How Much Are We Subsizidizing Banks (beyond TARP) ?
Dean Baker of the Center for Economic Policy Research looked beyond the TARP to see how much Uncle Sam is subsizidizing the banks considered “too big to fail” — beyond TARP. Call it the Value of the “Too Big to Fail” Big Bank Subsidy.
His conclusions?
-The spread between big banks’ (1.15%) and smaller banks’ (1.93%) cost of funds is 0.78%:
-The annual boost to profits of 18 biggest banks from that funds-cost advantage: $33 billion;
-Pre-2008 spread in big and small banks’ funds-cost: 0.49%:
-Part of big banks’ profits from rate “subsidy” (1H09): 48%:
To give this some context, Dean compares it to the Temporary Assistance for Needy Families (TANF) and to US Foreign Aid Spending. Not including TARP, the “TBTF bank subsidy” was more than twice as large as the TANF grant for 2009; the bank subsidy is almost 20 percent larger than spending on foreign aid.
Here is something to think about: Even after the TARP has been fully paid back, the US Government is STILL bailing out TBTF banks more than we are giving bailouts to US families with hungry kids, and more than all of our overseas aid . . .
>
Sources:
Value of the “Too Big to Fail” Big Bank Subsidy.
DEAN BAKER AND TRAVIS MCARTHUR
Center for Economic and Policy Research, September 202009
The Big Bank Theory
How government helps financial giants get richer
Dean Baker
Boston Review, JANUARY/FEBRUARY 2010
http://bostonreview.net/BR35.1/baker.php
Job-Creation Cacophony
BILL ALPERT
BARRONS FEBRUARY 22, 2010
http://online.barrons.com/article/review.html
See also:
The Cost of Saving These Whales
GRETCHEN MORGENSON
NYT, October 3, 2009
http://www.nytimes.com/2009/10/04/business/economy/04gret.html
Tweet
Facebook
Reddit
Digg this!
February 20th, 2010 at 10:50 am
duh, doesn’t anyone use napkin math anymore
too save homes prices, to get state and muni tax receipts, u must save the banks anyways possible cause they got massive foreclosures on hand, and the beat goes on, it’s like the terminator, it will not stop
February 20th, 2010 at 10:56 am
fwiw, hanky had one lasting effect on elected officials, no one knows what a derivative is yet they believe in there heart of hearts it is a time bomb and only the fantastic four, jamie, lloyd, ben and tim can save things, thus, the only factual reason i can fathom for zero reform or even intelligent discussion of reform
February 20th, 2010 at 10:57 am
Again… the thinking here is very WEAK.
Big banks run more of a “wholesale” business. I bet ALOT of their lending is to customers who PAY lower spread. So to assume they have some “profit bailout” because of a lower cost of funding is somewhere between naive and stupid.
Its funny how often I see people (Elizabeth Warren?) saying so much about banking when they dont see to have the first clue of what the different businesses look like inside a JPM or similar.
February 20th, 2010 at 11:03 am
cognos:
Here is what Baker is referring to: To help save the banks, the Fed took rates to Zero, thus punishing savers and anyone living on a fixed income.
Next, we changed the rules to allow the discount window — recall it used to be FOR OVERNIGHT BORROWING ONLY — to much longer periods of time. Then, we changed the requirements that the Fed only lent against pristine asset quality — now, they lend against any old Piece of Shit paper. Oh, and we allowed investment houses to become banks to access this free money.
These banks happily took money at zero percent for long periods of time against garbage collateral — and they turned around and bought risk free treasuries.
February 20th, 2010 at 11:06 am
Anyway, feeding starving American children is rank socialism. It corrupts the soul, turns men into women, night into day, up into down, black into white, good into evil, etc…
Unless, of course, you’re feeding starving Iraqi children. Then it’s our “freedom agenda,” and it’s Americanism at its finest.
One of the lessons I teach in my class is that I show my students a picture of a highway bridge being built with American taxpayer dollars. I ask them to guess where it’s being built. The responses come in: Nebraska? California? Arizona? Nevada?
Nope. The bridge is being built in Iraq–part of nearly $20 billion the Republican Congress approved to be spent in Iraqi reconstruction in 2003.
Does anyone think that the GOP would approve an infrastructure bill spending $20 billion in America today? Of course not. That would be socialism.
February 20th, 2010 at 11:07 am
Isnt the biggest “funding subsidy” to bad small banks who run massive risk of failure (>80% of all bank failures are small banks)… yet benefit from the FDIC subsidy?
These small banks then push up the “avg cost of funding” because they are willing to pay 2-3-4% on CDs in the wholesale market. CDs that are explicitly backed by the FDIC.
Often these small banks are closely affiliated with key congressmen or bank regulatory officials. The bad small banks are far, far worse than big banks.
~~~
BR: Given the choice between allowing inept insolvent banks to fail, or bailing them out at taxpayer expense, I’d allow them to fail.
As Allan Meltzer noted, “Capitalism without failure is like religion without sin—it just doesn’t work.”
February 20th, 2010 at 11:28 am
BR-
Bank holdings of treasuries are insignificant. Bank earnings from treasuries are completely insignificant. This is the worst type of academic, zero-experience, weak-thinking (I used to internally report on P&L across a $400B I-bank, and worked on ALM trade consulting for all the big guys — Wells, Wachovia, Fannie, Freddie, etc.).
The Fed just raised the bank “discount rate” from 50 bps to 75 bps, right? So even under the prior terms… only USTs beyond 2yr paid ANY carry versus the old 50bps discount rate, right? Banks want to maintain a healthy net-interest-margin of 1-3%. They dont want to make 50 bps spread on 3yr USTs vs floating. And the magnitude is ALL wrong… bank balance sheets dwarf the UST market.
So many of these academics and regulators dont really know what businesses the banks run and how they serve clients, and where the sources of profit are… Elizabeth Warren is the worst. Its just textbook academic conjecture with very little experience behind it.
February 20th, 2010 at 11:31 am
facts are not weak………………………..thinking takes all forms, math facts, not so much
February 20th, 2010 at 11:39 am
I correct that… WFC net-interest-maring was ~4% in the most recent report. They want to create funding sources as cheaply as possible (deposits, CDs, term bonds, preferreds, etc), averaging 1.15% in the note here and lend out at 2-4-6%. Ideally they want to lend out for greater %-interest. And the most profitable businesses at banks tend to be the juicy ones (high-spread). Of course, these also cause the losses when the cycle turns down.
But the idea that banks are making money holding USTs… when bills are 0, and notes are mainly sub-1.5%. Is just so silly.
My hunch is the “discount rate” lending facility was mainly un-used. BUT… it may be the case that 1 institution was willing to be more aggressive and was using the Fed lending, and 28-day term, to a significant profit advantage in this market. And that caused the Fed to say… lets remove this.
Further… the myth that “the Fed takes garbage collateral”… tends to be misleading in 2 ways. First, the Fed properly haircuts different collateral. Second, the Fed is only taking this collateral on “repo” in a transaction that provides liquidity. It is not taking the economic exposure to any “garbage”. Except in special facilities like Maiden Lane or other crisis-arranged loss-sharing agreements on which Bernanke has consistently said the Fed appears to be profitable on EACH one of these and that NONE show losses. Thus, these deals… made in crisis, appear to be quite profitable for the Fed (No surprise, when you fund at 0%).
February 20th, 2010 at 11:43 am
Well, anytime a Primary Dealer is able to buy Treasury bonds with freshly printed discounted money – it’s fraudulent IMO. So….the system is fraudulent and has been since my grandparents let them pass the ridiculous Fed Reserve Act.
We need to reform the Fed Reserve system to make it more equitable for taxpayers. But I do agree with BR that as long as other countries have central banks – we need one too.
February 20th, 2010 at 11:46 am
«These banks happily took money at zero percent for long periods of time against garbage collateral — and they turned around and bought risk free treasuries.»
There is also the longstanding trickery of the “prime rate”, which has been set to guarantee banks a fast secure profit:
http://www.interfluidity.com/posts/1160447599.shtml
«the spread between the Federal funds (and Treasury bill) rate and the prime rate widened from 1 1/2% to 3% in 1991. That was Greenspan’s gift to the banking sector to insure that major banks would not fail. You may recall at the time that rumors were rife — including some repeated on the floor of the House — that Citibank was about to go under. By doubling the margin between the prime and the funds rate — and essentially increasing the profitability fourfold after taking into consideration the costs of processing loans — an inverted yield spread lost all its meaning. And it will never return.»
Greenspan has also been advocating that the way our of the current (and every) crisis is for the government to ensure that the balance sheets of productive heroes of the economy are rebuilt, thus making funds available for spending and investing that.
Translated, this means that government should rig the markets to generate large profits and capital gains for Republican voters, who having become even wealthier would then spend some of their new new wealth on imported energy and luxuries, generating large bonuses for marketing and sales executives, and eventually even on hiring servants among the unproductive, uncreative residents of the USA.
February 20th, 2010 at 11:50 am
“Bad” small banks? Are these the ones that got squeezed out of more profitable markets by rent seeking TBTF banks while still being forced to meet full regulatory and capital requirements (paying full FDIC dues based thereon) or some other kind of bad small bank?
Of course these “bad” small banks are being duly punished by paying those dues to FDIC in advance, all the way to 2012, just like all the other smaller banks — no waivers for these punks — when they might have to be closed down before then. Touch of irony there.
The TBTF banks have to pay dues too but are currently receiving an FDIC loan guarantee that means their impaired capital can be treated as, well, less impaired I guess. Little additional irony there.
Adding another ironic tweak the FDIC must maintain a deposit insurance fund invested only in treasuries which, coming full circle, are not yielding very much these days because we are still in the ZIRP environment caused by (drum roll please) … the TBTF banks.
It’s enough to make a citizen feel, well, a trifle peckish or even inclined to conspiracy theory; e.g., the folks running the joint can’t really be this venally stupid — why they might forget to breathe or something — so there must be some plot afoot, eh?
February 20th, 2010 at 12:12 pm
What about the largest subsidy of all – Mark-to-Fantasy accounting?
That, my friends, is THE ball game.
February 20th, 2010 at 12:27 pm
By saving the banking system and then promising low rates for an extended period is something they cannot do for consumers who’ll have to service burdensome debts for the long term lowering standards of living in order to do this. So more real jobs are the only answer to the time frame disparity but, that realization comes after most bullets in the clip have been used.
These inequities would not matter if the economy were truly recovering in the normal sense but it is not. So long as that remains true, the subtly between big banks being wholesalers or retail profit generators is a distinction that will not matter. Exchanging bad assets for productive assets (temporary or not) is all people will remember as they are forced to both smarten and slow their spending down incrementally while government does the opposite while favoring banks that do not appear to be helping us.
I’d love for someone to tell me why we are any different than Japan Inc right now in terms of our long term trajectory? How long will it be before the feds want to borrow another trillion and in order to to do it they demand US savers buy Treasuries to insure we prolong the lower lifestyle standards for an entire generation? After that? “You’re not patriotic if you buy a foreign car (or most of the stuff at Walmart) ” ? Credit cards that give you cash back for buying American?
TBTF firms have had every opportunity to explain to Americans what they have done for us lately since they got the lionshare of social capital so far. If the President and Congress will be held to that standard, why not the TBTF firms?
February 20th, 2010 at 1:35 pm
We are coddling the banks. They do not deserve it, they do not appreciate it. Bernanke (read Greenspan’s protege) has saved the banks, yes; but at the expense of the rest of the economy.
February 20th, 2010 at 1:56 pm
BR —
The Fed takes the discount rate to zero (ZIRP) to incentive ALL risk takers. They do this… because in Q4 2008 everyone decided that ALL risks werent worth taking. The HY bonds and mortgage credit bonds you loosely call “garbage” all went to 0.50 cents on the dollar (IF you could even get a bid).
Now, the system hangs together. If everyone believes we are going to armageddon and acts that way (stops paying bills, stops going to work) it will happen. This is what is called the “debt-deflation” cycle. Bad policy decisions that encourage the debt-deflation cycle drove us into the GDP I and Japan into the “lost decade”.
Today, those same “garbage” bonds that were 0.50 cent on the dollar 1-yr ago… are back to 90 cents. They have increased 50-100% in price. They paid coupon of 4-8% of par (10-20% of cost!) and defaults and losses have come in FAR FAR FAR lower than expected. So the basic conclusion that they were “garbage” because they were priced at 50 in crisis… is silly. It far closer to reality to say these were “money good” and that fear caused risk aversion which caused fear. (Anyone… even the simple middle-class pensioner was free to capitalize on 50-100% returns… 1yr ago).
ZIRP didnt just bailout banks… but pensions, insurance companies, investment firms and businesses that need credit. I have artist friends with ARM mortgages that pay <3% interest rate today. 5/1 ARM rates at Wells Fargo are 3.9% and have been as low as 3.5%. Credit extension continues to be hampered by all this talk of uncertain "regulation" and the "TBTF". If we want banks to extend credit… dont we want them "bigger"? "More levered"? Otherwise… the key is to fund and open competitor banks.
It seems like many govt officials, academics, and pundits dont have solutions, only complaints.
February 20th, 2010 at 2:26 pm
cognos-
hindsight is 20/20-
not everyone knows exactly whats going to happen before it happens-
as you seem to do or at least profess to-
keep in mind- the dot com crash and burn and the housing bust crash and burn-
and everyone one is supposed to say- “let me take what I have left and double down”-
empathy
Definition
em·pa·thy
1. understanding of another’s feelings: the ability to identify with and understand somebody else’s feelings or difficulties
big hat tip to MEH (the dictionary ref is definitely prototypical Hoffer)
February 20th, 2010 at 2:30 pm
“(Anyone… even the simple middle-class pensioner was free to capitalize on 50-100% returns… 1yr ago)”
This was all just a huge misunderstanding, you just don’t realize how lucky you were to get this “opportunity”.
Unbelievable.
If you were an animal your mother would have eaten you.
February 20th, 2010 at 2:55 pm
Man, the comments here are wierd and pessimistic and alarmist.
RW — these small banks you speak of as being — “squeezed out of more profitable markets by rent seeking TBTF banks” — WHY were they concentrated in FL, NV, CA, NV? Did the TBTF banks squeeze profit mostly in those areas?
It has NOTHING to do with being “squeezed”,etc. Small banks are concentrated on local development loans. When things turn bad they fail FAR more easily, quickly and COSTLY than large diversified banks.
TBTF is a stupid myth. If every bank was 1/2 the size… we would’ve simply had 2x as many failures (and the same magnitude of a problem for the system). Many large institutions have failed… mainly in an organized way (Bear, Fannie/Freddie, AIG) and some in a disorganized way (Lehman).
February 20th, 2010 at 3:57 pm
You really don’t get it.
The smaller banks have been, over the past 2 decades, pushed out of every profitable business. 0% car financing by non-bank lenders would be the most recent example. Mortgage brokers working with I-banks making NINJA mortgages would be another.
TBTF is a myth, and a concept you don’t understand. They can fail. They don’t. The why is strictly political.
They built up debt. They use 0.005% of that debt to lobby, to go to DC and ask to have law changed so they can build more. On the way up, no big deal, a percent here, a percent there. 0.005% on a 200 m bank buys 1-2 local reps. 0.005% on a 1t bank buys most of k street and the senate.
After successfully building that debt bomb, and selling it to every insurance company and pension fund you can find, you go to DC and blackmail them to fix it.
February 20th, 2010 at 4:15 pm
i’m no fan of TBTF and the bailouts, but there is a massive flaw here. Baker asserts that it’s possible that the “taxpayers are in fact giving a substantial subsidy to these large banks as a result of the TBTF policy.”
there’s only one problem – it doesn’t actually cost the taxpayer anything. Just like the TLGP doesn’t actually cost the taxpayer anything.
said differently, the Fed could say “we will not allow Citibank to fail under any circumstances.” this might reduce Citi’s cost of funds by, let’s just say, 50 bps, but since it keeps the ponzi going and makes it so that Citi does can still raise funds and does not default, the Fed (and thus the taxpayer) doesn’t HAVE to pay the bills. voila. ponzi lives.
this was the entire essence of TLGP, which likely explains a portion of the large bank/small bank gap Baker refers to, since smaller banks didn’t participate.
also, as an aside, it seems perfectly reasonable to me that in times of stress large banks would benefit
February 20th, 2010 at 4:24 pm
We get it no where else can a specialized field of occupation get so happy on the little folk…except perhaps a beer brewer.
February 20th, 2010 at 4:45 pm
cognos,
What is PESSIMISTIC, ALARMING and frankly STUPID (that’s my all caps for the day) is a declaration of knowledgeably about finance and special knowledge of the industry coupled with a refusal to acknowledge the misfeasance and systemic culpability of the large financial institutions within that industry even as those same institutions actively engage in rent seeking in the ongoing project to evade responsibility for the debacle and prevent limits on their ability to repeat the practices that led to it.
That’s pretty discouraging, implying as it does a deep rejection of adult and citizen responsibilities, even though Sinclair Lewis’s dictum regarding resistance to critique of that which pays you helps explain it.
The location of small bank failures you cite is a non sequitur, simply irrelevant to the argument: First because there is a reason smaller banks tend to focus on commercial lending (hint: there are markets smaller banks cannot compete in and products they cannot produce for sale) and second because small bank failures in the states you specify are entirely consistent with other states where RE markets (a) became overheated and (b) lacked sufficient state-level regulation and/or enforcement of law; ie, the states you cite are simply not exceptional when comparing apples to apples.
There have been 188 bank failures in this cycle (starting in 2007 – ht Calculated Risk) and, quickly scanning the list for states of roughly comparable size, no outstanding pattern outside the expected occurs; e.g., NV has fewer failures than MN, about the same as MO, and more than OR (shrug) and both IL and GA have more bank failures than CA or FL (another shrug).
Not really worth wasting time calculating per capita failures since the argument doesn’t mean much regardless but those who are curious can find a complete list of bank failures since 2000 at the FDIC (http://tinyurl.com/226vl3) which is dynamic; sortable by state, date, etc.
February 20th, 2010 at 5:03 pm
KD,
Using your logic, what would the rate on tbills be now, if the banks were allowed to fail?
That is the only place you could put money. That lowers the benchmark.
Explict vs implict guarantee.
You have a friend who declared BK. You go into the bank with him to borrow for a car. You tell the bank that you are not going to let your buddy BK again. Implicit. The bank is not impressed. You offer to co-sign a loan(explicit) he may be able to get the loan, and you now have to declare that as a possible liability. This raises your borrowing cost.
Implicit guarantees can also raise your borrowing cost. How much do the financial press like to talk about how exposed the USG is to F&F? They haven’t explicitly guaranteed them, yet I know there is an entry on a spread sheet somewhere that takes that into account. That raises the borrowing rate for the treasury.
You whole argument is based on the risk free rate of borrowing treasuries. There is a risk, and part of that risk is directly related to the exposure of the USG to the banking sector. What’s the number? I bet there are many people making many billions trying to figure that out. They add that in too.
February 20th, 2010 at 5:07 pm
RW –
Your information is wrong. Oh sure, MN has 10 “bank failures” and NV has 6. Good call there.
EXCEPT — the estimated cost to FDIC of the 10 in MN is $2.5B. Thats 10x the cost… for a state with <50% of the people.
See: http://portalseven.com/banks/Failed_Banks_State_Wise.jsp?state=NV
IF you dont realize that bank failure are caused by speculative real estate lending in CA, FL, NV, AZ (and elsewhere)… I cannot help you. IF you actually think these small banks were "squeezed" out of other businesses (this is so ludicris…) then why did they choose the do the most reckless stuff? Its still their own fault, right?
Either way, it doesnt really matter. My point is a different, simpler one. I dont blame small banks or big banks. Banks which were concentrated on highly speculative real-estate or overlevered have sustained massive losses. This is roughly uniform across larger banks (BSC, AIG, FRE/FNM, LEH, Wachovia, WashMu, Indy Mac) and 100s of smaller banks. Some of this is their mandate (FRE/FNM), their geographic location (small banks in So Fla) or simply bad timing (imagine starting a bank in 2005).
That's life! Broadly speaking… despite the crisis… the system of incentives is working.
The real shame… is that regulators were unable to be COUNTER-CYCLICAL and lean against the boom back in 2005 and 2006. That was the real mistake (not TBTF?!).
Now… we should be leaning against the bust (promoting profit, leverage, credit creation and recovery).
February 20th, 2010 at 5:21 pm
sorry bob – if you believe that when the Gov’t implemented TLGP (that’s the one that guaranteed the short term notes issued by the banks, allowing them to fund) that rates on treasuries went up, i’m not going to debate it with you. it’s flat out false.
i think you’re trying to make the point that implicit guarantees can have costs – sure. that’s possible. i don’t think it describes what happened here though.
i’m actually talking about EXPLICIT guarantees that STILL came with no costs to the taxpayer -the perfect storm of Ponzi perpetration!
we don’t have to like them from a “fairness” perspective, but the “cost the taxpayer” argument is simply the wrong one here. we could try to make the point that we’d rather give the money to “Temporary Assistance to Needy Families” which barry mentioned, but if we did, that would be an ACTUAL cost. It still might be preferential, but that’s another debate.
February 20th, 2010 at 5:34 pm
That last post got clipped:
Cost of 10 MN failures $2.5B (or 10x the cost for a state with <1/2 the population)
That "portalseven" link has great stuff on FDIC bank failures. Looks like Feb will be the best month in almost a year… and the trend seems positive… would be nice to have low #s in Mar/Apr and one could call the crisis over. But we'll have to wait.
February 20th, 2010 at 5:44 pm
I read recently that the big banks were holding over $1 trillion of Treasuries.
Given that funding costs are LIBOR (or 0.25%), it’s pretty easy to make a profitable spread on a 2 pct Treasury, especially because NO REGULATORY CAPITAL has to be reserved against it. The risk-weighted return is INFINITE.
BR is right: this is a Fed-engineered recapitalization (read: bailout) of the banks.
When do we start the revolution?
February 20th, 2010 at 5:45 pm
KD
Paying more to borrow is an actual cost. T’s could and have gone negative. And no, everything is not instantly correlated. Set up all the straw men you want.
Your arrogance is humbling.
February 20th, 2010 at 5:48 pm
cognos – do you have a typo? aren’t the NV failures much bigger than the MN failures?
bob – please inform me how much more the Treasury is paying in interest because of the TLGP.
February 20th, 2010 at 5:49 pm
oh bob – i just had an epiphany. it’s the BONDHOLDERS of the TBTF banks that are bearing the “costs” of the lower funding rates for the TBTF banks. again, it’s NOT the taxpayers. The bondholders who are buying this debt are absolutely “paying” for it by getting less yield – but that’s their prerogative of course.
February 20th, 2010 at 5:55 pm
Ha. Its funny… same “typo” twice. The site clipped the same text point:
- costs of NV failures is MORE than $2.5B
- costs of MN failures is LESS than $250M
So NV has 10x the cost… despite less than half the population.
(Both typos are driven by the use of “less than” and “more than” signs. It must see that as a “comment” in the code).
February 20th, 2010 at 6:04 pm
MikeNY — So banks are “holding $1T in treasuries”… which is kinda the same as saying they are “holding $1T in cash”. From my perspective this is because regulators dont seem to want them to grow, or be profitable. So they are waiting to find out the marching orders. No sense being closed by Sheila Bair after you make a bunch of new loans, right?
$1T in Treasuries… if they were at 2% USTs that would be what… about a 4-yr note? I submit that this is silly. Why wouldnt they make a 4-yr car loan at 5-8% rather than earn 2% treasury rate? But hey… lets say they did that and they had them in treasuries at 2%.
And you mention LIBOR at 25 bps… so lets assume thats their funding cost on this money. So the net spread is 175 bps… against $1T in treasuries… this is $17.5B/yr. Sounds like alot.
But it isnt. $17.5B per year… that is LESS than a single Q of revenue for 1 major bank. Say for example, WellsFargo… which did $88B in rev or approx $22B/q in revenue.
My rough guess.. would be that this $20B in “treasury revenue” (which is wrong, this thought-experiment is wrong, the 2% assumption is wrong, etc)… but that is roughly 1-2% of total bank revenue.
February 20th, 2010 at 6:19 pm
cognos,
Thought I made it pretty clear that RE was a significant component of failure for everyone including the largest banks who were primarily causal for the debacle and actually did fail like everyone else but, contra your “different, simpler” point, the very largest did not do the “that’s life!” thing and go bankrupt; oh no, not them, instead they put the entire country on the hook.
That’s the real point of the objection to “TBTF” which none of your blandishments can dispel because “TBTF” is an exemplar of lemon socialism and the crash it caused cannot be prevented from reoccurring if the current model of governance remains fundamentally unaltered. In fact nothing you have said offers a solution that adequately addresses the problem of rent seeking and regulatory capture or even acknowledges their pernicious influence and your denigration or dismissal of those such as Elizabeth Warren who do offer solutions acknowledging that influence only compounds your error.
But thanks for the portalseven site; good stuff there so this conversation wasn’t a complete waste of time.
February 20th, 2010 at 8:34 pm
To dispute the overriding premise of Baker is ridiculous.
They were saved, are being saved and will continue to be saved at the expense of others.
The discreet mathematics are debatable but no reasonable analysis can conclude that Baker is wrong.
February 20th, 2010 at 9:20 pm
Cognos said, “Why wouldnt they make a 4-yr car loan at 5-8% rather than earn 2% treasury rate?”
Answer: The 2% is risk-free.
As an aside, how many credit-worthy borrowers have to pay 5-8% for a 4-year car loan? In most areas, credit-worthy borrowers are begged to buy cars at anywhere from 0-3.5% interest.
February 21st, 2010 at 12:04 am
@BR “These banks happily took money at zero percent for long periods of time against garbage collateral — and they turned around and bought risk free treasuries.”
And then paid bonuses on the proceeds of these brilliant banking strategies. Even worse, the (That is, OUR) money is now sitting quietly in the Cayman Islands.
February 21st, 2010 at 12:16 am
How many banks do you pass on your way to work? Even if you don’t live in a major financial center city, I bet everyone passes at least one.
I live in a relatively small college town, due to a sort of pedestrian-centric town layout, driving is discouraged. As a result there’s only two gas stations in the downtown area. I consider that a slight bit inconveniant, but I don’t run out of gas. If I were to count the number of banks in that same area I’d probably have a factor of ten greater number.
I’m not counting atm’s either. I just keep wondering: For what do we need so many useless banks?
February 21st, 2010 at 8:19 am
Winston Munn, I agree.
The credit crisis is two-fold: 1) the banks are insolvent; and 2) the consumer is over-leveraged, and many people are also insolvent. There is a dearth of credit-worthy borrowers. Calc Risk has graphics showing that small biz credit and personal credit combined have been FALLING for well over a year.
Banks invest in Treasuries because they are risk free, require no regulatory capital, and generate infinite return. The steeper the yield curve, the higher the return. This is a big part of how they are recapitalizing.
February 21st, 2010 at 12:11 pm
Br Said:
Next, we changed the rules to allow the discount window — recall it used to be FOR OVERNIGHT BORROWING ONLY — to much longer periods of time. Then, we changed the requirements that the Fed only lent against pristine asset quality — now, they lend against any old Piece of Shit paper. Oh, and we allowed investment houses to become banks to access this free money.
These banks happily took money at zero percent for long periods of time against garbage collateral — and they turned around and bought risk free treasuries.
And the Taxpayer is also funding the buying of a lot of that shit paper or as they call it toxic waste. And didn’t the fed also say the banks dont have to show that Toxic waste on their balance sheet to make the banks look more solvent then they really are. It totally sucks no matter how you look at it. Banks are still not lending to small business. Any dumb jobs bill that Obama pushes will be a waste of taxpayer dollars. More debt the next generation will have to pay down. Marc faber says, “Were Doomed”
February 21st, 2010 at 8:11 pm
foxmulda, BR, and others –
That quote from BR is tragic, “against garbage collateral”. This whole idea is ill-informed and precisely idiotic on the economic substance.
YES… in the crisis much of the credit / notes / bonds universe was marked down to below 50 cents on the $. This is exactly the “garbage” BR mentions and you speak of. This is exactly what caused “m-t-m” banks to appear insolvent. It turns out, it wasnt really “garbage” at all.
TODAY… HY and Mortgage credit bonds have returned 50-100% and MORE over the past year. Most of the high-quality universe is up from around 50 to 90-95. AND… most bonds have paid coupon the whole time.
LYONDELL CHEMICAL is especially notable garbage. It was not high-quality. It was an LBO chemical company that went bankrupt. Its bonds bottomed at 7 cent on the dollar in March 2009. As of Friday, these bonds traded at 81 cents on the dollar (up more than 1000%). Plus coupon!
What regulators, academics, and disgruntled citizens miss is that financial markets are very uncertain. Nothing is obviously “garbage” or obviously “a great investment” in 1-yr. Markets fluctuate! The future is unknown! When the stuff loses money, everyone screams that “Goldman raped its clients”. I am sure Goldman had Lyondell bonds available for sale at 10 cents 1-yr ago. I am sure clients bought these bonds from Goldman. They just facilitate trading and try to make money with minimum risk. Profitable trades are everywhere, but so are losers. Caveat empeator?
So those of you pounded the “toxic waste” and “garbage collateral” statement seem not to follow todays market. That is the stuff that is up 100, 200, 500% or more now! And just looking at the credit indices and stories like Lyondell, GGP, etc. Whatever banks you think have the most “toxic” assets… might be about to worth the most money.
February 21st, 2010 at 11:52 pm
cognos wrote:
“The real shame… is that regulators were unable to be COUNTER-CYCLICAL and lean against the boom back in 2005 and 2006.”
Unable? What are you smoking?
They were totally unwilling to regulate. See the fight between Spitzer (while he was AG) and the OCC. These bastards did everything in their power to prevent the States AGs to go after the mortgage miscreants, let alone the banks.
See this:
http://www.consumeraffairs.com/news04/2005/occ_spitzer2.html
or this:
February 22nd, 2010 at 11:36 am
FranciosT –
I dont disagree — unable AND unwilling — agree 100%.
My point, is that “counter cyclical” is what is necessary. Its not obvious what trades will be “toxic” in 2008 and that the same “toxic” shit will make the most money in 2009 (it also made great money 1995 to 2007, which is why it grew so big!).
Counter-cyclical thinking is the opposite of what populists, the commenters here, Elizabeth Warren, and 50% of BR seem to engage in. Right now is NOT the time for “leverage limits”, “breaking up banks”, “taxing profits”, etc. Now is the time to support risk taking… wild risks probably pay big.