This is what will be making the headlines the next few weeks:
The Obama administration will begin taking a hard look at the financial condition of the country’s 20 biggest banks this week to judge whether they could hold up even if the downturn worsens further than policy makers already expect.
These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.
Bank shares were pummeled last week, partly because of rumors that the government might nationalize some of the banks. Officials consider many of the top 20 banks “too big to fail.”
The tests come as anxiety is building among investors and industry analysts about the Treasury Department’s broader plan to shore up the banking system. People familiar with the plan, which has been criticized by executives and analysts as vague, say its crucial details may not be ready for another few weeks.
In yet another sign of distress for the banks, Citigroup officials were in active talks with federal regulators on Sunday night about plans for the government to take a bigger ownership stake in the bank, according to a person close to the talks.
I’m not even going to bother trying to figure out what all is entailed in the stress tests, because I will never figure it out. Instead, I am just going to ask the following question- Why haven’t we been doing this all along?
And if you read the folks at naked capitalism, calculated risk, and elsewhere, most of them have been hinting for some time (or at least I have perceived them as hinting this) that many of these banks simply are insolvent and will not pass these stress tests. Then what?
Ned R.
Then nationalization happens, which more and more folks are saying should happen anyway. Sounds good to me, really.
SnarkyShark
Yes..why the hell hasn’t a stress test been done?
Pretty sure it has and the results suck. This is performance art so we can all perceive the suckitude together.
I am ready for debt forgiveness across the board, a dollar based on homegrown chronic yield( people will work for pot),
and hard regulation of Wall Street that will never again be over 5% of our economy.
And the fed has to be taken under government control. No more of this quasi government/private bullshit.
Punchy
In related newz, the Today Show is apoplectic over the fact that O wants to cut the deffy. The got breathless over a plan to cut spending in a recession.
Yes, this is 1 week after going apoplectic about O’s plan to spend 700 billion, calling it excessive.
My TV remote will NOT last 4 years of this….
TheFountainHead
This is all part of the PR campaign to allow Obama to Nationalize the banks (which has to be done) without giving the right too much of a box to stand on. Anyone with a brain and a calculator can pretty much figure out that these banks are trash. They’re done. The only way to make anything of them is to nationalize them, and even then, they’re garbage. Frankly I think Obama’s waiting till he can get a few more Republicans like Lindsey to state the obvious so that when he does it, he can do it to all the banks, all at once, and the people will thank him for it. Which is what he SHOULD do.
Shygetz
Didn’t Obama say he wanted to cut the deficit…by like 2013 or something? C’mon people, a little focus!
BTW, Ned R. has the right of it. After the stress test comes receivership. In my opinion, the government would be well off saying right now what the criteria for receivership would be. That way, the banks in good shape can show stockholders that they are not at immediate risk, which should help shield them from speculative sell-offs. But then again, I’m not an economist (although given their recent record, that might be a benefit).
The Grand Panjandrum
It’s not to hard to figure out. Democrats are only moderately good and effective at managing regulators. The Republicans have spent most of the last eight years trying to drown the baby with the water remaining in the tub. (You must remember that six of the last eight years the R’s spent investigating "voter fraud", wearing flag pins, and convincing the American public that a mushroom cloud would appear over Manhattan if we didn’t fight an unnecessary war.)
Comrade Jake
I hope it’s as others above have suggested, that this is basically the first step in making the public case to nationalize. But I have my doubts.
And Punchy, I’m watching GMA now, and it’s painful. Apoplectic appears to be Lauer’s instinctive position.
dr. bloor
I would imagine a stress test for a bank is something along the lines of messing with books and asking hypotheticals along the line of "What happens when we do this?" to its balance sheet.
The reason why they haven’t been done it the past is the same reason why some folks with ginormous tumors growing out of their eye sockets don’t bother going to the doctor. They already know the results.
Mako
No offense John, but it doesn’t take a genius to figure this shit out.
People have been living beyond their means for too many years and now its done. If you still have money in the stock market you are an idiot and haven’t been paying attention. If you still have money in big national banks, you are an idiot and haven’t been paying attention.The whole freaking country is in denial and stupid. The cheap-petrol consumer-driven economic model is done, finished, never to come back no matter how much stimulus we throw at highways. Its done and over.
You know, Kuntsler says it better-
http://www.kunstler.com/mags_diary25.html
Scroll down to Jan 26,
or go read Roubini-
http://www.rgemonitor.com/
Not like he hasn’t been predicting this shit for five fucking years.
Try’n keep up people.
Walker
As Yves points out, it looks like these stress tests are just for show. Which is bad. Several banks will probably get a clean bill of health and still fail later anyway. That will be far worse that declaring these banks insolvent now.
If Geithner declares a bank okay and it fails, his career is over. I guarantee you that China will use its leverage to refuse to buy any US debt until he steps down, forcing him out for some one internationally respected like Volker. Because if Geithner was Chinese and did something like that, they would put a bullet in him.
TheFountainHead
What Mako @ #9 said.
Dork
OT: (no open thread)
Awaiting comment from the NRA.
Self-defense is a right, lefties?
mistermix
Isn’t it because these banks have a bunch of mortgage-backed securities on their balance sheets which they are unwilling or unable to sell, i.e., the "mark to market" problem?
The bank spokespeople I’ve heard say the "market is broken" and they can’t trade the securities. Others say that the banks could sell the securities for a price far below the value on their balance sheet, but they’re unwilling to do so because they’d then have to mark all other comparable assets to the new market price.
I can see why this would be a bit of an issue for regulators, because until someone starts selling those assets, they can’t get a "real" valuation of the securities in a bank’s portfolio.
Napoleon
What they have been doing all along is checking if the banks have been meeting capital requirements, but basically using the numbers on their books to figure it out. 99% + of the time that is good enough. So its not like they have not been looking at the banks, which I think is the underlying premise of your question. My understanding of the stress test is they calculate how values of assets would change under certain unusual circumstances that under current conditions could foreseeably happen (such as another 20% drop in housing prices). As those asset values change, then whether the banks now have sufficient capital reserves also change.
PS, echoing mistermix above obviously the one big asset whose value could change base on how you change economic assumptions is the mortgaged backed securities. In reality they ought to be fairly easy to value on a cash flow basis, just like you do in an appraisal of real estate, and as you change the various assumptions (default rates, cap rates, etc) you can see, at least in theory, whether they are being carried at a realistic value.
TheFountainHead
@Walker: I hope you’re wrong. I think this is being done for show as well, but for the opposite result. It’s being done so the Administration can (correctly) say, "Look, these banks are fucked, we’re taking over."
Comrade Jake
OT, but Yglesias just leveled David Gregory. Posts like that are why I read Matt’s blog.
The Grand Panjandrum
@Mako:
Then call me an idiot. But I suspect that in the long run the contrarians will win this argument. Yes the stock market is down. A value investor is hunting for bargains right now. I don’t have time nor inclination to explain that simple idea to you, but I will make money in this market. But I’ve always made a lot of money in bear markets. As far as banks go you are fully protected up to $250 thousand in any deposit account at the bank. (at least until the end of the year when it goes back down to $100 thousand.) If it gets so bad that the government won’t (or can’t) cover those deposits–that will be the least of your problems. So you have all your money in precious metals, or do you trade in the barter economy?
woody
that many of these banks simply are insolvent and will not pass these stress tests. Then what?
They’re the ones ‘too big to fail.’
Shorthand for "gots LOTS of friends In Congress."
So they’ll be ‘saved’ somehow.
woody
So you have all your money in precious metals, or do you trade in the barter economy?
If i could, i’d buy pharmaceuticals.
They’re small, easily stored, mostly don’t degrade, are absolutely VITAL, and therefore are worth far more than their weight in gold…
Dave
@The Grand Panjandrum:
Word. I have 30 years or so before I retire. Right now I am just buying up stock at a cheaper price. And if it does go in the crapper, I have a feeling I will have bigger worries than my retirement fund. Like fighting off scavenger hoards with a shotgun.
Xenos
Agreed- you can’t write off the stock market forever. I still need a place to invest money I won’t need for at least 25 years. I thought I was being right clever by putting some money in large-cap European stocks, too.
Index ’em and forget ’em. Unless you have the time and knowledge to get creative and active about it. Most people have a life that just does not allow them to meddle around in the markets.
Comrade Jake
I’ve absolutely no idea why GMA decided to give John Ziegler a platform to spew nonsense this morning.
bob h
They may be technically insolvent now, but assuming that the economy does recover in accordance with concensus forecasts, they may be viable enterprises long term. I think it is entirely appropriate for the Feds to try to nurse them toward the recovery that will come, taking equity stakes and making them reform along the way.
Like Barney Frank, I do not want our government using scarce personnel running these big banks. On the left nationalization is being offered as a panacea, without much discussion of the cans of worms it opens up.
Dennis-SGMM
@Napoleon:
In normal times simply weighing a bank’s assets versus its liabilities sufficed. Looks like some of the banks had faith-based assets: "This here mortgage-backed security is worth a lot of money because we paid a lot of money for it and it has a high rating from Moody’s." Now the banks are saying that the mark-to-market price undervalues these assets and that’s not fair. Watch for the banks to make the case that the gov should take them off their hands for what the bank feels they’re worth rather than their actual value.
Mako
Geither is a patsy bought and paid for by big banking. I spit on him when he was with the IMF.
I haven’t even started yet. I can’t believe how fucking stupid mercins are.
Anyone with half a brain had their savings in cash three fucking years ago. Anyone who was paying attention saw this mess coming ten fucking years ago.
Ailuridae
I have a lot of respect for Roubini and others talking about nationalizing/receivership and the ilk. However, I think they are, broadly confusing illiquid and insolvent and they will likely have a lot of egg on their face whenever this is sorted out. The problem with TARP is the continued infusion of capital to bank without a "de-tranching" (yes, I just made that word up put its meaning should be clear) of mortgage backed securities into their original mortgages is highly likely to fail. At the same time, the process of de-tranching would require massive government involvement and not just US government involvement but worldwide (at least amongst nations with comparable banking cultures) cooperation.
And despite that being eminently reasonable it’ll only stoke anger in the black-helicopter, New World Order, militia crowd.
BenA
@bob h:
What scarce personnel? Its the friggen government… and I’m thinking there are currently tons of unemployeed bankers (or soon to be unemployeed) who will work cheap for a few years…
We have two competing interests: those who are trying to maintain some minor value for the shareholders who are left in these banks, and everyone else in the fucking country. I feel for the shareholders, but not a whole hell of a lot.
John Cole
I’m just sick of this- it is so frustrating. Every time I hear the phrase “too big to fail” I just think that Bernie Madoff made only two mistakes- he was in the wrong line of work and he didn’t think big enough.
The Grand Panjandrum
@bob h:
I won’t speak for "the left" but I know when I see nationalization being written about I think in general it is used in the context of receivership rather than out and out nationalization of banks. That is a viable option and it does leave room to break up the "too big to fail" banks and make them more regional so they are no longer a threat to the economy. From what I am hearing and reading these banks will be broken up and the healthy part will be sold to new investors. The so-called toxic assets will be held in receivership until the mortgage securities can be unwound and looked at to see how much is actually just dead wood. The big issue is not that any one asset is necessarily bloated with bad loans but that they are intermixed with plenty of healthy and performing loans. The government could purchase those securities and probably make some money on most of them if held to maturity.
That is the endgame here and it will probably be months before we have even an inkling of how bad some of those securities actually are.
Ailuridae
@Comrade Jake:
The prick was on Morning Joe too. If I had to give a reason for sudden (and unwarranted) mainstream media access I would look at who has agreed to distribute his "documentary" and who is representing him from the "talent" side. Either of those, if mainstream enough could drive his bookings.
Stoic
Then we let them fail, put them in receivership and tell the investors (and management) to take a hike. Break them up into "small enough to fail" entities, recapitalize them, stabilize them and sell them off at a profit.
Pouring $$$ into the current management is the definition of insanity.
Mako
Not a problem, friend.
Yeah i know, gold. Contrarians. Don’t have time to explain. Making big money. Using phrases like "value investor". Explaining bank details. I know your type, you’ll be living under a highway overpass in a year begging for spare change. By the way, that bread recipe on your blog, I got a better one. Bitch.
The Grand Panjandrum
@woody: Now that is a plan I can get behind. Unfortunately, for me, they wouldn’t last long in my care. I’d have to check to merchandise a little too often to ever make any money on the deal. (Or they would kill me before they had time to appreciate.)
Dennis-SGMM
@John Cole:
That phrase is almost as annoying as those bumper stickers that read:
"The Bible said it.
I believe it.
That settles it."
Many banks have failed. Now they’re just too big.
John Cole
@Stoic: I think the dirty secret is that wiping the investors out will bring down the entire house of cards, because I would not be surprised if the investors are the entire middle class 401k portfolio.
The Raven
It’s been more than hinting. They don’t actually know, of course, but their opinion is probably correct. Then what? Krawk! Political circus. Even if the Obama administration knew exactly what to do, it’s still going to have to go through Congress. Especially, it’s still going to have to go through the Senate, which is appallingly corrupt.
BTW, I call "language" on one of your nastier posters. May all his vowels fall out.
Roonieroo
@Mako: Oh how cute! I was wondering if any of those poor Y2K survivalists were still kicking around. Still have your electronics free bunker set up?
BenA
@John Cole:
I think you’re probably right… the only investers left in these banks are probably 401Ks. Hadn’t even thought of that.
Dennis-SGMM
@John Cole:
Hereafter, those silly people who stuffed their money into the mattress or buried it in Mason jars shall be known as "The Solvent."
Emma Anne
Here you are John:
link
The reason no one has been doing stress tests is that they haven’t been listening to Calculated Risk.
Brian J
I sometimes feel as if I say this too much, but with a topic this specialized and dense, perhaps it’s never too much. Regardless, the details of this, and a fair amount of the general qualities of this, aren’t easy for me to understand, but I think it’s pretty clear that there’s no easy solution to any of this. Even if nationalization (or whatever else you want to call it where it doesn’t imply long-term government run banks but short-term bankruptcy-style plans) is the right solution in the end, it’s not as if it’s going to be easy.
As Tyler Cowen said a few days ago, when you are talking about the problems at Citibank, you are also talking about problems at Citigroup. It’s one thing to do what the FDIC does and go through the process of what would happen for a small regional bank, but it’s quite another to deal with a giant like Citigroup. Very specifically, he states: "Neither the FDIC (which generally does an OK job) nor any other government agency is in any way prepared for this kind of management task." I don’t think he means this as some sort of typical example of government being inept, just that it’s a massively complex set of problems where there’s little precedent for the agencies required to deal with it to actually do what needs to be done.
All of this makes me think that some of the people that Obama has brought on board, like Jeremy Stein, are there for specifically this reason, if what he’s advocated in the recent past is still his thinking. But it also makes me think that, as Cowen says, the administration realizes that the process isn’t as straightforward as some like to think it is. Among many other issues at hand, weren’t some of these places, like Bank of America, thought to be pretty healthy back in the fall? If so, what changed so dramatically compared to other banks? There are certainly reasons behind it, but my point is that the conditions that determine a bank’s health seem to change frequently, so it’s not entirely clear what the state of a particular bank is.
I guess the simplest way to say it is, give them time. Let them perform the "stress test" and let them rework some details of their plans if it’s going to help them down the line. Let them (hopefully) raid the departments of institutions where people have the expertise to make this work in the best way possible. The administration appears to be ideologically flexible enough to go with nationalization if they feel it’s required, but reluctance to dive right in isn’t necessarily a fault.
Notice, by the way, that this all about the technical aspects. There’s also the possibly far more important problem of dealing with the public reaction so as to avoid the riots and tear gas.
cleek
@John Cole:
401ks are basically pooled securities. and they can be transferred to other banks, if the fund manager goes under. think "rollover"
the only way to "wipe out the investors" would be to sell their shares in those securities and pocket the cash. is that legal ?
The Raven
To quote Digby, "OK, now I’m officially freaked out." It seems that George Soros and Paul Volcker are saying it’s the worst in world history. Which means…
More food for corvids! Krawk!
Mako
@John Cole:
hey this is a good thread, got all kinds of economic knowitalls stepping up to the plate. There’s even a guy up there making up words.
But it ain’t rocket scientry, its the same as its always been;
live beneath your means, and save what you don’t spend.
Comrade Darkness
@John Cole,
We need to keep repeating it so the end game of all of this is: strict laws that make it illegal to become ‘too big to fail’. Nationalization done right would take care of all of those sick banks qualifying under this metric. As part of re-privatizing, they’d be carved up into parts small enough to fail.
The beauty of limiting the size of all financial institutions in the wake of their "innovation" (otherwise known as more ways to steal money) bringing down the planet, they could actually argue for the leeway of it back sooner, since their screwing up again would be on their own dime. If they are allowed to stay large, they better be reduced strictly to 3-6-3 banking for the next fifty years.
(3-6-3 stands for: pay 3% interest on deposits, charge 6% on loans and be on the golf course by 3pm. which implies they’ve been working overtime to f*ck things up.)
Brian J
I’m trying to find information on this now, but when you guys worry about the percentage of 401K investments in banks, are you referring to (mostly) the employees of the banks and financial firms or huge parts of the population that work for a wide variety of companies? The former would definitely be bad, but it’s understandable if something that could happen were to happen to these people in an affected industry. The latter would probably be a much bigger problem, if anything were to happen.
Comrade Darkness
@Dennis-SGMM Hereafter, those silly people who stuffed their money into the mattress or buried it in Mason jars shall be known as "The Solvent."
Only temporarily. The current bubble is cash itself.
Paul L.
Our Lady of Perpetual Outrage is swiftboating another poor innocent victim.
How dare she go through public records and court documents to discredit this poor noble minority woman.
That should be limited to Government employees with private Government databases to prove rich white people who question Obama like Joe the Plumber are part of the rightwing noise machine.
Does she think she is a Investigative journalist.
Investigative Journalists target rich white men not poor minority women.
Comrade Dread
Because no one is looking at the long term picture of rebuilding a banking system from the rubble that will be stable, fiscally conservative, and sound which can facilitate a general economic recovery and growth.
Everyone is looking at the short term, which will mean some very bad days on Wall St. as the light of day hits these banks practices and balance sheets and a lot of ‘wealth’ generated during the last 8 years turns out to be nothing but smoke and mirrors.
It’s a lot like surgery. It’s not pretty, it will hurt, and it might kill the patient, but it has to be done.
The Raven
Comrade Dread, to quote my girlfriend’s late grandfather, an old country doctor, "It looks different from the other side of the knife."
Seems to me it’s more likely pension funds than 401(k) funds that are most heavily invested in securities issued by the bad banks. But the 401(k) accounts of people nearing retirement are more likely to be holding bad paper from the bad banks than those of younger people, because bonds issued by the big banks were supposed to be safe investments. Then again, we aren’t going to know anything real until we start seeing the accounting. Krawk!
Napoleon
I truly don’t understand why some upthread think that the amount of bank stock held is 401(k)s is such a "problem". First, it is well documented that the overwhelming percentage of stocks (way over 90%) is held by the top percent or so of people. There is no reason to think banks are held any different. So by zeroing out the banks investors you are almost certainly containing almost all of the "damage" to the very richest of the rich (and by the way, it really doesn’t matter if they are rich or not, I see no reason why the government should choose shareholders as worthy of propping up unless they are the last people left to prop up).
Plus, have you seen what bank stocks have done in the last year or so? Any one stupid enough to have held them until today has already seem a huge percentage of what they had in the stock go poof.
headpan
OT: Obama to asshole governors on stimulus today – "We don’t have time for your bullshit."
Of course, in the nicest way possible.
:)
El Cid
According to their advertisements, Degree brand anti-perspirant reacts to extra stress to become even more effective, so surely Degree deodorant would be willing to lend their awesome scientific research potential to this banking situation.
Ailuridae
@Mako:
If you don’t understand that the very act of establishing the tranches is the main enabler of this problem, you don’t understand the problem. I suggest you become less ignorant or less unpleasant.
Brian J
Link?
I’m all for working with the other side, even if there are profound disagreements, but when the other side routinely whips it out and pisses in the punch bowl, it might be best to try to ignore them. (I go back and forth between thinking what strategy is best, but maybe the Obama team applies a similar but different one to each particular political problem.) I mean, what else are you going to do? Either these governors try to refuse the money, leaving their constituents with a clear and direct reason to not only vote against them but actively work for the other guy, or they are exposed as massive hypocrites by one of the most skilled politicians in recent times as their legislatures force them to take the money they try to refuse and then they champion the results. Keep in mind, a lot of this money is for stuff that pretty much everyone with a pulse who isn’t an anarchist supports: food stamps and unemployment benefits, for instance.
Ailuridae
@Napoleon:
You’re right re: wiping out the equity of shareholders in Citi affecting the top 1% disproportionately. The reason the argument re: 401K and pension plans is being made is that future retirees and pensioners are sympathetic while the top 1% isn’t. However, the chattering class that drives discussion of economic and political issues in the country is taken almost solely from that top 1%. Matt Yglesias had an excellent takedown of David Gregory in this regard.
jrg
O/T, but if anyone doubts the existence of a judicial/prison industrial complex, they need to read this.
gbear
@Mako:
And if your kid gets hurt or really sick, well, you know you can always make more (wink wink nudge nudge).
Oh, and don’t lose your job. You’re a total moron if you have a job that might disappear. Right, Mako?
ThymeZoneThePlumber
On the first question, I have no idea why this type of testing is not continuously and routinely done. Probably because a false sense of security made it seem unnecessary until recently.
On the second question, "then what?", I guess we will find out. The choices are going to fall into the range of nationalization/takeover/bankruptcy, are they not? We have to wait for the wizards to tell us what the right moves are. I read an article yesterday that said, I am pretty sure, that the GreatDepression ™ saw 7k bank failures. Which was about half the total number of banks. That was a different era, and a different banking world. I think we are in uncharted waters here.
Comrade Kevin
@Mako:
Heh.
jrg
@Mako
Seriously. There’s even one guy upthread who thinks that "value investor" is some sort of meaningless phrase.
That also happens to be the same guy who claims to have known about this market crash five years in advance (shame he’s only talking about it now – he could have made some money if he acted on his knowledge five years ago).
Odd, seeing as how you’re the one who thinks saving money is a waste.
Mako
@The Raven:
see that’s denial.
You need to step up and admit that the consumer-driven paradigm is broken.
Until you, and your ‘leaders’ do, its just gonna skate into hell.
Don SinFalta
For those contemplating the extent to which the big banks are currently "insolvent" and what might constitute a "stress test" and "nationalization" plan for them (yes, many scare quotes, to indicate the possibility that these words may not mean what you think they mean), I suggest taking a look at this (warning, it’s too long and way too informative to be a typical blog post).
headpan
BrianJ, he was addressing the National Governors Association this morning. Here’s the cspan link but I don’t see where the video is up right now. They are replaying the Governor’s Summit from Sunday right now and they will probably replay Obama’s speech later.
Oh, btw, right now, former HHS Sec’y to Bush admin babbling right now about Argentina’s economy and going on about Medicare.
I so look forward to seeing my gov Mark Sanford (he so feels our pain) – my mom told me this morning that Jennifer Granhold (Michigan gov), once she began questioning him on his opposition to the stim, reduced him to babbling like the fool he is.
And he thinks he’s running for prez in 2012 which is why he is fucking us over now.
Mako
Not sure what you are saying, Chuckles.
You think Geither is a patsy cuz you knew him too? Or you think mercins are fucking stupid cuz you are one?
Hey, how overweight are you? I’m betting 100 pounds.
Punchy
Yeah, cuz the market didn’t go from approx 11K to 14K (a 27% rise) in that time, and therefore no one could have possibly made a shitload of money in that span.
Fucking dumbass.
headpan
oops, I don’t mean to say Sanford is refusing funds, b/c he is not. He’s gonna have to accept them. But *swoon* it is SO against his principles.
Saw him this morning on CSPAN saying that "this didn’t work in the 30’s, blah, blah"
Um, come again?
Once again, repubes re-writing history.
Another nice thing is that Obama referred to "cable chatter" focusing on very small percentages of the package which is unhelpful. I’ve heard him do this a few times now, and I’m really glad to hear him focus on it. As we all know here, therein lies our frustration. Is he perhaps "catapulting the propaganda"?
georgia pig
Geithner has essentially the same problem with Citi, BoA et al. that the DOD has with KBR. Essentially, the finances of the US have been contracted out to these behemoths, just like much of the logistics of the DOD are utterly dependent on KBR. With regard to the mega-banks, the problem isn’t so much the the shareholders, but what do you do about the bondholders? If the feds don’t take on the bondholder liabilities, a tsunami of defaults may sweep throughout the global markets. If the feds do take them on, the US credit rating is at risk and we can’t finance deficits. This underlines how profoundly Bush fucked us (with an assist from others), by running up huge deficits, sticking us in two protracted wars, and letting the financial system run amok. Oh, BTW, fuck Santelli. I want to say that at every opportunity.
Ailuridae
@Don SinFalta 62:
That’s about the best explanation I have seen of the problem. I strongly suggest everyone read the long piece DSF linked to.
liberal
@The Grand Panjandrum:
IMHO the issue isn’t effectiveness of regulatory mgt. It’s avoiding regulatory "capture" by the regulated industry.
Martin
We do, for small banks.
FDIC and the rules surrounding receivership were set up back in the regional bank days. FDIC has ballpark $50B to bail out banks. FDIC doesn’t really bother with banks like BofA because it’s way, way too small to receive them, that is, FDIC isn’t insuring BofA because it can’t, so most BofA assets really aren’t insured at all, other than by faith that the Feds won’t let it die.
Further FDIC only applies to consumer banking – none of the commercial stuff, or the real estate units like Countrywide that are grafted onto banks like BofA. So those units aren’t stress tested at all because those units only exist due to the deregulation that allowed BofA to get as big as it is – they’re post-FDIC, if you will. My guess is that if you tore BofA apart, the consumer bank part of BofA would look okay. Not good, but good enough to not take over immediately (which would be FDIC). The investment banking and real estate divisions probably look like fucking disasters, and the whole thing has only held together this long because the consumer banking unit still has some life in it.
This presents a real problem for the government – the only banking unit that the government has a formal division to receive into is the unit that doesn’t really need to be received, and even if it did, it’s not big enough for the job. The other two disastrous pieces, the government has no division authorized to take over. I assume they’d either just invent some broad authorization inside of Treasury or they’d chuck TARP at FDIC and expand FDIC, but really these are things that Congress would need to approve. I’m pretty liberal, but I don’t think the government should be able to take over businesses willy-nilly, and the only other mechanism I know of for the Fed to legally take over the banks is through the IRS failure to pay taxes rules, which I very seriously doubt apply here.
The bottom line problem is that the 80s banking deregulation eliminated the stress testing for most banking. What they’re going to do is likely adapt some big bank variant of those rules that would cover the investment and real estate units as well. What the free market folks are bitching about is that the rules appear to be pre-ordained to force some companies into receivership, but the rules being rumored about look ludicrously easy to meet (3% TCE) and yet there are a host of banks not meeting them. They’re rules that if anyone proposed them as stress tests outside of this crisis, someone would laugh at them and say ‘why bother – if they can’t meet that test, they were fucked long ago’.
Mako
@Ailuridae:
No offense, but its sometimes best to quit when you are behind.
HTH HAND
liberal
@Ailuridae:
Nope. You’re wrong, and they’re right: Citi, BoA, etc, are effectively insolvent; it’s not merely a liquidity problem.
Unless you redefine "liquidity" problems. Like a gambler who’s gone broke—sure, you hand him money, he could win a couple rounds and no longer be in the hole. Doesn’t mean he’s not in the hole now.
liberal
@bob h:
Yes. Just like the fact that I am not a bank now, but if Uncle Sam handed me $1B, I’d be a viable enterprise long term.
Wrong. Unless you hand them hundreds of $B, they’re going to continue in their role as zombie banks.
Sheer nonsense. (1) Frank doesn’t want gov’t taking control of the banks because he receives financial contributions from banks. (2) So-called nationalization doesn’t necessarily open up any can of worms if it’s done properly, and there are many historical precedents showing that it’s not that hard to get right.
liberal
@BenA:
I agree with your sentiments, but remember the big issue is the bondholders.
liberal
@John Cole:
I’m not sure, but I suspect that’s not really true.
A bigger problem is the bondholders like China’s gov’t.
liberal
@Brian J:
IIRC T.C. is a right-wing hack…why would you listen to him?
liberal
@cleek:
You mean, not that the 401k’s are invested by Citi or BoA or whoever, but that they’re managed by them?
Irrelevant, really, isn’t it? There must be a formal custodian, Citi only manages doesn’t hold, etc etc etc.
liberal
@Brian J:
Not possible with a true 401k. The worker owns the asset, not the company she works for.
To the extent that, say, a Citi employee’s 401k were invested in Citi stock or other financials, they’re screwed. But the asset is safe from bankruptcy proceedings, etc.
Martin
That’s a good link. The author doesn’t hint as to why Paulson and Geithner don’t have plans. It’s because they don’t have the resources for a plan. I don’t see how the Fed has the authority, other than the meager bits from FDIC and TARP, to actually do any of this stuff. Paulson knew that FDIC couldn’t swallow WaMu or Wachovia, and he had no other agency that was authorized to take them, so the only tool in his arsenal was to convince one of his buddies to buy them and he’d throw TARP money out to cover the acquisition and hope the end result would be stable enough to not need rescuing. It’s just kicking the problem down the road, but sometimes time is your best available weapon (even if it’s also an inadequate weapon). That was the plan because that’s all he really had available during the timeframe. Geithner is in a little better shape because he has more time to work with, but other than $350B and a non-lame duck President, he really doesn’t have a whole lot himself other than the bully pulpit to try and manipulate the markets to either solve the problem or provide urgency to Congress to support whatever plan they roll out.
liberal
@Napoleon:
I think there was a debate about concentration of stock ownership in some other thread here, or a similar blog, and IIRC I don’t think it’s nearly as concentrated as top 1% owns 90%.
But I do agree with your sentiment that this 401k/middle class connection is a bit overblown. Of course some people were way too aggressive, etc etc, but that’s their own damn fault.
"Middle class people own the banks through their 401ks" is probably not really true, and it shouldnt’ be used as a reason to prevent the banks from failing (viz, stockholders wiped out and bondholders given a haircut/converted to equity/etc).
Bigger problem is if e.g. China held shares and said, "you nix our holdings, we’ll stop buy your T-notes."
Elie
#35 — John C —
I think you are right — the dirty secret is prob that those investors are all that is left in the house of cards — people near retirement or retirees…catastrophic on a very personal level for me
liberal
@Brian J:
Uh, like the Republican thugs have been doing for, say 15 years now?
Mako
@gbear:
I suspect you have misread me gbear. You are picking a fight you won’t win, because i am even more on your side than you are. I’ve been on your fucking side since the 70’s, bitch. I’m here in japan, enjoying excellent public transportation and excellent public heath care. You think i want to come back to that backward fucking country were you can’t even get a ripe fucking tomato and you have to drive everywhere? Fuck you people who haven’t paid attention and fuck all my baby boomer generation that sold out the happy hippy dreams for cheap boubles and granite counter tops and debt.
If you didn’t see this coming years ago, you are an idiot. If you didn’t prepare years ago, well, you just fucked up. Its gonna get ugly and you’ll play victim and end up begging for change under a highway overpass. You will have lots of company.
Now is the time to, i don’t know, toughen up or something. Ask your grandparents, maybe they survived a depression and can offer advice how to bake bread and grow vegetables.
liberal
@georgia pig:
Agreed, the bondholders are the big issue.
Why not convert them to equity, to the extent necessary to recapitalize the bank? I don’t know enough to know for sure whether that’s simple and could avoid the cascade you refer to, though.
liberal
@Martin:
But banks aren’t typical businesses. They’re granted extraordinary powers by the government, including (for commercial banks) the right to create money out of thin air and loan it out.
ThymeZoneThePlumber
Oh yeah? Well then we will stop buying your T-shirts.
( raspberry sounds )
Heh. I guess that will shut them up.
And tell ’em while we’re at it, we’d like an order of the Spicy Won Tons.
Mako
@jrg:
hey, thanks for playing thru, anytime you want to stop by and totally missunderstand is cool, dumbass.
Napoleon
@Martin:
Martin said "We do, for small banks"
No we do not. What I don’t think people are understanding, at least the way I understand it, is that a "stress test" is not the way the FDIC usually comes in and looks at the books of a bank, just like your doctor usually checks for heart irregularities by listening to it, not running you through a medical "stress test". The small banks that have been taken over were declared insolvent the old fashion way. Then FDIC, more or less, takes the banks own books and uses them to prove insolvency. There is no reason you would not ordinarily do it that way.
But the situation you have now calls into question if the value of assets can me valued as you typically do, and with a fast moving economic environment changes in some basic parameters, like underlying real estate values, or default rates on loans underlying mortgaged backed securities, could be reasonably be projected as having certain impacts on assets held by the bank.
So the stress test, as I understand it, is more like running appraisals on certain assets, with certain variables (IE, cap rates, default rates and the like) being varied in certain scenarios I would assume are intended to represent optimistic, average, and pessimistic scenarios.
Martin
But the value of BofA and Citi is what, $40B? We shed that much shareholder value in the market in a day pretty routinely. Even if the middle class did own BofA and Citi outright, losing that value in their portfolios wouldn’t look any different than any other day right now. That’s $100 per citizen, say $300 per retirement account. Who notices $300 swings in their retirement accounts anymore even in the middle class?
Comrade Darkness
Pricing BoA’s assets is a slippery eel, but the larger math is clear:
$40 billion market cap + $45 billion bailout = $20 billion in market cap (as of this moment)
It’s a giant hole that sucks up money and it should be plugged by whatever means. 45 billion would have hired an army of lawyers and accountants to do the job of chopping them up and auctioning the junk, and it would have been better spent, even if they had to make it up as they went along.
While they’re at it assign a 100 lawyers the job of arranging clawbacks on the bonuses these guys got on fake earnings the last few years. Clearly if you want to get rewarded for being a common thief, rather than jailed, you have to think big. I won’t consider this mess dealt with until somethings come out of these guys’ hides. Preferably painfully.
Martin
True, which just means that the Fed should *always* have had the power to do this, but until Congress provides that power, they really aren’t any different from GM or Microsoft or anyone else. I just don’t want to see Obama create that authority out of thin air for banks or for any other industry – it should come from Congress. But that means that right now, the Fed doesn’t legally have that authority – so there really isn’t much that they can legally do today.
I’m not arguing that the authority *shouldn’t* exist, just that it *doesn’t*, and the fact that it doesn’t exist in general is a good thing and we should stand up and say it’s a good thing that the Fed can’t just take over companies on a whim.
Comrade Darkness
They also shouldn’t get government handouts willy-nilly either. Trouble is, banking is different. It has the power to destroy everything, hence it operates at the will of the government. They are special entities for a reason. We are seeing right now the results of 30 years of unwinding the extra special rules put in place after the last time they irresponsibly crashed the whole system.
Here. Let Jefferson state it:
cleek
yeah. correct me if i’m worng of course, but if i have $5K of some mutual fund in my 401k, that asset is mine regardless of who sends my 401k statements. the manager can fold, but i’ll still have $5K worth of that M.F.. a 401k manager really only owns the right to conduct transactions with my contributions, they don’t own the funds or bonds that are ultimately purchased with those contributions.
Mako
@Punchy:
Yeah, well. So how’s your stock portfolio doing, punchy?
Up a bunch i suspect? Living large are we? Bought yourself an island in Dubia? Nothing but caviar and sausages for you. Driving about in a gold plated Bentley with Cameron Diaz at your side?
Comrade Darkness
They are chartered institutions. The rest is a matter of scale, otherwise OTS would have shut citi and boa down already. (which just further argues that this scale should not be allowed to exist)
Napoleon
@cleek:
You are right, they act as trustees. Even if they hold the assets in their name, so long as it is noted that they hold as trustees, then their creditors can not get to those assets. If they fold they can simply be transfered to a new trustee.
Napoleon
This headline tells it like it is
John Cole
@Paul L.: Paul L.- you are an idiot, but I don’t think you are going to find any support for that woman here. No one here is a fan of someone who used their house as an ATM and then reneged on the payments.
The Golux
Here’s a question: If CitiBank gets taken over by the federal government, would the games the Nationals play in New York be considered home games?
Martin
My point on the small bank statement is that if the FDICs task was broader, BofA and Citi would likely already be in receivership based on current principles without any need of forward models. BofA and Citi are still alive primarily due to their size and complexity, not because of a lack of forward models predicting their health. But the FDIC does look at certain current measures as indicative of bank health and can seize based on those measures without need of additional models. The principle behind the current FDIC measures don’t even seem to be applied to the national banks, however. Seems you should at least do that before you get into models.
We went though this last September in the mark to market vs mark to model debate. The problem with mark to model was that it was always the banks providing their own model, so no shit they always looked pretty much exactly how they wanted to look. [cough]Enron[/cough]
The stress test may be a set of models presented by Treasury, and I think that’s a good idea as part of a broader plan. The problem with models is that models are subject to bias (as is the market, so they’re still useful) and so models need lots of competition to work well (including competition from the banks own books), so hopefully they’ll go the whole 9 yards here. But yeah, they should have been doing this all along. I think failure to model any critical system is a recipe for disaster and if the Treasury doesn’t have such models, even if they aren’t using them for policy, means that they have no fucking idea what’s really going on and no predictive ability for a market other than pulling things out of their ass (which economists are too eager to do anyway).
Just as an easy place to look for how bias shows up, it’s in the self-interest of the Treasury to model a strong economy (what administration wants to formally predict a weak one and risk creating a weak economy out of the prediction?) and it’s easy for banks to look solvent in a strong economy – there’s always new customers to lend money to, the default rate is lower, and assets inflate nicely without any work. But a banking system that only works in a strong economy is automatically a failure. It requires some real intestinal fortitude to build pessimistic models and present them to a public that only likes sunshine.
Ailuridae
@liberal:
Your signal to noise ratio is horrible. Please read the link in post 62 of this thread so you have some idea what you are talking about. Also, anytime you post seven consecutive times in a busy thread might be a good time to stop hyperventilating.
Chris Andersen
Can we PLEASE stop using the term "Nationalization". What is being talked about here is receivership. When you Nationalize something you mean the government runs it for the indefinite future. But in a receivership situation, the government would only run the banks for the purpose of clearing up the books, selling off the viable assets and then closing the doors.
One of the biggest mistakes made in this debate was that we allowed the term "Nationalization" to be used to describe what needs to be done (I am as guilty of this as everyone else). But we need to stop it now.
Mike in NC
I’d change "anarchist" to maybe read "wealthy and hypocritical Republican plutocrat".
Damn smart guy, that Jefferson. Should’ve named our last aircraft carrier after him instead of the idiot who fathered George W. Bush.
cleek
probably not. the GOP loves that it scares people.
valdivia
A little OT here and I posted this on another thread but what is up with Andrew Sullivan suggesting Obama provide the birth certificate so that he proves the lunatics wrong. Huh? I emailed him because it felt he is just giving the wingnuts what they want: credibility.
kay
@valdivia:
Andrew Sullivan wants everyone to provide documentation of everything. It’s creepy. I expect him to start calling for random paternity testing in kindergartens, or FULL DISCLOSURE of medical records at checkpoints.
He started down this road, and he can’t stop.
Church Lady
Andrew Sullivan wanted to see Sarah Palin’s complete obstetrical records concerning the birth of Trig. If he could only see them, well, then he could refute those nasty rumors he helped spread. Now, he wants Obama to put the nasty rumors to rest concerning his birth certificate, proving once and for all that he is a citizen of the United States, disregarding the fact that rational beings (which elimates Alan Keyes) already know that he is.
Since Andrew is so gung-ho on others proving things to his personal satisfaction, I have a demand of Andrew. Provide us with a brain scan, proving that he is not suffering from AIDS related dementia, because lately I have felt that he is slightly nuts.
valdivia
Church lady and kay–thanks guys for a sec there I had woken up on the wrong universe. Maybe he also wants Obama to produce once and for all the Whitey tape.
Fulcanelli
@Paul L.: Somebody really needs to ‘pillowcase’ Malkin.
kay
@valdivia:
I think his obsession with maternity is interesting, re: Palin. I wonder a little about that. Why not a paternity inquiry?
Because while maternity is sometimes the issue, paternity is almost weekly the issue among the group with with I work. He might be amazed at how common and mundane that question becomes in juvenile court. "Common" as in maybe 25%, where there’s a paternity inquiry. He went to maternity. Why not go to paternity?
The idiot still doesn’t get why sensible people generally leave that alone, unless it’s raised by those directly impacted. The rest of us are buying whatever story you’re selling, no questions asked.
Brian J
Maybe it’s just because I’ve started paying much more attention since I started becoming an adult, but it seems like it’s gotten worse in the past eight to ten years.
kay
@valdivia:
I’m a little mental on this. That he threw that kid under the bus publicly pisses me off. I prep with a MHP (mental health professional) before I address parentage issues with the kids I represent. It’s difficult for them.
What if he was right? What then?
D-Chance.
Then what?
The Dow 3,000. We’re getting there, and quick. One more day like today, and we’ll be sub-7. Hope evidently isn’t something my 401K is believing in. Neither is anyone else’s.
valdivia
@kay:
kay I am totally with you. There were 20 other things one could focus on with Palin why this one?
And what makes me even angrier is that he is now putting this fringe rumor at the same level of medical records (which I don’t think should include a maternity test btw). He is giving them cover and credibility. I am totally baffled.
Steeplejack
@The Golux:
I think that was one of the Zen Koans of Yoga Berra, but I can’t find my copy right now.
Wile E. Quixote
Our Lady of Perpetual Outrage, as Paul L. refers to Malkin picks her targets carefully. This woman is an idiot, but then again so are the bankers who got us into this mess. Malkin though will never go after them because they have money and Malkin is a coward who only goes after people who are weaker than she is. Malkin will never say anything bad about rich white people in positions of authority, she worships them.
Dr. Housing Bubble has a good post today that talks about how all of the commentators who are blaming this crisis on the sub-prime industry are completely full of shit. Subprime lending was actually a small portion of our overall debt market and certainly much smaller than all of the option ARMs that housing speculators in hot markets were taking out.
Martin
Not just true of Malkin but of all modern ‘conservatives’. Blame the gays, blame the blacks, atheists, immigrants, etc. But never blame anyone with power.
That was Rev. Wrights deadly sin in those sermons – he blamed up rather than what the Falwells do which is to blame down.
John Cole
The money pit is getting deeper.
kay
@valdivia:
Karl Rove dodged a subpeona today. Flipped them the bird.
Andrew Sullivan continues to doggedly pursue documents pertaining to parentage and birth, because he is an intrepid journalist who seeks only transparency.
Ash Can
@kay:
Isn’t it about time to sic the federal marshalls on his fat ass?
kay
@Ash Can:
I don’t know any federal law, other than, say, the Bill of Rights.
There are other people here who know a lot. The way I read it he’s claiming a privilege. In my little state law world, that’s valid. I’ve only dealt with attorney/client though, as a bar to testimony. The deal is though, you have to appear, and get that in. You can’t just not show up, or they issue a warrant.
I don’t know from anything about executive privilege. Maybe it’s not at all the same thing.
Chuck Butcher
Why haven’t stress tests been applied to Citi, et al? First you need authority and then you need their entire books, not the made up horseshit, the entire books. That piece is tough enough to unwind with an ordinary bank, think about the scale of Citi’s books. Not to mention the guess work on bs like derivatives.
I have a hunch that the reality of the books isn’t nearly as good as we’re fearing.
Elie
Valdivida and Kay —
We have an oberabundance of bloggers with not enough to comment about and/or investigate, in my opinion. To keep up the ‘hits’ you need a topic that generates interest (whether factual/fantasy or not). We have lots of people already flogging the banking/budget/market issues. Obama doensn’t have much personal shit to talk about (except good stuff like his wife and family — and who wants to talk about good stuff?) So the only thing that rises to any level of controversy (read get lot of hits) becomes the grist…
Its funny, I sense that there is a falling interest in that stuff in the general population although there is a small contigent who will always get off on it. You guys of course already know that even if the original minted birth certificate was shown, someone would STILL maintain that it was fake. They NEED the issue and now that it was at all ever discussed, it will NEVER be laid to rest by those in whose interest it still functions to discredit Obama by any means necessary. Questioning legitimacy is how the Republicans have always functioned in relation to Democratic office holders and the higher the office holder, the less legitimate they have to be made..
I wish that we could see Keyes’ bank account transactions. Where did he pop up from suddenly with this issue being so hot for him? Someone/some group is behind this — not that it matters — of course there is a group…always is.
Frank
They’ve been fudging their balance sheets.
For years.
See what Bonddad had to say about the case for nationalization.
He lays it out pretty clearly.
Paul L.
@Wile E. Quixote:
So what progressive standard will be used to not define Joe Biden as a rich white person in a position of authority