How-to Guide for Fixing America’s Banks
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This week’s Washington Post column is (finally) out, and its a look at the Buffett’s bailout of Bank of America, and what it means for the overall financial systems.
“Many investors assumed the Wall Street bailouts of Bank of America and the other big banks more or less healed the sector. All it took was few trillion dollars in liquidity and a few $100 billion in recapitalization. Voila!
In fact, the banking system was not saved. The massive injections of liquidity temporarily salved the day-to-day operations of banks, but they did not repair the more profound troubles. Indeed, pouring billions into nearly identical management teams that mismanaged risk, overleveraged exposure and drove banks off the cliff in the first place was an invitation for another crisis.
In past weeks, Bank of America has been under increasing pressure from investors. Its already damaged stock was cut in half, and commentators including myself argued that the bank was headed back toward the rocky shoals of insolvency.”
The rest is my regular “Go Swedish” rant . . .
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Source:
A how-to guide for fixing America’s banks
By Barry Ritholtz
Washington Post, August 27 2011
http://www.washingtonpost.com/a-how-to-guide-for-fixing-americas-banks/2011/08/26/gIQAdbUijJ_story.html
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August 28th, 2011 at 3:16 pm
Barry if you would like to use any
Lots of charts on US, EU and China
http://capital3x.com/?p=439
August 28th, 2011 at 3:24 pm
Excellent and spot on. But Treasury and our bought pols will never let it happen. The Establishment loves the smell of socialized losses….
August 28th, 2011 at 3:54 pm
Nice piece.
One asset nobody talks much about is BAC’s exposure to Sovereign Euro debt which if I am not mistaken is second amongst the banks to only Citi(if memory serves)
August 28th, 2011 at 4:14 pm
Absolutely brilliant, Barry! That’s what should have been done in 2009 if anybody in power had a clue. Obama relied on Timmah Geithner to give him advice, which may end up costing him reelection in 2012. It is absolutely absurd that they may get another chance at this after blowing the first one (“welcome to the recovery”, indeed). The worst thing about this is that there is no sign that anyone in power in Washington these days has the political cojones to do things the way they should be done…
August 28th, 2011 at 4:19 pm
BR, Great piece and I concur entirely. If B of A or any other bank slides into the pit again, the only option is to go Swedish, since the appetite for anything even slightly resembling a bailout is non-existent. It is like you suggest what should have been to begin with. We would ALL be better off…
August 28th, 2011 at 4:41 pm
It is just too bad that noone making the decisons has any idea what to do. Excellent piece but sadly we may once again listen to Timmy Bennie and the congressional “nitwits” like Franks….thank God Chris Dodd the world’s biggst bank shill is out of office.
August 28th, 2011 at 5:06 pm
Hmmmm………. who will be the first candidate for the Republican presidential nomination to advocate “going Swedish” on the banking industry? A: The one who wants no campaign contributions from the cartel which practically prints it in the form of annual bonuses. Wasn’t it $23 billion in bonuses in 2009? Take away $1 billion to contribute to the pols and life is good!
August 28th, 2011 at 5:59 pm
Very good article, Barry. Sometimes you think so lucidly. My only worry is the govt’s ability to execute it efficiently.
August 28th, 2011 at 6:11 pm
Excellent editorial, Barry, but may I suggest that your proposal, while a major improvement over the current situation, is only a temporarily fix. For a more permanent solution see Kotlikoff’s Limited Purpose Banking:
http://www.polycapitalist.com/2011/07/how-to-fix-our-optimism-deficit.html
and/or turning banks into utilities:
http://www.polycapitalist.com/2011/08/video-banks-should-be-public-utilities.html
August 28th, 2011 at 6:18 pm
Et tu, BR?
Will no one define the problem… what do you have to lose… or do you know what you have to loose and have chosen the safer, perhaps longer lived, and prosperous course of action. In your position I suppose I would too. So who will tell the sheeple?
All good points to start with, but where’s the re-imposition of Glass-Steagall? Can’t we at least have that?
In a future column (maybe under an assumed name): tell them the Oligarchs control us, derive their power and wealth through the power to create money… that the government forfeited their duty and responsibility to “coin money” and assigned that responsibility to private banks. That the government MUST farm the sheeple to pay off the banks because they too have to borrow money. That the only long term solution is for governments around the world to PRINT AND SPEND their own money. That commercial banking should be a utility, owned by the states for the benefit of the states. Private banks forbidden!!! Jefferson.
Sure, that will create other problems, but, those are solvable as long as criminal cartels are eliminated.
There is no downside to government creating it’s own money, save one – the irresponsible use of the printing press. However, isn’t that what we have now in The Bernank.
So again, who will tell the sheeple. You? Or must we await ever more.
August 28th, 2011 at 6:20 pm
Firm application of regulations.
Socialize the banks. They have been bailed out over the past 30 years to the point the billionaires are the largest recipient of federal welfare.
And recognize that the treasury has been run for the insolvent wall st banking systems since Reagan.
August 28th, 2011 at 6:55 pm
ilsm said:
“Socialize the banks. They have been bailed out over the past 30 years to the point the billionaires are the largest recipient of federal welfare.”
That is a great line. Truer words have not been spoken…
August 28th, 2011 at 7:00 pm
The rest is my regular “Go Swedish” rate . . .>
Did you mean ‘rant’?
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BR: Doh! FIxed
August 28th, 2011 at 7:21 pm
when the bankers go to jail ee-hah
when the bankers go to jail
we’ll all be dancing in the streets
when the bankers go to jail
http://thepeakoilpoet.blogspot.com/2011/07/when-bankers-go-to-jail.html
August 28th, 2011 at 7:31 pm
Obama, Tim and Ben do not have the permission of the Goldman Sachs CEO to do any such thing. The President may be the President of the USA, but the CEO of Goldman Sachs is the CEO of the USA.
August 28th, 2011 at 7:34 pm
BRAVO.
August 28th, 2011 at 7:53 pm
consolidation works too now that we know BofA’s CEO is a bald faced liar. The fact of the matter is all that’s going on is a “JPMorgan avoidance scheme” by the so called “powers that be.” the idea that 70 percent of our banking on the North American continent will be done by one bank is simply unacceptable and these criminals would blow up the state of Massachusetts before they would allow “their precious” to fail. they may end up blowing up Massachussets anyways–and may they be arrested and have their bodies hung in Harvard Yard for doing so…but the fact of the matter is the law hasn’t been an impediment since Citigroup was allowed to be illegally swallowed up by an insurance company (which turned out to be a total failure.) another round of “firing our reps in DC” appears in the offing and it’s hard to imagine a mega-bank like Morgan not stomping out all the “little people” in the process. the economy of course still is in deep doo-doo which is why i still haven’t changed my preference in the meglo-maniacal bank space from HSBC. obviously Buffet’s “other bank” known as M&T is a great one. They were “honest with their shareholders” and started illegally acquiring other banks with their ill gotten TARP funds and have made all of us the better for it. Well…MOST of us better for it. Or maybe it’s SOME of us better for it…anywho…if this tide goes out you’re gonna see more than who’s not “wearing any clothes.” you’re gonna see the mass murdering psychos (in the financial sense) in the process of doing the deed.
August 28th, 2011 at 8:04 pm
BR wrote “With the Fed offering banks capital at nearly zero percent interest rates”
How’s that? The Fed is offering banks *liquidity* at nearly zero percent, but I didn’t think that the Fed is offering banks *capital* at those low rates. Same difference as illiquid vs. insolvent.
The only capital injections the Fed has made, to my memory, is under the TARP CPP. Everything else is loans against or purchases of existing bank assets (although with thin collateral haircuts and below-market purchase prices forming a taxpayer subsidy and hidden capital boost, but that’s not what BR was implying).
August 28th, 2011 at 8:10 pm
Here is another possible solution:
1) Declare any officer of the U.S. Treasury who would circumvent the concept of “Uniformity in Bankruptcy” to be in violation of their oath to uphold the U.S. Constitution. (At Article 1, Section 8, Clauses 3, 4,5 and 6). Tack on a few more charges, abuse of office, abuse of discretion, causing the Treasury to cater to the interests of an elite class such that it would put that important Constitution mandate and much legal precedence in jeopardy, ruin, or, (to borrow a phrase from Henry) imminent peril; on the brink of being destroyed.
2) Declare same enemies of the United States and enemies domestic, of fair competition. Similar idea, enemies domestic, acting against justly administered capitalism. Enemies of the public peace. Careless and Imprudent Action of an Extra-Ordinary Reckless Nature.
3) Line the MFr’s up, and shoot them with exploding rounds. (Note, firing regular rounds might not serve as a sufficient deterrent of what is NOT tolerable.)
4) Put down Homeland Security, for it did not monitor bank transactions over 10k very well and for all the funding they got, produced no important reports prior to nor during the crisis (monitoritng flow of funds); therefore worthless to protect our interests broadly.
5) Raise up an Office of the CLAWBACK. Nw there is some government bloat I would not mind paying for, for once. The Office of Clawbacks would be complemented with military commandos and special forces squadrons, for “to seek you out in all your underground foxholes.” Naturally if any died in the course of their oath, sworn to DEFENDE the U.S. Constitution, against enemies domestic and corrupt Treasury officers who fail to defend those narrow financially important clauses necessary to preserving decorum in capitalist society … the Office can produce images of loyal dogs which served with the special forces. Complete with grieving spouse who stops tearing and padding for a moment, and becomes surprisingly happy when she remembers her husbands words, “He always said the dog could SNIFF OUT THE VERMIN from a mile away.”
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Other than that Ritholtz, you write what everyone else in the world realizes was common sense to begin with. I dont get how you can spin them back into market in the next sentence or two after nationalization tho. Once they become nationalized, what is the time table for when you think they would be returned to the private sector?
Are you talking another one of these quarter to quarter gigs – so we can hurry up and get our bonus pool funded type bs, or do you favor a longer term of nationalization, 7-12 years forward earnings kind of measure?
What in your mind would be fair after the blubbering lies we have been told so far?
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August 28th, 2011 at 8:24 pm
Barry,
I think you just gave a perfect example of why you are simply Barry, and why Buffett is Buffett. Do you think he would be investing in a bank that “doesn’t realize it is already dead”? Do you really think so? Come on, Barry. You can do better than that! Time will tell who is right, but I not doubt would bet on Buffett’s favor. Just curious, are you short BAC?
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BR: Sorry, but your arguments all fail:
BTW, what’ s YOUR BAC/BRK position?
August 28th, 2011 at 8:38 pm
“We have a major capital problem at the U.S. banking level. What Ben Bernanke and Hank Paulson are essentially proposing is an asset swap. The Fed will take on the toxic assets of the banks and they will receive reserves in exchange. This is important because it will alleviate the strains in the credit markets. That’s a good first step, however, it is not a solution to the problem at the household level and THAT is where the real economic weakness is. By introducing this asset swap idea Ben Bernanke is simply altering bank balance sheets. He is not fixing the economy.
So, the government has a partially correct solution. Not the BEST solution, but it gets to the core of the credit issues. They will essentially trade the bad paper for good paper and it will alleviate many of the pressures on the banks. As I have written here many times the banks are the lifeblood of the system. I like to think of the banks as the oil in the engine. If you run out oil the system begins to break down and eventually the engine stops running. You can’t have a healthy functioning economy if the banks aren’t lending. Unfortunately, because this won’t fix any problems at the household level it won’t induce any borrowing. So, it’s a clever way to resolve the banking crisis, however, it doesn’t fix the root of the problem which is at the household level. So, again I ask – is this a “bailout”? You bet your ass it is. Unfortunately, it’s not a bailout of the entire system. It’s just a bailout of the banking system. And their problems are merely a symptom of much bigger problems at the household level.”
- the oft quoted Richard Koo
Summary: Banks are the symptom, not the cause
August 28th, 2011 at 8:42 pm
While the Swedish solution is tempting, I would suggest that creating entirely new banks would be the answer.
The idea would be that the federal government create brand new banks by legislation. They would be capitalised by fiat money from the Fed (ie a variant of QE). And they would aim to privatise within 1-2 years of their creation (by offering shares to the public). While this is going on the old zombie banks would shrink and eventually die.
There is a precedent in US history for this: the first congress created a bank! Conservatives should not complain that this would be against the constitution because the founders did it.
More here:
http://one-salient-oversight.blogspot.com/2011/08/why-not-create-new-banks-from-qe3.html
August 28th, 2011 at 8:59 pm
Obama, Tim and Ben do not have the permission of the Goldman Sachs CEO to do any such thing.
Amen
Great post, fabulous writing and spot on commentary – except I have lost all hope for change.
August 28th, 2011 at 11:08 pm
Congrats on getting that message into the MSM – keep it up.
August 29th, 2011 at 12:17 am
Here we are ordering Swedish meatballs from the owners of a sushi bar.
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BR: That’s hilarious, but over too many heads in DC
August 29th, 2011 at 12:20 am
Let us hope you are becoming a weekly ‘must read’ column over there at the WP Barry.
August 29th, 2011 at 5:57 am
crutcher wrote: Congrats on getting that message into the MSM – keep it up.
Ditto. Good timing too – financial markets and banks looking a little shaky, but a new round of bailouts hasn’t begun yet.
Are Bernanke and Geithner prepared to resolve the big banks if they face collapse again? Someone should ask Bernanke about that at his next press conference: is the SOP written, the plan for resolving them in place? With Dodd-Frank we have a “resolution regime” now, right?
Isn’t it surreal that Bernanke and Geithner, who along with Hank Paulson were the key architects of the last bailouts, are still in positions to more or less decide whether banks get bailed out again or not? Unbelievable.
August 29th, 2011 at 6:42 am
I think the people get this much more than the elites in DC and NYC. That is why there is so much anger. O’s failure can be directly traced to his failure to change W’s policies. The problem is the Republicans offer nothing different. Perry is big business just as W&O. I vote BR for President.
August 29th, 2011 at 8:17 am
Great article that pretty much anyone can understand. I assume the people who decided to do it a different way could sit down and write an equally lucid point-by-point rebuttal of your views. I have yet to see anything like that from their side and it speaks volumes. Why can’t somebody force them to answer questions like this????
August 29th, 2011 at 8:34 am
I’m surprised you didn’t mention that Mr Buffet was just invited to the White House and awarded the Medal of Freedom by President Obama. Or that he was, and continues to be, a major donor and fundraiser for the Obama re-election campaign. Or that Mr. Buffet just recently began touting “tax the rich”, a favorite meme of Obama’s.
You don’t suppose that Buffet is angling for a big juicy bailout so that he can double or triple his money, do you?
Nah, that would be crony capitalism. And we all know that Obama would never, ever support that.
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BR: I mentioned it in the earlier draft on line, but that never made it into WP.
August 29th, 2011 at 10:29 am
BR said in the article:
Thats classic BR!!! What a great line. Reminded me why I come to read this blog everyday.
August 29th, 2011 at 10:36 am
Enough already with the Obama-Buffett conspiracy theories…. You Lilliputians are playing Fox “News” board games while those of us at the adult table are looking at TBP. This goes beyond election cycles and rooting for the blue or red team. Buffett certainly has his motives but how’s he different than anyone else in the shark tank? Ultimately Buffett is betting on U.S. banking at a time when people are looking at Canada and other safe options. He plowed into the mother of all financial collapse in 2008 and bet on an American recovery when all the other deep pockets were betting short and buying the shiny metals.
I’m not saying he’s Angel, but give some damn credit where it’s due. Obviously he’s got a different view on how best to get banking back to normal than BR, but I think Buffett’s earned some credibility and his approach should be examined carefuly because this isn’t someone who has sheep mentality when it comes to throwing down twice the value of the commons on any given day.
August 29th, 2011 at 11:39 am
I certainly concur.
I also encourage everyone to take a look at John Hussman’s latest missive, “A Reprieve from Misguided Recklessness.” Here’s a tidbit:
A major restructuring of debt is the clearest path to long-term economic recovery, and the accompanying losses to those who recklessly made bad loans would be the highest realization of Schumpeter’s idea of “creative destruction.”
From that perspective, Warren Buffett’s $5 billion investment in Bank of America preferred stock last week was essentially a defense of the old guard. Buffet observed, “It’s a vote of confidence, not only in Bank of America, but also in the country.”
Yes – to be specific, it’s a vote of confidence that the country will bail out Bank of America in any future crisis. We should all hope that Buffett’s investment is successful – provided there is no future crisis – and we should equally hope that Buffett loses the entire investment otherwise.
— http://www.hussman.net/wmc/wmc110829.htm
For those who aren’t familiar with Hussman: Dr. John Hussman is the president and principal shareholder of Hussman Econometrics Advisors, the investment advisory firm that manages the Hussman Funds ( http://www.hussmanfunds.com). He holds a Ph.D. in economics from Stanford University, and a Masters degree in education and social policy and a bachelors degree in economics from Northwestern University. Prior to managing the Hussman Funds, Dr. Hussman was a professor of economics and international finance at the University of Michigan. In the mid-1980′s, Dr Hussman worked as an options mathematician for Peters & Company at the Chicago Board of Trade, and in 1988 began publishing the Hussman Econometrics newsletter.
August 29th, 2011 at 12:40 pm
That Hussman piece made is in our earlier reads, under “Hussman’s Unhedged Recession Call”
August 29th, 2011 at 12:59 pm
Nice. So let’s do some resolutions like sheia baer says we can. Invite her back. Or even do it w thg FDIC staff who I respect. If no balls f
or BAC do a smaller one. But bac doable. Never mind my earlier on good bank bad bak for BACif yu goswedish it IS doable
August 29th, 2011 at 5:06 pm
“Lilliputians…” I like that.
Kind of clues you about the Administration’s views about managing the economy, taxes, the budget, etc. The adults at the table are “TBTF”. The administration is corruptly mismanaging the economy under the influence of big money interests. Wall Street doesn’t want to take the hit, so it gets the best president money can buy to deflect the hit elsewhere.
By bailing out the big corporations, investment banks, etc., the cabal foists the risk and cost onto the shoulders of the Lilliputians, prolongs the Great Recession, and blames those Nazi Teabagger terrorists for the next crisis. Meanwhile, what should be the most vibrantly prosperous economy in history coughs and sputters into the ditch so thoughtfully provided by that very same cabal. And the Lilliputian taxpayers and ordinary citizens who are caught in that sputtering mess are supposed to take it and like it.
Sure Buffet has some credibility, especially when it comes to buttering his own bread with the Berkshire-Obama “high-priced spread.”
The government is authorized by the Constitution to promote the general welfare. Not to promote the welfare of crony capitalists at the expense of the country’s prosperity.
August 29th, 2011 at 11:38 pm
Concur, great piece. Now, after the Big Banks undergo their 1000 years of punishment and emerge reincarnated as spunky new IPO’s having travelled the route of the unjust despots as wonderfully described in the Myth of Er at the end of Plato’s Republic, what happens next? MER at $20B? surely BKR would snap it too! Perhaps attach some strings to the IPO’s to avoid someone like Carlos Slim Helu to pull a Telmex like stunt? Re-instating Glass-Steagall would be obligatory too.