Yesterday Bloomberg reported on the gargantuan loans that big banks received by the nation’s largest banks in the wake of the collapse of the housing bubble:
Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress.
“These are all whopping numbers,†said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.â€
Question: which would have been more effective in staunching the hemorrhaging, loans to the big banks or addressing the delinquent and foreclosed mortgages directly? Please do not complain about moral hazard unless you’re prepared to defend the proposition that loans beyond the dreams of avarice create no moral hazard for bankers.
This and other outrages, some of which I’ve posted on here lately, have produced a bit of a swell of complaint from the blogosphere and beyond. Yves Smith complains:
It is high time to describe the Obama Administration by its proper name: corrupt.
Admittedly, corruption among our elites generally and in Washington in particular has become so widespread and blatant as to fall into the “dog bites man†category. But the nauseating gap between the Administration’s propaganda and the many and varied ways it sells out average Americans on behalf of its favored backers, in this case the too big to fail banks, has become so noisome that it has become impossible to ignore the fetid smell.
The Administration has now taken to pressuring parties that are not part of the machinery reporting to the President to fall in and do his bidding. We’ve gotten so used to the US attorney general being conveniently missing in action that we have forgotten that regulators and the AG are supposed to be independent. As one correspondent noted by e-mail, “When officials allegiances are to El Supremo rather than the Constitution, you walk the path to fascism.â€
Barry Ritholtz adds his voice:
Given the sadly misguided history of both the Obama administration and the NY Fed (led by the President Tim Geithneir, now Treasury Secretary) when it comes to Bailouts, this is not a huge surprise.
But what is surprising is the utterly inappropriate behavior of Kathryn S. Wylde. She is not only a member of the board of the Federal Reserve Bank of New York, but occupies the seat supposedly reserved for the representing the public.
If the Times report is accurate, and the quote below represents Ms. Wylde’s comments, than that position is a laughable mockery, and Ms. Wylde should resign effective immediately.
“Tyler Durden” of ZeroHedge joins in:
The best summary of this ongoing collusion between the Fed and Wall Street, in which it once again for the nth time becomes clear that all the Fed cars about is making sure its banking masters are never impaired, is from the article itself: “Even as the firms asserted in news releases or earnings calls that they had ample cash, they drew Fed funding in secret, avoiding the stigma of weakness.” And there you have it: everything that come out of Wall Street is and has always been a lie: either courtesy of 30 years of great interest rate moderation, in which only cheap money adds to banks’ top and bottom lines, or due to the Fed making sure the same banks never suffer a dollar loss when central planning fails, such as it does increasingly often lately (and forget about 10(b)-5 violation charges coming from the corrupt regulators: after all they are all in bed together). That Morgan Stanley, Dexia and Citi are, and have been since 2008, dead men walking, is by now known to all financially literate readers: additional confirmation can be found in the Bloomberg article, which we won’t paraphrase because it has all been said over and over.
And it’s not just the peasants. The NYT editors have also jumped on the pile (you’ll pardon if I do not link to the paywall-protected NYT).
I remember reading this article back in 2009. Johnson’s fundamental argument was correct then and still is. Very simply, until the political-financial oligarchy that has captured both parties is broken, nothing will change.
Yes, American politics is thoroughly corrupt. That includes this administration.
Unfortunately that kind of corruption — the control of government by the banks and investment firms and other big businesses — is accepted practice. It has been sanctified by the Supreme Court which now allows big business to funnel as much money as they like directly into politics and overwhelm any opposing voice.
What an amazing racket. We get this political dog and pony show with Democrats wanting more government and Republicans wanting less and it’s almost entirely nonsense. It’s three card monte — we’re watching the moves but the queen is already in the dealer’s pocket. We could cut to the chase and just ask Goldman, Sachs want they want since they’re the real power. We’re as corrupt as Nigeria, we just do it legally.
It’s reached a pretty sad point when I start thinking of the hacker group Anonymous as the most effective opposition voice.
Les bons mots. That’s precisely the right turn of phrase. It’s misdirection.
It is high time to describe the Obama Administration by its proper name: corrupt.
Which makes it different from previous administrations how, exactly?
And Michael, you just gave Obama either a B or a B+ as a grade just a week ago, and have been a relentless cheerleader for him and the Democrats for years. Don’t try pulling that “I can’t believe how corrupt it all is” crap now. These are YOUR PEOPLE. This is the group that you have claimed were going to fix everything, Hell, given the grade you gave his Administration you apparently believe that he IS fixing everything. Own it, bitch.
Ice:
I’m afraid you’re just on permanent “ignore” from me going forward.
Michael, I’m surprised it didn’t happen sooner.
But I AM surprsied you didn’t call me a liar again for saying you gave Obama a B or a B+ grade just a week ago. Turns out it was a B about a month ago.
So how is it that Obama is someone you “like” and believe is doing a good job to someone who is thoroughly corrupt in a little over a month? Go ahead and ignore me, but how can you reconcile these two concepts of Obama? Go ahead, show us some razzle-dazzle while you hide a few more cards in your pocket, charlatan.
* And hpow lucky for me that you can’t delete this comment? Very lucky indeed, Mr. Mighty Middle.
Dave, you have a funny concept of “peasant”.
Question: Is this $1.2 trillion in addition to the $5 trillion mentioned in a past a few weekends back? If so that ups the ante a good 20%. Never enough for the banks (who are desperately hoping that The Bernanke will bail them out with QE3 at Jackson Hole), and never enough complaining about the table scraps for the peons.
I don’t understand this, both scenarios result in problems with moral hazard and continue the problem…kick the can down the road so to speak.
This is the problem with bailouts. Once you start stopping them is more painful than if you had not started. Bailouts have a fairly long history and they have gotten progressively bigger due to the moral hazard problem. It is kind of like a ponzi scheme, the scheme grows and grows until it collapses under its own weight. With moral hazard and bailouts the bailouts grow and grow until the tax payers can no long pay for the bailouts, then they collapse under their own weight.
So, we either do bailout A or bailout B, but we have to realize that this will necessitate another round of bailouts later on that will almost surely be bigger. If we stop now it will hurt, alot. No doubt about it. If we keep going it we will be forced to stop eventually and the pain will likely be orders of magnitude worse.
And you can’t say, “Okay, we’ll bail you out this last time, but that’s it!” Let me introduce you to my little friend called “time inconsistency of optimal policies”. Any optimal policy, even in a setting with a social dictator, is time inconsistent. What does that mean, it means that policy is no longer the desired one in the future. This is how it works:
1. We bailout companies X, Y and Z now, and loudly proclaim the end of bailouts, so people better behave or else!
2. Everyone believes it, but then big companies A, B and C are now in trouble several years henceforth. If the government bails them out now, it will be “welfare enhancing”–i.e. it will save tens of thousands of jobs and likely avoid a recession. So the government will bailout.
3. Going back to step 1, companies X, Y and Z are not stupid. Further they are forward looking, they know that companies A, B and C (or any other group of large companies) will need a bail out and that the government will have a significant incentive to do so (i.e. welfare enhancing, avoiding a recession and most importantly getting re-elected), so the government is going to do bailouts. So now X, Y and Z know that the no bailout claim, no matter how stern, is bullshit and will act accordingly–i.e. once again taking on too much risk. If it pays off great! They pocket big fat bonus checks, if not, oh too bad for the American taxpayer.
This is one of the most damning criticisms of activist discretionary government power. And it isn’t just free market nuts like Edward Prescott and Finn Kydland who came up with the idea, George Akerlof and Paul Romer also suggested a similar concept, IMO, with their paper on “Looting”.
Then we can bring issues like regulatory capture and rent seeking, or as I like to point out the incestuous relationship between Wall Street, K Street, and Capitol Hill and the White House. Which why even a bureaucratic approach to solving the problem likely wont work either. The bureaucrats will be capture, the politicians will be influenced, and the proffered solutions will be toothless or work in favor of the big Wall Street firms.
TL;DR: we are f*cked.
Republicans don’t want less, this is a myth.
I think, like Dave, this pretty much sums up the situation and it is true whether it is Democrats or Republicans. The whole D v. R issue is really nothing but kabuki to keep people from really seeing what is going on…the three card monte game.
This has been the most disappointing part about the Obama administration. They should have broken up the big banks, but we got a weak Dodd-Frank instead. If the GOP sweeps in 2012, even that will be gone.
Two questions- First, can anyone more conversant with economic history point out recent, meaning in the last 100 years, instances when countries did not rescue their banks? By my reading, that is the norm rather than the exception. If true, rather than railing about bailouts, we should try to keep banks from reaching that point.
Secondly, how do those who subscribe to regulatory capture reconcile their beliefs about the GSEs causing our problems with their beliefs in capture?
Steve
1. We bailout companies X, Y and Z now, and loudly proclaim the end of bailouts, so people better behave or else!
2. Everyone believes it, but then big companies A, B and C are now in trouble several years henceforth.
Your timeline doesn’t need to be that long. We bailed out Bear Stearns in March of 2008. They said it would be the last time, and by golly, when Lehman collapsed that fall the government didn’t bail them out! (Note that the government has lots of GS guys in it, and they hated Lehman, so fuck ’em.) That didn’t work out so well. This led to everyone getting their knickers in a twist, and we faced the prospect of widespread failure. So the government did the “responsible thing” and bailed out everybody*. This took less than seven months from start to finish. And of course, the banks have been getting periodic bailouts in this form or that ever since.
All of this means that there will be some form of additional money for the banks this fall. It may or may not be QE3, but it will be something. As the recent revelations show, the bailout doesn’t technically even need to be made public, though it is hard to see how a secret agreement can help the likes of BoA. (It’ll be fun to see how the markets react if The Bernanke doesn’t announce help for the bankers at Jackson Hole.)
Lather, rinse, repeat, until there’s no more shampoo.
* Well, everybody that matters.
Iceland refused to bail out their banks in this crisis.
And why do you think Dodd-Frank has any positive reforms for the financial system? Given that the two co-sponsors are two of the biggest whores for the financial industry in government (which is truly impressive, given this government) it seems highly unlikely the legislation would accomplish anything useful.
Like Steve Verdon I’m a little confused about the statement about moral hazard since it would apply to both. But the two groups are not entirely equivalent.
The banks were undercapitalized following the bursting of the bubble, the big ones were re-capitalized by the government, the others were liquidated.
The group of “delinquent and foreclosed mortgages” are not necessarily under-capitalized, they are behind by at least one mortgage payment.
The moral hazard problems are very different. Bailing out the banks supports risky decisions from several years ago and may encourage similar risks several years down the road. If the government decides to bail out people who are delinquent on their mortgages, a lot of people won’t send in their checks next month. That’s an immediate moral hazard.
I think you guys are missing Dave’s point on moral hazard. I believe that he simply means that one can’t argue that bailing out individuals would have been bad because of moral hazard because moral hazard was created by bailing out the financial institutions. The moral hazard “capital” has been spent regardless. Financially, would it have made sense to do it the other way.
That said, PD Shaw’s point about immediate moral hazard might be relevant – except for the fact that the banks have kept going back for more and more and more, not having the decency to wait for a few years to pass.
Here’s a story about the Icelandic refusal to bail out banks. From the article:
Too bad for Iceland that they just can’t fire the heads of the rating agencies until they get the answers they want.
But it’s funny that the citizens feel the banks should be responsible for themselves, but the government feels that everyone should be responsible for the failure of the banks. Socialized losses versus privatized profits. Again.
Steve V:
At the time of the Bush-Obama transition there was a great sense of urgency and peril and Washington either believed — or at least led us to believe — that there was a definite tick-tock. It occurs to me that pushing money to banks takes less time that establishing a mechanism for bailing out individual mortgage holders, if for no other reason than there being only a handful of banks and millions of underwater homeowners.
So how does time affect this? If you’re you’re the guy holding a trillion dollars in bailout money, and the clock is ticking on a series of bank collapses, would it have made practical as opposed to ideological sense to let the banks fall while announcing the beginning of what would I assume be a complicated process of rescuing individuals?
If we had announced that we were not rescuing the banks but would bail out mortgage holders instead, wouldn’t that have caused even a certain number of solvent families to stop paying their mortgage, and wouldn’t that in itself have pushed even some of the stronger banks over the edge?
Also, had we let CitiBank fail, would I and others who hold Citi credit cards, car loans, etc… have kept paying our bills? Or might people have concluded that there was little point paying bills to a dying bank?
Yes, that’s exactly what I meant.
Sweden handled its banking crisis in 1992 by first nationalizing, then re-privatizing their banks. That’s what I advocated as a response to our banking crisis and federal officials who’d handled the S&L crisis, viz. Bill Black, have affirmed that it could have been handled that way.
I think the GSEs were a factor but a relatively minor factor. However, I also think that the GSEs shouldn’t exist in their present form at all. They should be either entirely public or entirely private not the abortion that they were.
While I’m ranting about banks I think I should mention that in the aftermath of the S&L crisis 10,000 criminal cases were filed. To date about a dozen have been filed in the banking crisis that’s well over an order of magnitude greater. That’s a scandal and an outrage. It beggars credulity.
Michael, see Henry Blodget’s sketch of how BofA should be handled. IMO that’s about what should have been done with Citi.
Yes, that’s exactly what I meant.
I thought it was clear.
As for the lack of criminal prosecutions – the SEC’s document destruction process probably means there will be a lot less than otherwise. Between what’s going on (or rather, isn’t) at the SEC and the virtually complete lack of action from the Justice Department, I’d say the Wall Street guys got more than they could have possibly imagined when they bought this ‘solid B’ President. Getting Turbo Timmay placed in Treasury was just the cherry on top.
Once again showing almost zero real understanding of how the business world really works………..in the absence of subsidy and political favor…………..and hysteria.
“Also, had we let CitiBank fail, would I and others who hold Citi credit cards, car loans, etc… have kept paying our bills?”
“If we had announced that we were not rescuing the banks but would bail out mortgage holders instead, wouldn’t that have caused even a certain number of solvent families to stop paying their mortgage, and wouldn’t that in itself have pushed even some of the stronger banks over the edge?”
In workouts its almost always the cap structure participants who get wiped out, not the operating organization. The equity first, the jr debt next and on we go up the cap table. (Of course, if you are GM and have friends in high places, you get gifts, like the unions, but I digress.) The surviving organization would chase you down, Michael. In addition, the inherent franchise value of the banks would have attracted capital. Workouts happen every single day in America. Every single day. You can’t have it both ways: the proverbial greedy capitalists salivating at the prospect of a buck………but nobody would have shown up to invest in the obvious infrastucture of a Citi or BoA. Nice try. No understanding.
“It occurs to me that pushing money to banks takes less time that establishing a mechanism for bailing out individual mortgage holders”.
A false choice. Neither needed to be bailed out at third party (taxpayer) expense. In fact, subsequent analyses have shown that the majority of mortgage holder “bailees” have simply slipped back into the soup. In Latin: moneyus downus toiletus. And really, bail out the owners of Citi?? On what theory?
Meet the new boss, same as the old boss – Michael Reynolds: shill for Wall Street crony capitalism. Its only OK because its “his guy.”
Which reminds me a CSNY song……..
Which is why I asked the question. I do that sometimes when I’m curious.
It wasn’t my choice, I was responding to an earlier comment.
Where did I shill? Obviously if I’m admitting I don’t know the answer I can’t be shilling for one choice over another.
I don’t believe I’ve ever expressed much strong opinion about the rightness or wrongness of Obama’s actions on the bail-out beyond pointing out that at one point people were screaming that the sky was falling and later it seems not have fallen. I tend to look more to foreign policy, which I understand moderately well, and social issues, ditto.
Call me crazy, Michael, but I see advocacy in the post you wrote.
Let’s move on.
BTW – the Swedish model of an intermediary nationalizing, followed by privatizing, would be fine with me if the case for hazardous “acute economic dislocation” could be made satisfactorily. But that’s a high bar. But let’s not coddle dumb or inattentive capital. See: GM, Citi, BoA…….
“Iceland refused to bail out their banks in this crisis.”
It was not that they refused, but rather that they could not. Over $100 billion debt with a GDP of about $10 billion.
Dave- Thought about Sweden, but not sure that is quite the same as just letting the banks fail.
“And why do you think Dodd-Frank has any positive reforms for the financial system?”
We have never resolved or undergone BK proceedings with a large international bank. I am convinced by finance lawyers working within the banking system, that we do not know how to do it. That part of the problem with Lehman, is that they did not know where all of their assets were and how to get to them. I like the living will provision in Dodd-Frank. The banks will fight this heavily of course.
Steve
It was not that they refused, but rather that they could not. Over $100 billion debt with a GDP of about $10 billion.
Go back and read the story. Icelandic voters had a proposal backed by the IMF put before them twice – it was a bailout of the banks. (Or more specifically, the banks that held the Icelandic banks debt.)
Saying “They couldn’t pay it back” doesn’t matter – Greece can’t pay back its debt,and neither can Ireland or Portugal. And it’s doubtful Spain or Italy can either. And yet they (TPTB – Europa edition) still try to bail them out.
Could we acknowledge that America has institutions and a culture that are extremely hostile to nationalization of banks? Like over 200 years of hostility?
I think the notion of nationalizing the banks might work in theory, but it wouldn’t in practice. You can take over the banks and try to force the banks to “realize” their balance sheets, but you still end up with the existing problem that you don’t know the value of these impaired mortgage instruments and other debt are unless you start foreclosing on the underlying assets. Is a government-run bank going to be hard-nosed about straightening up the bank’s balance sheet? Or is it more likely to be under severe political restraints or be used as a vehicle to subsidize McMansions?
Icepick,
Yeah Lehman was an attempt to break the cycle and it was probably the single most important event in the financial crisis, IMO. Granted it was the only factor/event, but it was the one that made everyone on Wall Street sit up and take notice, but as other financial institutions started to collapse due to the fact that they had taken on way too much risk the government back tracked and bailed them all out. Failure to do so would have meant a much worse situation than we had. But by doing so, and the pathetic Dodd-Frank bill/law will ensure that the next bailout will be even bigger, and if we attempt to stop it then the pain will be even greater. And there will come a day when the full faith and credit of the American taxpayer wont be sufficient to support a bailout. When that day comes, if we get to it, it will make what we have gone through look like a picnic.
Steve,
Like I said such responses will either be toothless or will work in favor of those who are benefiting from the current process.
Michael,
Michael, it isn’t ideological. It is like dealing with a crack addict. You can keep enabling them or you can try to get them to stop or you can simply decide not to enable them. I’m not saying we shouldn’t bailout the banks simply because it tickles my libertarian fancy, I’m saying we need to stop bailouts because the incentives it puts in place creates a dynamic that is unstable and unsustainable. John Persona used to link to something on PBS about the long history of bailouts (apparently he thought I was unaware of them, and that such things had happened before I’d be fine with them happening now or something, IDK), and if you look at it you’ll see that bailouts get bigger over time. It isn’t a perfect fit, but there is definitely something there. If I can find the link I’ll post it.
I don’t think I’m alone here, and I’m not just talking about Drew. I think Dave would agree with me and hopefully he’ll chime in on this one. I don’t know about the rest of the people here either. My main point is its the incentives. Bailouts create a bad incentive structure and trying to stop that is going to be costly. The longer it goes on the costlier it gets. Since we’ve already done this round of bailouts we have to wait for the next, and my claim/prediction/forecast/whatever is that the next round will be even bigger. And the fallout from not bailing out will be even larger than if we hadn’t done it now.
Damn…
And I messed up the html…figures.
It wasn’t PBS, but propublica for that link.
Here
…assuming I didn’t mess up the html…again.
But by doing so, and the pathetic Dodd-Frank bill/law will ensure that the next bailout will be even bigger, and if we attempt to stop it then the pain will be even greater. And there will come a day when the full faith and credit of the American taxpayer wont be sufficient to support a bailout. When that day comes, if we get to it, it will make what we have gone through look like a picnic.
I agree with all of that. We COULD fix some of the problems now (by breaking up the biggest banks, etc) but we’re not going to. Collapse is inevitable at this point. The question is what will follow?
Steve, as to your point about bailouts – I largely agree. I do think we needed to do something in 2008 to stave off the complete collapse of the banking sector. However, bailing out the sector should have been accompanied by punishing individual bad actors by removing them from their jobs, punative financial measures against them, criminal prosecutions, etc. Additionally, banks should have been broken into smaller units, separation of investment banks from commercial banks from other forms of financial services, outlawing some forms of transactions (I’m thinking getting rid of things like CDOs & CDSs would be a good start. If the City of London wants to indulge in that, I’m willing to let them. I’m also willing to regulate banks HERE to prevent them from gambling over THERE.)
Also, we shouldn’t have let various entities simply declare that they were commercial banks so as to cash in via bailouts. The investment banks did this, but so did many other financial entities. Not to mention that paying out 100 cents on the dollar for various CDSs was absolutely criminal. (I’m not sure if that or the crooked GM deal was the worst part of the bailout. Both amounted to theft.)
The ultimate point is that any bailout of the system should have meant much pain for those in charge of the system getting bailed out. It would be the only way to mitigate moral hazard.