Banking Crisis
I need some help and direction. I'd like to study the banking crisis at a deeper level and would like some recommendations on blogs to read that have a pulse on the current banking crisis and what might be in store for us.
There's less than $350 bil left in the TARP plan. Chances of the banks needing another bailout in 2009 seem high. Do we nationalize the banks? Partially nationalize them? Create another RTC?
Are Fannie, Freddie, and the Fed Reserve turning into another RTC by buying up all these bad mortgage backed securities?
What seems like eons ago, I asked synthetik and sniglet for advice on what I should be reading to study the subprime crisis and SB readers were generous enough to refer me to CR and other fabulous blogs.
I'd love your advice again. Thanks and Happy New Year to all.
There's less than $350 bil left in the TARP plan. Chances of the banks needing another bailout in 2009 seem high. Do we nationalize the banks? Partially nationalize them? Create another RTC?
Are Fannie, Freddie, and the Fed Reserve turning into another RTC by buying up all these bad mortgage backed securities?
What seems like eons ago, I asked synthetik and sniglet for advice on what I should be reading to study the subprime crisis and SB readers were generous enough to refer me to CR and other fabulous blogs.
I'd love your advice again. Thanks and Happy New Year to all.
Comments
Here's what I honestly believe will have to happen. People will come around to the idea that too big to fail is just untenable. If we decide we simply don't need any huge banks (say nothing bigger than WaMu or Wachovia) then we just break up the too large ones like Citibank. But maybe we do need some (or at least one) bank that's too large to fail. In that case, the taxpayers are already backing that bank, and it will have to become a government entity.
Think of it this way, a number of very important shared services in this country are already controlled by the government. The roads you drive on, airports, the airwaves, the backbone of the internet, and of course the currency you use. We have a long and storied history of the US government intervening wherever necessary to support commerce, and it just might be possible that a true federal bank will be a necessary part of the future.
That's funny you say that Rose, because I've sort of been thinking the same thing. I think that it's pretty likely that we'll see some revisiting of anti-trust and monopoly laws and see some break-ups of giant companies, Ma Bell style.
I hadn't quite brought it to the same conclusion that you had about a federal bank. I think that's a really interesting theory for sure. I mean, it's not like there isn't precedence for this in many other countries that have worked just fine. If I remember right, all banks in Canada are nationalized.
I think it is an interesting idea for sure. It's funny, because I think the last 8 years have been the verdict on whether trickle down economics actually works and it is surprising to me that no one but lefty commentators have made the statement that it's been a failure.
I think that's because while what we want is for some limited government control, as a culture I think we were so fearful of communism for so long and that Free Market Capitalism is the cure all for everything that psychologically people can't quite let go of that.
Obviously, banks won't be broken up via current anti-trust regulations, but consider for a moment why we have any bailouts at all. It's because some of the entities (Bear Sterns for instance) were deemed too big to fail. And the solution was...merge the failed institutions with the only other institutions large enough to maybe survive all their toxic waste.
2008 was a year of panic as "regulators" did anything they could just to keep some of the wheels on the trains, but unless the recession ends soon the country will reap some lessons learned from this recession (unlike the dotcom crash). If one of the memes that really catches steam is "why do we have banks that are too big to fail at all?" then we'll see some pretty drastic changes made in the next 5-10 years.
Besides, there is no justifiable reason why financial companies cannot fail. Plenty of small banks function excellently, and the service provided is practically a commodity. It's not like Boeing or MSFT where the upfront costs to enter the market are insurmountable. The banking industry is much closer to the retail industry in terms of value added to the economy, and we know Circuit City isn't getting a bailout...
http://seekingalpha.com/dashboard/the_macro_view?source=headtabs - Sort of a catch-all stock site. Often bearish, but occasionally some good, solid macro-analysis.
http://globaleconomicanalysis.blogspot.com/ - MISH's a perma-bear. He goes into amazing depth, but you have to divide by 10.
The nationalization of housing finance will lead to large banks, because that's the way the government works. For example, the defense industry consolidated into a few prime contractors and which then handle the work of farming out the smaller tasks. Could be a lot of reasons: better pay for former Congressman and staffers when the leave civil service, the role of lobbyists to direct business to their client, and the cost of complying with ever-growing government regulations.
Small banks can efficiently manage fraud because the owners are close to the process. When it becomes someone else's money, the chance for fraud is much greater and can only be controlled with massive layers of bureaucracy.
Your defense example is a piss-poor one. 1) When was defense not nationalized? 2) If it was always nationalized, then how did it being a national matter cause consolidation?
Defense consolidation happened for a number of very different reasons and is in no way related to nationalizing (or not) our banking system. Please try again.
I think now it will just be that way to a larger extent.
Yeah, I don't think that we're going to actually see a revisiting of the old anti-monopoly laws, but I think there's a good chance we'll see some new legislation that is similar to avoid the "too big to fail" problem.
AIG is I think the best example of this. Multiple different entities all under the one umbrella. Many of which are profitable on their own. The whole company was taken down because of credit default swaps. One part of the company took on enormous risk that they shouldn't have that had massive repercussions. Also that they wouldn't have if CDS' had been properly regulated like all other insurances are.
Not true. While it's true that Canada's banking system is far more centralized than the US (i.e. with just 3 big banks covering 80% of the market), the government does NOT own these banks. That said, there is a far cozier relationship between ALL businesses (including banks) and the government in Canada. The fact that the government likes to stick it's fingers into the financial system is a big reason that the Canadian banking system is so centralized in the first place.
By the way, there are SOME Canadian financial institutions that various governments have a stake in, but this is the exception. The Alberta Treasury Branch, for example, is largely owned by the provincial government of Alberta (ATB is puny though).
Don't forget that the ULTIMATE end-game is to see the savings rate rise substantially and to MASSIVELY reduce the debt burdens on individuals and businesses. The only way these things are going to happen is for defaults to grow substantially (i.e. wiping out debt), and for borrowing to be greatly reduced.
Any attempts by policymakers to prop up asset prices (and thereby avoid defaults) will fail. Sure, there will be plenty more interventions and capital injections, but they will do nothing but prolong the inevitable.
At some point the governments will reach some point at which additional bail-outs just aren't possible. Notice how each intervention so far was bigger than the previous ones (and needed to be to have any impact). The government is setting itself up as the first and last resort for all lending and investing. Each bail-out spooks even more investors to put their money into "safe" government guaranteed instruments (withdrawing it from the private sector, which forces more businesses to beg for government help). The super-low interest rates are ample evidence of this phenomena (i.e. that there is ferocious demand for government securities).
Nevertheless, the government simply doesn't have the wherewithall to pick up the slack for the entire free-market financial system. I predict that sometime in the next year or two the government will be FORCED to throw up it's hands and allow some massive institution to fail, simply because the sum of money required to prop it up would be so huge that even the most eager interventionists would never be able to get public support for the legistlation. If Congress thought passing a $700 billion bail-out was difficult, just try a $5 trillion one.
Aside from outright bail-outs, I suspect that regulators are actually going to become more lenient in rule enforcement just to avoid the government having to handle even more defunct institutions. We will be saddled with zombie banks for years, as the government REFUSES to pull the trigger on many institutions (i.e. and accept the losses that would be necessary).
In the end, I think we WILL wind up with a mass of bank failures, similar to the 1930s. All the government intervention so far merely delays the inevitable. There are limits to how much money the government itself can poney up, and once those limits are reached, look out below...
Of course, I have outlined this case for deflation on my blog.
http://www.surkan.com
We already ARE backing all of Citi's bad assets, but it wasn't nationalized. If Citigroup doesn't fit this model, I don't know what bank entity would.
My point was that when it becomes obvious to everyone, including legislators, that we are backing such a huge bank with the full faith of the US government, there will remain few choices asides from breaking the bank up or truly nationalizing it.
To realize why, is to know just how the system has worked for a long long time and how many people are involved, and that in reality bending the rules has always been a common practice in the white collar large lending. IndyMac was taken down not for just its huge withdrawls and liquidity issues, but because the people above all knew what went on in that place and nobody wanted to expose the whole system, and have the 120+ top managers lined up in court. If they did that, every bank would be in the same spot.
FDIC at this point doesn't care it is too busy as well as the three letter agencies, as files in IndyMac have disappeared before feds came in. It cleanses the system, but doesn't bring attention to it. Makes it appear as a regular whipeout.
Not sure about WaMu, never knew anyone there, but I think Chase got a steal in the marketplace that they never had presence. Even at the loan losses that are observed on top, it is a great aquisition for 20+ year term.
People who are high up, that have intent and have done things the way they have been done for countless decades will never witness anything. As a gray area where there haven't been prosecutions in my memory. Good luck finding anyone with anything concrete with intent all written out and ready to face the LJ.
I am however happy to see a lot of the regular brokers getting shaftet for forgery which was rampant. However their superiors won't be.
The next administration is currently touting "bipartisan" agreement, and has no interest in raking the muck. If anything the recent Dem scandals (Rod Blogoyovech, and Bill Richardson) are just warning shots in case the Dems do try to prosecute anyone. I know there were some tinfoil theories floating around about Spitzer getting taken down because he was about to expose a bunch of suits.
If people get pissed enough, you'll see some celebrity business-person get paraded around (like Martha Stuart) to salve the public dignity. You might also have a handful of really obvious crook-suits singled out like Bernie Ebbers and Ken Lay, but you won't have the cleansing you need (like thousands of people from S&P, Fitch, Moody's, Chase, Countrywide, Lehman, Bear Stearns, etc.).
It's sad, too. If we could just enforce some of the damn laws we have on the books, we could put an end to a lot of the fraud that's been raping the country for a generation.
Banks generally are much more thinly capitalized than people realize, and it doesn't take a huge amount of bad loans to drive them into insolvency. Unfortunately, the majority of banks today haven't acknowledged, or written off, all the non-performing assets on their books. There is substantial evidence that banks have been playing games with their books (e.g. delaying foreclosures, etc), to avoid having to officially book losses. Regulators have been turning a blind eye to these shenanigans because the consequences of having half the financial institutions in the world just go bust is too great to contemplate.
Actually, chartered banks are legally allowed to use false values for assets in their financial reports, since they don't have to use current market values. Instead of listing a mortgage security at 20 cents on the dollar (it's current market price), banks can claim the security is still worth a full dollar since they plan on holding it to maturity. This ability to use loose accounting rules is one big reason that all the surviving investment banks transformed themselves into chartered institutions. When Goldman Sachs was an investment bank they had to use mark-to-market accounting, now they they are a chartered institution they are free to blithely fudge their books.
The government really only has two choices over the next few years: allow the majority of financial institutions to go bust, and force depositors to take massive losses or nationalize the banks and socialize the losses. In the end, I think that governments will eventually have to just allow banks to fail, and depositors to lose their savings. The magnitude of costs involved in a complete nationalization are so huge that even an interventionist government can't pull it off.
Here is an article by Nouriel Roubini, claiming that banks are insolvent.
http://www.calculatedriskblog.com/2009/01/roubini-us-credit-losses-may-reach-36.html
I tend to agree. Governments won't be able to prop up the banks with the trillions necessary. Those that are trying right now (ie: Ireland, UK, Spain, etc) are in danger of defaulting, and allowing the US to default spells the end of modern economics globally and instantly.
I think the bailouts are a delay mechanism, so that the powers that be can wrap their minds around the problem(s) and determine the best course of action.
What happens when the banks are allowed to fail? Will the FDIC still insure those savers with $250k or less? Will all medium-large businesses go tits-up (since many of these businesses will no longer be able to make payroll with under $250k in the bank)? Will most of the banks be allowed to fail at once, or one-by-one?
I'm trying to figure out if it's time to stuff the matress yet, or just keep stuffing the local credit union.
Interesting argument from our friends across the pond that the UK should probably nationalize all banks and just be done with it.
Doesn't seem that the US is far behind.
And keep in mind that these are global private losses. It could be tens of trillions for all we know. Can the US take that sort of a hit?
The world cannot afford for the US to default.
We do need some sort of nationwide banking safety net to protect large corporate American depositors to keep payrolls moving and trade alive, but we don't need to bail out every Citibank, BofA, JPM Chase, and Wells Fargo depositor the world over.
Agreed, which is why I absolutely wouldn't nationalize an existing bank. If it happens, the US should set up a US bank with blank balance sheets. That bank should provide liquidity to the markets by lending to corporations (payroll lending), and individuals who meet very old fashioned standards (20% down mortgages of less than 30 years). It should be slightly profitable, but that can't be the focus.
I would suggest such a bank should not even lend to the other banks. Once a nationalized bank like that were in place, depositors would flock to it, and those other banks would just fail. Oh well.
True, which is why they'd have to form some sort of lending facility for non-financial corporations only (short-medium term lending for corporations only - for payroll, and possibly some other cashflow uses only). Since we have a reserve banking system, all it would take is for about 5% of all deposits to go to the new national bank before every other bank and credit union is wiped out, which would destroy trillions of dollars needlessly.
The lending facility should concentrate only on necessary lending (home mortgages are not necessary, but payroll is a common short term loan. Likewise, some capitol or inventory-related expenditures might fall into this category)
Starting a separate nationalized bank is the surest way to wipe out the entire financial system. Similarly, nationalizing enough bad debt could nuke the global economy, too. This isn't going to be solved by a single, silver bullet, but by thousands of precise maneuvers.
The argument seems to be whether we should do nothing (let the big banks fail, and other healthy banks can take their place) or fully nationalize them. Right now we're implicitly or explicitly (depending on the bank) guaranteeing the bad debt, but neither positioning ourselves to be compensated for that guarantee, nor punishing the banks and their executives and thus creating greater moral hazard.
OK, there is no "nationalizing" the banks in the United States. It can happen in socialist countries or military backed governments, but here we expect a return on investment or a loss.
I'm thinking that the people who made the investments need to take the loss. People owe me money, always have, always will, it's the cost of doing business. I get it back or not, get swindled or come out ahead. I go on, do business, and that's it.
It's time to pull the plug and stop allowing this mega mergers time to 'figure" stuff out. I think the real problem is we have a bunch of college kids running financial models that were engineered by theory rather than by sound business principles. Yea it all looks good on paper but....
Utterly absurd. Warren Buffett avoid real estate because it doesn't produce anything; i.e. it's not an investment. Unless you are talking about a cash-flow positive rental or builders, real estate is always, always, speculative. It just happens to (historically) be one of the more stable speculative markets.
Let's call a spade a spade here Davey boy.