Doesn’t that also mean “too big to fail the stress test”? That’s why I haven’t been overly impressed by the process and haven’t pinned any hopes on the outcomes. The test will be tortured so that it produces the desired results. Whatever those might be.
This morning the Nouriel Roubini and Matthew Richardson in the Wall Street Journal wonder how long the federal government will continue to subsidize the banks:
The results of the government’s stress tests on banks, to be released in a few days, will not mark the beginning of the end of the financial crisis. If we are to believe the leaks, the results will show that there might be a few problems at some of the regional banks and Citigroup and Bank of America may need some more capital if things get worse. But the overall message is that the sector is in pretty good shape.
This would be good news if it were credible. But the International Monetary Fund has just released a study of estimated losses on U.S. loans and securities. It was very bleak — $2.7 trillion, double the estimated losses of six months ago. Our estimates at RGE Monitor are even higher, at $3.6 trillion, implying that the financial system is currently near insolvency in the aggregate. With the U.S. banks and broker-dealers accounting for more than half these losses there is a huge disconnect between these estimated losses and the regulators’ conclusions.
The title of the op-ed is “We Can’t Subsidize the Banks Forever”. Sez you. The banks, at least the biggest banks, will be subsidized until the desired outcome is reached and if that means they’ll be subsidized forever, then that’s what will happen. That the desired outcome may be intrinsically impossible won’t be a deterrent.
And if we’re upset that billions are made by bankers in this process we have nobody to blame but ourselves. That’s the nature of the financial sector. Vast sums are flying by and those who work in the sector are covered with glue. Some of that money will inevitably stick to them. The more that flies by, the more will stick. That’s why many if not most who work in the financial sector do so.
I think the same argument can be made about the car companies. It appears that the government is arguing that the situation is so utterly dire and hopeless that the normal expectations of secured creditors must be set aside. Their collateral has virtually non-existent liquidation value without keeping the concern going. In short, it’s too big to fail.
I supported the initial auto bailout, but no plan to make Chrysler viable has appeared, so it’s time to pull the plug on taxpayer support.
One of the many reasons I opposed subsidies to GM and Chrysler from the get-go was that I saw no viable exit strategy. Indeed, once you’ve decided to subsidize them that very fact provides additional weight to future support. In for a penny, in for a pound.
I suspect that the frantic desire for Fiat to acquire Chrysler is a search for an exit strategy. Surely, there’ll be less pressure for government support for a foreign-owned company! At least I think that may be the argument they’re thinking of.
BTW/ the Bankruptcy Litigation Blog has the best legal coverage of the Chrysler reorganization IMHO.
What is the interconnectedness of all things to big to fail..are things so interconnected now because of how so many loans got bundled up into those wild financial schemes…that if we let the wrong pieces of the puzzle fail that it would most likely take much of the rest of the structure down with it?
For example, retirement funds, I believe trillions have been lost from retirement funds..from 401K types, to state retirement funds..and many other forms of retirement plans linked to the markets in various ways…is it possible that the government is in some way trying to save these accounts, but in order to do so ..it has to shore up the part of the system that created this mess, a Catch 22 situation?
There must be countless other similar connections to these so called “to big to fail” giants that the government cannot allow them to fail because of a domino effect.
The same for our failing auto industry…what’s really at stake here..a company name…or peoples lives? Isn’t government the only system left at this point that can actually do something that may correct or at least soften the crash for so many?
As a society, and collectively as a society, is it not in our best interest to fix the breaks in our system, even if it means that there will be those who will take advantage of the situation for their own personal gains, while we repair the system.
One county in my state has a poverty rate over 21% several other counties are not far behind. The effects of the recession will drive these numbers even higher..and it will take years if ever in my life time for these numbers to fall.
I am angry, but is this the time to stop and blame someone or some group while the flood waters rise, or do we pull together as a community, fill as many sandbags as possible in hopes of being able to build a wall high enough and soon enough to hold out as mush of the flood as possible…
PD –
Thank you for the blog reference. The arguments laid out there are just fabulous, obviously more eloquent and anchored in the case law than mine laid out here or at OTB.
That all said, are we anywhere closer to what is “right” than your observation that somewhere between “the absolute clause” vs Ginsberg’s “equal distribution among creditors” points of view lies practicality??
Having been through some of these as a finance man, here would be my hip shot at something that would make sense:
Seniors: $3-4B cash, plus 15% of the equity.
Juniors (VEBA): $1B note plus 10% of equity.
Juniors: (Taxpayers): 50% of the equity for their fresh $6B
Fiat: 25% of the equity for mgmt and startup losses
Old Equity: Nothing. (Although in a private deal I bet they would get 2-5%.)
Note how radically different this is from the current proposal: UAW – big winner. Taxpayer: boforked..
Watching the law is going to be intellectually stimulating. Watching the preference politics makes me feel I have the swine flu.
uh, “absolute priority”
Drew, I think the practical considerations stem from the notion that the difference between the Government’s position and the disident creditors right before the filing was a mere $1.2 billion. Maybe, I’m suffering a loss of numerosity, but if this were a bona fide reorganization and a company could not come up with $1.2 billion (or let’s be irresponsible and suggest $600 million might cover the distance), then we would conclude the market lacked confidence in the company’s future at that valuation.
PD –
I understand completely. This is classic workout stuff. But think about what you just said about “the market.” (And as I pointed out in one of my posts.) The “company” doesn’t come up with anything. Its the other interested participans who “come up” with value.
Case A. The company has no future, and should be liquidated immediatley for the benefit of the creditors. The government’s position was “take the liquidation value we offer, because you will do no better in actual liquidation.” The hedge creditors said: “We disagree, you are shy $1.2B, so we’ll take our chances.” It was the TARP’d banks, with other motivations, who caved, not the hedges. It should have gone to liquidation, or the government should put up. The “market” disagreed with the government.
Now let’s consider the alternative: Chrysler has prospects as a going concern. And of course, this is the scenario the government forced. If that is a viable scenario, the lenders might take a measly $2B in day 1 cash, but why in the world would they forego meaningful future equity?? That, quite frankly, is fiduciarily “nuts.” The government should have paid the seniors for going along with this instead of liquidation. I would not want to be on that Board or Creditors Committee defending that decision. “So let me understand this, Drew, the government made clear they were not going to let Chrysler liquidate, so as my creditor representative you caved and took a 29 cents on the dollar cash number – less than you thought achievable in liquidation – and a stub equity piece infinitely less (zero) than others with faulty claims that were a fraction of ours, despite our senior secured position in the cap structure???
I’d be looking for a hole to climb in………and a good lawyer.
I think my “hip shot” whacking up of the spoils would pass a lot of sniff tests.
55% to the UAW, zero to the seniors and 10% to the taxpayers putting in $6B fresh is really, really stinky, any numerosity aside.