Poll: Let Big Banks Fail to Reform Financial System
I saw an interesting poll on a web site called The Globalist run by my friend Stephan Richter. He and I share a delight in telling the truth — or at least what we see as truth — in public in Washington. Since 95% of what is spoken in Washington is sponsored by some corporate interest, expressing actual honest opinions is a radical concept.
Here are the poll questions:
Should the U.S. government let some of the big banks fail?
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| No, it would have catastrophic consequences. | |
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| Yes, it would finally lead to real banking industry reform. | |
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| The banks are already failing. Nationalization is the only option. | |
The thing which caught my interest was 2/3 of the respondents favor allowing the large banks to fail and be broken up, this to advance the concept of reform.
Chart via Globalist
Almost a third of the respondents said that the banks were already failing and should just be seized and broken up.
What is interesting about this poll to me is that The Globalist is a pretty broad, non-financial portal with a definite international following. Not a hotbed of Republican, conservative politics. But there does seem to be a broad and broadening public disgust with the problems on Wall Street.
Of note, something interesting happened at the Financial Services Hearing this week that very few people picked up on, but that is actually somewhat newsworthy. During the hearing on mark to market accounting standards Robert Herz of FASB (Financial Accounting Standards Board) said that about two weeks before insolvent institutions go under, they come to him and ask for accounting rules changes. The exchange is at about minute 4:45.
So guess we should be tracking Bob as a bank fail indicator? When Rog Cohen calls with a patient on life support and Bob gets on the conference call, we know the time is nigh?
On Wednesday, Bloomberg News wrote a piece about lawmakers (Brad Sherman) thinking of giving bad bank bondholders a haircut based on the GMAC model whereby bondholders were given a 40% haircut. That would help improve capital ratios, and make them smaller. Both desirable outcomes, the financial clog could clear and confidence could be restored.
But, on Thursday, Bloomberg News reported other lawmakers were talking about legislating an end to FV accounting, to allow banks to continue the lie. Paul Kanjorski is the nutbag on the Hill spear-heading this lame-brained effort. The goal is to let banks decide what marks to give their assets. Presumably, these marks would be marked-to-model, that is whatever fictitious fantasy model they wish to create. The financial system would not clear and confidence would remain in the shitter.
The FASB chair Robert Herz is being pressured by lawmakers to change the FV rules, according to the chatter. Barney Frank is doing some of the arm-twisting, a role he does with only modest skill. SEC Chairman Mary Schapiro appears to be against eliminating mark-to-market, but she is not forceful on this point.
>
Sources:
Banks’ Bondholders May Be Next to Share Bailout Pain
David Mildenberg and Bryan Keogh
Bloomberg, March 11 2009
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aKqHkkFlnvfM
Lawmakers Tell FASB to Change Fair-Value ‘Quickly’
Ian Katz and Jesse Westbrook
Bloomberg, March 12 2009
http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a6RX9zOA4Td4
Alan Grayson Questions AIG Math
You Tube, March 13, 2009
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March 14th, 2009 at 7:28 am
Ummmm, isn’t the entire problem with the financial sector based on lack of transparency? And now the banks want to claim their “assets” are worth whatever they say they are? Hmmmm, yeahhhhh. Great ideas all around.
Fire Geithner and Summers, hire Krugman, Stiglitz, and Roubini. Anyone receiving federal money must immediately open all their books to public auditors who will place all relevant information and derivative positions on the internet for everyone to review.
Then, and only then, will any financial stock be worthy of investment consideration.
March 14th, 2009 at 7:46 am
to your point of: ” Since 95% of what is spoken in Washington is sponsored by some corporate interest..”
Kanjorski, no mere nutbag, is compromised 6 ways from Sunday..
http://clusty.com/search?input-form=clusty-simple&v%3Asources=webplus&query=Kanjorski+ethics+issues
and, interestingly enough, though trailing in every poll, save one, was re-annointed..
http://www.pollster.com/polls/pa/08-pa-11-ge-bvk.php
this: “SEC Chairman Mary Schapiro appears to be against eliminating mark-to-market”, though, is spot-on. for ‘appearances’ only..
we’ve allowed all manner of compromised hacks and polished liars to accede to our highest offices, then wonder why ‘the Economy’ is ‘in a soft patch’
maybe, one day we’ll be able to say 4 when presented with 2 2′s..
Chris,
btw, your insight into the Political side of things is, either, what makes you, as Roubini put it, the best ‘Bank Analyst on the Planet’, or more than, just, a ‘Bank Analyst’. I’d go w/ ‘Both’.
March 14th, 2009 at 7:53 am
I have a problem with outright Nationalization. Yes sure, the bond holders made risky bets but, who’s money were they waging, their institution’s or their client’s? Nationalization would be ok if the same bond and stock holders own the spun out good entity. Otherwise, Nationalization would be another case of hwy robbery, haven’t we have enough of it already!
As always, it is the little guy that would bare the front of it, the little depositor in Korea or Europe whose bank lent their deposits to U.S financial institutions. So, might as well let ALL the little guys bare the cost. Why the US tax payer and not the other ones? Because, he elected governments that deregulated the U.S finance industry.
I think nationalization is a cop out from responsibility, let the bond holders salvage the institutions. Nationalization NO, Chapter 7 YES.
March 14th, 2009 at 8:13 am
…….BR: there are times when you amaze me……treating this poll seriously is one of them……As for letting the banks fail or nationalizing them…..It simply isn’t going to happen however much the know nothings or those with an agenda respond to rather silly polls like this
March 14th, 2009 at 8:25 am
otto,
remember R.I.F.
http://www.rif.org/
see header: By Chris Whalen – March 14th, 2009, 6:00AM
March 14th, 2009 at 9:08 am
Kyle,
There’s this impression that if the banks open up their books so we see what toxic waste is on their balance sheets, the public will be able to decide whether there is or is not value. That impression is misguided. Market participants spend many $OOOs/month for subscriptions to services such as Bloomberg, Intex, Loan Performance, Yield Book, etc. just to know what’s going on in these things. Offering documents run into the hundreds of pages, and in the case of CDOs refer to the collateralizing assets, for each of which the same is true. The whole point of the scam was information arbitrage. I agree that taxpayers should see what they are on the hook for (and what exactly Ken Lewis means by Merrill Lynch as a “thing of beauty”) but the only way that seeing the actual assets helps taxpayers is if they ascribe a value of $O to anything that looks indecipherable.
- crabs
March 14th, 2009 at 9:15 am
OK Otto. Describe for all of us how you fund the operating losses for FNM, FRE, C and AIG in Q1 2009? And then talk to us about full year. Are you going to print the money? Be specific.
And I see that the Premier of China has asked Secretary of State Hillary Clinton for an explicit, state-to-state debt guarantee. The game is afoot.
So before you say “ain’t going to happen,” tell us why not, specifically. OK?
March 14th, 2009 at 9:31 am
Otto:
You need to lighten up, dude. You tend to take a dismissive attitude with any of your responses that makes me think you ain’t very happy. Whether it is living in Bum&%^*, Kansas or responses to our economic mess. Blogs are for discussion, and they can be a lot of fun. Let’s argue, don’t dismiss me because you are anal retentive…It is not a silly poll, people are worried about building a mountain of debt…maybe you should vacation in Kansas…I noticed the great plains have the lowest unemployment rate in the nation….
There is something about the debt picture I noticed today and it is from California…
http://www.bloomberg.com/apps/news?pid=20601015&sid=a_CBZQZVBVOM&refer=munibonds
California Budget Runs $8 Billion Short, Analyst Says
Basically says, like the banks, that what you thought in February is going to fall way short…and we now need more money….what I thought was interesting was the same thought congress has for us, that
“Our year of shared sacrifice isn’t over,” said Noreen Evans, a Napa County Democrat and chairwoman of the Assembly Budget Committee. “As grim as it is, this forecast is not even the worst-case scenario facing California. We must be prepared for more bad news to come.”
Shared sacrifice means higher taxes to those in office…not the loss of government jobs in any meaningful way…it reminds me of the Patton movie where to GI’s are leaving a battle and Patton drives by…one says,” There goes old Blood and Guts.”
The other replies,” Yeah, our blood, his guts….”
Same idea…at least in my opinion about creating legacy debt…
March 14th, 2009 at 9:39 am
I think Otto is right – Washington does not have the ability to let the banks fail precisely for the reasons cited. And that is sad.
However, if we are to ever restore any confidence in the world’s banking system, we need comfort in the value of their assets – that is what it is all about. And if that means allowing banks to fail – because their assets have no value – then that must be an accepted consequence. The market reacted very badly to the Lehman collapse, precisely because it was not aware that assets were so bad. It now accepts that banking assets are suspect so there should be less reaction – as has been said before the market already reflects the situation.
March 14th, 2009 at 9:43 am
> The market reacted very badly to the Lehman collapse, precisely because it was not aware that assets were so bad.
Do you know this? Lehman had a portfolio of $40B in commercial mortgages which they misvalued, but I was not aware that they were big-time CDO issuers or CDS writers. I think the market’s reaction was bad because they were not bailed by the government and had to file for BK.
March 14th, 2009 at 9:45 am
Yup. LEH was a toxic waste site. They did not even have the docs for the mortgage paper. Outsourced to some outfit in CT, so nobody could buy the firm. Virtual record keeping.
So John, to your comment about Otto being “right.” tell us how you are going to fund a subsidy for the big banks, AIG and the GSEs? I see a sovereign default coming folks.
March 14th, 2009 at 9:59 am
Two comments:
If we hold an asset because we think the market value is too low – that is investing. If we change our valuation methods – ie more away from marking to market values – that is close to fraud.
If we do not recognize reality, we will prolong the current malaise.
The US government would seem to have a virtual unlimited ability to issue debt – but, as more debt is actually issued, that it will be clear what actual limit there might be. I would think the US government can go on funding bailouts for everyone but as each bailout is funded then the US government credit will become of less value. Then it is a spiral downward.
I am interested by the Chinese comment as it seems to indicate that, perhaps, one of the largest holders of dollars, is beginning to question the value of its holdings. That becomes an indication of that limit.
March 14th, 2009 at 10:12 am
This so called poll is totally meaningless without more context
1. WTF does “Let Banks Fail” mean exactly?
2. Who was Polled ….USA Today Readers? Fox News Listeners… WHO???
Let Banks Fail… means???
Shareholders, bondholders are wiped out?..
What about deposits? Deposits are backed by government or not?
Do some think deposits should be wiped out too?
Should we all be withdrawing our cash from banks on Monday?
Tell me
March 14th, 2009 at 10:20 am
The thing which caught my interest was 2/3 of the respondents favor allowing the large banks to fail and be broken up, this to advance the concept of reform.
I think it is because most people in the poll will have most of their deposits under guarantee so it will cost them nothing. They are also in the mood to give the banking system a good swift kick in the shins for the mess they made and that is one way to do it
March 14th, 2009 at 10:30 am
I agree with Otto and Bob. 95% of the American public believed that having loans that reset to 8 or 10% interest was no problem. 95% of the American public is functionally illiterate. 95% of the American public couldn’t tell a CDO from a CEO.
This is a meaningless poll.
March 14th, 2009 at 10:33 am
I also think that the Chinese have made too many mentions of their concern about our debt creation to assume this is just posturing. I think they are truly worried that their history of buying our debt with their surplus monies could have been bad policy, and I expect them to significantly slow in the future (as in Now)…they will find other ways to invest besides buying treasuries..the 3 largest holders of our debt are China, Japan, and Britain…and I would think all 3 could find alternates..
March 14th, 2009 at 10:47 am
i suspect the chinese comment had something to do w/a little sea going incident recently, too.
March 14th, 2009 at 10:48 am
Johnbaring said:
“If we hold an asset because we think the market value is too low – that is investing. If we change our valuation methods – ie more away from marking to market values – that is close to fraud.”
Does that mean all banks are fraudulent because they don’t mark their loans to market?
The assets that are being marked-to-market are securities, which in many cases the banks say they will hold to maturity if they have to because they will not sell them at these distressed prices. Why not sell them now? Because based on the economic value of these securities, on an expected cash flow and loss basis, (some of) these securities have much much higher values. Which makes them very ‘loan-like’. And thus mark-to-model is no different than the way loans are treated, and have been treated. So this would not be fraudulent, but simply accounting for the assets the same way other similar assets are treated.
There just needs to be a better way to separate out the truly bad assets, that mark-to-market would only obfuscate the truth, and the actually still-good assets, that are being badly mispriced due to deleveraging in the marketplace and lack of liquidity/demand/$ from buyers.
In regards to the poll, I agree that its meaningfulness is questionable. Who are these people? And do they have any idea of how the banking system works and the interconnectivity of the firms and how everything that happens at the system level filters down to the man on the street in some way? Or do naiively they feel that ‘Wall Street’ is disconnected from ‘Main Street?
I would love to have seen a similar poll conducted prior to the Lehman collapse – would these same people have argued that a Lehman bankruptcy would have minimal effect on markets? On credit flow? On the entire world economy? They might have had an non-rigorous knee-jerk ‘let them fail’ attitude then, but I’m wondering if they knew what the consequences would end up being, if they would have still argued for that point.
The poll also implies we can’t have meaningful reform without major bank failures – I disagree – everyone, from the President to leaders around the globe, has an understanding of the role that failed regulatory regimes have played in this collapse that has not only claimed our financial systems, but every economy around the globe. Significant reform is coming regardless, no need to ‘teach them a lesson’ to beat the dead horse and inflict more pain to Main Street.
And only 6% of the respondents think major bank failures would have catastrophic consequences? – this low?? – I know there are differing points of view on this, but if only 6% of the respondents felt this way, that just indicates to me that the vast majority of those polled have no clue to how the system works or could articulate what possible consequences might occur from a fallout. 6% is just too low and unrealistic and leads me to question the validity of the results of the poll.
March 14th, 2009 at 10:48 am
Froglips Says: at 7:53 am “…. As always, it is the little guy that would bare the front of it, the little depositor in Korea or Europe whose bank lent their deposits to U.S financial institutions……” .. you missed me in that sentence
I’ve been take’g a position blog’g and on talk radio that invest’g in a local bank money market account instead of entrust’g Corporations via stock buys is a financial way to starve corps of funds since corps are allowed by charter to do as corps see fit with that investment ( ie wages to top, vacation retreats, close factorys, invest globally ).
Froglips – your statement woke me up .. there is no escape is there? Hum ……… maybe a statement on garbage disposal I made years ago is a concept .. garbage should not be allowed to cross county lines (consumer and producer) .. notice there is no r in county … Regional Banking Balance & Paygo
March 14th, 2009 at 10:53 am
sorry – typo in my post
this:
There just needs to be a better way to separate out the truly bad assets, that mark-to-market would only obfuscate the truth
should read:
… mark-to-model…
March 14th, 2009 at 11:00 am
@jeff in indy:
I think the seagoing incident was partially because they are our biggest debt holder now…I mean, if your neighbor holds your mortgage, how are you going to stop him from planting bulbs in your yard??
March 14th, 2009 at 11:15 am
agreed. i think they hold something north of 600b reasons to tell us to get out of their yard. much more effective to rattle dollar bills than swords, eh?
as to the poll results, i would have somewhat agree its questionable:
“In regards to the poll, I agree that its meaningfulness is questionable. Who are these people? And do they have any idea of how the banking system works and the interconnectivity of the firms and how everything that happens at the system level filters down to the man on the street in some way? Or do naiively they feel that ‘Wall Street’ is disconnected from ‘Main Street?”
how many ‘in the know’ truly understand this relationship? if they did would we be in this position now? i would tend to give the poll some weight. yes, i know more than 95% of the public doesn’t understand, but then again 95% of the public doesn’t visit, nor even know about, websites such as the Globalist and even, sorry Barry, The Big Pic. hopefully, those that do have some semblance of understanding and knowledege of the topics at hand.
March 14th, 2009 at 11:17 am
Chris Whalen Says: March 14th, 2009 at 9:15 am
“I see a sovereign default coming folks.”
~~
people, if you didn’t hear the bell ringing, before, you might want to tune in and Hear it now.
USTreas Complex, aka “Sovereign Debt”, Default is the Endgame of this scenario.
and, for you History, and Finance, dilettantes that may be among us, it wouldn’t be the first time..
as I’ve asked before: “Who has bets on the U$D seeing 2010?”
March 14th, 2009 at 11:20 am
The Fair Value fix is going to be a little complicated, but not impossible.
Currently you have a witches brew of horribles that converge on the value of Level 3 assets. First there’s the decreased value of the underlying with respect to mortgage backed securities. Then, there’s the negative feedback loop of created by falling value and fear of even more falling value. Then you add non-payment and foreclosure to the mix. Then, finally, you have to define and apply ‘risk’.
Then, let’s not forget accountants who live in terror of SarbOx problems and lawsuits for making a bad valuation recommendation if the securities owners fail to value the Level 3 assets properly. By properly, the only logical value would be tied closely to the concept of conservatism, which is commonly used to value assets as low as possible, ‘just to be sure’. I suspect cash flows are frequently an ignored byproduct of the valuation process.
Finally, you add a mentality that thinks if you don’t choose the worst possible value out of many that are rationally defensible, then you area a crook (more conservatism, popularly applied)
The you ignore the fact that these securities will again rise to Level 2 or Level 1 at some point in the future, and trade at deep deep discount since a lot are and will remain pure crap by any reasonable definition. Just not quite as crappy as commonly believed.
Put it all together and you have a somewhat phony capital crisis. All based on a mix of facts and terrors and probably the wishes of a few criminals who hope they can con the regulators into crashing all bank stocks so they can make some large cash shorting them.
FASB should recommend that valuation be based on the highest reasonable and defensible alternative. Then it should provide specific examples in the guidance. Without realistic examples, the advice will be ignored.
March 14th, 2009 at 11:21 am
franklin411 Says:
March 14th, 2009 at 10:30 am
I agree with Otto and Bob. 95% of the American public believed that having loans that reset to 8 or 10% interest was no problem. 95% of the American public is functionally illiterate. 95% of the American public couldn’t tell a CDO from a CEO.This is a meaningless poll.
…..95% you’re being generous…how about 99%……I’ve been running an informal quiz for months on this very question and apart from a couple of people who work in the heart of the financial industry I’ve yet to get a correct answer even from the financially literate.
@ sourcethree Says:
March 14th, 2009 at 10:48 am
…..You raise some interesting points about MTM…..I’ve always been a MTM man and thought some of those who were calling for its abandonment were crazy but gradually I’ve come to see that it’s a lot more complicated than this one shoe fits all formula……In fact it’s like everything about this banking crisis….immensely more complicated than it looks……which brings one to the poll…..for some reason BR seems to have embraced his inner populist of late and believes that the opinions of some guy going by on the bus are as valid in fixing this as those of Larry Summers…..It’s the ultimate outcome of the theory that if two heads are better than one….then 200 heads must be even better still……the notion that these enormously complicated issues are susceptible to populist notions advanced by the totally uniformed and unqualified seems bizarre in the extreme to me
March 14th, 2009 at 11:29 am
dead hobo Says:
March 14th, 2009 at 11:20 am
……Yep hobo I’ve rather come around to this view myself…..It’s going to be fiendishly complicated but it has to be tackled in a sophisticated way that recognizes this is a multi tier problem…..I think the fact that this is starting to be talked about by sophisticated financial observors is a straw in the wind and it was a factor in the bank rally this week.
March 14th, 2009 at 11:29 am
crabs,
“Market participants spend many $OOOs/month for subscriptions to services such as Bloomberg, Intex, Loan Performance, Yield Book, etc. just to know what’s going on in these things.”
Well apparently none of these services were worth paying for, as seemingly very few people knew what was going on. Or they just didn’t bother to read hundreds of pages of documents designed to make your eyes bleed.
“There’s this impression that if the banks open up their books so we see what toxic waste is on their balance sheets, the public will be able to decide whether there is or is not value. That impression is misguided.”
Misguided? It’s the companies that are doing the misguiding. Maybe this “impression” exists because companies like AIG say they need $30B to survive, no, $85B to remain solvent, no, $125B to pay their debts, no, no, wait, $175B to stay wind down their positions just a little more, and perhaps as much as $250B to “avoid destroying the world’s financial system”.
Citibank, GM, et al are much the same: we need a lot of money, oh wait, a lot more, but maybe not, oh yes we do, we’re about to go bankrupt! But we’re also profitable! Maybe just let us mark-to-model and things will all work out! We speak the truthy!
These companies all seem to be operating under some Rand Illusion of inevitable profitability just because their CEOs golf with the right people. They want to ignore the fact that some their assets are actually liabilities for as long as they can.
March 14th, 2009 at 11:41 am
Let’s hope the sword does not become the only option but that is the question to be asked. Who are the debt holders and what is their position to influence Washington. The age old question of: Does it benefit the many or the few?
The question on whether the poll is meaningful is not the question. I think we all agree these are the options on the table and should all agree that the only way for a truly free market to come out of this is the one that garnered the most votes.
I’m with Sherman and think the “Too big to Fail” scare tactic is bullshit! Let the debt holders eat cake! I sure didn’t see the banks sharing record profits over the last decade with the taxpayer.
March 14th, 2009 at 11:46 am
Bruce in Tn Says:
March 14th, 2009 at 9:31 am
“It is not a silly poll”
……..You’re welcome to your opinion Bruce…….but really it’s a totally valueless poll…….why I’m down on this sort of stuff is it encourages the illusion that enormously complex problems can even be described let alone solved by simplistic formulas like “let the banks fail” whatever that means
March 14th, 2009 at 11:46 am
ho bo
good post – agreed
the only point you made that I would disagree with is your last one:
“FASB should recommend that valuation be based on the highest reasonable and defensible alternative. Then it should provide specific examples in the guidance. Without realistic examples, the advice will be ignored.”
the problem is, FASB has been there, done that – they have tried to clarify the rule to provide more leeway to the firms in applying the rule – but as the rest of your post points out, and as Bill Isaacs (former head of the FDIC) has also stated, firms still default to the lowest price/worst outcome solution for fear of Sarbox, etc.
I think that without actual changes to the rule, mere ‘clarification’ will mean no change and we’ll still be stuck in the same spot we’re in now – surprisingly, from the limited amounts of commentary I’ve seen on the hearings on Thursday, Congress seems to get this – which is why they kept hammering FASB, etc. that they want to see something done now, and it has to be meaningful, not just cosmetic
relatedly, it blows my mind that the initial position of Hertz, the FASB’s chairman, was that they planned on reviewing M2M over the NEXT YEAR in concurrence with whatever IASB comes up with – NEXT YEAR?!?! – this guy’s head is in the sand if he doesn’t see the urgency of this issue and this is truly frightening – changes are needed now, or there won’t be a ‘next year’ for parts of the banking system (and who knows what else consequently)
March 14th, 2009 at 11:48 am
Thats exactly what has been in the back of my mind for some time Hoffer. Maybe that was end game since Greeny came out hocking ARM’s and China threatened to collapse the USD with their commanding position. when was that,…2002?
March 14th, 2009 at 11:56 am
Chris,
Barry believes that bond holders should not be protected from their decision to lend to poorly run, insolvent financial companies. You appear to agree (as do I).
Now I realize that there are very serious geopolitical implications here as well, but by that same logic, do you also feel that China should not be protected from their decision to lend to a poorly run, insolvent country?
March 14th, 2009 at 12:01 pm
Good post hobo but we don’t live in fantasy land. No disrespect intended but it is well known there is no way to determine good from bad with these assets plus your asking the very people who” DIDN”T SEE THIS COMING.” to oversee it. Please! Do you really think that will instill confidence in our market? Barney Frank overseeing the righting of our financial system. What a joke!
March 14th, 2009 at 12:01 pm
Ken H –
you make me laugh! – thanks!
“the only way for a truly free market to come out of this is the one that garnered the most votes”
yes, and I’ll ask my kids if they want one piece of candy or 45 pieces – or $0.25 or $1,000 – and I have to abide by their votes – no overriding with common sense or rationality!
the system needs checks and balances and effective regulations to overcome the human nature/greed/etc. element that would come into play if everyone just went by their own best interests or were otherwise uncontrolled
- if all those that couldn’t afford a house were asked to vote if they could still buy one even if they couldn’t afford one, they’d all vote yes – in essence, our free market allowed that… and look what happened
also,
“I sure didn’t see the banks sharing record profits over the last decade with the taxpayer.”
- umm, do you have a 401K? – I’m sure there are some banks in there – they paid tons of dividends every year, and bought back shares – these all benefitted shareholders, among which were many many taxpayers
anyway, I don’t mean to ding your entire post
your question of ‘Does it benefit the many or the few’ I think is critical – its extremely complicated to answer and is why apparent knee-jerk reactions like ‘let them fail!’ need to be balanced with the consequences of failure to society from mass bank failures and a decrepit financial system – there’s no clear answer to this, which is why there are so many differing opinions
March 14th, 2009 at 12:04 pm
agree w/Ken H. sadly, the political agenda remains bigger than the economic one. we can talk until blue in the face while coming up the best solution, but if it doesn’t butter the political bread, it ain’t gonna happen.
March 14th, 2009 at 12:04 pm
Sourcethree,
You’re right. Rather than jimmy around with FAS 157, they should come out with specific guidance that applies only to mortgage backed securities. FAS157 is dense enough as it is. Any additional layers would be ignored. And easy to understand examples must be included.
March 14th, 2009 at 12:18 pm
jeff in indy Says:
March 14th, 2009 at 12:04 pm
agree w/Ken H. sadly, the political agenda remains bigger than the economic one
……..Actually I think the reverse is true……the mere fact that Ken H. thinks that different asset classes are indistinguishable speaks volumes……Ultimately this is going be sorted out by the technocrats (in our case Bernanke/Geithner/Summers) and the politicians will just deliver the votes……..As it happens whatever your politics Frank does strike me as having more of a handle on the complexities of it all than most…….Some of them are unbelievable……My favorite is Jim Bunning
March 14th, 2009 at 1:41 pm
No problems source,
Objectively, the poll is pretty much useless but….I believe the only option,…of the three that BR has provided in this post IS the one that garnered the most votes. No one here, including the poll states “MASSIVE” bank failure is an option. Do you want market confidence?
Simply said, you cannot bailout fraudulent big banks with a “Too big to fail” mentality while all the little banks get fucked for doing the right thing. Whether you nationalize or let them cook the books! This does not promote market confidence. A true free market creates it’s own checks and balances brother. Change the rules, and I guarantee the market will fail. May as well socialize the whole deal.
401K? uh fuck no, saw this coming. For that matter, your children probably don’t have one either but their gonna pay for this bailout.
Otto, I know which asset class is smoking the banks in question. Did you honestly think the BofA /CW deal was a money maker,…or a taxpayer funded cluster fuck. The problem is the banks themselves cannot distinguish their assets, now that makes me laugh. What I don’t laugh about is this issue of them knowing they could fall back on me and my kids and….Source’s kid’s (ones with all the candy).
Frank’s dealings with Freddie and Fannie are enough for me, no thanks.
March 14th, 2009 at 2:20 pm
Ken H.
some solid points – and kudos for getting out of market before all this happened
one thing I’d point out is regarding making our kids pay for this – I’ve analyzed quite a few banks where they’ve only been ‘forced’ to take gov’t capital because they don’t know there the marks on even their good assets are going to stop – so while you see it as cooking the books, I see it was trying to make a distinction between the truly bad assets and the assets that are just simply mispriced from a cash flow/epectected loss basis (yes, that does happen from time to time, even in free markets) – see my post at http://www.ritholtz.com/blog/2009/03/robert-herz-on-large-bank-insolvency/#comment-153497
this would allow us to separate out the bad banks from the healthy banks and stop putting all banks in the same bucket – and would save taxpayers money too boot
also, my comment about ‘massive’ bank failures stems from my thinking that allowing M2M to continue as is, means keeping the negative feedback loop mechism in place that it entails, which means shorts can move from bank stock to bank stock forcing values toward $0, which sucks confidence out of the system and creates the potential for bank runs, etc. – so while I don’t think ‘massive’ failures are an intended option, they could be the unfortunate fallout if things continue as is
and I’ll just add that I’m not saying that changing M2M will solve all of our problems – but I do think improvements to the rule could go a long way in lending some stability to the system, at which point we can then start to think about more micro and macro solutions to get out of this mess and to prevent it from happening in the future – without any changes, the downward spiral to asset values and concerns over capital adequacy will continue for even the ‘good’ banks
lastly, I’m cognizant of your point regarding the ‘little banks getting f*cked for doing the right thing’ (I work for one!) – my views are generally more from a macro ‘save the system/economy’ standpoint than from figuring out how to address that problem – but I do believe there are probably some outside-the-box solutions that could even resolve this dilemma
– for example, set up a trust so that x% of future earnings for x number of years from those banks that have been ‘bailed out’ will be captured and then distributed to these other banks – you can’t make it so punitive that the banks who can survive but only with a little help don’t actually take it, but it has to be substantial enough that they are in effect punished for their past behavior while at the same time the angel banks are rewarded – this also helps restrict some of the unintended consequences as we’ve seen with AIG, where they are apparently underpricing certain insurance contracts to the detriment of their healthier competitors – drawing the lines for such a solution could be difficult, but I think you get my drift – I’m not sure that helping the troubled banks and preventing this downside for the good banks is automatically exclusive
March 14th, 2009 at 2:37 pm
Interesting poll. But what are the odds that Obama cares in the slightest what the public wants with respect to the banks? Obama will want what is good for his own political career. Unfortunately, that probably means throwing more money at the banks. From Obama’s point of view, the single most important issue is going to be the unemployment rate on election day in 2012; perhaps second most important is the unemployment rate on election day in 2010
March 14th, 2009 at 2:53 pm
@
Change Ken H. Says:
March 14th, 2009 at 1:41 pm
“Change the rules, and I guarantee the market will fail”
………Well you see I don’t want the market to fail
DL Says:
March 14th, 2009 at 2:37 pm
Interesting poll. But what are the odds that Obama cares in the slightest what the public wants with respect to the banks?
………..Zero…..He’s been hired to fix the economic system amongst other things…..He has a bunch of competent people in Bernanke/Geithner/Summers/Volcker who’ve forgotten more about this subject than anyone posting here has ever known……..As has already been pointed out at least 95% of adults are financially illiterate so not paying much attention to their latest whim makes entire sense…..If he succeeds he’ll be FDR II….If he fails he’ll be out on his ear.
March 14th, 2009 at 3:20 pm
otto – i think it’s those 2 guys in the middle that are the problem. and yes they do have 1 eye cast towards ’10 and ’12. the name of the game is get re-elected/re-appointed. cynical as it may sound, i don’t think they give 2 shits what us little piss ants have to say about it. though it’s nice to come on blogs like this and pretend we do have an impact.
March 14th, 2009 at 3:22 pm
It is the essence of naivete to believe that well-meaning technocrats a) can fix the banks, and b) would be allowed to do so if they can. Belief of this sort is just childish.
The banks will be “fixed”, i.e., subsidized to exist in their zombie states for as long as it is feasible to do so, because, as DL observes, that is the state the powers that be believe will likely to lead to less unemployment, short-term (2010-12).
The difficulty is long-term structural problems are not addressed by ottovbvs’ technocrats when insolvency is not allowed. All of this will come to rest on the dollar, initially, then the American public through higher taxation and lower employment, and then American world hegemony, ultimately.
The collapse in employment will come when the technocrats are no longer able to prop up a failing financial system. The more they “fix” the banks now, the bigger the collapse later.
For all the optimists that believe things are on the mend, I recommend going long BAC, C, WFC, JPM, and especially GE (it really is more of a bank than an industrial conglomerate).
For those that are skeptical of the ability of the best and brightest to fight wars (Viet Nam) or (today) to fix banks and financial systems, I’d recommend arable land, gold and ammo.
I’m in the latter camp. Too clever-by-half technocrat quants that couldn’t recognize risk if it bitch-slapped them got us in this mess. I seriously doubt Obama’s or Bush’s best and brightest can get us out.
March 14th, 2009 at 3:44 pm
Kyle,
“Well apparently none of these services were worth paying for, as seemingly very few people knew what was going on.”
Not quite. if you’re going to value a security backed by thousands of mortgages, you need to buy the mortgage data as well as cashflow-generation software which allows you to make assumptions about prepayments, defaults, and loss severities. The problem is that the underwriters used bad assumptions, and the ratings agencies used models which failed if the price of real estate went down nationwide. That is how these deals got rated and sold.
“Misguided? It’s the companies that are doing the misguiding.”
That is certainly true, because all they have in place to value this crap are the same tools they had before. Thus, each time Moodys increases their loss estimate on subprime mortgages (and it has already happened 6 to 8 times), it triggers a series of downgrades which makes the value of Citi and AIG’s asset ratchet downwards. Since the govt refuses to let them fail, expect to see them given many more billions, particuarly AIG, the CDO-squared-insurer par excellence.
However, if Citi says that you as taxpayer are backstopping losses on Klio II, what does that tell you?
“Oh, it’s an SIV they say”. You then say “what’s that”? They’ll tell you, “AAA-rated CDO paper funded by commercial paper”. Then you say “what’s a CDO?” They’ll say “a resecuritization of mortgage-backed securities backed by subprime mortgages” Now do you see why you need all these tools to figure out the value of that?
March 14th, 2009 at 3:46 pm
jeff in indy Says:
March 14th, 2009 at 3:20 pm
otto – i think it’s those 2 guys in the middle that are the problem. and yes they do have 1 eye cast towards ‘10 and ‘12. the name of the game is get re-elected/re-appointed.
…….I thought I’d aknowledged that politics was very present…….As for Summers/Geithner both have brilliant records…..I’m not terribly influenced by what some scribblers have to say
The Curmudgeon Says:
March 14th, 2009 at 3:22 pm
“It is the essence of naivete to believe that well-meaning technocrats a) can fix the banks, and b) would be allowed to do so if they can. Belief of this sort is just childish.”
…….You’d prefer Paris Hilton, Barry Ritholz and Jim Cramer…….And how about Ben Affleck for FEMA…….And House for Surgeon General………The four I mentioned are in the driving seat on this matter just as Paulson and Bernanke were previously
March 14th, 2009 at 4:12 pm
@otto:
Here’s the thing. I may be wrong about the banking system and the ability of politicians and their best and brightest boys to fix things. If I’m wrong, life goes on more or less as before, and I can give away my excess crops, and use my excess ammo for target practice.
But I might be right. If I’m right, I’m prepared for the worst. I mostly understand the risks in my life due to forces beyond my control (such as the actions of idiots on wall street). I try my best to worst case every scenario and mitigate the risks as much possible. If I’m right about the ultimate consequences of financial system failure and bail-out, there won’t be any bail-outs coming to me because there won’t be anything left to bail with. I’ll have to ensure my family’s survival in a very dangerous and unpredictable world.
Understanding risk is the essence of a banker’s job, yet little ol’ me who is not supposed (according to you) to know squat about it, is being asked to bail the banker out. We’ll see who’s still standing at the end.
March 14th, 2009 at 4:50 pm
Source,
Very articulate and I appreciate the time. Sorry my posts are…not. Nothing I couldn’t do with a little more time and money?
I really don’t think we are that far apart in our thinking. Remember the poll referred to letting SOME banks fail.
This is where time and money become an issue, sorting this out as you suggest.
It’s going to be banks like yours who need o be the loudest in making sure this is done right.
“I hope that we shall crush in its birth the aristocracy of our monied corporations, which dare already to challenge our government to a trial of strength, and bid defiance to the laws of our country.”
- Thomas Jefferson
March 14th, 2009 at 4:51 pm
Curmudgeon,
It’s simple, like otto, his philosophy is that of pro-Dependence.
Summed, in different terms:”Uppity Slave, who are You to think you can think? let alone know better then your Master?”
These ‘people’ in Power, the ones otto so supports, are no friends of Freedom, nor Lovers of Liberty, they are, contra to that, Romancers of Realpolitik.
March 14th, 2009 at 5:14 pm
@ Chris Whalen Says: March 14th, 2009 at 9:15 am.
“I see a sovereign default coming folks.”
Chris, can you paint a scenario of how it would appear or be recognizable…what are milestones on the road as we do a sovereign default?
I do agree. I’ve been saying I suspect an undeclared defacto sovereign default is becoming more probable for the US but I use those two qualifiers “undeclared defacto” because all scenarios seem so murky and foggy but share one feature: via hubris, the US will never declare a default and by the time that moment in time is upon us where we forcefully illicit ‘consents’ from our overseas creditors to ‘re-structure’ our obligations, there will be few major sovereign economies left, who haven’t defaulted, who would dare claim we have defaulted.
Our complaining creditors being China? Japan?
I’m not sure what state their economies will be in by that date. The EuroZone economies, UK, Russia, all will have preceded us in sovereign defaults (likely via a daisy-chain of dragged defaults). Would it matter to a still-solvent China & Japan by then if those three others had already defaulted, given that a reconstruction of global economic systems and currencies will by then be unavoidable anyway?
The creditors’ refutation of our claims that we didn’t default might be like that odd day in the 1940s when Stalin’s USSR very belatedly declared war on Japan in WW2; it was murky, it was late and it was by then basically immaterial to the big picture and what was clearly inevitable.
March 14th, 2009 at 9:28 pm
What got us into this mess is the inability of our “Elites” to balance a budget. Relaxing the rules on FV accounting and allowing “Mark to solvency” would be an enormous step backwards. The last thing we need is to introduce less discipline. Maybe when this is all over, our so-called elites will have learned something and will manage accordingly going forward. We must stick with FV but, going forward, eliminate those items which make FV controversial. Do we really want our Banking institutions to be hiding things off balance sheet which cannot be valued or have no value?
March 14th, 2009 at 9:35 pm
Chris W@ “Yup. LEH was a toxic waste site. They did not even have the docs for the mortgage paper. Outsourced to some outfit in CT, so nobody could buy the firm. Virtual record keeping.”
Where were their auditors? Oops, I should know better by now……………..!
March 14th, 2009 at 9:50 pm
> Chris W@ “Yup. LEH was a toxic waste site. They did not even have the docs for the mortgage paper. Outsourced to some outfit in CT, so nobody could buy the firm. Virtual record keeping.”
It made the press that some judges were delaying foreclosures because trusts did not have actual loan docs, but this is a straw man. The loan docs are given to deal trustees, and an “assignment of rents” is given to the trust. This is all the trust has to produce in court. But some judges wanted to be lenient and popular.
March 14th, 2009 at 10:28 pm
That poll is a joke. “Not scientific” could very easily mean that Stephan Richter asked his secretary, the mailman, and the dog.
To Bruce’s point, it’s a blog (fyi – I always appreciate Otto’s comments) and we all enjoy the discussions. But I expect a little bit more from the person posting the article/story than I do from the commenters. (Although, I learn just as much from the group as a whole. )
Doesn’t anybody sniff-test this stuff before it gets posted?
I wonder if Chris Whalen uses the same level of due diligence to determine bank stress as he does to determine the legitimacy of a poll that he posts.
March 15th, 2009 at 7:52 am
If it’s an online poll, then there is no data here, and discussing it becomes an excercise in seeing what you want to see. While I would love to believe the poll results as stated reflect reality, it does seem unlikely. It certainly validates my opinion, but my perception, unfortunately, is that most people are pretty well and thoroughly suckered by the spin machine, thus I doubt that in fact these numbers represent an accurate statement of the opinions of the populous as a whole. On the other hand, if it is a scientific poll, the above is non-operative.