwards to me, unless you’re trying to encourage real estate investment over home ownership.
–Its quite clear that we have a lot of swollen bloat to trim out of the market. How we do that and with what speed or patience will determine a lot about how this big shitpile corrects over the next 5-10 years and how lethal the politics will be. Its a tougher call than some acknowledge. Seems to me like a tiger is behind each of the closed doors…
Not sure why my comment is awaiting moderation, but here it is again, with some dashes in hotbutton words:
IMO Graham is baiting Obama and the Dems. He knows that nationalizing is probably the inevitable solution, and that what’s keeping Obama from doing it is the political risk. So he baits them, signaling that it’s something Republicans will possibly be on board with, and then when it actually happens, you see the noise machine cranked up 10 times higher than it was for the stimulus bill, with cries of Social-ism, Commun-ism, Sta-lin, etc.
Yes. Which is why it is so infuriating that Obama’s team is not focusing more on cramdowns. Instead, it sounds like they want to emulate Japan.
That’s a very interesting idea. You could be right.
Hopefully they didn’t fall into the trap of buying an overpriced house 60 or 100 miles out in the desert. San Bernardino County now has one of the highest foreclosure rates in California because too many people stretched themselves too far (financially and geographically) in order to buy a house.
#38 — Of course he is baiting them. The Republicans haven’t provided an honest alternative in a long time so of course its a bait.
But who cares? Lindsey and the Repubs are just playing with themselves anyway. They will never be a part of the solution — only the kids throwing sand and picking their noses.
I actually heard the 2nd home thing from Obama himself as being a ridiculous aspect of bankruptcy law, so I think they’re working on it.
Ding ding ding! We have a winner!
Except it’s not about encouragement, it’s about giving protection in proportion to the person’s wealth. The 18th century theory of law: the purpose of the government is to protect propertied interests from the grasp of the lower classes; in other words, to give the people who have the financial power to challenge governmental authority an incentive to support it instead.
joe from Lowell
Depreciating asset like cars, eh? Shouldn’t get back your renovation costs, eh?
Garages make money fixing cars all the time. In other words, $car + $repairs
we can and we will
How about we charter the Third Bank of the United States? Seems like the best, or at least least bad, answer. Use the Post Office as a model, make the CEO answerable to the Treasury Secretary and the President, oversight from Congress. What could possibly go wrong?
It could, actually. Remember, the US housing market is not homogeneous. My neighborhood does not need rising home prices – they are well inflated and everyone is clear on that fact. But we were the bubble market and I hope Obama doesn’t have us in mind.
Cleveland does need rising home prices, however. Median home prices in some zip codes in Ohio and Michigan were under $10K. $10K is what people where I live pay in property taxes each year. Anyone who lives in a 4 digit home price neighborhood and has a mortgage is royally fucked and there is no way that those homes are rationally priced when homes where I live are 2 orders of magnitude higher. Now, with no jobs in those zip codes, it may be somewhat understandable, but that’s the other part of the problem Obama is trying to solve, so let’s consider that the right solution to some problems involves doing unrelated things in parallel.
Cleveland and Detroit were not bubble cities. They were not overpriced and they are now seriously underpriced. Let’s agree to move beyond BOB analysis of all of these things, shall we? There are details that we don’t know, so let’s wait for the details and then judge.
Agree, totally. I watched Graham say that in real time, and have been puzzling over it all day. Graham fancies himself a player, and his comment was deliberately floated.
The long term trend has been that houses go up at the rate of inflation, that is it. They are "good investments" largely because of tax benefits and that you are socking away money by paying off your mortgage.
DougJ, your friend seems to be confusing banks with other financial institutions. Lehman was not a bank when it collapsed, which is probably why Goldman Sachs, AIG and many other financial institutions that made up the shadow banking system all lined up to become bank holding companies. Because they wanted access to federal money to delay going the way of Lehman. And since they couldn’t come up with DIP loans, Lehman went into liquidation rather than reorganization. Did none of these super-brilliant hedgies see that as a possibility, i.e. that they would lose their money and have to submit a claim (which seems to annoy your friend a great deal–having to make like the commoners, from his tone).
There are other points he makes that I’d disagree with, but mostly he doesn’t address the issue of marking to model vs. marking to market. Continuing to do the former, and having the accounting rules changed in order to keep doing the former, just prolongs the day of reckoning. If banks and hedge funds (and the shadow banking system, or what’s left of it) want 95% accuracy, maybe they could start with their own books.
Yeah, I’m not saying it’s a smart strategy. Just pointing out that that’s what I think is going on, for some of the same reasons you mentioned.
It will be a very difficult political battle for Obama though.
Because of the stakes here, mixed with the real ideological battles currently happening, if things go right, we could really be looking back in just a few years at the ruinous remains of the Republican party. They’re already playing the part, and seemingly putting the pedal to the metal as they approach the cliff. It will be very interesting, and historic. Crazy times.
Are you suggesting that after your car has been repaired it’s gone up in value by at least the cost of the repair?
I hate to break it to you…
The appointment of Tim Geithner as Secretary of the Treasury is exhibit A that the Obama administration doesn’t get it. Geithner is a card-carrying member of the Wall St. insider club, and it comes as no surprise that his first instinct was to throw trillions at the very banks who helped get us into this mess in the first place. Obama is smart enough to change course when it’s clear that Geithner’s approach isn’t working, but I wonder if that day will come too late.
I think the point is not that you are selling at a profit, but that the government is capturing the entire value and not diverting any part of it to shareholders. To answer John’s question up thread on hurting peoples retirements, the ownership of stock is heavily concentrated in a very small percentage of the population, so that is not an issue.
I probably won’t be able to afford a house till I’m 50 or so, maybe much later if this turns out to be as bad a recession as it looks as though it will be.
Go to the Labor Department’s CPI statistics and calculate what that would work out to today. I would love to see the result.
@joe from Lowell:
They get paid for their labor, which is their value add. I could buy the same parts that they do (well, maybe not at wholesale, but consumer access to wholesale is widening all the time), but I would probably mess it up.
Flippers pay retail for home improvements including labor — improvements anyone could make — and try to pass 100% of those costs to the buyer. Before the bubble, that has never been accessible practice.
And yes, cars are depreciating assets (not counting antiques — which are more complex). You can pay to repair a car, but you cannot then turn around and sell it for repair costs+original purchase price (which you have sunk into this asset). This is asset management 101.
It was an investment bank, just not a holding bank.
As much as we make fun of them for it, conservatives are good at influencing debate by calling things by various names (the "death tax" for the inheritance tax as an example). We need to do the same, and stop using the term "nationalization" in favor of "organized bankruptcy" or something.
The sensible expectation for housing values is that they will rise with inflation, to the extent that demand for housing is the same. Actually, a more sensible way of stating it is that they will rise with wage inflation, as housing values are ultimately limited by the portion of salary people are willing to contribute to their mortgage payments.
Yes, occasionally you will have hot exclusive areas that rise massively in value. But there are only so many rich people, and even John McCain could only manage 9 or so houses, despite the fact that his income/wealth is vastly more than 9x the median American. So actually, an even more accurate way of looking at the phenomenon is that housing values will rise with the median salary, since growth in the salary of wealthy folks can’t totally replace demand of median folks on a dollar-per-dollar basis. And median salaries just have not risen very much over the last 20 or so years.
The only reasons why housing values rose like they did the last 30 years were a) massive inflation in the late 70s and b) obscene availability of credit that allowed decoupling of the median salary and housing values.
Completely and utterly irrelevant. Ohio and Michigan most likely do not have the jobs like where you are, and hence the land (which ties you to jobs in that locality) is no where near as valuable.
There is only one factor that matters and that is price-to-rent. Where I live, I can rent a 2k square foot farm house on 10 acres with apple trees for $1k/month. That means that paying over $200k for such a house is financially stupid. Even after you factor in tax incentives and the like, you lose more money on depreciation and carrying costs than you would spend each month on rent.
The only way what you are saying would make sense is if you are claiming that jobs and wages have to equalize everywhere. That is a really strong claim, and I doubt that it will ever happen.
The term that we use when the FDIC does it is receivership.
Plus, the whole argument needs to consider the current value of the bank to shareholders. BofA and Citi, who combined have balance sheets worth about $6T have a combined market cap of $55B – about 1/7th of the last half of the TARP pool. The shareholders have already been wiped out. Losing the last dime of their dollar would suck, but better to lose $55B than $700B.
Put another way, shareholders really don’t have much skin in the game relative to the rest of us.
Calculated Risk says we should use "pre-privatized" banks to kind of slide over the fact that they are nationalized in between.
Just curious: what’s in your 401(k)? According to this, over half of 401(k) account balances are invested in equities, either directly or through funds.
I’m not saying that. I’m saying that jobs and wages aren’t 100x stronger here than they are there to explain the 100x disparity in home price. I don’t doubt that it’s bad there, but it’s not that bad there and it sure as hell isn’t that good here.
What I’m saying is that there should be some relationship between median income and median home price. Where I live, median household income was $105K when median home prices was $990K. 9:1 simply isn’t sustainable, so no shit we had a bubble. In other parts of the country, the ratio is just the opposite. Hell, the ratio from federal minimum wage to median home price in some places is 1:1. That’s absurd, especially when you consider how shitty the fed minimum wage is. Basically ANY job, even a lot of high-school part time food service jobs would qualify for a home mortgage there.
Where you live, inbound wealth transfers from Asian parents to Asian-American children inflated the bubble even further (you know what I’m talking about, I’m sure), but your basic point is correct. Too much irrational behavior by far too many people. The ability to say "fuck you" to mortgage brokers who kept telling us we could afford to move to Villa Park is something I’m actually rather proud of, in retrospect.
I’m 34 and have totally given up on owning my own home. With the prices, credit being what it is, and the brutal uncertainty, I’m gonna skip it and rent for a long, long time.
It’s not a nationalization, it is a liquidation.
It will take time to get that realization soaked through America’s ballcaps and tiaras, though–it has to heat up more I guess.
My only hope is that this will drive down the cost of rent somehow.
Yup. But I think it was also just a part of the whole big-business republican scheme to find every way possible to privatize everything in the government so they could make money off it.
These people are like so many thousands of Milo Minderbinders. Really.
Are you serious? Whistle-blowers are traitors; they ruin things for the Important People.
DougJ, Lehman was not a depository institution and was not chartered as a bank, so if it could have reorganizaed it would never have been under the aegis of the FDIC but under court protection, as in any other BK. As it is, none of the Wall Street firms wanted to bid on Lehman nor provide DIP financing for a reorganization. So the end result, liquidation, was plain for all to see.
Had Lehman been a bank holding company, then it would have had access to the various fed funds to keep itself afloat (even more to the point, there would have been capitalization requirements, which none of firms that make up the shadow banking system maintained).
As it was, when Lehman went belly up it was as a private financial institution, not a bank. PWC is the appropriate entity to handle the liquidation, not the FDIC. Why your friend would think Lehman should be under FDIC control is puzzling to me. Or that stakeholders would have to prove their claims, which is normal in any liquidation.
Yes, that’s the point. The FDIC does not apply to investment banks. What is needed is some kind of FDIC system for investment banks (that is more or less what Roubini suggests in today’s WaPo as well).
Sure I will tell you, but of course what people have in there 401k’s, along with all other stock investments is very heavily weighted to the super rich. That is just a fact. Zeroing out big banks shareholders, instead of propping up the generally superrich shareholders at the expense of taxpayers.
Note I do everything through Fidelity. Four years ago I put all my 401k off shore since I realize American companies were insane, a year or so ago moved everything in to Fidelity’s Cash Reserve Fund because I thought the economy was going to go to hell, and on Sept 14, 08, after concluding that Lehman was history and that some of the commercial paper funds like Fidelity’s Cash Reserve Fund were investing in things like Lehman and therefore would "break the buck" I sold and put it into short term Treasuries, which I sold 2 weeks ago a good profit to put it back into Fidelity’s Cash Reserve Fund, since until April they are participating in the fed government program insuring the fund. I have made money for years in my 401k (including the entire Bush years), what about you?
Regardless, shareholders should be wiped out first, and not not propped up. But like MLK Jr. said, we have socialism for the rich and capitalism for the poor in the USA.
Lets try to cover a couple things here that have been stated and are absolute bullshit. Renting is not a better investment than a house, it is obviously a much better stategy than buying something you can’t afford, but if the house returns 100% with inflation, your loss is interest payments, renting is 100% loss to finance someone else’s investment. It may take some calculation to figure what will work to keep most of the money in your hands, but chances are there is working point, simply because rent is tied to the costs of owning that property.
Home improvements return at various rates depending on a lot of factors, what is improved, the condition of the property, surrounding properties, markets… etc. Anybody can throw bullshit blanket statements around, conditions will dictate reality. In reality the two best reasons to improve are to preserve the building and to have what you want for living. The investment portion requires careful analysis because ot the number of factors involved.
Places like Cleveland and Detroit have become housing black holes, employment insecurity is a piece but the market in certain price ranges is absolutely flooded with forclosures and desperation sales resulting in pricing that has no reflection of reality. If you had patience, the money, and good analysis skills you could make some real money from such a situation because the market will correct at some point. Best be able to afford the wait…
Sorry so long, rants have a habit of making me do that. ;)
The expression "too big to fail" was coined in an attempt to assuage fears of failure by allowing market consolidation/concentration but now it is being used to persuade us into believing that we have to save them or else everyone suffers. An old adage probably defines it best: The bigger they are, the harder they fall. People who portrayed themselves as the epitome of intelligence and knowledge ignored the truth of this adage, thinking they knew better. While I was for bailing out the banks I am now of the opinion that failed institutions need to fail. Rewarding poor decisions by making everyone else pay for it is not a solution, it is an attempt to cover up the damage. To recover and attempt to pick up where they left off.
The system has blown out, the ‘tire’ has a huge hole in it that no patch can ever fix. We can pump all of the air into it that we want and it is only going to leak right back out. No, this tire needs to be replaced. I have heard cries of ‘People will lose their investments! Their pensions!’, to which I respond with what do they have right now? If we were to take a full accounting of our financial system, what is left after all of the debts are taken into account?
The truth is, the bottom two-thirds of our financial ‘mansion’ is nearly empty. All of the furnishings have been moved to the top floors and the top-heaviness of that weight is threatening to bring the building down. We have been witness to the largest transfer of wealth in history. We were told that Free Trade, Credit Default Swaps, Mortgage Backed Securities, Collateralized Debt Obligations, Unlimited Executive Compensation, Unlimited Golden Parachutes and more were all good for our economy. These giants knew what they were doing and they could be trusted to do what was right.
They didn’t. For all their touted intelligence, they failed us and did so spectacularly. Now they want us to cover for them, to stand behind the promises they couldn’t. To do so is to endorse privatizing the profits and socializing the losses. In other words, their flavor of capitalism failed. They were willing to rake in the dough while the going was good but are unwilling to change their ways when it is clear that they were wrong. They gambled, made a bad bet and want us to cover it for them. No, it is time for them to pay the piper.
We need to rip the covers off of this sucker and expose the whole mess to light. Take an accounting, paying or wiping out where necessary, and start over with a clean slate. If people are pissed then let them take it out on those who screwed them over. Beyond the FDIC and pension guaranty coverage, everything that is a loss is written off. Repackage and sell off the good stuff to good banks, then pack up the bad stuff and sell it off to the highest bidder. It is time to clean house, time to bite the bullet.
Regarding our economy, our government and businesses took a strong manufacturing economy and shredded it for profit, devastating our blue collar workforce. What is left are poor paying service jobs that barely allow you to survive. Many who were in manufacturing took advantage of retraining, went to college and got involved in the white collar workforce. The problem is that unknowingly, many of them were working on dismantling our economy and they are getting laid off now that it is a smoking wreck. What can they look forward to for work? Low paying service jobs. Problem is, now that the economy has tanked, able retirees whose retirement savings were wiped out are looking for work. There is not an endless supply of service jobs, so people are going to go hungry.
I would like to know who came up with the brilliant idea that we could survive and thrive as a service economy, making nothing of commercial value, only consuming. If we are only consuming and not producing, our cash flows out of the country and whatever flows back only flows to the top of our financial ‘mansion’. If that money doesn’t trickle down to the bottom and start its cycle anew, sooner or later we just run out of cash. But rather than rewarding employees for higher productivity, we made it easier for them to go into debt. Take a look at wages versus productivity from 1950 to now and you will see that they part company when Reagan was elected. If businesses had continued to pay workers based on productivity, we would have a much stronger financial base. Instead, they chose to skim off everything they could and call it profit.
At one time, a strong, well paid workforce was an investment we made to assure a strong economic base. This workforce drove the economy, they made it work since they were the ones who circulated the wages they earned back into the economy. This cycle was broken once we moved our manufacturing off shore. We can’t survive in a service economy that only has jobs where everyone services everyone else, it won’t work. Service jobs do not pay enough to move an economy as large as ours. Combine that with the fact that the rich are not going to spend (read: move money) at a rate or in a way that would offset the migration of cash out of our country and to the top of our society, and you have a recipe for economic disaster.
The ‘bottom’ is tapped out, surviving on crap jobs that are coming under increasing competition with the economic collapse, buried in debt, and we are supposed to believe that giving the banks more money is the solution to the problem? That getting the banks to hand out more cash, burying us further in debt, is the solution to the problem? No sale.
This DFH only sees one way to attempt to refloat this sinking ship; create good paying jobs and tax the rich, specifically the bastards who milked the system dry, at a rate commensurate with their ability to pay. Regarding the need for good paying jobs, we need a strong manufacturing base. There are many reasons why it is in our economic interests to have a strong manufacturing sector, the most important being our national security. It is kind of hard to be able to fight a world war if we don’t make a damned thing to sustain us.
Good paying jobs mean more money is moving in our economy. We need corporations to recognize that our economy stagnated because they refused to pay American workers for their increased productivity, instead preferring to skim off the productivity ‘profits’, pocketing them via ‘executive compensation’ and paying the rest out in dividends. They forgot that a strong, well paid workforce is an asset to the economy and to their businesses. Free trade allowed them to get away with it. The excessive profits and financial wrangling of those profits led to an investment frenzy that had no basis in reality.
We need to return to a strong manufacturing base that is fairly compensated for productivity gains, and we need a fair tax rate for the rich. When the government taxes the rich at a higher rate, this allows them to return some of the money from the top back into the bottom by building and maintaining our infrastructure, creating more good paying jobs and further stimulating our economy. It worked before and it can work again. All we need is a government that can lead.
Since that is the case, we’re fucked.
You’re getting sillier every time. Define "super rich," if you don’t mind. Sez here that 76 percent of employees who are eligible to participate in their employers’ 401(k) plans participate.
There’s some of that, but not quite as much as you think. In my neighborhood, about half the homes are owned by Taiwanese. Most of that isn’t recent – it dates back to the One China period when a lot of folks in Taiwan bought up homes in California to have a place to escape to if the shit hit the fan. They’ve been renting those homes, and some do move here, but a lot of the kids are really just taking over previously purchased properties. As a result, they are reducing the supply of property but they aren’t having as direct an impact on price because they aren’t paying market prices.
No, the bigger problem here really is that EVERYONE decided that their home was their retirement account, and the lending industry fed them like mortgages were crack. Real estate agents bought properties expecting to flip them, regular folks did as well, they bought way above their means because the home would double in value in 3 years. My wife and I bought our 2nd home for $215K. We sold it 4 years later for $420K and bought our current one for $485K. At its peak it was worth $850K. Our monthly payment never changed from start to finish. So the market value of our home quadrupled in 7 years without us putting any real money into it. We had friends that bought a $1.1M home with $0 down. We know tons of people doing that kind of thing. Many of them are fine – the market in older areas (older being 20 years) went up so much, so fast that even now people are still way ahead. The people that moved into new neighborhoods (5 years or less) are truly fucked. Not only did they lose big, but they have properties with large month assessment burdens for schools and roads that will be difficult to unload.
The reason it was so bad where we are is that the brokers were compounding an already bad situation. The more they lowered their standards, the more demand they could make which drove up prices. The higher prices allowed them to move larger mortgages (higher commissions) and to point to the rising prices as a reason to move fast, so people did, which created more demand, and things just flew out of control. Large parts of SoCal are finally running out of space, so it’s hard to increase supply, unlike 20 years ago. The brokers didn’t care about neighborhoods without growth potential and so they didn’t see those places didn’t see quite the same dynamic. They wouldn’t loan there because they didn’t see that prices would go up enough to lower their risk. If prices went up fast enough, borrowers could always sell for a profit, so there was little risk – so long as they could keep shoving up demand by lowering standards. For people already there, they’d push cash-out refis and HELOCs which would go into remodels and help push up prices. I remember walking around with my kid doing door to door for scouts and there wasn’t a single home we visited that didn’t have a flat screen smaller than about 42". Not one out of at least 100 homes, and a shitload were in the 60-72" range. This was 3 years ago.
I had a guy working for me that had been a broker with Ameriquest and he said it was clearly known that these were bad mortgages and that the floor would fall out, but until it did, there was money to be made. The key was getting out before the day of reckoning, taking your profits and bonuses, and finding something new to do or retiring. Lots of people did that – as did he. It was a societal scam and everyone in the industry knew it. Everyone. Don’t anyone think this was unforseen.
Investment banks don’t need their own FDIC. They need to be out of the banking business. Moreover they need to be regulated to protect the public from their dealings. If you allow those greedy fucks to game the system, they will.
I dunno, the lead article here doesn’t make a sale to me.
For one thing, it seems to completely ignore public perception. Banks going bankrupt right and left? Who sends out the National Guard to control the mobs in the streets? Who explains this to the people so that they don’t come at the banks and the government buildings with pitchforks?
Isn’t the scheme we are seeing played out really intended to slow down the rate of shit hitting fan and keep the public at bay? And isn’t that a completely necessary thing to do?
I don’t know the exact answer, but my impression is that whoever wrote that "long but well worth reading" thing above hasn’t really thought this through … which is fine, but since it is obviously so, why am I being asked to vet it for him?
I think the "run on the bank" story (the Kanjorksi story) from last week better explains the scheme we are seeing. Had the public seen the true extent of the banking system’s fragility and vulnerability, they’d have long since set fire to the barricades.
Try again guys, this material ain’t feeding the bulldog.
I really enjoyed all the story’s on 60 Min tonight, and it’s about time they came out of their post Rather marshmallow stage. The guy in the first story was just great in explaining the whole Free Trade kinard, in a way that the average person can get their head around. The entire free trade thing was concocted to enrich the big international corps., to exploit cheap labor and dum down our economy with cheap foreign products, many highly subsidized or made from dirt cheap labor and no concern for the environment. And the watb’s running around screaming trade war don’t get what that guy said tonight. That the war has been on, and against AMerica, and we didn’t show up. It’s just about time somebody called foul and made it so every nation has to play by the same rules or go fuck themselves. Putting the buy American clause in for US steel, should be scored one more point for Obama doing what he said he would do. Insist on Free Trade being fair, or no trade at all.
You are a moron. So what to your point. Just for giggles lets say that 100% of those of Americans participate in 401ks, the fact is that way over 90% of stock ownership of stock is in the to 1% of the population in wealth.
So quit trying to argue that the poor should bale out the rich again, which is what you are doing.
Not in socialist Amerika, Komrade Kat.
Just finished watching the 60 Minutes story. For the record, Church Lady had it wrong. The original thesis was the claim of mortgage executives that they were blameless in the mortgage meltdown. That’s the premise the 60 Minutes team and the salesman they interviewed were attacking. They were proving that World Savings knew they were selling bad mortgages and that Sandler knowingly screwed Wachovia. it wasn’t a matter of the salesman being a whistle-blower. he never claimed to be that.
Banks (depository ones) already are going bankrupt right and left. They have FDIC insurance so it doesn’t bother people very much. Most of these are smaller, regional banks (maybe three or four a week) but WaMu was pretty big.
If people don’t care about the banks they actually have their money in (which they don’t, because of FDIC), why would they care about investment banks going under? And, anyway, the whole point here is to make investment banks going under less scary. The whole point is to avoid another Lehman catastrophe without bleeding the treasury dry with bailout money.
Indeed, they will. That’s what they’re doing now. One way to stop them from doing so is to let them go bankrupt. But without some more orderly process for doing so, that’s a disaster.
No, be precise please. You are half right but that half is critical.
Banks are going insolvent and being restructured in a way that looks seamless to most depositors.
Your friend wants bankruptcy, which is a legal process and one that has a whole different tableaux, and the assets processed out in a different way (better way, or not, another question).
The public doesn’t see or hear bankruptcy right now, it hears that the bank is reopening under different management and that the assets are in place. Whether that’s accurate or not, another story, but that is what Ma and Pa Kettle are hearing. Which is why there are not mobs in the street, right?
So how does your friend suggest selling his "plan" without having the streets mobbed with angry and scared people?
I think the whole point, if I am, say, in the White House, is to avoid public panic. I don’t see how the bankruptcy scenario does that.
Are you sure about that? I’m not so sure. My sister knew when WaMu went under and was worried about getting her money out (I think there might have been a delay of a few days with this).
I agree that for any depository bank, things have to look fairly seamless to depositors, though, as you say, and I’m not sure how that fits in with his plan. I’ll ask.
I’m not sure public panic is so much of a concern (people know they can get their own money back because of the FDIC). And I think we have an institutional panic right now that needs to be addressed.
I think this makes sense if you think of banking and finance as a vital organ or something else that’s essential to a normal, healthy (relatively speaking), functioning economy. There are, I would imagine, plenty of industries that could take significant hits if one or a few significant players went down. A lot of people talked about how all states, but particularly the ones in the Midwest, would be screwed if the American auto companies went under, but as bad as that could have been, it wouldn’t be the same if the financial system received a blow of similar scope.
Simply put, I’m not saying that I’ll always feel this way or that others should or will, but I don’t think it’s nuts to assume that finance is an area where significant government intervention is a good starting point. Chaos in the markets of money without the government as a referee can make it difficult, if not impossible, for the economy as whole to function. The normal rules may not really apply here, especially in times of crisis.
I think two things at this point. One is that public panic is a real danger, and a real concern to the administration. Two is that you are making a great case for nationalization.
I don’t see how widespread bank bankruptcy — at any level of the banking system — proceeds in a calm orderly fashion unless you get the bankers to basically (a) line up and salute the plan en masse and (b) start turning on the credit spigots.
when do we nationalize the whorehouses and strip clubs?
When they start going bankrupt, i.e. never.
Wait, didn’t one go under in Nevada? I guess with enough incompetence, any business can be run into the ground.
Wading into water over my head. Musings from a common idiot, so go easy.
I don’t think people are panicked about their money in banks. I think they are deeply worried that something is really fucked with the system, as in their Government and the business sector. They rightly see it as a product of greed, avarice, and a blind eye being turned by those who are supposed to keep such things from getting out of hand. They unrightly don’t see their complicity in living on credit above their means
They are afraid for their jobs, and when that happens they stop buying stuff that isn’t required. And since our economy is 2/3 based on consumer spending the feedback loop is in play, and everything grinds to a halt.
I think a lot of what is happening is just the system clogged with bad loans and excessive gambling with assets that didn’t really exist, mainly in the form of an enormous number of very bad sub prime home mortgages. And because there is so much of it, the government is going to have to soak up the losses and stop the bleeding and most of all find a way to keep people in their homes regardless. If not, and other people see their neighbors and relatives going down the tubes to the street, they are not going to spend money, then businesses have no incentive to make things. The banks know they’re not going to spend money and holds back credit, and the neg feedloop loops on.
Geihtner’s plan damn well better work in keeping folks in their homes, while not crashing all the banks at the same time. Any way you turn it, it’s a giant shit sandwich for all of us.
That was very well said.
Except that you cannot use median price for measurements like this. Those 10k median prices in Michigan reflect that there are a lot of burnt-out neighborhoods, and the government does not have the resources (or the demand) to bulldoze those suckers. This is further evident from how impossible it is to get people to even rent these suckers. If you look at the desirable suburbs of Detroit (yes, they exist), the prices are more in line with incomes.
Rent is the only factor I have ever found to be reliable. It adequately reflects the scarcity of land with respect to jobs available. You are never going have homes in the "zoned zones" be comparable to fly-over territory, because land use restrictions make the land an even scarcer resource.
Step 1: Pick the biggest Banker and shoot him.
Step 2: Explain to the next biggest guy what needs to happen.
Step 3: Repeat as needed.
( voice of William Shatner )
Now you’re negotiating!
You know what’s scary? It’s not mostly bad subprime loans. The total fall out from that alone is something like $300-$500 billion. Because of the CDO market, there’s another loss of $300-$500 billion or more in assets derived from subprime in some inscrutable way. And then there’s an elevated rate of default in loans that are rated a little above subprime.
If this were just the subprime loans themselves, we would be fine. It wouldn’t be that big of a deal. Recession-making possibly, but like early 90s recession-making.
In what way?
You must be talking about what I’ve heard called Derivatives, where I think I remember someone on teevee saying the traders were gambling with them as though $1 was $30.
Banking/Government joint scams go back to the Jacksonians and the 2nd National Bank ‘crisis’. Nothing changes until the system itself is changed – and no one is talking about that.
At least Alan Grayson is asking questions – priceless:
@Delia – My point was that he said he threatened to tell Wachovia what a total pile of crap they were about to buy, but didn’t. He now says he wished he had. Well, yeah, that would have been nice and I’m sure Wachovia’s shareholders would have been grateful if he had gone public. Perhaps it might have stopped Wachovia from the World Savings purchase, or at least caused them to perform more due diligence prior to the completion of the sale, because the crap loans he was complaining about are a very large part of what drove Wachovia into the ground.
@DougJ – I read something about that somewhere recently, but I can’t remember where. As I recall, the government (don’t know if it was federal or state) took a Nevada whorehouse over due to unpaid taxes and somehow managed to run the business into the ground. I’d like to know more about it, given the odds are getting pretty good that the government might well take over a fair sized chunk of our financial system. It might not portend well.
Um, you do realize that there is a difference between a whorehouse and a bank, and that governments are expected to know very little about the former relative to the latter?
That’s like saying that Yo-Yo Ma ruined your power drill and now you’re worried about what he’ll do if he borrows your violin.
@Martin – It was a joke. Sort of. Both of them are in the habit of screwing the customer.
Well, if you’re not a Republican, yeah….
I’ve posted a reply to this over at my blog. Too long to reply here.
Long story short it’s probably a bad idea to ask a ‘Senior Hedge Fund Manager’ who probably has the most to gain from allowing the banks to go bankrupt for advice on whether to allow the banks to go bankrupt.
BTW Doug, I’d be curious as to whether the Sr. Hedge Fund Manager you quote has in his fund, credit default swaps that pay off if banks default on their debt and also like to know if he would anticipate investing in the assets of the banks if they went into fire sale.
Slightly OT, but that’s why I laugh whenever the media presents Donald Trump as some kind of financial genius. The dude LOST money running a casino, FFS! It takes a special kind of stupid to bankrupt yourself by running a casino.
@Martin: Hey, Vitter worked hard to turn whorehouses into a family-friendly business.
Whorehouse must of been a highrise.
Too much fucking overhead.
I said ‘expected’…
Let’s see: you’re slinging factual shit that can be disproven in less than 30 seconds, in support of God knows what fantasy, and I’m a moron.
We really need an "ignore" button around here.
This is a course of action that needs to be adopted. I remember a scene from Voltaire’s Candide in which the protagonists visit England and witness an admiral being courtmartialed and shot. Candide inquires why, and the answer comes back, "To encourage the others."
After witnessing the bankers’ playacting before Congress last week, I certainly think they need some serious encouragement.
Brick Oven Bill
Re: Nevada Brothels and Robert Rubin
Martin, The Federal Government has no idea what it is doing in running a brothel, but individuals within the Federal Government know how to run banks, which is worse.
A nice neighbor lady heard about the Mustang Ranch, and decided to take her kids to see the horses. But there were no horses there, only trailers. Then she figured it out and turned around.
The Feds ran the place for a while and sold the trailers on eBay. To the Wild Horse, which currently has a very refreshing series of signs along I-80. Joe Conforte now lives in Brazil, who is protecting him.
The last thing America needs is Robert Rubin outright owning the banks.
Yes, but (a) some people are poor enough that they have no 401(k), and (b) just because stock ownership is somewhat widespread doesn’t mean that it’s widespread when you take into account size of holdings.
Is he really that far off?
My search of the web implies that the top 1% own perhaps 44% of stock, and the top 10% about 85%. (Those numbers are pre-crash.)
Not as concentrated as "top 1% own 90%," but still very concentrated.
The banking crisis is not merely as you have described; it needs to be fundamentally reformed, because the present system of banking *creates and destroys money* in large quantities, and is at the root of every panic and depression we’ve suffered since the 1860’s.
Please consider the material shown in the following documentaries:
Money as Debt. (47 minutes)
Our money is literally created out of debt—IOUs that earn interest, which are then packaged and traded around as investment assets by the banks. (Remember mortgage backed securities?) The problem is, the money that is created out of debt is destroyed by each bank payment; unless new money is borrowed into the system, the money supply gradually gets destroyed. That’s why our economy is so damn sensitive to interest rates, which manipulate the rate at which people borrow money. The system is fundamentally disaster prone.
The Money Masters (215 minutes)
Our money system, that creates money out of debt, is based on fractional reserve banking; the banks lend out more "checkbook money" than they have currency to back. The head of this system is the Federal Reserve, which is a private banking cartell, and the biggest creditor of the US Federal government. All of our personal federal income tax (a sum of over a trillion dollars) goes towards servicing the interest on the US Federal Government’s debt.
I urge you to watch these two documentaries. You will never see economics the same way after seeing these.
Note: The most vocal opponents of fractional reserve banking and the Fed tend to be gold standard advocates from the libertarian/Austrian school of thought. The two documentaries above do not push the view that the gold standard is the best solution to the banking crisis.
And while many workers have 401(k)s, it does not follow that they all have significant sums in those 401(k)s. People who can afford to sock away $15,500 per year, every year, for their entire career, do not make up the bulk of the account holders.
@Brick Oven Bill:
Which, of course, is why David Vitter still needs to hold onto his Senate seat.
We can intervene on the margins, but not overall. Many trillions of dollars were lost when the bubble burst, and there’s not much that can realistically be done about that.
Furthermore, in terms of fairness/etc, as one commenter put it:
Doug, the Mustang Ranch was taken over due to tax evasion. It wasn’t run into the ground. The owners just didn’t believe in paying taxes (imagine that, someone running a brothel who invited trouble, stupid if you ask me).
What the government did with it later, I don’t know, I guess that is what you’re talking about.
See, that’s the problem, everyone wants to get rich off real estate. Its not an investment, its a place to live that hopefully holds its value.
Interesting that I heard this little tidbit when I was younger about real estate doubling every ten years (this supposedly included rentals) and I’ve been watching the trend ever since. Thankfully the trend failed about twelve years ago, or else I’d be paying $3200 a month now for a lousy apartment.
And your point is?
I think his point is that fucking over taxpayers hurts the working class more than fucking over shareholders, and therefore we shouldn’t give a shit about the shareholders of these institutions. After all, they chose to enter that relationship, they own the company, they select the BoD, and they are the ones to be left holding the bag – by definition of a corporation.
The point is that worrying about the poor workers losing values in the retirement accounts is a really stupid reason to want to keep these insolvent banks propped up. The alleged ubiquity of the accounts does not mean that the mass of employees get much out of them.
You understand why it is in the interest of corporate executives to subsidize employee participation in these accounts?
I’m not saying nationalization is not the only route out, but:
You still have the problem of what to do with the toxic assets-they don’t magically disappear.
You throw the bastards out, but you have to have to find new people to run nationalized banks. You have to hire more banker bastards to do this.
Does Geithner or the FDIC really have the staff to do this?
How do you get new equity investors at a time when everyone is broke and maybe feeling burned by the nationalization?
Whatever happens, the banking industry must be much smaller, tightly regulated, and no longer a financial weapon of mass destruction.
You got it backward, the "loophole" is that residential real estate is treated differant then other types of secured loans. If you are multibillionare Sam Zell and you march into bankruptcy court and want to cram down on your secured creditor who has a lien on your printing presses at the Chi Trib, you can do it. Same if you own apartement buildings or other investment residential real estate, but God help you if you actually live in it because the law suddenly can’t allow you to cram down.
What you do is the same thing they did in the S&L crisis, review the banks viability and if viable review the banks assets and move the unperforming assets to another entity to liquidate (like they did with the RTC in the S&L crisis) leaving the viable bank. If not viable just move all assets to the RTC like entity.
No, they have been holding job fairs and bringing people out of retirement, but remember plenty of attorneys, accountants, MBAs and others who may have worked in banking are now available due to layoffs. Group them with the retires they are rehiring to train and you have your workforce.
This is an interesting question I have thought of. IMO the government will have to (or at least should, if they are fiscally responsible) hold onto the bank for the period of time it takes for the economy to stabilize so that even if, just to pull and example out of the air, the GDP is then at a level 10% off of where it was, at least everyone feels confident that we are bumping along the floor (or set for a come back), and therefore willing to look at making investments. So that may be a 3-5 year window (the gov held its stake in Chrysler way back when for 5 years, if I am recalling correctly). I suspect though with Republicans crying a river of how we are a Communist nation now that the Dems will do the irresponsible thing and reprivitize at fire sale prices.
Sure they do. Well, the actual, real assets get sold for the market clearing price. Counterparties will benefit to the degree they succeeded in verifying the true value underlying the deals. Shareholders get nothing. The wealth created by manufacturing derivatives will go *poof* – off to money heaven, as it were. It is not coming back.
The only permanent wealth created by the whole process is that which was cashed out by the bankers themselves.
Actually, I’m not sure what exactly the point is, perhaps I’m over-reading this post. Lehman and others of that kind had no FDIC system in place because they were not regulated by the federal government. They (Lehman, Goldman Sachs, Merrill Lynch, Morgan Stanley, the hedgies, etc.) had their own set of rules, and not too many of those to boot. And they were constantly lobbying for regulatory rollback, and winning (the repeal of Glass-Steagall is one example).
Hedge funds were specifically not regulated because Congress and the agencies made it clear that those who were rich enough to invest in hedge funds were rich enough, and sophisticated enough, to lose money. So no insurance for wealthy investors, and therefore no bailouts for hedge fund managers.
So you friend’s email is about how there should be some sort of federal regulatory system for an industry that never wanted to be governed by a federal regulatory system in the first place. And that’s to ensure that investors get their money from someone, most likely the US taxpayers, when the risky assets marked to model suddenly are worth less than toilet paper when marked to market. Now, after all the money is lost, the FDIC system looks good, huh? Why didn’t it look so good in 2005?
What happen is that banks got greedy because they know they could turn around and sell their loans for a small percentage and make one hunred thousand dollars instantly. They were giving loans to folks that had no jobs just on the fact that applicants told them that they were going to get a job. I know this first hand.
What happen is that eventually someone will get the short hand of the stick. It’s similar to a pyramid scheme. Everyone gets paid and the ones at the bottom loses.
You convert some debt into equity.
I humbly make the suggestion at the bequest of someone who really understands this stuff, that Bank of America be taken over by the government with the shareholders bought out. BOFA would then serve as the true national bank. Other small local banks would be spared and then the government would be able to loan funds on a large scale to worthwhile (America-building) enterprises like biotech and infrastructure and well run real estate firms. Even start ups with a reasonable success outcome. I know it sounds harsh, but banks themselves are not the best business and the larger they get, the MORE likely it becomes that they will fail.
A friend of mine works in Wall Street and he and his co-workers agree that the guy who blew the whistle on Madoff is a traitor. It’s not that they approve of Madoff but the whistle blower went outside the tribe, which is wrong.
No, I think we’re saying the same thing: the bankruptcy laws were set up to privilege real estate investors over homeowners. A few states (I believe Florida is one) have laws that allow you to protect your "homestead" (primary residence) in case of a bankruptcy, but it’s not a nationwide policy.