How Banks Cut Stress Test Cap Requirements in Half
We have noted on repeated occasion that the Stress tests were: a) not very stressful; and b) relied on metrics that were rather generous. Odd, in my opinion, to show such largesse to those very same reckless banks that caused the entire financial mess.
In particular, the 25-to-1 leverage is absurd, as is the worst case scenario of 9.5% unemployment — a number that is mere pissing distance from the current 8.9%.
Far be it from me to call the Stress tests a charade, a dupe, a con game or an exercise in manipulation. For that, I’ll leave it to others.
Like the Wall Street Journal, who noted this morning that the banks managed to browbeat the Fed into accepting much lower Capital needs than the tests should have required:
“The Federal Reserve significantly scaled back the size of the capital hole facing some of the nation’s biggest banks shortly before concluding its stress tests, following two weeks of intense bargaining.
In addition, according to bank and government officials, the Fed used a different measurement of bank-capital levels than analysts and investors had been expecting, resulting in much smaller capital deficits. . .
The Fed ultimately accepted some of the banks’ pleas, but rejected others. Shortly before the test results were unveiled Thursday, the capital shortfalls at some banks shrank, in some cases dramatically, according to people familiar with the matter.”
Just how much were the actual required amounts haggled down? According to the WSJ, alot:
>
| Bank | Original Stress Test Capital Requirement | “Re-Negotiated” Amount |
| Bank of America’s | $50 billion | $33.9 billion |
| Wells Fargo | $17.3 billion | $13.7 billion |
| Fifth Third Bancorp | $2.6 billion | $1.1 billion |
| Citigroup | $35 billion | $5.5 billion |
>
That is a decrease in require capital of about half (48.33%). The Journal implied these four negotiated test results were typical of the 19 banks.
One last note: The Stress Tests were done using “Tier 1 common capital” as a yardstick. We can assume that was also pushed by the banks, rather than the expected metric “tangible common equity.” That measure would have required another $68 billion in capital.
The entire exercise is turning out to be one giant joke — and the laugh is on the taxpayers . . .
>
Previously:
Stress Test: Not Very Stressful (April 24th, 2009)
http://www.ritholtz.com/blog/2009/04/stress-test-white-paper/
Stress Test: 25-to-1 Leverage as a Healthy Bank Target? (May 8th, 2009)
http://www.ritholtz.com/blog/2009/05/stress-test-25-to-1-leverage/
Source:
Banks Won Concessions on Tests
Fed Cut Billions Off Some Initial Capital-Shortfall Estimates; Tempers Flare at Wells
DAVID ENRICH, DAN FITZPATRICK and MARSHALL ECKBLAD
WSJ, May 9, 2009
http://online.wsj.com/article/SB124182311010302297.html
Stress Tested: Has Geithner’s Bank Confidence Game Worked?
MASSIMO CALABRESI
Time, Fri May 8, 1:10 pm ET
http://www.time.com/time/politics/article/0,8599,1896825,00.html
May 9th, 2009 at 9:21 am
It looks like the only honest place to make a buck now is the stock market. It appears to be a sure thing. It’s to big to manipulate. The economy is finally improving. Employment is improving .The banks are healthy. The government is doing right.
Bizarro Dead Hobo
May 9th, 2009 at 9:21 am
BR: Please check your site. The HP now displays a “Forbidden” warning. I came in through the history tab on my browser. Might be me, but I don’t think so.
May 9th, 2009 at 9:25 am
How to tell the real dead hobo from the bizarro dead hobo? Bizarro dead hobo has a pencil-thin moustache.
How to make fractional reserve banking work: require a smaller fraction. Next thing we know, banks will be lending with no reserves.
A little more analysis of the scam stress test:
http://market-ticker.denninger.net/archives/1029-More-On-The-SHAM-Stress-Test.html
May 9th, 2009 at 9:32 am
Ahhh I see…the Fed which already holds $10 Trillion of ‘assets’ ( mostly toxic ) transferred from too big to fail banks is just not enough
must lower the bar further to further to make sure ALL of the 19 banks pass with flying colors so The Federal Reserve could become the supercop for “too big to fail” which is a proposal being seriously considered by the White House.
The financial con job on American taxpayers by Bush admin ( Greenspan, Paulson, Wall St, etc ) is even more egregious now with the Obama admin ( Bernanke, Giethner, Wall St, etc ) because great big chunks of Big Shitpile that were “impaired,” “illiquid,” or “distressed,” were worthless – unless the peak real estate values of the bubble could miraculously be restored.
Stock market going up to get investor confidence to bring in more sheeple – wash – rinse – repeat cycle.
All of this renewed Goldilocks while
1) The projected budget deficit for 2009 is $2 trillion
2) The debt-drowned United States debt is already 350 percent of G.D.P and rising fast !
3) The Fed is now holding $10 Trillion of ‘assets’ ( mostly toxic ) transferred from too big to fail banks.
4) Other countries are now buying less of our debt
5) The USA has $53 Trillion in unfunded liabilities
Wow just wow – just when you think you’ve seen the biggest con jobs ever ( Like fradulent Iraq war and profiteering by oil companies and defense contractors ) we get this.
As The Triumph of the Banking Oligarchs continues at huge taxpayer expense perhaps most Americans should look forward to being a much BIGGER version of Argentina or Mexico in the near future !
Simon Johnson’s The Quiet Coup http://bit.ly/9QobY was a great read bu this is NOT going to happen
If the IMF’s staff could speak freely about the U.S., it would tell us what it tells all countries in this situation: recovery will fail unless we break the financial oligarchy that is blocking essential reform.
There has never been a bunch of greater and outright corrupt liars and thieves as there has been in the U.S. government in the last 10 years.
RIP America as we once knew it….
May 9th, 2009 at 9:41 am
km4:
Keep your eye on the dollar. While we might be going through deflation now, the money pump has been started up at full power, but it will take a little while for the full effect to trickle down (I use “trickle down” in the same sense that the South Fork Dam “trickeled down” through Johnstown, PA in 1889).
There are only two options for the US, and they are inflation or default.
We’re standing on the banks of Shit Creek. Make sure you have a paddle.
May 9th, 2009 at 9:42 am
If a bum on the street tries to panhandle Geithner for some spare change, I wonder if Tim negotiates with him, too?
May 9th, 2009 at 9:47 am
I wonder if all the reports coming out indicating the stress tests were a sham will have any effect on share prices at this point- I do think that the stock market- in the end- will reflect the “conditions on the ground” but sometimes it takes longer than a person would think-
the run up to 14,000 is a most glaring example of he stock market throwing caution to the wind- another poster on another thread indicated that a push to 9000 may be in the works due to options expiration next week- I do not discount that possibility- however-
I hope the great American “bubble chasing” public does not create yet another fabricated “wealth generator” that will defy all logic until it is yet again brought down to earth-
I do believe that CNBC and other outlets were heavily involved in pushing the real estate fiasco when their advice after the tech implosion was “real estate is the best place to put your money now”- so I cannot count CNBC as a business show – I see it more as a “medicine show” or maybe “The Medicine Show”
May 9th, 2009 at 9:50 am
so . . . discount heavily anything CNBC is pitching
May 9th, 2009 at 10:05 am
I read about this first thing this morning when I picked up my morning paper and literally laughed out loud. Better than expected.
May 9th, 2009 at 10:06 am
It’s not you, Marcus. I’m having the same problem.
May 9th, 2009 at 10:15 am
I couldn’t get the site to load for a few hours yesterday.
oh yeah, this is a complete joke, a charade, a dupe, etc.
I said it.
I don’t even get angry about this stuff anymore, instead this is exactly what I expected.
May 9th, 2009 at 10:18 am
Thanks, Mannwhich.
May 9th, 2009 at 10:31 am
Marcus, since the only two alternatives (and they’re basically the same) are inflation or default, what becomes the best move going forward. Does one invest in gold, gold-related stocks, alternative currencies or financial assets outside the US. Japan appears to be as bad a basket-case as the US and China is tied too closely to the US markets. The EU appear to be slow growth, but return of capital might be more important than return on capital when we look three years out, which is when I estimate the inflation demon will be roaring the worst. Decisions, decisions.
May 9th, 2009 at 10:42 am
A little off-topic but I have to share one anecdote from last night – my wife and I had an early dinner with friends last night at one of our favorite restaurants in Minneapolis. It resides on what Minneapolis has tried to spin as “Eat Street”, with attempts at spurring restaurant business, which to some extent it has, but I noticed many more closed restaurant storefronts last night, and, to be honest, last night it was more like “Dead Street” (didn’t see Dead Hobo though), with no street life outside whatsoever. None. Completely dead on a Friday night at around 10 p.m. Also, the restaurant (which has been one of the more popular restaurants in the city in recent years with the younger 20’s/30’s crowd) was a little over half full inside at peak time and lounge/bar area were dead. No weekend “buzz” in there whatsoever. Felt like a Monday or Tuesday night. It could mean nothing but I just thought I’d share. Seemed odd for a Friday night in May when the weather is getting pretty good for it to be so dead in a place that’s usually buzzing on the weekend.
May 9th, 2009 at 10:42 am
So what, Barry? A month ago we were talking about endless losses and universal default. Now we’re talking about less than $100 billion in *reserves,* not losses. And the WSJ, which is about the most impartial publication out there and has no incentive to color the data (amirite?), says we might need to increase that by up to 50%.
Wow. I’m soooooo scurreeddddd!
May 9th, 2009 at 10:42 am
PP:
Personally, and don’t take this as advice, I’m out of stocks (I was heavily into home builders during the boom, ’cause I worked in the industry. Got out in late ‘05 ’cause I saw everybody drinking bong water and ignoring the writing on the wall) and equally into cash, PMs (physical, no leverage), and CADs (I want to be able to drive to my money). So far, so good. If I knew what else to do, I wouldn’t be in here. When the going gets tough, the smart hunker down.
May 9th, 2009 at 10:45 am
I like trains and I prefer carrying my clothes around in a bindle.
Does that make me a hobosexual??
May 9th, 2009 at 10:50 am
Mannwich:
I’m trying to imagine your wife introducing herself, “Hi, I’m Ms. Mannwich.” Bet that’d raise some eyebrows.
Franklin:
You do understand that $100 billion in reserves can’t withstand the projected losses the banks will take over the next 3 years, or so, don’t you? The WSJ says we’ll need to increase it by 50%? Even after we’ve pumped more than a trillion dollars (and that number is waaaaaay conservative) into the system?
Go ahead and ignore the gorilla, but when he gets a woody and takes a shine to your eye socket, don’t come running to me for an eye patch.
May 9th, 2009 at 10:51 am
I would term it more as a fraud. Calling it a joke discredits comedy.
May 9th, 2009 at 10:57 am
MA
Thanks for the comments. I completely understand your view on just hunkering down. Unfortunately, I am all too well aware that even the best fortress can be taken or just gone around.
May 9th, 2009 at 10:57 am
@MA:
http://www.theonion.com/content/video/live_from_congress_the_skull
May 9th, 2009 at 10:59 am
PP:
No problem. I don’t want a fortress, I just want the battle to pass me by.
May 9th, 2009 at 11:01 am
Transor Z:
Ha!
May 9th, 2009 at 11:02 am
Buy stock in pitchforks and torches, it’s a sure thing.
May 9th, 2009 at 11:03 am
Mannwich,
A dapper and radiant personality such as myself would be noticed.
Butto,
Yeech. Not that it matters.
May 9th, 2009 at 11:04 am
Is it me or does anyone else think the toxic asset PPIP plan is now Dead on Arrival? What’s the point now? Or maybe they figure, “we’ve gone this far sticking it to taxpayers with no real adverse response, we might as well go all the way with it?”
May 9th, 2009 at 11:07 am
The only thing that Main Street cares about is if they can still get their money out of the bank when they need it. All this means is that they now have a “Real” number that the banks have to meet. Too bad most of this will be met with Preferred stock conversions.
The only thing I see is that the performing loans are bringing in enough to pay for operations, while the banks use the spread to build up capital. At this rate they should be re-capitalized in 10 years.
I’m personally wondering what the GM restructuring, if it happens like chryslers, will affect pension plans.
May 9th, 2009 at 11:08 am
By the way, I’m pretty sure there was a fair amount of insider trading happening on these garbage firms. I guess it’s legal if you don’t get caught, right? Mark it down – some low level shmuck will get charged with insider trading, but anyone who matters will get off scott free.
May 9th, 2009 at 11:08 am
Mannwich:
The average taxpayer hasn’t gotten the bill, and when they do, they won’t be able to pay it. Inflate or default?
May 9th, 2009 at 11:10 am
@Todd: You mean, along with “American Idol”, “Dancing with the Stars”, professional sports, and other nice diversions to keep people distracted from all the chicanery happening in front of their eyes that will vastly affect not only their lives, but their kids’ lives, their kids kids’ lives, etc?…..
May 9th, 2009 at 11:10 am
@Marcus? Isn’t it obvious? Default coming to a town near you.
May 9th, 2009 at 11:11 am
I’m sorry, I meant to say, INFLATE. Need……more………coffee.
May 9th, 2009 at 11:11 am
Mann:
Damn. I was hoping to be a Billionaire.
May 9th, 2009 at 11:12 am
Mann:
Okay then, Billionaire it is.
May 9th, 2009 at 11:13 am
@Marcus
The question at hand is the stress test for the current recession, which will be over by late 2009/early 2010. I don’t buy into the various “sword of Damocles” theses floating about.
TARP was $700 billion. So are you saying that none of that will be repaid?
Finally, I wonder why nobody ever answered my question:
What’s the alternative?
Even if nationalization wasn’t a dead letter, its advocates always portrayed it as some sort of a free lunch. IE, why reward bad banks? Simply nationalize them and the losses magically disappear. No fuss, no muss and we can move forward. Is that right? Was the price tag of nationalization–to the taxpayer, to GDP, to the guy working as a dishwasher in a hotel–really $0?
I suspect the price tag of alternative measures such as nationalization was so immense as to be beyond measure, which is why nobody ever answered my question.
May 9th, 2009 at 11:16 am
Shit Creek
http://www.youtube.com/watch?v=rGG45p0ZQUc&feature=related
May 9th, 2009 at 11:18 am
Marcus Aurelius Says:
May 9th, 2009 at 11:08 am
The average taxpayer hasn’t gotten the bill, and when they do, they won’t be able to pay it. Inflate or default?
reply:
——————-
Default if they can get away with it and bully the lender. Mostly, inflation. Super massive inflation. Rates will rise and debt will be settles at pennies on the dollar. Like I said yesterday, we use Animal House rules here. “China and others, You Fucked Up. You Trusted Us.”
In fact, I bet the rise will happen sooner than most think and by way of the debt markets. Secondary rates will go up mysteriously and others will follow. It will be a world wide phenomena. GS and others will astutely buy this now heavily discounted debt, along with Uncle Stupid. Surprisingly and Amazingly, rates will fall back to current levels maybe a year later. GS wins again and Uncle Stupid gets ways with it.
May 9th, 2009 at 11:19 am
Yes Mann. Exactly. Anything that requires Brain engagement is automatically discounted. Now they have number, nothing to worry about anymore.
The new show won’t be who wants to be a millionaire, it will be Billionaire.
With all of the second derivative talk, I’ll lay money that less than 2% of the people using the term on TV have ever taken Calculus. I’d say we might get a div zero error, but I want to be nice.
May 9th, 2009 at 11:19 am
“…..which will be over by late 2009/early 2010….”
LOL
Talk about removing all doubt…..
May 9th, 2009 at 11:20 am
Here’s the thing – if/when interest rates rise, the housing market shits the bed again, which means we’re up “shit creek”. The Fed is trapped on so many levels. Inflation will still put us in a world of hurt in the end.
May 9th, 2009 at 11:22 am
Franklin:
TARP being repaid? if you mean being repaid by the banks, I doubt it. I think the Fed is using Open Market Operations to support the banks through off-balance sheet non-recourse loans to their primary dealers (or some other equally nefarious bullshit/chicanery). I have answered you. The answer is massive amounts of taxable devalued dollars, distributed to the rank and file, who then pay the banks and the Fed Gov with it. Everybody is made whole, but the dollar crashes (bond-holders will be pissed, but who cares – they had no business supporting crack whores in the first place).
Understand this about life: Big problems don’t just g away with the stroke of a pen. Sometimes, all options are bad. A positive attitude won’t help you a bit on a battlefield, in a hurricane or earthquake, or in a car crash.
May 9th, 2009 at 11:23 am
In the end, housing prices will find their true value. The question is how long will it take and how many dollars will be wasted while trying to artificially prop up prices? I hope I’m wrong. I stupidly went against my instincts and bought in ‘05 (we were tired of renting and had just moved from NYC to Minny), so we’re screwed if that happens.
May 9th, 2009 at 11:24 am
dead hobo, you couldn’t be more correct. When the real shootin’ match starts, maybe frankiln will be on the front lines.
May 9th, 2009 at 11:24 am
Mannwich,
It’s called “Squeezing A Balloon”. A little pressure in one place makes a bulge somewhere else.
May 9th, 2009 at 11:27 am
@Marcus: I would also add: propping up failed firms and rewarding the kind of behavior we’re supposed to penalize will get us nowhere in the end. Failing firms and the incompetents (“Tyranny of the Incompetent”) need to fail so that new people and firms are given a chance to take their place. The banks already think it’s going to be business as usual and that no real substantive change will take place, and why shouldn’t they from what we’ve seen thus far?
Lastly, the rule of law matters or should matter. Beware the law of unintended consequences.
May 9th, 2009 at 11:28 am
Me-thinks ‘ole franklin will get an academic/video game/blackberry deferment from any real sacrifice or pain.
May 9th, 2009 at 11:29 am
Mann:
Agreed. I’m all for law enforcement and harsh penalties. Too bad the sheriff is in on the scheme.
May 9th, 2009 at 11:30 am
franklin-
you obviously have no moral bearings and cannot distinguish between right and wrong- keep on with your doe eyed view of the world- even Bambi couldn’t be that naive-
that the TBTF banks are heavily backed by the USG and need to answer to the USG- nationalization?- all shareholders and bondholders had a losing ticket and were protected by the USG- sure share prices went down- but when you have an insolvent institution that brought on its demise- the vale of your shares should of course be ZERO and the bondholders would have to negotiate in BK court- so
that is reality- you are missing that in your analysis-
and please- spare me all the talk about feeding the hungry children
May 9th, 2009 at 11:36 am
Franklin:
I have to add, you are a contrarian, but you are also patient and polite (unlike the late, great, ottobvs). Those attributes will serve you well. OTOH, unfounded optimism will see you bound, gagged, and stuffed into a closet for the duration of a negative event.
I’m glad you comment here.
May 9th, 2009 at 11:37 am
franklin411:
No one knows what the price tag would be. Or what the “nationalization” process would entail because Obama is obviously catering to the banks(Yes, I voted for the guy and have been very disappointed on his caving to the banksters).
May 9th, 2009 at 11:47 am
Franklin:
We are all glad you’re here…reminds me of the days when I thought I was smarter than the market and would never lose a dollar like those simpletons on Wall Street often did…blue skies, just starting out..
Er, time has passed…turns out some of those folks were pretty damn smart…
May 9th, 2009 at 11:49 am
Franklin, how can I put this to you delicately?
You are our token pollyanna….
May 9th, 2009 at 11:53 am
I dragged this over from the other thread. OT but I’m interested in feedback.
@SB
Re: GM. Yet another unintended consequence of the continuing trend of trading index & sector funds/ETFs. Is true and efficient price discovery happening here? Clearly not in this case. How many other distortions are out there?
More and more professional investors are using ETFs vs. individual stocks. Maybe that’s exacerbated the tendency for just about everything to either go up or down at the same time. During this rally I think that the breadth indicators have been showing “healthy” breadth during this rally while most (or many) other technical indicators don’t show such health.
Is there something to this? Am I missing something?
May 9th, 2009 at 11:57 am
Hard to understand the point of the “stress tests” at all. Maybe it’s all part of a propaganda campaign to convince “J6P” that everything’s coming up roses and green shoots.
When banana Ben ends his “cash for trash” and “QE” programs, then I’ll start to believe that that the banks are on the road to recovery.
May 9th, 2009 at 11:59 am
Um… Where did I read yesterday the Fed has $30 trillion in unhedged exposure on it’s balance sheet which stands to go to $0 in value when & if the interest rate on the 10-year breaks above 5%?
May 9th, 2009 at 12:01 pm
Onlooler-
I know- weird- GM share price should be almost zero- I threw that same question out late last night- got a few responses but guess everyone else was sleeping-
considering the massive stock issuance being proposed with a 100-1 reverse split to follow- do not understand why that share price has not dropped accordingly- I know it is 1.60 or so now- but when you are told by GM itself that you are going to be wiped out- seems to me everyone would be heading for the door
May 9th, 2009 at 12:02 pm
sorry Onlooker- please forgive my spelling error- I have no idea who onlooler is
May 9th, 2009 at 12:15 pm
Onlooker from Troy @ 11:53
“During this rally… breadth indicators have been showing “healthy” breadth …while most…. other technical indicators don’t show such health”
I don’t know the answer, but there are two points to be made. First, one should look at where the volume is. Consider the following ETFs and their average trading volumes: SPY (343 M), QQQQ (158 M), and IWM (70 M). It seems that the biggest volumes are in the large cap ETFs, and so the buying of ETFs is probably not, in the aggregate, increasing the purchase of small cap stocks relative to large cap stocks.
Looking at this from another perspective, however, if the advance/decline line includes ETF’s (which it must), then their presence could render comparisons with earlier periods meaningless, i.e., an advance/decline line back in the early 1990’s might have a different meaning than it does now because of the huge proliferation of ETFs.
May 9th, 2009 at 12:21 pm
DL
Yeah, I’m an amateur here and just trying to understand and have a healthy skeptical eye to what’s going on. There are clearly a lot of factors here that make some of the historical comparisons and indicators somewhat suspect. One of the other ones is the proliferation on the NYSE of all kinds of non-common stock issues that skew that data compared to historical data.
I certainly don’t have the answers. Just trying to ask the questions to understand and not follow the lemmings over the cliff, herded by our friends on Wall Street and other salesman hucksters.
May 9th, 2009 at 12:29 pm
Onlooker:
On the subject of “amateur” versus “experienced”:
Good judgment comes from experience, and experience comes from bad judgment.
May 9th, 2009 at 12:36 pm
Chief Tomahawk @ 11:59
Yes, where DID you read that? The 10 yr was at 5% back in July ’07, and it’s certainly going to get there again… maybe soon.
I can’t imagine where that $30T comes from… can’t be right. However, when Berrnanke buys 10 yr and 30-yr treasuries, that’s got to be a losing proposition, because rates are obviously going up.
May 9th, 2009 at 12:40 pm
but wouldn’t the ETF just follow the trend of the stocks in the index- i.e. if the S&P as a whole goes down then SPY goes down accordingly- or- can an ETF such as SPY drive the S&P down if enough people bet against SPY by shorting or buying the inverse regardless what is happening to the individual stocks? Or would it matter- because when you are buying an inverse you are in effect shorting- so maybe it only reduces the actual short plays that would normally be made if there were no corresponding inverse ETF-
any thoughts-
May 9th, 2009 at 12:47 pm
@ Mannwich 11:04
Would anyone else offer their thoughts on PPIP? William Black was on TechTicker on Friday talking about PPIP being the biggest boondoogle in US taxpayer history. I called my congressman, Rodney Alexander, to complain about PPIP a month or two ago and have yet to hear back. Is it only me or does anyone else think that if BHO and the other 535 miscreants (excluding our robed masters on SCOTUS) allow Geithner to execute PPIP, we’ll won’t be able to recover for a generation or two?
May 9th, 2009 at 12:48 pm
call me ahab @ 12:40
If you’re limiting your analysis to the S&P500 stocks, and the SPY, then it is true that the “tail can wag the dog”, i.e., large purchases or sales of SPY can drive purchases and sales of the underlying stocks on a large scale. But your analysis has to extend to the whole Wilshire 5000, at least.
May 9th, 2009 at 12:50 pm
Cursive @ 12:47
As many others have written, the whole point of the PPIP is to shaft the taxpayers without the majority of them realizing it.
May 9th, 2009 at 12:53 pm
[...] the stress test were able to negotiate their capital requirements lower by half. Truly astonishing. http://www.ritholtz.com/blog/2009/05/banks-watered-down-stress-test/ Categories: Economics Tags: banking, inflation, stress tests Comments (0) Trackbacks (0) [...]
May 9th, 2009 at 12:58 pm
for folks having difficulties accessing the site — try clearing your browser cache and then accessing the site. That cleared things up for me.
May 9th, 2009 at 1:08 pm
@ DL 12:50
Is it enough to be resigned to that fate? I dislike sounding like a 1960’s vintage radical attempting to crash the ‘68 Deomcrat convention, but shouldn’t we be asking ourselves if there is more that we can do? And before anyone poses the rhetorical, “Yeah, but what is so special about PPIP after TARP,” I would answer that this is the “BIG ONE.” PPIP has the opportunity to make 700 Billion look like chump change. Moreover, PPIP doesn’t even try to perpetuate the pretense, as evidenced by TARP, of paying anything back. Once PPIP rolls, it is GAME OVER. We have got to get out in front of this before it really and truly destroys the taxpayer.
May 9th, 2009 at 1:11 pm
Excellent post on Naked Capitalism by Edward Harrison- excerpt:
“What worries me is that behind Summers’ (and Geithner’s) calculus is a belief that the system is fundamentally sound and that we should not upset the cart. In my view, the last 25 years of U.S. growth have rested mostly on the creation of debt in complete disproportion to the economic growth the debt has engendered. This has meant we have consumed more in the last generation than we could possibly afford without cutting back our standard of living for at least the next generation.”
kind of long but well worth the read-
http://www.nakedcapitalism.com/2009/05/guest-post-channeling-my-inner-larry.html
May 9th, 2009 at 1:13 pm
@Bruce and Marcus:
I’ll admit I was a pessimist from Sept-Nov, when I thought we might have a Great Crash as we did in 1929. When that didn’t happen, I still hoped we could have some immediate, dramatic changes to fix the system in January. Then it became obvious that the Republicans were determined to fight anything and everything at all cost (they would filibuster the opening prayer at baseball games if Obama was in the stands). Worse, I realized that 20% of the Democrats in Congress are essentially Republicans who got pushed out of their own party. So the Economic Recovery and Reinvestment Act was a good thing and its will kick start growth, but the time for dramatic change has come and gone. There was no 1929 Great Crash. There was no 1933 Bank Panic. And there is no Democratic majority in Congress. Recent data shows that we are stabilizing, and political developments are encouraging given the headwinds. I certainly believe that the President has shown he wants change, but he’s also proven a brilliant strategist who knows how to pick his battles. All of this is cause for optimism.
Thanks! I’ll take it when I can get it!
I like most of the comments here, as far as the spirit is concerned. If I were King I would cram down mortgages, wipe out GM and Chrysler’s bondholders (they wagered poorly. They lost.), cut bankers’ pay across the board, confiscate the booty they gained from 10 years of rape and pillage, etc… Of course, none of that is practical, achievable, or desirable given the unintended consequences that would result.
May 9th, 2009 at 1:24 pm
@ franklin411 1:13
Have you considered that a replay of the 1929 Great Crash or 1933 Bank Panic may yet await us later this year or next or 2011 or 2012? Have you considered that, while we may be “stablizing” – and I in no way agree with that assessment – that we may be in this economic coma for years or decades? BTW, regardless of their stated political affiliation, I would estimate that 95% to 97% of the Congress and Senate are definity statist, bureaucrat-leaning types. If they weren’t, they wouldn’t have given all of this power to the Fed in the first place or propogated the lie of “too big to fail.”
May 9th, 2009 at 1:34 pm
franklin Says:
“If I were King I would cram down mortgages, wipe out GM and Chrysler’s bondholders (they wagered poorly. They lost.), cut bankers’ pay across the board, confiscate the booty they gained from 10 years of rape and pillage, etc…”
now you’re talking franklin- but mortgagors need to be foreclosed upon so the home prices fall- it’s the way it works (they can always rent franklin) and don’t forget the shareholders and bondholders of the TBTF banks- that is a risk/reward relationship- things go up you get the reward- things go down- well you took a risk- can’t all be good- has to be consequences
May 9th, 2009 at 1:34 pm
@franklin411 1:13
As CNBC Sucks would say, the can has been kicked down the road…
May 9th, 2009 at 1:41 pm
@ahab 1:34
I am in no way advocating or siding with franklin, but isn’t that what is eventually going to happen once our zombie society awakens? Can you imagine how someone in franklin’s current state of mind might react once the curtain is finally and truly pulled back? I think it could be a very ugly reaction, indeed. There are a few prescient souls amongst us who have been stockpiling ammo. As Bruce in Tennessee has repeatedly observed, there are reports of ammo shortages.
May 9th, 2009 at 1:44 pm
@ahab 1:34
Forgot to mention this idea and it coincides with my PPIP demon: I read on another blog last night, maybe it was Denniger’s Market Ticker, that the cramdowns will come AFTER PPIP. That way, the banks will be fine and the taxpayer will be screwed. Timing is everything.
May 9th, 2009 at 1:57 pm
DL, I think I got it from a story on Itulip.com. But I can’t seem to find the info now. Ugh.
May 9th, 2009 at 1:58 pm
Thanks! I’ll take it when I can get it! I’ll admit I was a pessimist from Sept-Nov, when I thought we might have a Great Crash as we did in 1929. When that didn’t happen, I still hoped we could have some immediate, dramatic changes to fix the system in January
————-
I guess we’re not living on the same planet.
http://www.ritholtz.com/blog/2009/02/bear-market-comparisons-1929-2009/
You’re not going to get a quick fix when this fiasco has been decades in the making and when so many people are still so optimistic.
May 9th, 2009 at 2:08 pm
Cursive-
cramdowns would hurt the banks and help homeowners filing bankruptcy- the judges would then have the discretion to modify the mortgages to the benefit of the mortgagor (homeowner)-
the quickest way for the RE market to hit equilibrium- is to let the homes be foreclosed and drive prices down- that way home prices fall to a level that is affordable to an average buyer- government intervention only “slops” up this process with tax credits to purchase, moratoriums on foreclosures, low down payment government backed mortgages, cramdowns on mortgages- these are all intended to put a floor under home prices- thereby hurting the people with more modest income who may have been able to buy a home had the market dictated the price-
re: ammo- not a gun owner- I am a naturally violent person and with a gun around I can only assume I would have shot somebody by now- best to leave guns in the hands of folks with an even temper
May 9th, 2009 at 2:20 pm
franklin411 @ 1:13
“If I were King I would cram down mortgages”
Depends what the means, exactly. If that includes giving judges the authority to dramatically reduce the principal (of the mortgage), then there would be a very high price to be paid in the long run.
…………..
“If I were King I would …. wipe out GM and Chrysler’s bondholders”
O.K., but they shouldn’t get a worse deal than they would in bankruptcy.
…………..
Now if I were king, I would wipe out the bondholders of the banks before putting one dime of taxpayer money into them.
May 9th, 2009 at 2:26 pm
Cursive @ 1:08
No way to stop it. The nice thing about government loan guarantees is that no money has to be put up at the time the guarantee is offered; and if the sh*t hits the fan, the politicians will say that we have to do the “responsible” thing and honor the guarantee.
(Of course, if the guarantee cannot possibly be honored, as with social security and Medicare, that’s a whole other issue).
May 9th, 2009 at 2:30 pm
DL Says:
“Now if I were king, I would wipe out the bondholders of the banks before putting one dime of taxpayer money into them.”
alright- I’m behind you- I want to be at minimum a knight- or possibly a Baron- or even better a- Viscount or Marquess
May 9th, 2009 at 3:03 pm
@ahab 2:08
Re:ammo Given your admitted violent nature, I applaud what I take to be a Northeasternly bit of social self-restraint. I live in the South. We accept that most of our resident violent types, be they white supremacists, gang-bangers or various other misanthropes, either a.) already have a gun or b.) have ready access to a gun or guns. Therefore, most Southerners and Texans are apt to have prepared for our own self-defense.
@DL 2:26
Is that a tone of self-defeatism? Should we give up this easily? Do you know/remember the scene from “Network” where Beatrice Straight forcefully and passionately informs William Holden that she’s not going to accept his infideility and that she’s going to fight for him? Why are we giving up? This is still the greatest country and we are all honored to be born on these soverign shores. I’m not giving up. I hope I have plenty of company.
May 9th, 2009 at 3:07 pm
@DL 2:20 / ahab 2:30
I am your liege.
May 9th, 2009 at 3:15 pm
If I were King, I’d do what Kings are for–provide protection to the inhabitants of the kingdom–extracting a fee (tax) for it, and leave the broken bankers, car companies and homeowners to work it out for themselves through the legal infrastructure I set up just for that purpose. That would mean homeowners would be released from the peonage of “owning” a home they can’t afford, either through foreclosure or bankruptcy; bank shareholders would get wiped out and bondholders would get the detritus; likewise auto company shareholders, bond holders and the UAW. Nothing more or less than what would or should have been expected at the initiation of these endeavors. That was the regime under which these risks were taken. That’s how the losses should be resolved.
So long as I maintain a monopoly on the exercise of violence, nobody gets hurt, except in the pocketbook.
Which causes one to pause and ponder: Did Godman Sachs buy some nuclear submarines and aircraft carriers or something? If they didn’t, then why are they running the country?
May 9th, 2009 at 3:42 pm
@ Curmudgeon — “Godman Sachs” — typo or insight?
May 9th, 2009 at 6:35 pm
Curmudgeon-
good post
May 10th, 2009 at 6:51 pm
thanks ahab…
and no CN…that was not a typo
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