i heard it described quite succinctly the other day: you're walking down the street and you see a vampire sucking the blood of a man. you give the vampire a blood transfusion in the hopes that the blood will fill up the vampire and will eventually flow the other way, from the vampire back into the man. what we need to do is yank the vampire off the man and stick a wooden steak in his heart turning him into dust so he can never harm anyone again.
------
Yeah, it boils down to triage. There is a point where the constant billion-dollar infusions add up to be costlier than just cutting them loose or taking them over. I guess what Stiglitz said about Lehman is important though - Washington was wrong to let that entire institution fail, which did have serious ripple effects. There was the good, necessary side of Lehman (commercial paper trading as an important payment mechanism in the global money market - whatever that means!), and the irresponsible, gambling side. Preserve the good, rename it, or sell it to someone trustworthy, then ditch the cancerous part. Easier said than done I'm sure, but I don't see any other way.
Unfortunately the financial sector has become very skilled at vampirism and parasitism. We may be able to kill the vamp, but he's biting down hard on our jugular, so to remove him means injuring ourselves greatly (or mortally). They're a top campaign contributor to Washington, they employ thousands of people, and are custodians of trillions of our wealth. They "oil the gears of the economy". We can't just cast them out to the wilderness. Even if we try to purge the bad aspects while retaining the good, they will sound the alarm that the sky is falling, and then no one will have the balls to carry on. All they have to do is threaten us that our money will be in jeopardy, then instant paralysis and compliance. It's blackmail in its purest form. That's why the Reagan-Bush-Clinton de-regulations were so costly - they let the financiers run amok and take over. Now we can't put the genie back into the bottle without a lot of pain. I guess we've passed the point of no return. It's not like we can return to the 1960's with conservative S&Ls, double-digit interest rates deterring overborrowing, and less-globalized, less-volatile markets.
-----
Yeah, he makes some interesting points, and he's obviously a smart guy. I think it's good that he's pointing out how cheated the government was in the initial TARP stuff. The warren testimony from the congressional oversight committee suggested that for the $254B the government spent, we got assets worth $176B, so a $78B shortfall. That's kind of a lot.
There are a couple of complexities which I think he gives short shrift to, which help explain a bit more of the government's challenge here.
First, the government cannot announce that they're thinking about nationalization because it becomes a self-fulfilling prophesy. As soon as you announce that you're considering a plan to nationalize and wipe out existing shareholders, all of the existing shareholders run for the exits. That makes the bank's capitalization rate collapse, and suddenly the bank *requires* nationalization. So even if Obama and Co are thinking about it as a potential plan, I'd hope that they're smart enough not to talk about it until they're ready to go. A lot of this is confidence management, because everyone is still spooked.
Second, this crisis is dramatically complicated by all of the SIV and CDO-style financial products. In earlier bank bailouts, to which everyone keeps referring, when the government nationalized a bank they got real assets, or something one step removed from real assets: a title to a steel factory in Pitt, a mortgage on a specific home in Dallas, etc. Pricing and selling those assets back into the market is reasonably well-understood - you can service the mortgage, foreclose on it, etc, because you own the mortgage. With this bailout, if the government takes over a bank they get ... SIVs? The connection to the real assets is diluted through these complicated debt tranches, such that ownership is diluted among potentially the whole economy. And the bank or company actually servicing the mortgage is distinct. In previous bailouts you could take over the bank, and become essentially the owner-operator of the mortgage, where one legal entity makes decisions about how to act and bears the effect of those decisions. You've now got a company that operates (services) the mortgage and makes decisions about it according to an elaborate contract, but bearing the effect of those decisions is diffused among this huge number of people who own portions of individual tranches into which the mortgages were collateralised. The tempting answer is to say, "well, take over all the banks so you own all the pieces, and unwind them yourself" ... but it's not just banks who own these things, they're spread throughout the financial system. It's pretty tough to buy up all the remaining pieces because nobody really knows what they're worth ... I mean, they had some pricing model before the crash, but the legal contract binding these things up hasn't really been tested in a doomsday scenario like we're seeing now, so no one knows what it's worth when it falls apart.
So somehow you have to figure out how to unwind or desecuritise or otherwise deal with these crazy-complicated CDOs. And you can't really talk about it publicly, because as soon as you say "Well, we're thinking about forcing desecuritisation of these things," everyone flees, the market value drops, more banks implode ... self-fulfilling prophesy. And you've got similar problems throughout the shadow banking system. I mean we're talking about some serious "rebuild the airplane while it's in flight" kind of shit here. I don't mean to suggest that bankers aren't a bunch of pocket-filling assholes (and shameless ones at that - the Merrill bonuses were just unbelievable), but rather that there really is a fair bit of complexity to what Obama has to do here.
-------
The other thing making a nationalization of a bank like Citi more complicated is that they don't simply just make investments based on their internal capital and then collect the income from the investments. Citi and its ilk have grown into these massive financial conglomerates that offer hundreds of tangentially related financial products. In these dealings, if the counterparties (i.e. other large financial institutions) start to get worried that they may be locked out of their money for a certain amount of time, they're going to head for the hills in a matter of days, leading to the collapse of the bank. It's basically an institutional run on the bank, across hundreds of different products.
Even the threat that nationalization could disrupt operations could send all these counterparties elsewhere, and once the downward cycle gets started, it's basically impossible to stop. That's what happened to Bear Stearns and Lehman. What could happen if nationalization is done incorrectly is that the government takes over a bank only to find the money-making aspect of the bank dried up and all that's left is all the obligations. A shitpile of enormous proportions.
Of course, it's entirely problematic that banks got so big and so complex that they can't fail in the first place, and I'd be fully in favor of regulations that don't allow banks to amass such shitpiles of capital and become so central to the economy that we have to baby them in bad times with tons of taxpayer money. So we can thank Phil Gramm and co. for those innovations, but at the moment, we are where we are, and there are not a lot of good options, from what I understand.
--------
I see what you guys mean. By no means do I think Obama's task is easy or clear - or someone would have done it already.
Yeah, I agree J about the panic over nationalization. Didn't Sen. Dodd mention that they were pondering it, and BofA/Citi shares dipped 20%? So of course Obama had to go public and reassure everyone that it is not the case. I know he may have no choice, but it just seems bizarre that our leader would have to knowingly deceive us, then spring it on us at the last minute, just because he knows human nature and needs to save us from ourselves. The gov't can impose trading freezes in some situations, in order to prevent market crashes or excessive speculation. Why can't they freeze shares in banks that are under consideration for conservatorship? Not just shares, but all the complex SIVs and whatnot too? Then there won't be a fire sale and they have time to sort stuff out without chaos. Head off the bank run. So instead of figuring out how to fix the aircraft mid flight, freeze it until you know what's wrong, then fix. I am sure that is against the law or something though.
Well, for now we must demand better accountability and paper trails for all these creative investments. In the drug business, the FDA mandates that you literally show quality/safety data every step of the way in a clinical trial. First everything has to be documented, approved, and you can't deviate from your pre-established plan without very good cause. The raw materials that go to the plant, the manufacturing process, the shipping/storage, the dosing in patients, and every unused cc is accounted for. We better have something similar for the financial sector, like mortgage bundle A is 60% owned by Citi via fund X, and 40% owned by Fannie. Or if the ownership is too complicated or dilute as you said, then the gov't can cancel all ownership claims until the asset is properly valued, then distribute it as fairly as possible to the parties based on what paper trail evidence they have? I mean, can't we apply the rules of bankruptcy court to any of this? Even if we nationalize banks that are hollow and full of obligations, why not cancel/postpone those obligations? So people don't get what they're owed - sucks but not the end of the world. It's no different than the FDIC. If an insured bank goes down, the gov't may not get around to compensating the victims for years, due to all the red tape (and their modest money pool). But we feel security from such a system nevertheless. We've had over 6 months to try to figure out what we bought with TARP, and there's so much still out there to untangle. Either we need to get more headcount on this, or force institutions to give out more information.
Like A said, it was too risky to create these one-stop-shopping financial behemoths. Sure in the good times they are more competitive and can leverage diverse assets to make more money in complex investments. Yeah the sad part is Gramm, Greenspan, Clinton, Weil, Bush, Cox, and all those free marketeers are not regretful at all of their actions. They always just chalk it up to greed and human errors - the system is fine. We broke up Ma Bell and Standard Oil - so maybe we can do it again. But actually it was the Fed. Gov't that encouraged BofA to buy Countrywide/Merrill, Chase to buy Bear, etc. Just imagine how those super banks will behave in the next boom? Even with better regulation proposed by Obama, they will always be ahead of the curve. Regulation is often retrograde.
I guess this convo. mirrors our previous threads: sure Uncle Sam wants to prevent bank runs, but what if they are propping up a zombie as A said? Better to let go now than when you're more committed. That's why DC needs to stop babying Wall Street and really get down to business to find out who owns what and how much its worth. Of course the problem is that no one knows, not even the owners. But we can't sit idly by as they stall and hold out on us, until Washington has no choice but to nationalize.
No comments:
Post a Comment