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Perpetuating the Problem?
March 6, 2009 10:39 AM   Subscribe

Is the Obama administration, in its handling of the ongoing banking crisis, dithering while Rome burns? Is it perpetuating the problem by encouraging private investors to finance its rescue plan? (quote: Term Asset-Backed Securities Loan Facility, or TALF, has been welcomed by a range of hedge funds and private-equity firms as well as some lenders who issue assets that finance consumer loans.) While hedge funds and others are preparing to make money on the downturn, we still don't have a handle on where all the AIG money is going (and forget that four years ago, AIG was being outed as the new Enron), and despite calls for more transparency in the "bailout" process, the Fed has not been forthcoming in revealing how the money is being spent.
posted by ornate insect (55 comments total) 1 user marked this as a favorite

 
So why has this zombie idea — it keeps being killed, but it keeps coming back — taken such a powerful grip? The answer, I fear, is that officials still aren’t willing to face the facts. They don’t want to face up to the dire state of major financial institutions because it’s very hard to rescue an essentially insolvent bank without, at least temporarily, taking it over. And temporary nationalization is still, apparently, considered unthinkable.

-from 'dithering' link

peel an onion anaology works.

bank: we need money

BIG SAM: HOW MUCH AND WHAT FOR....

Bank: not sure and none of your business

BIG SAM: I COULD MAKE IT MY BUSINESS...

bank: ...that means you have to go through the books...

BIG SAM: AL CAPONE SAID THE SAME THING.

Bank: um can we have a blank check and get back to you later after we have spent it?

BIG SAM: WTF
posted by clavdivs at 10:51 AM on March 6, 2009


Regarding AIG: My understanding of this is that all the money being thrown at AIG isn't about "saving the company", it essentially political cover for bailing out the world financial system. They believe it needs to be done, but it would be politically impossible for the government to make direct cash payments to AIG clients if the company folded.
posted by lattiboy at 10:55 AM on March 6, 2009


The third link (WaPo) seems slow to respond, so here are some choice quotes (all emphasis in bold is mine; the article is a gem of unintended irony):

U.S. to Invite The Wealthy To Invest in The Bailout

[...]The program, which could involve the government lending nearly $1 trillion to these investors, exceeds the size of every other federal effort to address the crisis so far. The initiative's approach could be the model for future federal efforts to aid the credit markets, sources familiar with government planning said. [...]

Architects of this initiative have long been sensitive to the political challenges of teaming up with hedge fund managers and private-equity firms. [...]

The Treasury Department and Federal Reserve will continue to lean on these private investors as officials expand their aid to more segments of the lending markets each month, moving from consumer credit possibly on to commercial mortgages and financial derivatives, the sources said.[...]

This approach will culminate in a separate program that aims to relieve banks of toxic assets, backed by distressed loans, that are clogging the firms' balance sheets, sources said. This second initiative, which officials are hoping to unveil in the coming weeks, is also expected to reach at least $1 trillion.[...]

The TALF's primary aim is to get the "shadow banking system" running again. [...]

posted by ornate insect at 11:00 AM on March 6, 2009


AIG isn't about "saving the company", it essentially political cover for bailing out the world financial system

Yes, it's not just AIG. And they're using enron-style accounting to do it:


[Talking points memo:]
By law, the Fed isn’t allowed to buy assets — it can only lend, as lender of last resort. That was a problem for the Bear Stearns bailout, because JP Morgan said it would only buy Bear if someone else assumed responsibility for the crap. Fed came up with this idea to start a shadow company, called a special purpose vehicle (SPVs were how Enron operated, creating “Chewco” and the like named after Chewbacca - the New York Fed called their SPV “Maiden Lane LLC” for name of the street the NY Fed is located on in southern Manhattan). The deal then was JP Morgan put $1 billion into Maiden Lane, the Fed put $29 billion in cash into it. Maiden Lane paid Bear Stearns $30 billion, which went straight back to JP Morgan as this deal happened simultaneously to JP’s purchase of Bear. So Morgan got $30 billion in cash ($29 billion net) and the Fed got stuck owning the crap, but was legally only making a loan to Maiden Lane, who was the legal owner (Maiden Lane was incorporated not in NYC, but in Delaware to avoid paying taxes). By the Fed’s own accounting - which is very different from a real company’s accounting - Maiden Lane has lost $5 billion between its creation and today.

The same problem happened in AIG, but this time there was no buyer. In Sept, the Fed bought AIG (80%) in exchange for an $85 bill loan. By Oct, it was clear AIG was still dying, so the Fed lent it another $40 billion. This $40 billion was restructured in November when the Treasury put in $40 billion of TARP funds, which was needed to bail out the Fed’s loan which had by this time gone bad. But essentially AIG had 2 problems: it had lent out safe securities with real values and used that money to buy shit mortgage backed securities — this was called ‘Secured Lending Facility’ which was done right under the nose of the state insurance commissioners. It was in the hole $20 billion. The other problem was the crappy insurance that AIG’s financial products company had written on other people’s shit mortgage backed securities - the credit default swaps (CDS). When the bad mortgages that AIG insured went bad, the insurance had to pay-up — but because it wasn’t called insurance, but rather derivatives, AIG hadn’t reserved any money against it. This had lost about $25 billion.

Using the loophole it had learned during Bear Stearns, the Fed set up two new companies: Maiden Lane II and Maiden Lane III. Two dealt with the secured lending and Three the shitty credit default swaps. The Fed lent each Maiden Lane $20 billion and $25 billion and then Maiden Lane paid off the investors that had either lent AIG the money to buy the shitty mortgage backed securities (ML II) and those who had the shitty mortgages and the corresponding insurance (ML III). To avoid booking a loss on the Fed’s balance sheet, because the Fed had some legal problems if either of these Maiden Lanes lost money, and because of a reporting requirement that Dodd had put into TARP which actually required the Fed to report to the Congress and the public about the cost to taxpayers from ML I, the Fed did some creative accounting. They still paid all of the investors off at full value (par), so that they didn’t lose anything. But they booked the loss on AIG’s balance sheet and kept Maiden Lane clean. This is the hidden story behind how AIG went from losing $38 billion during the first 9 months of 2008 to losing $61 billion in the 4th quarter.
posted by DreamerFi at 11:04 AM on March 6, 2009 [5 favorites]


In fairness, I'd point out that Susan Lee, the author of the Forbes piece, sits on the arch-conservative Wall Street Journal editorial board, which doesn't delegitimize her arguments in itself but does raise a specter of doubt about her motives and ideological commitments.

And Krugman has been aggressively pushing for bank nationalization since day one--and has repeatedly expressed his dismay over the Obama admin's decision to take a more measured approach, despite the fact that there are already growing numbers of Wall Street types who seem ready to take up arms over the relatively modest steps the administration has taken so far--which again, doesn't delegitimize Krugman's position, but does raise questions about the extent to which his preexisting ideological commitments are driving his arguments.
posted by saulgoodman at 11:04 AM on March 6, 2009


pushing for bank nationalization

Everyone except the administration itself seem to be pushing for temporary nationalization.

That includes Greenspan, Krugman, Roubini, Harry Reid, even James Baker and Lindsey Graham. I never thought I would agree with the more conservative folks I just listed, but what I can't agree with is to go in the exact opposite direction of nationalization and set-up TARF.

TARF makes TARP look positively brilliant by comparison. The idea of having hedge funds bailout the economy seems so insane I hardly know where to begin.
posted by ornate insect at 11:09 AM on March 6, 2009 [1 favorite]


TARF TALF
posted by ornate insect at 11:11 AM on March 6, 2009


My secret hope is that the Obama admin really is for nationalization, but that can't tell anybody because it would freak the markets, and they need time to plan such a thing (it would be a BIG job, after all.) But I'll admit I don't have much to base that hope on.
posted by fungible at 11:15 AM on March 6, 2009


My secret hope is that the Obama admin really is for nationalization, but that can't tell anybody because it would freak the markets...

The markets are already freaked. I think the "markets" already see the writing on the wall and are in a continual "shitting their pants" mode right now, just waiting for the shoe to drop.

Honestly, the markets are not going to react positively to anything other than the gov't parking dump trucks full of money with big "Come and get some" signs along Wall Street.
posted by Thorzdad at 11:22 AM on March 6, 2009 [1 favorite]


actually, fungible, some commentator on the diane rehm show today claimed that effectively, by taking large ownership stakes (80% in AIG, 36% in CitiBank so far), that's what they're doing--back door nationalization. there are plenty of arch conservatives on wall street freaking out and claiming that to be the case, at least.
posted by saulgoodman at 11:24 AM on March 6, 2009


US FED: NY FRB's Dudley Certain TALF Will Expand

TALF? TARP? Let's call the whole thing off
posted by ornate insect at 11:27 AM on March 6, 2009


Honestly, the markets are not going to react positively to anything other than the gov't parking dump trucks full of money with big "Come and get some" signs along Wall Street.

I can haz CDS protection on US treasuries?
posted by ryoshu at 11:34 AM on March 6, 2009


Diplomacy is the art of saying "Nice doggy, good doggy" while slowly reaching for a hefty stick.

Look, it's no coincidence the markets tanked below 7000 after last week's This American Life. (Yes, I'm going there... NPR nuked your 401k.) The banks and their backers, like AIG, are going to be nationalized, an now everyone in "The Market" knows it's going to happen because it needs to happen - there really isn't another way out. Stock brokers and fund managers aren't generally "TAM" listeners, but =everyone= got wind of it, a cold dose of reality, and the market moved just as you expect it would.

However, it will require a few months of planning and preparation to pull off an operation of this size and scope, during which you don't want the execs and boards punching the "self destruct" button and generally doing everything in their power politically and legally to force the Government to back off and completely grenade the economy.

So, Obama dithers... for now. Nice doggy. Good doggy.
posted by Slap*Happy at 11:42 AM on March 6, 2009 [2 favorites]


Well sure they're freaked. But can you imagine what would happen if Obama said "hey everybody nationalization some time next week!" Dow 500, anyone?
posted by fungible at 11:47 AM on March 6, 2009


Is the Obama administration, in its handling of the ongoing banking crisis, dithering while Rome burns?

Well, I can't speak for all bankers, but I can speak for my little clique, and yes, we all feel Obama has lost his chance.

Upon taking over the White House he had the initiative but seemed to rapidly fumble then not recover. Treasury Secretary has hardly been impressive as well, and we've seen multiple examples where details simply are not available. Unacceptable, given what's going on.

Probably could have pulled off some grand (and sorely needed) regulatory strengthening but lost his chance. He could have called an immediate summit of the G20, and invited most of the regions where "hot money" flows to as well, and hammered out a new world order for financial system regulation. Even having the broad framework announced, without details, would have gone far to restore confidence.

But look at what we've got otherwise. Almost every week there is more negative news, the media has now seized upon the credit crunch and is making things seem far, far worse than they really are. So I hate to say it, but I fear he's lost his chance. Still might turn it around, but with every week the chance of flipping this about, retaking the high ground and the initiative diminishes.

In terms of private money profiting on this mess, one certainly doesn't have to get into bed with The Fed or Treasury to do so. Heres a trade some guys I know were piling lots of money into Q4 2008.

Imagine there is a company teetering into bankruptcy. You've got a forward looking view and this thing is almost certainly toast in six months, maybe as fast as three, if you can help it (and you can, more on that later). So you purchase a boatload of this companies debt for pennies on the dollar. Its "distressed", meaning traditional bondholders don't want this paper, therefore it's cheap. After all, the company is going bankrupt and if you pick the "right" bond (nothing too Senior, and certainly nothing secured) then that paper is very, very cheap.

Next, you purchase Credit Default Swaps which pay off if the issuer of your distressed debt defaults. Default is a rather broad term as most CDS' are written, so events as benign as repudiation of debt or even filing for a restructuring is technically a default. Meaning you get paid, or made whole.

And made whole? Well, the bonds carry a face value of par ($1,000 for most corporates), but you bought them for maybe ten cents on the dollar. Probably paid another thirty or forty points, maybe a little more for protection. So if a credit event occurs, the CDS makes you whole and you net some 40 or 50 points.

But why sit back and wait? Generally companies will talk to bondholders, trying to get them to agree to either equity or reduced coupon in return for avoiding a technical default. And in "normal" times bondholders are indeed willing to talk, as they almost certainly won't benefit from a bankruptcy.

These aren't normal times. There is no way you're gonna miss your big payday by renegotiating; after all, if this company defaults you get made whole, or paid off to the tune of par (generally $1,000). So you sit back, insist you don't want to accept equity for your debt and wait for default or even (in some circumstances), wait for the company to make you an offer for your distressed debt.

So there are lots of ways to profit from this mess, and there is a lot of money being made.


ryoshu
-- I can haz CDS protection on US treasuries?

I'm not in front of a bloomberg terminal right not, but CDS' protecting against a US default were recently trading close to record highs. They've narrowed a little since last month, but still very high.

Keep in mind that default as CDS' are written is a pretty broad term.
posted by Mutant at 11:49 AM on March 6, 2009 [9 favorites]


TARF TALF

I think TARF sounds better. As an outsider, this whole thing is maddening. It seems like everyone in the world except Jim Cramer, Bank CEOs, and Obama don't want to nationalize. Even Lindsay Graham and Alan Greenspan!

On the other hand, it seems pretty clear that if they were going to nationalize the banks, they wouldn't announce it, they'd just do it. And in the meantime they'd have to put out some random fluff about other potential plans.

But what's going on right now is outrageous.
posted by delmoi at 12:07 PM on March 6, 2009


Bank Rescue Programs: Setting the Stage for More Looting?

New Report Follows Lobbying Money Trail Behind Deregulation that Helped Cause Financial Crisis

Swaps Need Regulation After Bank Losses, Gensler Says

New naked credit default swaps that are merely for speculation should immediately be declared gambling contracts and illegal and new credit default swaps that are used to hedge real risk should be immediately declared insurance contracts and regulated as such.
posted by ornate insect at 12:09 PM on March 6, 2009


So what do you all think of the idea that instead of using the word 'nationalization', we call it 'receivership'? The way I understand it, receivership happens all the time to smaller banks. Using the former term buys into the opposition framing and has negative connotations, like 'socialism'. Seems to me those in favor would be well off to reframe the conversation in this way.

Am I correct in thinking they are fundamentally the same or are there some big differences I'm missing?
posted by daHIFI at 12:27 PM on March 6, 2009


euphemisms for nationalization (temporary receivership, anyone?) (NYT, 2/22)
posted by ornate insect at 12:34 PM on March 6, 2009


So what do you all think of the idea that instead of using the word 'nationalization'

I don't think any of the financial wizards opposing nationalization are somehow going to be fooled.
posted by delmoi at 12:43 PM on March 6, 2009


People who think (hope?) TALF is a kind of "pre-nationalization" PR bait-and-switch are forgetting it was announced at the end of last November (more here), and is now being expanded (and now GE may participate). I don't claim to understand all the details of TARP and TALF, but what I am very weary of in general is attempting to stave off financial collapse by appealing to the same kinds of investors who helped to bring it on.
posted by ornate insect at 12:46 PM on March 6, 2009


From the WSJ link up-thread on the new TALF plan:

Originally limited to backing securities for consumer and small-business loans, it now will also target securitized loans for heavy industrial equipment, agricultural-equipment leases and rental-car fleets.

So the plan is to offer credit (loans) to banks that will in turn be used not to buy up bad assets but to encourage consumer lending, small business lending, and lending for large equipment purchases.

I think we can all agree that it'd be best if the days of maxing out our credit cards on cheeseburgers and ring tones were behind us, but without the ability to borrow, how do you propose Hertz rent-a-car replaces its aging fleet to keep its business going? Or that a new competitor to Hertz manages to make a dent in the market? How do large construction firms get the equipment they need to build all those new bridges and lay down all those new roads?

All forms of currency are debt instruments at some level of abstraction. The small and large-scale businesses that keep people working have to be able to borrow money in order to function. How do you propose we accomplish that quickly enough to avoid protracted collapse without a program like this that extends credit to banks? I'd seriously like to know what your thoughts are on the alternatives available to the administration.

There's a lot of talk about how screwed up all these plans are, but very little about what we could otherwise. Apart from letting America collapse into another Great Depression, that is--which is not a better alternative from my perspective (although I do have a few friends who love to indulge in their future dystopian fantasies, forgetting, I suppose, that my son's future is not some minor detail in the fucking fatalistic SciFi movie running on a loop in their heads).
posted by saulgoodman at 1:13 PM on March 6, 2009 [2 favorites]


I think anytime something is touted as a "New Enron", those people in charge of that thing should be shot in the face as quickly as possible.
posted by mr_crash_davis mark II: Jazz Odyssey at 1:14 PM on March 6, 2009 [1 favorite]


Well, I can't speak for all bankers, but I can speak for my little clique, and yes, we all feel Obama has lost his chance.

Oh, is the baby gonna cry?

We know about bankers. Shut the fuck up and get a job and quit whining about how you can't skim off of people that actually create wealth.
posted by stet at 1:14 PM on March 6, 2009


saulgoodman--back in November when TALF was first introduced, someone on a TIME blog wrote:

Sounds great! I mean, what could go wrong with a ABS's? After all, the risk has been quantified statistically and diversified away. Plus, they are AAA-rated by a reliable organization! Hey, all we need to do is buy some CDS's on these things and they'll be practically guaranteed!

I'm still learning about TALF (is it good for small business?), but I am worried it encourages the very same kinds of "investment" practices (see the hedge funds and CDS's) that helped to bring about the mess we're in. I realize I could be wrong, but my problem is structural: does it really make sense to set up a huge slush fund for private investors and hedge funds to capitalize on bailing out the economy?
posted by ornate insect at 1:27 PM on March 6, 2009


mutant - I'm a bit surprised by your subscribing to your associates view, honestly. Isn't it better to taken a more thoughtful approach to resolving this type of complex, multi-constituent issue which is facing Treasury? We've already seen what a ready-fire-aim approach can do with the events of 4Q08, isn't it better to measure twice-cut once?

stet - Don't be a twat.
posted by sfts2 at 1:30 PM on March 6, 2009


This post from the Democratic Strategist blog about the anti-Obama opposition has an excellent encapsulation of the damned-if-you-do, damned-if-you-don't situation Obama is in:

...the situation is ripe – no, absolutely ideal -- for demagogy. If Obama is forced to take over failing banks, he can be labeled a radical nationalizer. If, in deference to the bankers, he doles out funds without adequate oversight, he is at fault if the banks fail. If his fiscal stimulus is not sufficient, he can be damned for failing to cure unemployment. If it is, he can be damned for fiscal irresponsibility. In area after area he can be simultaneously criticized for doing too much and too little, for being too radical and too cautious, all at the same time and regardless of what outcome actually occurs.
posted by jonp72 at 1:30 PM on March 6, 2009


my second link in my previous comment was supposed to be this
posted by ornate insect at 1:31 PM on March 6, 2009


ornate: believe me, i share your misgivings. but i really haven't heard any suggestions for good alternatives. maybe the only really insightful constructive thing i've heard lately has been a suggestion some commentator made on the radio about focusing more of the efforts on getting the paper market back on its feet; he claimed it actually accounts for 2/3rds of commercial lending, and that banks meanwhile, may not really be as important as is often stated. i don't know though. my point is, what are the alternatives and why/how would they be better? it'd be nice if there was more of that kind of constructive discussion around. some innovative solutions that are more palatable might surface that way.
posted by saulgoodman at 1:34 PM on March 6, 2009


some innovative solutions

Temporary receivership of the big banks like the Swedes did, a loan to the commercial paper market if necessary, stop the AIG loans and come clean about where all the money has been going, make credit default swaps illegal and begin new and rigorous reforms and regulations of Wall Street. For starters.
posted by ornate insect at 1:38 PM on March 6, 2009 [1 favorite]


fungible: "Well sure they're freaked. But can you imagine what would happen if Obama said "hey everybody nationalization some time next week!" Dow 500, anyone?"

Yes, please! Let these sons of bitches tank themselves out of some sense of moral righteousness. Yeah, yeah I know. Everyone gets hurt in it. We're gonna be hurt regardless, but I'd rather the rich spite themselves to make a point in the process. Then they can share the pain. (OK, maybe I'm being slightly facetious here, but... My overall point still stands.)
posted by symbioid at 1:45 PM on March 6, 2009


Hope you're enjoying your 5 bucks, stet.

jonp72, I agree with that assessment. But if you are truly damned no matter what you do, then why not do the right thing? Basically every objective expert agrees that nationalization is inevitable and necessary.

From Bill Moyers, this interview with Robert Johnson is very compelling. This idea that the market will somehow "crater" further if we nationalize the banks is absurd. The whole point being made is that nationalization will improve the economy, while the alternatives will not. The sooner we nationalize the better - in the meantime, we simply have zombie banks shuffling about doing nothing, delaying recovery and therefore worsening the recession.
posted by mek at 1:54 PM on March 6, 2009 [1 favorite]


Temporary receivership of the big banks like the Swedes did

those banks would still need large infusions of credit in order to make credit more readily available and to buy up more securitized debt.

the problem is that necessary banking regulations that require small institutions be well-capitalized come into conflict with the ever-expanding demand for capital to fund new economic activity. the only way those institutions can continue lending is to securitize their debt, but nobody wants to buy securitized debt now. so either we do it, or the banks do it. i think the obama administration would prefer to keep the banks on the hook as much as possible, at least on paper, so that the US government isn't the defaulting party when the whole tottering shitpile of modern finance falls off the cliff and into the ocean. if the US owns the banks that have to snap up all that securitized debt, then if another unprecedented round of defaults comes, the option to just walk away and leave the banks to fail or sort out their own obligations is basically off the table, isn't it?
posted by saulgoodman at 1:56 PM on March 6, 2009


the whole tottering shitpile of modern finance falls off the cliff and into the ocean.

This has already happened. Watch the Bill Moyers interview that mek linked to. Johnson uses the term "re-structuring."

The banking system is insolvent. We have already nationalized the banks in the sense that we own them: the problem is that we have not done it with any meaningful control.
posted by ornate insect at 2:01 PM on March 6, 2009 [1 favorite]


[comment removed - the "fuck you" stuff needs to end now. Take it to email or metatalk, thanks]
posted by jessamyn at 2:13 PM on March 6, 2009


well, maybe so, but how do we get that control without also assuming more legal liability for their losses?
posted by saulgoodman at 2:14 PM on March 6, 2009


The only way to kill (rez?) a zombie bank is for the government assume its losses. The free market sure as hell ain't gonna do it.
posted by mek at 2:24 PM on March 6, 2009


why? let the debts be settled in civil courts.
posted by saulgoodman at 2:37 PM on March 6, 2009


Didn't you post this yesterday? And the day before?
posted by LarryC at 2:47 PM on March 6, 2009


well, maybe so, but how do we get that control without also assuming more legal liability for their losses?

You don't take on liability when you buy stock in a company, which is what's being proposed.
posted by delmoi at 2:48 PM on March 6, 2009


Saulgoodman, what we are doing right now is assuming the banks' losses, just in a piecemeal fashion. What do you think these bailouts are? The government is taking on their debts, they're not driving trucks full of money to AIG etcetera.

This is the essence of what we have decided - that the banks cannot be allowed to fail. Now do we forcefully restructure them, or just keep throwing money at them and hope they get their act together? Obviously there are all sorts of problems with doing the latter (which is what we are currently doing) which are covered in some detail in the video I linked above.
posted by mek at 3:00 PM on March 6, 2009


sfts2 -- mutant - I'm a bit surprised by your subscribing to your associates view, honestly. Isn't it better to taken a more thoughtful approach to resolving this type of complex, multi-constituent issue which is facing Treasury? We've already seen what a ready-fire-aim approach can do with the events of 4Q08, isn't it better to measure twice-cut once?

Point taken about knee jerk reactions, but investor confidence is oh-so critical in the markets and before Obama took office this confidence was clearly lacking. Unfortunately, it hasn't gotten better since. I guess I'd have felt better if we saw strong leadership, and sharp moves towards fixing the underlying problems, and I don't think we've seen those actions, and the markets seem to agree. Regardless, we urgently need to see strong leadership and the sooner the better. Not only for the markets but also for the fundamental problems - financial regulation.

We've currently got a regulatory system that lags financial engineering by decades. Finance has globalised but financial regulation hasn't even taken baby steps towards this end.

Worse, the regulators are always fighting the last battle, targeting the last crisis. After almost every crisis or blowup ordinary people bang the table, demanding new rules and regulations and they get them. Typically in spades. But the tools the regulators get are targeted at the last problem, and don't address what could happen in the future.

For all intents and purposes we're equipping front line soldiers to fight the last battle, and not taking a proactive and measured view of where or how the next conflict will occur.

This isn't a new problem; after the dot com collapse the investment banks analysts got whacked, as did the auditors and that time we even claimed heads, with Arthur Anderson being led to the sacrificial altar. That didn't stop future blow ups at all.

To really get this under control they've urgently got to revamp the regulatory system, not just in the United States but across the entire G20 as well as the off shore centres where hot money flows. If they just try to revamp the US and not the rest of the G7 / G20, efforts at controlling the banks or big funds will fail. Same thing goes if they include the G20 but exclude (either by omission or commission) the off shore centres.

And some of those funds - even with recent losses included - rival or perhaps dwarf the financial strength of many central banks. In 1992 George Soros, via his Quantum Hedge Fund, famously led speculative attacks on the British Pound. On what is now known as "Black Wednesday", September 16th 1992, The Bank of England was forced to hike interest rates to 16% in order to defend the value of Pound Sterling.

Just one fund, and by todays standards a relatively small and well behaved fund at that. We do see the big funds coordinating their market activities these days, and that is worrisome.

We urgently need a new deal for financial regulation, one that favours flexibility and rapid response. I don't think the way forward is the invent new volumes of rules, leaving loopholes for the big fund or banks to "discover". They will always win those battles and have.

And other the other hand, we can't let fear paralyse us into inaction. After the South Sea Bubble collapsed in 1719/1720, the British (in a knee jerk reaction to be sure) actually banned the formation of new listed companies for well over one century. By many accounts this markedly slowed the Industrial Revolution as entrepreneurs were not incentivised. After the Great Depression was well and truly underway, stock options were outlawed, negatively impacting the American stock market.

So they've got to do something but also do it fast. I do fear they're running out of time and if they don't move quickly things are going to really head south.
posted by Mutant at 3:25 PM on March 6, 2009 [6 favorites]


Well, I'll admit, I'm not 100% sure what I mean here--I'm trying to ask a question, really. So far, our "bailouts" of AIG and CitiBank have been in the forming of buying large positions in newly minted preferred stock (in the case of AIG, I guess much of that's been converted to common stock now, but either way). As preferred stock holders, crudely put, we have no voting rights, but we get to jump to the head of the line in cashing out our stock if AIG becomes insolvent. Also, as preferred shareholders--even though we own large stakes--we aren't financially liable for the companies losses beyond whatever losses we suffer due to our stock suddenly being completely worthless. Presumably, if bankruptcy courts can't settle AIG's debts through selling off assets, then AIG executives might be subject to civil liability to make up the difference between what the courts can recover through liquidation and AIG's obligations to any remaining counter-parties.

But if we completely nationalized AIG (in other words, in the short term, forget about owning stock; everybody's AIG stock is now worthless, including our own, and we just dictate AIG's executive policies), then if AIG became completely insolvent in the interim, the US would become the de facto legal counterparty to the agreements, and those who got shafted would be available to turn to the courts to appeal for civil remedy for their losses directly from the US government, wouldn't they? I may be overthinking a plate of beans here, but I'm curious to know what (if any) legal precedent might apply here. As it stands, couldn't Uncle Sam just walk away from the table and cut its existing losses if it came down to it? I mean, apart from the disastrous practical consequences of such a step? Would the nationalization option effectively put the US on the legal hook indefinitely into the future for the massive counterparty and other liabilities of the big guys?
posted by saulgoodman at 3:50 PM on March 6, 2009


(ahem. "in the forming" --> "in the form.")
posted by saulgoodman at 3:51 PM on March 6, 2009


saulgoodman,

Part of the problem with an AIG bankruptcy as pointed out above is the fact that derivative contracts are not part of the bankruptcy process, at least here in the US - not sure about other regulatory regimes.

mutant - I agree with the need for urgent action, but I guess I just don't think its realistic to think that someone can really come up with a workable plan in the time that its being expected, especially since we are talking about a new person, new staff, and almost an infinite number of viewpoints to take into account. I expect that our man Tim is a little gun shy after he tried sharing a framework and got friggin hammered for it. I just expect that the strong leadership and willingness to take on the tough problems that this administration has shown in other regards is going to be extended to this problem. Hopeful anyway. I'm not yet jaded enough to think that everyone dealing with this problem is the idiot that everyone seems to think they are.
posted by sfts2 at 4:11 PM on March 6, 2009


I think TARF sounds better.

Rhymes with barf.

We have already nationalized the banks in the sense that we own them: the problem is that we have not done it with any meaningful control.

Which, as Krugman has pointed out, amounts to lemon socialism.

Temporary receivership

Pre-reprivatization?
posted by IvoShandor at 4:23 PM on March 6, 2009


You know, I'm really hoping here that Mutant's comment above was completely from his own thoughts, and not basically taken from this Bloomberg article and reposted as his own.
posted by SeizeTheDay at 5:34 PM on March 6, 2009


Spoke to Mutant and he says they're his own thoughts and I believe him. My fault, but still a good article.
posted by SeizeTheDay at 6:40 PM on March 6, 2009


I think the next step we should try is to create a Bank Asset Reallocation Fund, or BARF. Yes, it'll be horribly icky to implement, but fortunately we already have a TARP to handle the mess.
posted by jamstigator at 6:59 PM on March 6, 2009 [1 favorite]


In 1992 George Soros, via his Quantum Hedge Fund, famously led speculative attacks on the British Pound.

Why isn't a coordinated attack on a nation's currency considered an act of war?
posted by ryoshu at 9:17 AM on March 7, 2009


Despite warnings from many economists that stimulus may be too small, network news rarely raised the issue
posted by homunculus at 3:36 PM on March 7, 2009


Top U.S., European Banks Got $50 Billion in AIG Aid:
The beneficiaries of the government's bailout of American International Group Inc. include at least two dozen U.S. and foreign financial institutions that have been paid roughly $50 billion since the Federal Reserve first extended aid to the insurance giant.

Among those institutions are Goldman Sachs Group Inc. and Germany's Deutsche Bank AG, each of which received roughly $6 billion in payments between mid-September and December 2008, according to a confidential document and people familiar with the matter.


**

Fed Official: ‘Institutions Are Being Nationalized Piecemeal With No Resolution Of The Crisis’:
Yesterday, Kansas City Fed President Thomas Hoenig unleashed “the most detailed criticism of the Treasury’s actions by a Fed official since the financial crisis began,” hitting the Treasury Department for “drifting into a situation where institutions are being nationalized piecemeal with no resolution of the crisis”
posted by ornate insect at 11:50 PM on March 7, 2009


Cancer Patients Die While “New Democrats” Help Bankers Get Billions
posted by homunculus at 1:49 PM on March 11, 2009


Geithner: Government Couldn't Prevent Another AIG
posted by homunculus at 2:59 PM on March 12, 2009


Insurance giant AIG to pay $165 million in bonuses
posted by homunculus at 9:16 AM on March 15, 2009


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