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UPDATE III: JibJab on Obama Man:Try JibJab Sendables® eCards today!
UPDATE II: Our President, the Miracle Maker. Read The New York Times, And the Angels Rejoice.
UPDATE: More about Obama Man. Read the Washington Post, Obama's Center-Left Two-Step.
UPDATE: Here is an argument that the GM bailout won't work. Read The New York Times, The Quagmire Ahead, which argues convincingly that while the Obama plan for General Motors is bureaucratically smart and financially tough-minded, it won’t revolutionize the company’s corporate culture and will likely make things worse.
"In the space of five head-spinning months, the economic downturn and a few strong-willed financial officials in the Obama administration have done what legions of car executives, consultants and policymakers had failed to do in three decades: overhaul the U.S. car industry."
And besides paying bonuses, buying toxic assets with government money, guaranteeing loans, and posting huge profits, what else is being done with our money? Read the Washington Post, Bailout Recipients Spent Millions on Lobbying, Records Show.
Once a foob, always a foob?
UPDATE IV: You might not have realized it, but our government was overthrown in a coup recently. Read The Atlantic, The Quiet Coup, and find out how the Geithner, as Member and Overseer, Forged Ties to Finance Club has effectively captured our government.
New York financial institutions are using our treasury to more pay bonuses, buy toxic assets with government money, guarantee loans, and post huge profits.
Read the Washington Post, Fannie, Freddie Budget $210 Million On Bonuses, Draw Lawmakers' Fire and Reuters, US banks with taxpayer money could buy toxic assets, The New York Times, U.S. Program Lends a Hand to Banks, Quietly, and The New York Times, Big Profits, Big Questions.
At the center of it all, Goldman Sachs, the former firm of former Treasury Secretary Paulson. The AIG bailout never made sense, except if you understood that the money was meant to save Goldman Sachs. Since early on it has been clear that payments to AIG were just a cover to get money to Goldman Sachs. And when the original terms of the bailout proved too onerous, the terms were waived for another sweetheart deal.
"Some Americans are afraid that the government might temporarily “nationalize” the banks, but that option would be preferable to the Geithner plan. After all, the F.D.I.C. has taken control of failing banks before, and done it well. It has even nationalized large institutions like Continental Illinois (taken over in 1984, back in private hands a few years later), and Washington Mutual (seized last September, and immediately resold).
What the Obama administration is doing is far worse than nationalization: it is ersatz capitalism, the privatizing of gains and the socializing of losses. It is a “partnership” in which one partner robs the other. And such partnerships — with the private sector in control — have perverse incentives, worse even than the ones that got us into the mess."
Read The New York Times, Obama’s Ersatz Capitalism.
UPDATE II: An update from on my post in February. Joseph Stiglitz, an economist and professor at Columbia University, and winner of the 2001 the Nobel Memorial Prize in Economic Sciences, agrees that the Obama public-private partnership to buy up to $1 trillion of 'toxic' bank assets "amounts to robbery of the American people." Read The Daily Telegraph, Geithner rescue package 'robbery of the American people.'
UPDATE: Next week Uncle Sam is expected to triple down on AIG. Read the appropriately named article in The New York Times, Propping Up a House of Cards, in which the writer predicts that the government will spend "quarter of a trillion dollars" to prop up AIG. All for the purpose of saving Goldman Sacks, the former firm of former Treasury Secretary Paulson, the focus of an initial bailout proposal that never made sense, beneficiary of over a hundred billion bailout dollars, and then a hundred billion more.
It is robbery of the future!
"Losers double down.
That’s the classic trading rule which the USA is about to violate in an enormous way. According to trading maven Dennis Gartman, one should “never, ever, ever, under any circumstance, add to a losing position.”
And yet that is what we are about to do.
To review: Former Treasury Secretary Hank Paulson made a terrible investment on behalf of the taxpayers by purchasing a 7.8% stake in Citigroup (C) for an initial $25 billion dollars. He further put the US on the hook by guaranteeing against 90% of future losses on $301 billion in assets. Subsequently, we (the taxpayers) injected another $20 billion dollars.
At the time, Citigroup had a market cap of about ~$50 billion dollars. Today, its worth ~$13 billion.
So for about 100% of the market value of Citi, plus insurance guarantees worth of as much as 500% of its value (~$275 billion), we got less than 1/10 of a company that in total was worth 1/5 of our investment.
Pretty good deal, eh?
That $45 billion dollar stake now has a market value of just over a billion.
And, its about to get even worse.
Rather than do what is the FDIC-mandated-by-law thing, we will instead convert the nearly worthless common into preferred shares. The taxpayers stake will rise to near 40% of Citigroup.
NYT:
“Under the terms of the deal, the Treasury Department has agreed to convert up to $25 billion of its preferred stock investment in Citigroup into common stock. It will convert its stake to the extent that Citigroup can persuade private investors, including several big foreign government investment funds, to do so alongside the government, two people close to the deal said.”
What does this do for us? Well, the higher investment stake creates an enormous incentive for John Q. Public to continue to pour money into Citi, regardless of valuation. The inept banking giant then has access to infinite amount of capital, courtesy of you, the 1040 filers.
Its just another example of why these insolvent banks should be nationalized, or for you squeemish free marketers, FDIC mandated, pre-packaged Chapter 11, government funded reorganization.
If Obama continues to listen to the god-awful advice of Larry Summers and Tim Geithner, he will doom his presidency, and finsh marginally ahead of George W. Bush on the list of worst presidents.
This is not change we an believe in . . ."
"The modern bank robber calmly hands a note to the teller, asking for money and making a moderately specific scary threat. The robber, of course, expects the teller to hand over unmarked bills without a fuss.
This morning’s “research” note from a major international bank is entitled, “Falling Short: The government needs to buy toxic assets,” and the heart of their one page argument is, with the emphasis as in the original,
One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.
Tell me if you think I am overreacting - it has been a difficult week - but I interpret this as saying: “give us as much money as you can, or else.” And the “or else” appears to be unemployment up around 20% and debt/GDP in the red-for-danger zone.
Can bankers really trump the American government in this fashion? It’s painful to read, but probably helpful that the oligarchs put their cards (and notes) on the table so brazenly. This is, after all, a critical fight to save American democracy, and it’s good to know what we are up against."
All the while the investment banks and other financial institutions pay dividends and bonuses, and have lavish retreats and their CEOs get 'golden parachutes.
This is why it is time to refresh the tree of liberty.
UPDATE III: Still not fed-up with the Washington politician-New York banker cartel. Then read The Associated Press, 13 firms receiving federal bailout owe back taxes and the Washington Post, House GOP Report Details Countrywide's Efforts to Benefit VIPs.
The bonuses at AIG are just the tip of the iceberg. As The Deal Professor writes:"Washington is filled with outrage over the $165 million in bonuses given out by the American International Group. Yet, as I said in my post on Tuesday, “Seven Sad Truths About A.I.G.,” the real concern over the insurance giant should be about the $170 billion in government bailout money it received and and A.I.G.’s subsequent payments of tens of billions to a myriad of banks.
All of this appears to have been done without any attempt to bargain or otherwise obtain government recompense from these third-party banks. Congress should hold hearings to find out why this was done and if it was appropriate, instead of concentrating on the more minor compensation issue."
Clearly there are two sets of rules and regulations in life: those that apply to the Washington politician-New York banker cartel and those that apply to the rest of us.
Is it time to renew Operation Siege?
UPDATE II: FINALLY, after nearly six months of criticizing the bailout of AIG and other insolvent investment banks and non-depository financial institutions, people are starting to realize it was and is a con job, flim flam, gaffle, grift, hustle, scam, scheme, or swindle. Claim the world will collapse unless _____ (fill in the blank), and the purpose: save the big-wigs. Former Treasury Secretary Henery Paulson had become fabulously wealth working at Goldman Sachs.
Read the Washington Post, Wall Street's Dangerous Refusal to Learn and The New York Times, A.I.G. Bailout Priorities Are in Critics’ Cross Hair.
I SAY AGAIN: the AIG bailouts were an attempt to try and save well-connected investment banks, like Goldman Sacks. The AIG bailout never made sense, except if you understood that the money was meant to save Goldman Sachs. Since early on it has been clear that payments to AIG were just a cover to get money to Goldman Sachs. And when the original terms of the bailout proved too onerous, the terms were waived for another sweetheart deal.
Read The Big Picture, Backdoor Bailouts for Goldman Sachs? Also read The New York Times, A.I.G., Where Taxpayers’ Dollars Go to Die.
UPDATE: For months I've said, let the insolvent non-depository banks and other financial institutions fail. Others are beginning to realize that it would be the better solution. Read Time, The Case for Letting AIG Fail.
You also might want to reread my proposed solution to the economic mess.
REPOST: First posted on January 1, 2009:
Bailout and Dividends
Taxpayers are Chumps Cont.
Taxpayers Continue to Be Treated as Chumps
Taxpayers are Foobs
"This week, President Obama proposed imposing a $500,000 compensation cap on companies seeking a bailout. It’s a terrible idea. We all want the taxpayers’ money returned, and capping compensation at bailout recipients will just make it that much harder for those boards to hire and hold on to the executives who can lead their companies to compete and thrive.
Perhaps a starting place for “tax, not shame” would be creating a top federal marginal tax rate of 50 percent on all income above $1 million per year. Some will tell you that would reduce the incentive to earn but I don’t see that as likely. Besides, half of a giant compensation package is still pretty huge, and most of our motivation is the sheer challenge of the job anyway.
Instead of trying to shame companies and executives, the president should take advantage of our success by using our outsized earnings to pay for the needs of our nation."
UPDATE : On Friday's show Dr. Dennis F. Paulaha, Ph.D., is scheduled to be a guest to discuss the status of the bailout effort, his original plan to Remortgage America, and Senate Republican leader McConnell's latest proposal, the 'Fix Housing First Act.' Tune-in.
UPDATE II: The idea is catching on. Listen or read NPR, Housing Fix? Republicans Push For 4 Percent LoansSenate Republican leader Mitch McConnell, is proposing cheap, government-backed mortgages to stimulate the economy. "Under the 'Fix Housing First Act' -- an amendment spearheaded by both McConnell and Republican Sen. Lamar Alexander of Tennessee -- new and refinanced mortgages would be available to homeowners for 4 to 4.5 percent. "
So contact your Congressman or Senator, and tell him/her to support the Fix Housing First Act, as revised by McConnell and Alexander to provide new and refinanced mortgages for 4%. (The original Fix Housing First Act does not include this revision.)
Do it now, before Congress wastes more of your tax dollars on the Wall Street Ponzi scheme.
Just do it, NOW.
"Companies that have gotten bailouts continue to make a mockery of taxpayers.
The interior of the 18-seat jet, as described by The Post, is posh, with a full bar, fine-wine selection, $13,000 carpets, Baccarat crystal glasses, Cristofle sterling silver flatware and — my personal favorite — pillows made from Hermès scarves."
"The curious task of economics is to demonstrate to men how little they really know about what they imagine they can design."from The Fatal Conceit
"The man of system, on the contrary, is apt to be very wise in his own conceit; and is often so enamoured with the supposed beauty of his own ideal plan of government, that he cannot suffer the smallest deviation from any part of it. He goes on to establish it completely and in all its parts, without any regard either to the great interests, or to the strong prejudices which may oppose it. He seems to imagine that he can arrange the different members of a great society with as much ease as the hand arranges the different pieces upon a chess-board. He does not consider that the pieces upon the chess-board have no other principle of motion besides that which the hand impresses upon them; but that, in the great chess-board of human society, every single piece has a principle of motion of its own, altogether different from that which the legislature might chuse to impress upon it. If those two principles coincide and act in the same direction, the game of human society will go on easily and harmoniously, and is very likely to be happy and successful. If they are opposite or different, the game will go on miserably, and the society must be at all times in the highest degree of disorder." from The Theory of Moral Sentiments
"WILD DERIVATIVES In 1998, when Brooksley E. Born, then chairwoman of the Commodity Futures Trading Commission, sought to extend its regulatory reach into the derivatives world, top officials of the Treasury Department, the Federal Reserve and the Securities and Exchange Commission squelched the idea. While her specific plan may not have been ideal, does anyone doubt that the financial turmoil would have been less severe if derivatives trading had acquired a zookeeper a decade ago?
SKY-HIGH LEVERAGE The second error came in 2004, when the S.E.C. let securities firms raise their leverage sharply. Before then, leverage of 12 to 1 was typical; afterward, it shot up to more like 33 to 1. What were the S.E.C. and the heads of the firms thinking? Remember, under 33-to-1 leverage, a mere 3 percent decline in asset values wipes out a company. Had leverage stayed at 12 to 1, these firms wouldn’t have grown as big or been as fragile.
A SUBPRIME SURGE The next error came in stages, from 2004 to 2007, as subprime lending grew from a small corner of the mortgage market into a large, dangerous one. Lending standards fell disgracefully, and dubious transactions became common. Why wasn’t this insanity stopped? There are two answers, and each holds a lesson. One is that bank regulators were asleep at the switch. Entranced by laissez faire-y tales, they ignored warnings from those like Edward M. Gramlich, then a Fed governor, who saw the problem brewing years before the fall. The other answer is that many of the worst subprime mortgages originated outside the banking system, beyond the reach of any federal regulator. That regulatory hole needs to be plugged.
FIDDLING ON FORECLOSURES The government’s continuing failure to do anything large and serious to limit foreclosures is tragic. The broad contours of the foreclosure tsunami were clear more than a year ago — and people like Representative Barney Frank, Democrat of Massachusetts, and Sheila C. Bair, chairwoman of the Federal Deposit Insurance Corporation, were sounding alarms. Yet the Treasury and Congress fiddled while homes burned. Why? Free-market ideology, denial and an unwillingness to commit taxpayer funds all played roles. Sadly, the problem should now be much smaller than it is.
LETTING LEHMAN GO The next whopper came in September, when Lehman Brothers, unlike Bear Stearns before it, was allowed to fail. Perhaps it was a case of misjudgment by officials who deemed Lehman neither too big nor too entangled — with other financial institutions — to fail. Or perhaps they wanted to make an offering to the moral-hazard gods. Regardless, everything fell apart after Lehman. People in the market often say they can make money under any set of rules, as long as they know what they are. Coming just six months after Bear’s rescue, the Lehman decision tossed the presumed rule book out the window. If Bear was too big to fail, how could Lehman, at twice its size, not be? If Bear was too entangled to fail, why was Lehman not? After Lehman went over the cliff, no financial institution seemed safe. So lending froze, and the economy sank like a stone. It was a colossal error, and many people said so at the time.
TARP’S DETOUR The final major error is mismanagement of the Troubled Asset Relief Program, the $700 billion bailout fund. As I wrote here last month, decisions of Henry M. Paulson Jr., the former Treasury secretary, about using the TARP’s first $350 billion were an inconsistent mess. Instead of pursuing the TARP’s intended purposes, he used most of the funds to inject capital into banks — which he did poorly."
The stimulus package should be timely, targeted, and temporary. Instead, it is a sprawling, undisciplined smorgasbord of pent-up partisan fantasies, therefore I will not support it.
“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. . .
“So here’s what we’re going to do: we’re going to unclog the arteries. My banking experts have analyzed each of your balance sheets. You will tell us if we’re right. Those of you who are insolvent, we will nationalize and shut down. We will auction off your viable assets and will hold the toxic ones in a government reconstruction fund and sell them later when the market rebounds. Those of you who are weak will be merged. And those of you who are strong will receive added capital for your balance sheets, after you write down all your remaining toxic waste. I am not going to continue rewarding the losers and dimwits amongst you with handouts.”
"To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets — say, $400 billion worth — are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless — it still has a market capitalization of $20 billion — but that value is entirely based on the hope that shareholders will be rescued by a government bailout.
Why would the government bail Gotham out? Because it plays a central role in the financial system. When Lehman was allowed to fail, financial markets froze, and for a few weeks the world economy teetered on the edge of collapse. Since we don’t want a repeat performance, Gotham has to be kept functioning. But how can that be done?
Well, the government could simply give Gotham a couple of hundred billion dollars, enough to make it solvent again. But this would, of course, be a huge gift to Gotham’s current shareholders — and it would also encourage excessive risk-taking in the future. Still, the possibility of such a gift is what’s now supporting Gotham’s stock price.
A better approach would be to do what the government did with zombie savings and loans at the end of the 1980s: it seized the defunct banks, cleaning out the shareholders. Then it transferred their bad assets to a special institution, the Resolution Trust Corporation; paid off enough of the banks’ debts to make them solvent; and sold the fixed-up banks to new owners.
The current buzz suggests, however, that policy makers aren’t willing to take either of these approaches. Instead, they’re reportedly gravitating toward a compromise approach: moving toxic waste from private banks’ balance sheets to a publicly owned “bad bank” or “aggregator bank” that would resemble the Resolution Trust Corporation, but without seizing the banks first.
Sheila Bair, the chairwoman of the Federal Deposit Insurance Corporation, recently tried to describe how this would work: “The aggregator bank would buy the assets at fair value.” But what does “fair value” mean?
In my example, Gothamgroup is insolvent because the alleged $400 billion of toxic waste on its books is actually worth only $200 billion. The only way a government purchase of that toxic waste can make Gotham solvent again is if the government pays much more than private buyers are willing to offer.
Now, maybe private buyers aren’t willing to pay what toxic waste is really worth: “We don’t have really any rational pricing right now for some of these asset categories,” Ms. Bair says. But should the government be in the business of declaring that it knows better than the market what assets are worth? And is it really likely that paying “fair value,” whatever that means, would be enough to make Gotham solvent again?
What I suspect is that policy makers — possibly without realizing it — are gearing up to attempt a bait-and-switch: a policy that looks like the cleanup of the savings and loans, but in practice amounts to making huge gifts to bank shareholders at taxpayer expense, disguised as “fair value” purchases of toxic assets.
Why go through these contortions? The answer seems to be that Washington remains deathly afraid of the N-word — nationalization. The truth is that Gothamgroup and its sister institutions are already wards of the state, utterly dependent on taxpayer support; but nobody wants to recognize that fact and implement the obvious solution: an explicit, though temporary, government takeover. Hence the popularity of the new voodoo, which claims, as I said, that elaborate financial rituals can reanimate dead banks.
Unfortunately, the price of this retreat into superstition may be high. I hope I’m wrong, but I suspect that taxpayers are about to get another raw deal — and that we’re about to get another financial rescue plan that fails to do the job."
