(U.S. vs. U.S. Banks) vs. (U.K. vs. U.K. Banks)
August 24, 2015 11:11 AM   Subscribe

In 2008 both the U.S. and the U.K. spent big bucks bailing out their banks.
At the end of last year the US government announced that it had made a profit from its bank bailouts. The UK, on the other hand, probably won’t. So what did the Americans do right and we do wrong?
British business blog Flip Chart Fairy Tales tries to account for the difference.

Although some of the details of the original negotiations can be confusing, the post contains fascinating details, links to interesting papers, and its style is nicely straight-forward, including descriptions like
How did the US government get its banks to play ball? It bullied them.
/Blog brought to my attention by TheophileEscargot's previous post.
posted by benito.strauss (21 comments total) 28 users marked this as a favorite
 
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posted by benito.strauss at 11:14 AM on August 24, 2015 [15 favorites]


Crazy that Switzerland's banks are much bigger than Switzerland's actual economy.
posted by GuyZero at 11:22 AM on August 24, 2015


Huh. The US bailout was essentially Obamacare for the banking system, then. I'm not sure it was a good idea anyway since the banks must be scared of collapse or they will always try increasingly risky maneuvers to reap big gains. If you know you're protected from going under why not try things which risk causing you to go under? That this particular bailout was handled in such a way as to not cost the taxpapers money in the medium term doesn't mean that the moral hazard caused by bailouts won't cause taxpapers to lose massive amounts of money in the long term as banks go for another bite at the apple.

The UK didn't even have the medium-term profit to point to. Why in heck would you bail out international banks which aren't dependent on your government for survival? Can I get a bailout from the UK?
posted by Justinian at 11:29 AM on August 24, 2015 [2 favorites]


It doesn't sound like the UK did anything specific wrong in the actual negotiation, based on this analysis; they just had a weaker hand to play. I guess what we did wrong is allow so much of our economy to be dominated by the financial services sector in the first place.
posted by Aravis76 at 11:29 AM on August 24, 2015 [1 favorite]


I'm recommending this post be favorited by my entire downline!

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posted by leotrotsky at 11:32 AM on August 24, 2015 [2 favorites]


Yes, they didn't have as much leverage. The mistake wasn't that they had a weaker hand, it's that they tried to play the same way as the USA despite that weaker hand.
posted by Justinian at 11:33 AM on August 24, 2015


>That this particular bailout was handled in such a way as to not cost the taxpapers money in the medium term doesn't mean that the moral hazard caused by bailouts won't cause taxpapers to lose massive amounts of money in the long term as banks go for another bite at the apple.

True, but the US bailouts were accompanied by major regulatory reform that was designed to manage this moral hazard problem. These are really valid concerns about the long-term implications of bailouts, but I'm not sure it's fair to give this analysis without also considering Dodd Frank.

To quote Bernanke: "...the problem of moral hazard has no perfect solution, but steps can be taken to limit it. First, regulatory and supervisory reforms, such as higher capital and liquidity standards or restriction on certain activities, can directly limit risk-taking. Second, through the use of appropriate carrots and sticks, regulators can enlist the private sector in monitoring risk-taking." (From a Nov 2013 speech.)
posted by schroedingersgirl at 11:39 AM on August 24, 2015 [3 favorites]


But what was the alternative? It sounds like the UK couldn't have persuaded the healthy banks to buy in and was therefore obliged to absorb the risks of bailing out the insolvent banks. Is the argument that there should have been no bail-out at all and the insolvent banks should have been allowed to collapse? Apart from that option, I don't see what could have been done differently.
posted by Aravis76 at 11:41 AM on August 24, 2015 [1 favorite]


(Also Pepper D. Culpepper is a truly great name.)
posted by Aravis76 at 11:49 AM on August 24, 2015 [5 favorites]


Is the argument that there should have been no bail-out at all and the insolvent banks should have been allowed to collapse? Apart from that option, I don't see what could have been done differently.

Nationalization? Asset seizure to pay for the bailouts?
posted by Justinian at 12:11 PM on August 24, 2015 [1 favorite]


I feel like this article pairs well with (U.S. vs. U.S. justice) vs. (U.K. vs. U.K. justice).
posted by RedOrGreen at 12:12 PM on August 24, 2015 [3 favorites]


Do you mean nationalising and seizing the assets of the healthy banks? At least some of the insolvent banks were properly insolvent, holding more debt than assets, so nationalising them wouldn't have helped since the state would then have had to pay out on the debt. If the UK government had nationalised and seized the assets of a bunch of ordinary functioning banks, without compensation, they would potentially have run up against legal problems (under the European Convention, companies have rights and art 1 of the First Protocol protects against deprivation of property without compensation). It's also not clear to me that the consequences for the economy of such a radical step would really have been better than the bail-out.
posted by Aravis76 at 12:23 PM on August 24, 2015 [2 favorites]


The government wound up owning 81% of RBS, which isn't far off of nationalizing the bank.
posted by jpe at 12:28 PM on August 24, 2015


The difference is that nationalisation tends to be compulsory, whereas RBS and Lloyds could have declined the government's offer and gone into liquidation if they wanted.
posted by Aravis76 at 12:33 PM on August 24, 2015


Three critiques here.

First, the math is incomplete. The banks that paid a premium for capital they didn't need all got huge benefits elsewhere. They acquired big piles of assets for very cheap prices in the orchestrated acquisitions of Wachovia (by Wells Fargo) and Washington Mutual (by JP Morgan). Their vast counterparty exposure to Fannie, Freddie and AIG were directly bailed out -- Goldman benefiting most of all here. Their sizable counterparty exposures to Wachovia, Washington Mutual (mostly), Merrill Lynch, Bank of America and Citigroup were also shored up.

Second, a key different of personality. Gordon Brown was a junior academic turned career politician. He didn't know City bosses and they didn't know him. Paulson was the former co-CEO of Goldman Sachs: the bank CEOs trusted him, and he also knew how far he could push them.

Finally, a big difference in power. Lord King (Mervyn King as he then was) had the limited power of the Bank of England behind him. Bernanke has the essentially unlimited power of the Fed behind him -- he basically ran the world from September to December of 2008. As with Paulson's edge, this was quite without regard to the domestic revenue share of the banks.
posted by MattD at 12:34 PM on August 24, 2015 [3 favorites]


GuyZero : Crazy that Switzerland's banks are much bigger than Switzerland's actual economy.

I thought that Switzerland's banks are Switzerland's actual economy
posted by wenestvedt at 12:37 PM on August 24, 2015


Cuckoo clocks, chocolate, skiing Nazi gold and knives with a thing to get stones out of a horse's hoof
posted by howfar at 1:17 PM on August 24, 2015 [3 favorites]


I think you can read it either way, even if you take the author's analysis at face value that the British bailout was far less profitable / more costly for the average Brit than the American bailout was for the average Yank.

Because the question isn't how much one bailout costs, it's whether it happens again (okay, more likely, how long until it happens again). If sticking the electorate with a painful bill drives home the lesson that the banks are nothing but a bunch of parasitic wasps out to inject their venom into the political system and thereby zombify it so they can ride around on its undead corpse until it collapses as an empty husk, and they fly off for more delicious prey... then that's actually a win for civilization. Because that is what unregulated industries do. (It's not really even a bank thing; the banks misbehave because they're comparatively unregulated vs. other industries. If we gave them the opportunity, meat packers would be grinding up stray cats and the occasional orphan into tinned ham, we just don't let them because we've been down that road far enough to be disgusted by it, even across generations.)

If on the other hand, as I am somewhat concerned is going to be the case in the US, the banks are left in a situation where they can point back, a few years hence, and say "hey, it wasn't that bad, I mean the government even ended up making a profit! We don't need no stinking regulation!" ... that's really bad.
posted by Kadin2048 at 7:26 PM on August 24, 2015


> How did the US government get its banks to play ball? It bullied them.

To be fair, when the US government exerts pressure on corporations that only exist because of US corporate law, is it really bullying?

More like applying the Big Stick everyone always knew was behind the referee's back.

> Bernanke has the essentially unlimited power of the Fed behind him -- he basically ran the world from September to December of 2008.

I never thought about it this way before, but that's a really salient point.
posted by IAmBroom at 9:56 PM on August 24, 2015 [1 favorite]


You could only say that the U.S. made a profit on its loans in the sense that if you loan me $1000 and I give you back $1001 next year, you could say you made a profit. But really you have lost money because you could have gotten a higher rate loaning it in the market.

The Treasury loaned money to the failing U.S. banks at below market rates. Typically it was 5%, but the real market rate, which Warren Buffett got by loaning to Goldman Sachs, was 10%. So to call it a profit is concealing the fact that the bailout money was an outright gift to the U.S. banks at below market rates.
posted by JackFlash at 11:35 PM on August 24, 2015 [3 favorites]


Wrong. Making money IS making a profit. The fact that the guy across the street invested in Apple Inc. at $10/share doesn't mean your 5% profit doesn't exist.

You are confusing sophistry with accounting, and envy with profits. If the loans hadn't been made, there's no proof that our economy right now wouldn't be much worse off - and then no one would have profited.
posted by IAmBroom at 9:09 PM on August 27, 2015


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