How the Bailouts Should Have Gone
I did a short interview with Rick Newman of US News on the state of Bailouts. Here is a quick excerpt:
“The ideal bailout is not a bailout of reckless financiers. It’s like the government equivalent of a hospice for dying companies, involving no taxpayer money and no moral hazard. And the people who behaved recklessly, they get their comeuppance.
The most egregious bailout, that’s a tossup between Citigroup and AIG. I think AIG was worse just because it involved so much money. And there’s no way we’re going to see all of that back. It could end up being the greatest theft in history.
Citi is a perennial debacle. They were clearly insolvent. They were too big to fail but also too big to succeed. They had lobbied for the repeal of the Glass-Steagall Act for 10 years before it actually happened. They started in the late ’80s, when they realized they were limited in terms of growth and the only way to really grow would be to buy other companies on other side of the investment business. To do that, they needed the repeal of Glass-Steagall. The bailout was the classic example of saving the bank instead of saving the banking system.”
The full interview is here.
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Source:
How the Bailouts Could Have Gone Better
Rick Newman
US News & World Report, September 01, 2009 04:19 PM ET
http://www.usnews.com/blogs/flowchart/2009/09/01/how-the-bailouts-could-have-gone-better.html
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September 2nd, 2009 at 11:18 am
I’m still at a loss to understand “too big to fail.” I mean, if the big boys were just allowed to go down (into BK), the rest of the system would eventually have taken up the slack, right? FDIC pays back the depositors (up to $250k) and the rest goes to receivership. Can someone explain what would have happened to the rest of the financial system and the economy had this been allowed to play out? Paulson had promised Armegeddon. Instead, we get Zimbabwe.
September 2nd, 2009 at 11:49 am
Mouse
It’s all about saving the bankers, who have the politicians in their pockets. They got saved and now continue to pay their execs big money, and inflation is in their best interest as deflation and the resultant (or causal) defaults would wipe them out. So the average Joe is sacrificed to save the financial oligarchy. Pretty simple, and disgusting.
September 2nd, 2009 at 11:55 am
mouse, the idea behind to be to fail, is that if one of these monstrosities fails they impact a lot more than just that company. example your friends at C, they have about 1 trillion in deposits which the FDIC couldn’t afford to pay out. and to add to the trouble, they would take many others with them as they collapsed as they are a money center bank, not just a bank. thats a banks bank. in a way you could look at it this way, back in the GD, there were 4000 banks that failed representing at large part of the countries money. today, the TBTF gang have a larger share than those banks did, but its in a smaller number of banks. so far we don’t look any thing like Zimbabwe (last time I checked we are more in a deflationary spiral than an inflationary one, though it could change, but it requires the job market to recover for it to happen. lotsa luck with that one ), we look more like we did in the GD on the head shake up ward, and just before it turned down again. and banks never go BK, they get taken over by the government, one of the things that we learned in the GD, was that after the banks collapsed (all of them were private), every one avoided putting money into any bank like the plague (hints the reason bankers used to be so stuffy, that was to get some confidence in them. that and the FDIC).
September 2nd, 2009 at 11:58 am
and on looker from troy is right about one thing. they have lots of political power, they got theirs, and don’t want any body else to be rescued, otherwise they loose some income. they want to make sure the rest of us are kept in our place. at the bottom
September 2nd, 2009 at 12:02 pm
Thanks, OfT, but I think I understand that.
Everyone here (well almost) complains about the way events unfolded. I want to play a “what if” alternative universe game. What would have happened if TBTF insolvency had played out without big bailouts? Lots of folks here with more knowledge and imagination than me.
September 2nd, 2009 at 12:11 pm
Mouse,
Someone like Chris Whalen would be the best person to answer your question, but FDIC receivership does not mean that bank operations stop while ownership changes hands. Moreover, FDIC wouldn’t have to “pay out” on all those deposits unless everyone demanded them at once — and since lots of people (thanks for nothing!) still hold their money there NOW, I don’t think that would be an issue. The big issue — one that’s been deliberately swept under the rug by TPTB, is the issue of the bank bondholders. Why haven’t they been asked to take a haircut or swap debt for equity? No one really seems to know for sure (Whalen? BR? Anyone?), but treating the bondholders — as they should — really changes the whole issue of how to finance an intervention that doesn’t involve an outright bailout of people who have failed.
September 2nd, 2009 at 12:13 pm
Sorry, I meant to say that “lots of people (thanks for nothing!) still hold their money at places like Citi.”
September 2nd, 2009 at 12:25 pm
Excellent interview Barry. My favorite line:
“The way I see it, if a company blows itself up the way AIG and Citigroup did, in a capitalist system, you have to take it out back and put it down like Old Yeller.”
Now we’ve just got to get other to agree.
September 2nd, 2009 at 12:30 pm
mouse best guess, a repeat of the GD written extra large. a larger percentage of money on deposit with banks would be gone than happened with the GD. and not sure the FDIC could have handled the banks, they have to put money into every bank they put into receivership (note that even though they haven’t paid out depositors much yet, they have almost depleted their funds. and thats with banks many times smaller than any of the TBTF versions). and FDIC would probably be stuck with managing the bank as nobody else could take it over or afford to. while some might not demand their money, as we noticed in one of the bigger failures, a lot did (indymac or so other big bank failed started a bank run). and once one bank has bank run, group psychology takes over and drives the others under (which is what killed a lot of banks that were in good shape in the GD too!) by having multiple bank runs. and its not just individual depositors that would have lots their money, companies would have too! would we have liked to not go through the bailouts? sure! but we would have to have done things that really did ensure stability, like regulate the banks, keep the ratings companies from rating swamp grass as AAA, keep manipulators out of commodities, and a few other things along that line. but nobody back in 2000 or so, thought we would ever have this problem again, that the market would assure it never occurred again. and that was ignoring the human element in it, the ability to delude ourselves, and greed and stupidity.
September 2nd, 2009 at 12:38 pm
I’ve actually come to terms with the bailouts (for the most part), but what galls me is that I honestly think it’s back to “business as usual” again on the Wall Street, which is astonishing to me after everything that we’ve seen and are still seeing. To me, that’s the most disconcerting and disheartening thing about all of this right now.
September 2nd, 2009 at 12:43 pm
mannwich, that i think is the biggest problem with the bailouts. the banks don’t even seem to recognize they were saved, and are back at what caused them to fail to begin with. some where i seem to recall that doing the same thing over and over again, expecting a different result is the definition of some mental issue
not i remember its insanity!
September 2nd, 2009 at 12:56 pm
I think that there may be a place for bailouts which are provided only to the extent necessary to mitigate a financial panic. But when a bailout is given, the receiving company should be forced to pay a big price. Fire the CEO, fire the board of directors, and either break up the company or liquidate many of the assets. Do that, and very few CEO’s will use bailouts as part of their strategic plan.
September 2nd, 2009 at 1:02 pm
OK, so the problem wasn’t the bailouts per se, it was the a) lack of consequences for malfeasance (or non-feasance, as our kind host has put it) and b) the lack of substantial changes in regulation or oversight (giving the GS-owned Fed Reserve these duties has a distinct fox-guarding-the-henhouse-quality).
September 2nd, 2009 at 1:14 pm
You folks who have “come to terms” with the bailouts are just capitulating. It’s been a long year, it looks like the Geithner’s and Blankfein’s have won, and it’s easier to just give up. Fine, give up — if your health and sanity require it, I understand completely. Really. But please don’t go out of your way to perpetuate the myth that the bailouts, except maybe for some very minor changes, were absolutely necessary. They weren’t. I think many of you are confusing panic in the markets to panic in the real economy. Yes, Libor was up, but it was also up AFTER the TARP. And yes, there was a problem in commercial paper, but if you look at the Minn. Fed data, it was mostly in the financials. Whirlpool and Campbells Soup could still fund their operations without a hitch. Commercial bank lending — you know, regular old loans — were also up at this time. The shadow banking system imploded because it was unstable. Good riddance. But I still defy anyone to show the chain of causality on how the crisis in financials would have led to GD 2. I promise, I’ll believe it if I see it, but I haven’t seen it yet. Finally, a more sever recession or even depression may have been a shorter one without the bailouts — right now we’re on the way to becoming Japan (or worse).
September 2nd, 2009 at 1:19 pm
Not giving up and will never perpetuate that myth, clawback. Just easier and more beneficial to my mental health to accept things as they are.
September 2nd, 2009 at 1:23 pm
Mouse,
The biggest elephant is still the bondholders — they haven’t lost a dime. Contrary to what Geithner and Bernanke, et al. want you to believe, making responsible parties pay has never been on the table (as others here have pointed out). Remember, too, that all but a literal handful of Congress even understood what the bailout was about — don’t read their capitulation as evidence of the necessity of the bailout. A handful of people at the Treasury and the Fed were responsible for making decisions involving trillions of dollars which have benefitted a select few. You have every reason to be suspicious — if not of their motives, then at least of their objectivity. Do you know, for instance, how many times Tim Geithner had lunch with Lloyd Blankfein and Bob Rubin last year? A lot more times than you’ve talked to your congressman, I’ll wager you that.
September 2nd, 2009 at 1:28 pm
Fair enough, Mannwich. I’ve seen your comments and I know you’re hardly naive on this. Personally, I really haven’t slept well since November. And up until March, I was having Howard Beale moments on a twice-daily basis. The only things that have helped have been things like BR’s book coming out, Dylan Ratigan getting his own show and websites like The Daily Bail cropping up. Without those things, I’d probably think I was insane to be so angry. It’s good to have company on this. Trust me, I feel your pain.
September 2nd, 2009 at 2:56 pm
Clawback, here’s what I’m thinking on the bondholders — isn’t it likely that a lot of the bondholders are public/private pension plans and insurance companies? And a lot of the others are likely to be similar entitities outside the US?
If the bondholders took a beating, we’re talking about a pretty big beating, right? And these are on bonds that most buyers considered investment grade, I expect. Of course, a lot of this leads back to the ratings agencies.
But it seems that if the bondholders took a big beating, we would be looking at pension fund wipeouts, and insurance company wipeouts. A lot of folks are going to keep on dying; I’m thinking that if the implication was that a bunch of life insurance policies wouldn’t get paid out, that would be a very bad thing.
Even though the ratings agencies are not “US Govt. Approved”, I can imagine a whole lot of other countries coming back to us saying we let this fraud go on right under our noses, we abrogated our regulatory responsibilities, and we better step up and keep them whole.
I am largely guessing/making this up, so I wonder what you and others think.
September 2nd, 2009 at 3:16 pm
Whammer,
I’ve considered this, too. If I remember correctly, this was the one excuse/rationale that I heard way back last year — since then, the whole issue has gone silent. As I understand it, the issue of pensions is way overblown — were they solely invested in C, BAC, JPM and WFC debt? Stocks haven’t exactly performed spectacularly on a buy-and-hope basis, either. You could be right, but I resent that we’ve never had that conversation.
In any case, we’re only shifting the losses onto other people (taxpayers). I myself don’t have a pension, for example. Nor do lots of other people. But losses are losses — they have to be recognized and booked at some point. By someone. We really have become “bailout nation” insofar as people want to avoid any and all pain, any and all losses. I think the Fed and Treasury are just playing “pretend and extend” — they really hope that things will just turn around, the losses won’t have to be realized and they can be heroes. I don’t see that happening.
September 2nd, 2009 at 4:55 pm
clawback, I’m not disagreeing with you, and I agree that we never had that conversation overall.
Even if you wanted to keep the bondholders whole, I still can’t see any good reason that the common stockholders were not wiped out. Not to mention the management.
Seems to me that the bondholders ought to be stockholders now.
Anyway, I am still astonished that there haven’t been any ratings agency types frogmarched off to the pokey…..
September 2nd, 2009 at 4:57 pm
The bailouts have never been about: banks, economy, financial system.
The bailouts have been always about protecting and rewarding the people that finances congress and the president (not just this one BTW).
As long as the corruption stays in government the transfer from taxpayers to the people who buys (or leases) the government will continue regardless of any regulation that may get enacted.
Consider: if HFT is a problem no regulation is needed to fix it. All you need is to tax (at %90) all gains on transactions held less than say a day a week etc. Do you hear anyone in government proposing this? What you will see is regulations that will be written and circumvented by the players and you can take that to your credit union. JMHO
September 2nd, 2009 at 6:11 pm
The bailouts should have never occurred. Sink or swim based on your own ability. Providing life rafts only exhorts moral hazard.
September 2nd, 2009 at 6:58 pm
I’m wondering where is the change?
Can anyone provide one instance where there’s been substantive change in this new administration?
I’m all ears.
September 3rd, 2009 at 11:15 am
This is an excellent interview. Onlooker from Troy makes a very good point about the financiers having the politicians in their pocket, while the average guy gets screwed. And unfortunately until the Fed is audited and/or removed, this awful trend is going to continue. So in my view one of the only ways for the average person to protect him or her self is to invest in gold. I know that this may seem like a crowded trade, but so was shorting the financials in 2008 when everyone knew they were insolvent, and that worked out pretty well. All of the money printing by the Fed will lead to a lower dollar, and the gold price should benefit from the inflationary consequences of such actions.