Time for Bank Rationalization
By Dean Baker Guardian(UK)
February 2, 2009
http://www.guardian.co.uk/commentisfree/cifamerica/2009/feb/02/obama-bad-bank-plan
Leaks in the media indicate that the banks are about to inhale another helping of taxpayer dollars. This round is likely to be considerably larger than the $350 billion that they swallowed in the bailout last October.
The leaks from Obama administration officials without names suggest that the money will provide a further subsidy to bank executives and shareholders and may not even resolve the banks’ financial crisis. In other words, the banks may yet come back for more.
The rumored plan is for the government to buy up hundreds of billions of dollars of bad debt from banks and place it in a “bad bank.” The bad bank would then resell these assets for whatever price it could get from private buyers.
The basic problem with this sort of plan is that it requires that the government overpay for the bad assets. If we just pay Citigroup, Bank of America, and the rest what their assets are worth, then they would be bankrupt. They have taken enormous losses on these assets. If they had to own up to their losses, it would wipe out the capital of many, if not most, of the banks in the country.
Recent estimates from Goldman Sachs and Nouriel Roubini put the cumulative losses to the banking system at around $2.0 trillion. There is a lot of room for guess work in such estimates, but there can be little doubt that this number is in the right neighborhood.
We are in the process of losing $8 trillion in housing bubble wealth. Most of this will be absorbed by homeowners, but if just 10 percent of this loss accrues to banks, that would be $800 billion. In addition, banks have lent $3 trillion to support a bubble in commercial real estate. If one third of these more speculative loans go bad, and half of that loss is incurred by banks, that gets us another $500 billion. Add in $200 billion each in losses on credit card debt, car loans, and small business loans, all of which are now far shakier because borrowers no longer have home equity as a backdrop, and you get to the $2 trillion neighborhood.
This $2 trillion loss compares with bank capital of just $1.4 trillion, a large portion of which is rapidly disappearing “goodwill.” In other words, the losses to the banking system will almost certainly vastly exceed its capital. This is why the banks need to tap our wallets.
If we go the bad bank route and pay too much for bad assets, then taxpayers are effectively subsidizing bank shareholders, who would otherwise be wiped out, and bank executives, who would otherwise be looking at big pay cuts or unemployment.
But it gets even worse. There is no reason to think that the bad bank route will be sufficient for resolving the banks problems, at least not in Round I, because they may not come clean with all their bad assets.
It is important to remember that these banks are run by people who could not see an $8 trillion housing bubble. It is likely that they still don’t know the full seriousness of their problems. (The same can be said of Treasury Secretary Tim Geitthner and National Economic Advisor Larry Summers, the bad bank’s designers.)
Many of their loans have not yet gone bad. For example, underwater mortgages that are still current. The bad news on these loans will come when homeowners have to make short sales, which could leave banks with losses of $100k, or more, per loan. This means that the “bad bank” created under this plan will have to be an ongoing business, handing out more taxpayer dollars for the banks’ junk over the next several years.
There is a simple alternative, which can be called “bank rationalization” in order to avoid the “n” word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market, it is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can’t let them be tied up in bankruptcy proceedings for years.
Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.
While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.
To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.
In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.
By Max Blumenthal/Senior Writer for The Daily Beast
Posted January 5, 2009 | 08:17 AM (EST)
Almost as soon as the first Israeli missile struck the Gaza Strip, a
veteran cheering squad suited up to support the home team. “Israel is
so scrupulous about civilian life,” Charles Krauthammer claimed in the
Washington Post. Echoing Krauthammer, Alan Dershowitz called the
Israeli attack on Gaza, “Perfectly ‘Proportionate.'” And in the New
York Times, Israeli historian Benny Morris described his country’s
airstrikes as “highly efficient.”
While the cheerleaders testified to the superior moral fiber of their
team, the Palestinian civilian death toll mounted. Israeli missiles
tore at least fifteen Palestinian police cadets to shreds at a
graduation ceremony, blew twelve worshipers to pieces (including six
children) while they left evening prayers at a mosque, flattened the
elite American International School, killed five sisters while they
slept in their beds, and liquidated 9 women and children in order to
kill a single Hamas leader. So far, Israeli forces have killed at
least 500 Gazans and wounded some two thousand, including hundreds of
children. Yesterday, the IDF blanketed parts of Gaza with white
phosphorus, a chemical weapon Saddam Hussein once deployed against
Kurdish rebels. (more…)
I’m trying my best to understand the current economic crisis. I thought the the following article was very illuminating.
By Stephen Lendman
Global Research, December 12, 2008
Irving Fisher (1867 – 1947) was perhaps the most noted economist of his day. The Concise Encyclopedia of Economics calls him “one of America’s greatest mathematical economists and one of” its clearest writers. He earned special acclaim for his work on monetary and statistical theory, policy, index numbers, econometrics, and the distinction between real and nominal interest rates.
He’s also remembered for having made one of the worst and most ill-timed ever stock market calls that cost him his reputation and millions in the subsequent crash – on October 17, 1929 (a week before Black Thursday) when he said “stock prices had reached what looks like a permanently high plateau.” (more…)
As the debate about whether the Feds should
"bail out" the big three auto makers comes
to a head, it is relevant to answer charges
made by conservatives and right wingers
about whether this is "nationalization".iT IS NOT.
In the current situation it does not mean
actually running the companies but rather
having a "car Czar" overseer to
monitor how the "loan" is being spent.
What perilous path does this lead us down?
Or is that path really that perilous? The article below
examines some of the political directions
taken in Europe, with an ear to understanding
how this can affect us here in the good ol'
capitalist US of A
Gary
By Neil Clark
New Statesman (UK)AsAs the debate about whether the Feds should "bail out" the big three auto makers comes to a head it is relevant to answer charges made by conservatives and right wingers about what this "nationalization" means. In our case it does not mean actually running the companies but having a "car Czar" overseer. overseer to monitor how the "loan" is being spent. the debate about whether the Feds should "bail out" the big three auto makers comes to a head it is relevant to answer charges made by conservatives and right wingers about what this "nationalization" means. In our case it does not mean actually running the companies but having a "car Czar" overseer. overseer to monitor how the "loan" is being spent.
December 2008
http://www.newstatesman.com/europe/2008/12/socialist-party-socialism
At the beginning of the century, the chances of
socialism making a return looked close to zero. Yet
now, all around Europe, the red flag is flying again
"If socialism signifies a political and economic system
in which the government controls a large part of the
economy and redistributes wealth to produce social
equality, then I think it is safe to say the likelihood
of its making a comeback any time in the next
generation is close to zero," wrote Francis Fukuyama,
author of The End of History, in Time magazine in 2000.
He should take a trip around Europe today.
Make no mistake, socialism - pure, unadulterated
socialism, an ideology that was taken for dead by
liberal capitalists - is making a strong comeback.
Across the continent, there is a definite trend in
which long-established parties of the centre left that
bought in to globalisation and neoliberalism are seeing
their electoral dominance challenged by unequivocally
socialist parties which have not. (more…)
After nearly 40 years on the left side of the political spectrum I’ve come to expect disappointment and betrayal from the Democratic party. I am a skeptical member of that party. I want to have “hope” for a better vision of the world my kids will grow up in.. I was impressed by Obama’s campaign and the outpouring of street level support for him. I was impressed with his speech at 5th Third Field. On the other hand John McCain was anathema, definitely not a good choice for President, so I voted for Obama. I did so knowing full well Obama is not the “democratic messiah”
So what do we do now? How does the amorphous movement of people
Maintain influence with the new President? What is the best path for progressives to follow? The article re posted below is one vision, focused on the critical question of what Obama’s foreign policy is going to look like. It’s long, but well worth the time. Expect more on this important debate.
_____________________________________________________________________________
November 26, 2008 By
Joanne Landy jlandy@igc.org
Source:
New Politics
Joanne Landy’s ZSpace Page
With the election of Barack Obama, millions in the United States and around the world are hoping for relief from the dangerous arrogance and destructiveness of George Bush’s foreign policy. President Obama is expected to take important positive initiatives — like closing Guantanamo and lifting the rule denying international organizations receiving U.S. aid the right to let women know about abortion. When the inevitable right-wing reaction to these initiatives comes, it will be crucial for us in the peace movement to defend them. On some broader questions, there is a chance that with strong continuing popular pressure — from both within and outside the United States — the pre-election hopes of many Obama supporters can be realized on issues such as an end to the war in Iraq or stepping back from Bush’s attempt to install “missile defense” in Poland and the Czech Republic. (more…)
consortiumnews.com
Obama, Ask the Kremlin about Gates
By Robert Parry
November 25, 2008
Nearly 16 years ago, during the last transition from a President Bush to a Democrat, Moscow made an extraordinary gesture to Washington: The Kremlin supplied a summary of its intelligence information about secret U.S.-Iranian contacts in the 1980s.
The report was from a national security committee of the Russian Duma to Rep. Lee Hamilton, who had requested what might be in Moscow’s files as part of a task force investigation into whether the Reagan-Bush campaign in 1980 had interfered with President Jimmy Carter’s bid to free 52 American hostages then held in Iran.
The Russian report arrived late, via the U.S. Embassy in Moscow, showing up on Jan. 11, 1993, but the contents were stunning. The Russians reported that their intelligence revealed that long-rumored meetings between Republicans and Iranians in Europe during Campaign 1980 had indeed occurred. (more…)
Speculation and suspicion about what political position the “most liberal” Senator, now President Elect Barack Obama, will assume once he arrives in office abounds. I understand the need to “hit the ground running”, especially considering the dire circumstances of the economy. At the same time, from this distant post,it starting to look like the new administration is going to epitomize the line out of the old Who song, Won’t Get Fooled Again…”meet the new boss, same as the old boss…”
Hillary at State, Gates still guarding the coop at Defense. OMG. Really?
One unrepentant hawk, Gates, and saber rattling Hillary.
k, maybe Obama can focus them on HIS vision. Maybe.
With those two he risks alienating the left even more on policy toward Iraq & Afghanistan.
He wants to stay; she’s never regretted her vote [“thought the prez was going to use diplomacy….]
And for the Treasury post we have the president of the New York Fed, Timothy F Geithner, from the District Bank most linked to Wall Street. Partnered with Current Treasury Secretary Paulson and Fed chairman Bernake, Geithner has been one of the architects of the current Bailout fiasco.
How well has THAT worked??? Trying to save the Monopoly Capitalist system before main street totally collapses has proven to be a task beyond the capabilities of our current technicians.
I don’t pretend to have answers but a couple of things seem clear. “saving” the big 3 looks to me like a better bet than giving Billions to banks so they can buy other banks, pay off dividends and golden parachutes and hold half million dollar weekend junkets.
Dayton’s economy is so far down the tank [the view from this post on Main Street] that another blow coming in the form of closing local GM facilities, may be one that it takes years [if ever] to recover from. With some three million direct & related jobs on the line nationally, the fallout in cities with GM plants and suppliers will absolutely be devastating.
And oh yes, the “big 3” did it to themselves, anyone with a brain can see that. There are cars in Japan that get 50 miles to the gallon of gas. Detroit, with the help of DEMOCRAT legislators like the recently deposed John Dingell, has resisted higher fuel & emission standards, further digging itself in the hole as it produced various SUV behemoths that just increased USA dependence on foreign oil.
Maybe some form of nationalization is what we need.
Dump the guys who so very stupidly flew to Washington in separate corporate jets.
Implement a “Manhattan Project” for cars?
Because giving the fox access to the chicken coop is NOT working
Some pertinent viewpoints:
Honeymoon: Left Cuts Obama Slack for Now
By: Ryan Grim and Glenn Thrush
November 21, 2008 02:41 PM EST
<http://www.politico.com/news/stories/1108/15845.html>
_____________________________________________
Dingell Loses to Waxman and Auto Stocks Dive
Call It What It Is: Corruption
By Joshua Holland, AlterNet
Posted on November 21, 2008
AlterNet
<http://www.alternet.org/story/107974/>
My worst fears about the forthcoming Obama Presidency seem to be coming true. Readers will recall my skepticism during the primaries vis a vis Obama’s rhetoric about the middle east and his willingness to use “bomb” diplomacy in places like Pakistan and Afghanistsan. I really really hoped that he was going to be a different kind of democrat, that his early anti-war stance was really about “change”, that we were not re-electing the Democratic Leadership Council [DLC]. Reading the article reprinted from the weblog Alternet that is posted below made me very depressed. Is there really a new direction in national politics or is this really just more of the same?
This is Change? 20 Hawks, Clintonites and Neocons to Watch for in Obama’s White House
By Jeremy Scahill, AlterNet
Posted on November 20, 2008, Printed on November 20, 2008
http://www.alternet.org/story/107666/
U.S. policy is not about one individual, and no matter how much faith people place in President-elect Barack Obama, the policies he enacts will be fruit of a tree with many roots. Among them: his personal politics and views, the disastrous realities his administration will inherit, and, of course, unpredictable future crises. But the best immediate indicator of what an Obama administration might look like can be found in the people he surrounds himself with and who he appoints to his Cabinet. And, frankly, when it comes to foreign policy, it is not looking good. (more…)
A BUZZFLASH NEWS ALERT
By Meg White
“This isn’t just about impeachment. It’s about reorienting our politics to a position which respects morality. Our moral compass needs to be reset here.”
-Rep. Dennis Kucinich
In an exclusive interview with BuzzFlash Friday, Rep. Dennis Kucinich (D-OH) discussed the 35 articles of impeachment he introduced against President George W. Bush earlier this week. Though the word on the Hill is that the call for impeachment will not go anywhere, the Ohio representative is undeterred.
“This is a very grave matter that cannot be and will not be swept under the rug by some kind of a legislative trap,” he said.
Representatives Robert Wexler (D-FL), Lynn Woolsey (D-CA) and Barbara Lee (D-CA) have signed on to the resolution, and Kucinich expects more co-sponsors in the coming days and weeks.
“There will be more. I’m quite confident of that, and as members start to read the document it’ll keep growing,” he said.
The proposal is now in the Judiciary Committee, where many expect it to stay at least until after the November elections. (more…)
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