For over a year now, I have been advocating a Swedish rather than Japanese approach to crisis. The Swedes decided to protect their banking system at all costs; the Japanese protected their banks at all costs.

That subtle distinction is the difference between a rapid recovery and a slow, agonizing one.

Some people think this is an academic debate — a distinction without a difference. However, when you see who bears where the actual costs of this fall, it is apparent that the it is an enormous difference.

Unfortunately, the US  (mostly) went the Japanese route. Exceptions are the automakers and a handful of FDIC closed banks. Instead of waxing philosophical, let’s look at who pays the costs of this – and who does not.

Shareholders:  In the Swedish approach, the Shareholders get wiped out. In the US/Japanese model, they take a big hit — a loss of 90%+ of their value — but they got to keep there stock shares. Hope springs eternal for an eventual recovery.

On Wall Street, other than Lehman Brothers (LEH), all other shareholders were saved. Bear Stearns (BSC), Citigroup (C), Fannie Mae (FNM), AIG, BofA, (BAC) Goldie (GS), Morgan Stanley (MS) — all were kept afloat.

Ironically, the insolvent firms that were forced into a reorganization – GM & Chrysler, Washingon Mutual, etc. –  actually are the ones following (at least partially) the Swedish style model: Restructure, Wipe Out Debt, Recapitalize, Relaunch as a new, clean firm.

Bondholders:  There are 3 parties that undeservedly were bailed out, and the head of the class are the bondholders.

Except for Lehman and FDIC closures, most bondholders were rescued: Bear Stearns Bondholders received 100 cents on the dollar — that was their reward for exercising terrible judgment when lending money to a reckless irresponsible insolvent investment house (so much for Moral Hazard). Same for Citi, Fannie Mae,  Bank of America. We still don’t know what the final impact will be for AIG Bondholders, but expectations are for the full monty.

When future historians discuss the bailouts of 2008-09, and discuss who were the greatest financial recipients of taxpayer largesse, they will be referring to the bondholders.

Counter-parties:  For reasons not yet explained, Paulson, Bernake and Geithner essentially gifted to speculators and hedge fund traders a guarantee that all their back alley bets would be made good. This is truly perplexing, as they are probably the least deserving group receiving taxpayer money.

Management:  Several senior execs have lost their jobs, but they have been the exception. A recent study found that 92% of TARP firm senior execs, boards of directors, and C-level management were still running the firms they had been. It is perplexing to those of us are trying to figure out the penalties for driving your firm over a cliff . . .

Taxpayers: So far, the US taxpayer has laid out all of the costs of the bailouts. TARP appears to be mostly repaid, and the new TBTF tax should recover the rest. But the question the FCIC should be asking is why are taxpayers a backstop fro traders and speculators?

Borrowers:  Banks are lending dramatically less, as they slowly recapitalize their balance sheets, borrowing from the Fed at 0% and lending back to the Treasury at 3%. Best guesses are that this year and last will see a $1 trillion less dollars than normally would be loaned to credit worthy borrowers. This is directly due to the Japanese approach that allows bad balance sheets and enormous bank under-capitalization to continue.

Workers:  Are going to suffer for a long period of slow job recovery due to the above. If banks were forced into the normal FDIC insolvency  process, the economy and employment would likely recover must faster.

Savers:  Zero % interest rate. Estimates are this costs depositors $250Billion per year.  ’nuff said

Bank Customers:  All banks customers are now buying services from frims in a sector with much less competition.

First Time Home Buyers: Although they get a minor tax credit, various government policies are maintaining home prices at levels far in excess of where the market would take them. Outside of the big foreclosure zones, they are feeling the impact of the subsidies and bad policies.

The bottom line: Bailouts have specific winners and losers . . .

>

Previously:
Attack of the Zombies ! February 26th, 2009
http://www.ritholtz.com/blog/2009/02/attack-of-the-zombies/

92% of TARP Firm Sr Management is Unchanged (January 4th, 2010)
http://www.ritholtz.com/blog/2010/01/banking-sector-remains-literally-unchanged/

See also:
What we can learn from Japan’s decades of trouble
Martin Wolf
FT, January 12 2010
http://www.ft.com/cms/s/0/3c5b388e-ffb2-11de-921f-00144feabdc0.html

Category: Bailouts, Credit, Economy, Employment, Regulation

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

29 Responses to “Who Bears the Costs of Post-Crisis Recovery ?”

  1. I pulled out Underwater Home-Owers, as the bailouts did not really affect them.

    Home-Owers: These are the people whose homes are worth less than their mortgages. Most of them made ill advised purchases beyond what they could afford; many extracting enormous monies via refis and HELOCs.

  2. Machiavelli999 says:

    Here is my question. Even if Obama went the route Barry here proposes, would anyone care?? Or would they still call him a communist/socialist/death panels, etc. I am pretty sure that if Barry Ritholz was President and he proposed this plan he just outlined, Barry would still be called a communist by the usual crowd and the message would stick.

    As an aside, as a shareholder of UnitedHealthGroup (UNH), I want to say on behalf of all the shareholders, a big thank you to the voters of Massachusetts and conservatives around the country in general. Thank you for continuing to let us rip you off. We look forward to NOT serving you in these coming years. My advice to you is please don’t get sick, because we definitely will NOT be there for you. Goodbye and don’t call us.

  3. jonpublic says:

    “Home-Owers: These are the people whose homes are worth less than their mortgages. Most of them made ill advised purchases beyond what they could afford; many extracting enormous monies via refis and HELOCs.”

    Disagree. If you simply purchased a home in 2005-2007 you are screwed. My friends did the right thing, put 20% down, pay extra each month, on a home they could afford, etc, etc, but because they bought at the peak they are screwed.

    ~~~

    BR: Agreed — I reread that and didn’t like it — I replaced them with bank customers (above)

  4. cognos says:

    I think the responsibility is: 1/3 home buyers and speculators, 1/3 financial industry, 1/3 govt and regulators.

    Ironically the first 2 have paid their shares (and maybe more) but the govt expects to “not lose a dime” despite being the biggest failure as a lax bank regulator (more down payment please! some consumer protections).

    I think the govt missed an opportunity to help homeowners more directly by “matching mortgage pay-down” for the most at-risk homes. This could’ve been done with a match from banks… so that an extra $25k paid down $75 of mortgage.

    Fully agree that more management turnover would be better. But companies are complex and boards are risk averse. When 99% of financial companies look like total failures — who are you going to hire? Why just shuffle chairs?

    (Thats why its more of a systematic policy problem, than a mgmt problem. We must forgive, bind up wounds, and move on).

  5. ACS says:

    Where in the world is it written that buying a house has to be “profitable”? If you bought something you can afford and it is worth less now than when you bought it, well tough luck! The point is you CAN afford it. Maybe someday it will be worth more but buying a house should be done because you love it and want to live there; not because it’s an ATM machine in disguise. The people to feel sorry for are the ones who lost jobs and really are screwed not the ones who are simply underwater.

  6. tagyoureit says:

    Bailouts have specific winners and losers, like a pick-up basketball game. I blame the jerks who are picking and organizing the teams.

    Not sure which kids was picked last, either homeowners or savers. They are both a little short.

    Regardless, I just lost the game! :P

  7. bmcnamara82 says:

    I keep on hearing how “bondholders” received 100 cents on the dollar. Fine, but who are the bondholders? Name names. Who were the biggest bond holders of all the firms that received bailouts?

    If they were pension funds of middle class workers, would you there still be the rage against?

    Now that things have calmed down, we need hard, substantial reform and we aren’t seeing it from Washington.

    ~~~

    BR: I don’t know or care who they are — you simply do not want to reward people who made really bad bets, loans, etc. by shielding them from the result of their errors.

  8. Greg0658 says:

    ACS Says: at 8:51 am
    “Where in the world is it written that buying a house has to be profitable”
    bingo – but the rest of the sublim is why was buying one so encouraged? .. because it drives our economy … sadly those days are my fathers bygone days .. today be lite on your feet (jump to the jobs or out of harms way) and be free from the mechanisms to pony up & provide for the world as a whole … sadly ditto – the fight mechanism I just proposed is self defeating (if everyone gets on board) … so just go out & buy buy buy .. turn those machines back on

  9. ZackAttack says:

    If you were a *financial* bondholder or anything that could put up the figleaf of a bank holding company, you got bailed out quite nicely. Not so much everyone else.

    I always suspected the reason was that there were a lot of foreign holders of this debt and it was part of a quid pro quo to avoid a funding crisis.

  10. Marcus Aurelius says:

    Who pays for anything?

    Me and you.

    Didn’t you get the memo?

  11. Mannwich says:

    @Machiavelli: The nut jobs on the far Right wouldn’t care, for sure, but millions of other thinking citizens (like myself) would have cared….a lot. That’s why Obama should have never tried to appease a group that would never support him even if he did everything they wanted him too.

  12. hue says:

    aren’t the taxpayers getting the bailout too? the taxpayers’ 401(k) mutual munds and/or pension funds likely are the bondholders and equity owners of the bailed out companies as well as non-bailed out companies. and all the Fed/Treasury action reinflated all assets to help these owners, who hopefully didn’t sell at the bottom. we will huff and puff and reinflate all assets, until we can’t any longer …

  13. flipspiceland says:

    TheBamster is ‘appeasing’ no one. Those people selected him as their front man to do their bidding. Likewise his financial appointees who were selected by the men who pull the strings of Lord Blankfein,
    and the Tribe.

    Why do people insist on investing more power in the POTUS than he has? He is a marionette, dancing to those who pull his strings.

  14. Marcus Aurelius says:

    flipspiceland Says:

    Why do people insist on investing more power in the POTUS than he has?
    ____________

    The fruit of “Unitary Executive” theory.

  15. flipspiceland says:

    @Machiavelli999

    I have had occasion to use the medical system from time to time. I’m all in favor of “reform” but not
    what this admenstruation proposed.

    A step by step approach could easily pass, but maybe you know it and maybe you don’t that this program wasn’t in the least about helping the catastrophes that happen in some lives, helping get uninsured coverage. I don’t think I’m getting ripped off but do recognize that the $500.00 Nasal Cleansing System I was charged (and insurance paid) for is ridiculous.

    What is so wrong with cleaning up the abuses and such rather than what Nancy Pelosi wanted which was to claim some kind of socialist Phyrric victory?

  16. clued13 says:

    In your analysis, the Swedish approach/outcome is represented via the shareholders, but what happens to each of the following categories/parties/assets with that approach?

  17. jpm says:

    Why have the BoD’s not been hauled out, drawn and quartered?

  18. phb says:

    Sold my Detroit area home in the spring of 2006 for $50k less than I owed in part due to anticipation of a “correction” in real estate. Today, I feel like a complete fool for taking personal funds and paying off my debt when if I had just waited a bit longer (not paying anyone), I could have settled for much less!

    Now mortgages are being “renegotiated” and payments lowered in order to avoid foreclosure and keep the good people in their overvalued home rather than let the invisible hand set the value. Banks are pulling out all of the gimmicks to avoid mark to the market accounting and we, employed taxpayers are footing the bill! Outrageous, and no one, NO ONE seems to care.

    We deserve the Japanese banks we are building as this madness continues.

  19. tude says:

    phb,
    I feel like an idiot as well. We bought a very tiny fixer home in a unincorporated and “undesirable” area in the Bay Area in 2004. Even though we are DINKS making a very comfortable salary well over the median and almost in the top 5% percentile nationwide, I can do simple math and we bought what we could afford spending less than 25% of our net salary every month. Even though we had more than 50% equity in this home, we are now underwater probably 25-50k (or even more, who knows).

    What a moron, living within my means trying to save money for the future. I should have bought that home up in the hills with a panoramic view of SF with my 1% IO reverse amortization loan! I could now be in “hardship” living the good life for free, then get my fellow taxpayers to help me “afford” my home! Instead it’s me that is paying for their “lifestyle choices”.

    Well the good news is it will all start to tumble down now. I put a small amount of my retirement funds into an S&P500 fund on Friday, so you are all guaranteed that the top is in!

  20. croatian says:

    and what about swedish bondholders? they were rescued too, weren’t they? i mean, every time when government steps in to rescue banking system with or without nationalization creditors are rescued. so i don’t see the big difference there. only shareholders haven’t been totally wiped out. that’s all!

    ~~~

    BR: The firms were temporarily put into receivership, the shareholders wiped out, the debt eliminated, the management fired, the firms recapitalized and spun back out or sold.

    What is left (including the sale/spin out proceeds) goes to the bondholders . . .

  21. wunsacon says:

    >> Here is my question. Even if Obama went the route Barry here proposes, would anyone care?? Or would they still call him a communist/socialist/death panels, etc. I am pretty sure that if Barry Ritholz was President and he proposed this plan he just outlined, Barry would still be called a communist by the usual crowd

    Yes.

    >> and the message would stick.

    I disagree. I think the message would “stick” only with the usual dopes (e.g., the 28% who continued supporting W up thru the last days and who voted for Palin) but not with independents, liberals, or pragmatists.

  22. bmoseley says:

    you quickly mention savers as paying a part of this whole mess. this is a neglected subject. i suspect that a lot of savers and responsible investors are pissed-off seeing the interest received on their money market funds (etc) stay at zero and compare it with benefits given to so many other groups.
    i haven’t seen any calculation of how much income they have lost because of the Fed’s actions, but its got to be big. no wonder people have lost their belief in Obama’s big ‘change in can believe in’

  23. call me ahab says:

    “Where in the world is it written that buying a house has to be “profitable”

    irrelevent statement-

    strictly a business decision on whether a person should stay or go-

    if the borrower is upside down and can rent for cheaper down the street-

    rent the other home and hand your keys to the bank-

    issue resolved

  24. kmckellop says:

    What post-crisis Recovery?…I don’t think so… I’ll give “post-crisis Recovery” until September.

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