>

I continue to be of the mind that the Wall Street Bailouts were misguided, and that a massive Swedish style reorg would have been the best thing for the nation and the economy in the long run. Both Uncle Sam and the Fed would have provided the broad based debtor in possession financing required, and the losses would have fallen where they belonged — on the Shareholders and Bond Holders — and not the taxpayers.

The latest evidence of this: Data obtained by Bloomberg News through Freedom of Information Act requests, followed by months of litigation, and eventually, an act of Congress. (Wall Street Aristocracy Got $1.2T in Loans)

And the data ain’t pretty.

We knew that Citigroup (C), who borrowed $99.5 billion, and Bank of America (BAC), who took loans of $91.4 billion, were in trouble. I’ve been saying for the better part of 3 years now that they were, and likely still are mostly insolvent. But the surprise data point was Morgan Stanley (MS), got as much as $107.3 billion in loans, with no strings attached.

What should have happened?

Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants, but instead, were run honestly for the benefit of the taxpaying voter. Imagine the goal was saving the banking system (not the banks), and the financial rescue was for the benefit of the taxpayers, not the bondholders. Naive thoughts, I totally understand, but hear me out.

A person who truly understood what had happened and why would have considered the following actions. Note these are not ideas come about with the benefit of hindsight, but what a small band of insightful people were saying at the time.

An honest broker of the situation would have:

1. Fire the senior management of the banks (see this)

2. Banned all lobbying activity as a condition of any aid (see this)

3. Forced a Swedish style prepackaged bankruptcy (see this and this)

Instead, we bailed out the bondholders and management, choking off hope for a robust recovery. We are in fact slowly turning Japanese, awaiting the next recession (and the next and the next).

>

Source:
Wall Street Aristocracy Got $1.2T in Loans
By Bradley Keoun and Phil Kuntz
Bloomberg, Aug 21, 2011 7:01 PM ET
http://www.bloomberg.com/news/2011-08-21/wall-street-aristocracy-got-1-2-trillion-in-fed-s-secret-loans.html

Previously:
The Moral Hazard of the “Bad Bank” (January 2009)
FDIC Bair: Bank Chiefs Need to Go (May 2009)
Report: Paulson Lied to Congress, Public (October 2009)
Banking Sector Remains (literally) Unchanged (January 2010)
Elections: Money Talks Louder Than Ever (October 2010)
Too Bad Banks Missed Out On the GM Treatment (November 2010)
BofA Freddie Mac Putbacks Resolved for 1¢ on $ (January 2011)

Category: Bailout Nation, Bailouts, Federal Reserve

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.

50 Responses to “Forget TARP: Wall St Borrowed $1.2 Trillion from Fed”

  1. kenny powers says:

    Excellent post!

  2. Moopheus says:

    “Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants, but instead, were run honestly for the benefit of the taxpaying voter.”

    Actually, it would be even nicer if the government weren’t run just for the benefit of taxpaying voters, but for all citizens, some of whom are not taxpayers or voters, for various reasons, but amazingly, still retain the rights and privileges of citizenship. I know it’s cool to say stuff like “government should be run like a business,” but this is one way in which government is very much not like a business.

  3. SivBum says:

    Recall that Goldman Sachs told Congress that they really did not want TARP but were forced to take it. Perjury or not?

  4. BusSchDean says:

    Speaking truth to power helps (hopefully). The Sweden approach was well known so this is not hindsight or Monday morning quarterbacking. See two articles from 2008:

    http://nyti.ms/o3HJYM
    http://nyti.ms/nvsMa7

    When it comes to firing people virtually every business person I talk with about preparing our young people talks about responsibility and accountability. Yet for some reason once someone reached the executive suite things change.

    Now, however, we have a different problem. Any movement in the direction suggested above means explicitly or implicitly admitting past decisions have been wrong. We all know how much humans like to admit they are wrong or don’t know something.

  5. Bill Wilson says:

    If I believed in conspiracy theories I would say the TARP was a smokescreen to distract us from the real bailouts.

  6. Sechel says:

    Could it be that the reason why we’re not seeing any problem with the big banks raising funds is because the Government has virtually taken over that role? Also not sure if you’ve seen this but there’s a very interesting piece out on how the Chinese abandoned their banking reforms after seeing what happened to Lehman..

    http://www.macrobusiness.com.au/2011/08/chinese-banking-perversity/

  7. eliz says:

    And, of course, not a word out of Obama or the White House on this.

    Your previous post on “Attorney General of N.Y. Is Said to Face Pressure on Bank Foreclosure Deal” – demonstrates Obama and his White House have zero interest in the well-being of this nation, only the well-being of the phantom financial economy and the banksters running it.

    If the Dems hope to retain the WH in 2012, they damn better find a candidate who has demonstrated (not just vocalized) an on-going interest in “the small people.”

  8. Frilton Miedman says:

    In the internet era of instant communication, access and exchange of idea’s, I can’t see how the U.S. government isn’t about to undergo a major overhaul….a first world equivalence to what social media has just accomplished in Egypt.

    If so, that means corporations that have benefited for decades will lose that edge.

    We’ve already started to see this in education stocks that scam government backed loans, TBTF banks and to a degree it’s starting in healthcare stocks.

    To me, this is starting to spell out an investment theme.

  9. Raleighwood says:

    Imagine the goal was saving the banking system (not the banks), and the financial rescue was for the benefit of the taxpayers, not the bondholders

    I would have thought to have not put the taxpayer and the system first was a criminal act. Maybe even treasonous.

    I am so over it all.

    http://www.youtube.com/watch?v=7o6VKD1Eg-8&feature=player_embedded

  10. mle detroit says:

    As Coates would say, Talk to me like I’m stupid. Is it too late for those three steps to have a good effect? If not too late, can it be done without those ho’s in the halls of Congress?

  11. HEHEHE says:

    Amen Barry!

  12. farfetched says:

    Yes it is criminal, but I also think the term “treasonous” is becoming overused and losing it’s punch.

    Fraud and felonious are still useful. It is abundantly clear that officers of publically traded corporations lied to shareholders when describing the condition of their finances and for that alone should be prosecuted.

    As pathetic as I find Governor Perry of Texas, I would not object to handing the Bernank, Hank Paulson and Little Timmy Geithner over to him and a group of Texas vigilantes to do with them as they wish. Particularly Hank Paulson who get’s my coveted Liar of the Century Award.

  13. slowkarma says:

    A former Fed official now a professor at Carnegie-Mellon named Marvin Goodfriend was quoted in a MarketWatch story this morning: ““We are in a period of extreme uncertainty of the direction of the economy. If ever there was a period where wait-and-see was called for, this would be it,” Goodfriend said.

    I have to say I sorta believe that. I also believe that the three steps wouldn’t have been (or wouldn’t be) a bad idea at some point, either in the past or the future, but right now might be the boot that kicks the economy off the cliff. Right now, we’re hanging on by our fingernails. If we get solid again, then do something about the banks. If we fall off, about the time we get to the bottom, do something about the banks. But right now…keep digging in the fingernails.

  14. louiswi says:

    “Knaves and Fools”?? I think not! What part about clubs aren’t you guys getting? Do you not know the advantage of being a clubmember?

  15. EMichael says:

    eliz Says:

    August 22nd, 2011 at 12:20 pm
    “And, of course, not a word out of Obama or the White House on this”

    And what should they say? That the BA lent them this money? Look at the timeline.

    Hey, I personaly think we should have pulled an Iceland(in hindsight), but we screwed up in 2008 and ignoring or trying to sweep the fraud under the rug with the state Attorney Generals’ consent(which will happen) is just another part of the process.

    Only those who, in 2007 and 2008, wanted to pull an Iceland have a right to comment on a process that was set in stone then.

  16. EMichael says:

    Just from an interest point of view, I would love to know the amounts of the guarantees made by the FED to stop the run on the banks.

    $1.2T might be chump change.

  17. Individualism consumes itself. This is not to say that collectivist (socialist) societies are better but that the true big picture view is that individualism (western thought, capitalism) reflects the human tendency to self-destructive behavior.

    Short-term gratification and laziness take precedence over mindful decisions and actions ideal for long-term prosperity. Politicians live and die by short-term decisions that are contradictory to long-term prudence; the problems are pushed down the road, the problems get larger and the consequences increasingly become more severe.

    The price we pay for living in a free society is that we paradoxically move closer to removing our freedoms. At a minimum, we may at least keep our freedom of thought…

  18. Woof says:

    Barry — you convinced me about the need to ‘go Swedish’ a long time ago.

    Is it true that the $1.x trillion was repaid with no losses?

    If so the next time (may be sooner than we hoped) this happens, do we have the opportunity to finally ‘go Swedish’ in the great tradition of ‘fool me once shame on you, fool me twice…don’t fool me again’?

    Can we ever expect a legislative body to cut off its own funding (lobbing ban)?

    Who, if anyone, in congress would be most likely to lead / support a move to ‘go Swedish’?

  19. dsawy says:

    “…slowly turning Japanese…”

    I think we’re “turning Japanese” faster than the Japanese “turned Japanese,” if you get my meaning. We’re heading down the road they pioneered faster than they did. They had years between rounds of QE, we had mere months. We’ve now announced a ZIRP for the next two years – again, faster after our downturn than the Japanese went to this policy.

  20. theexpertisin says:

    This is outrageous.

    Our Fuhrer’s are certainly loose with taxpayer-earned money.

    What in the hell are they thinking????

  21. Than says:

    “3. Forced a Swedish style prepackaged bankruptcy”

    Sweden never put its banks through a prepackaged bankruptcy. They took over their banks via equity injections. Bondholders were not hit at all. They were paid 100 cents on the dollar.

    Facts are fun.

    ~~~

    BR: Its not quite that cut & dry: The bondholders got paid back 100% of their bondholdings in Swedish Kroner, but only AFTER a 75% or so Kroner devaluation. Note the Swedish government seized most of the banking sector, wiped out equity holders before injecting cash. By the time markets stabilized, and the Swedish state took the banks public again, there had been a huge devaluation.

    So its rather misleading to claim Swedish bondholders were made whole and recovered 100% on the investments.

    Facts may be fun, but context and nuance mare where the big bucks are.

  22. Mike in Nola says:

    Looks like we may need more pikes and guillotines than I contemplated earlier :)

    But seriously, is Rick Perry going to change his tune when BAC who promised to “help” him, according to the video, points out that the Fed is really the only thing keeping these potential major campaign contributors afloat?
    Or, perhaps Perry is counting on all the right wing billionaires like the Koch’s for his campaign money and we will see a proxy battle between the right wing industrialists backing Perry and Big Finance backing Obama.

  23. louis says:

    “Short-term gratification and laziness take precedence over mindful decisions and actions ideal for long-term prosperity.”

    Absolutely, this is what their stucture depends on. Fight or distract yourself the best you can. If you chose to distract yourself, and accept the structure, don’t be surprised to someday lookup from your Ipad and see a gun pointed in your face. You will then be escorted to a new residence.

  24. carpediem0496 says:

    I agree with BR. Treasury Secretary Paulson had about $800 million reason to bailout the system in the way it happened.

    Meanwhile, we are quite Japanese. The banks earn and writeoff. The government spends and the central bank monetizes the debt. The economy languishes despite low interest rates. And, there is no end in sight.

    Since we don’t get a do over, the question is what should we do now?

  25. TrickStyle says:

    I have a hard time buying into any analogies between Sweden’s banking system and the US’s banking system. The implications of a prepack on the banks listed above would have sent the world into chaos – especially 18 months ago.

    BR: where do you think the the US unemployment rate would be if the above mentioned banks filed for bankruptcy? And in Brazil? In India? South Africa?

    Theoretically, sure it’s interesting to think about. The likely global impact? Incomprehensible.

  26. [...] trove of subprime mortgages held by banks. Some who were against the bailouts in the first place, like Barry Ritholtz, say the banks are likely still [...]

  27. machinehead says:

    Among this Hall of Shame of corporate-welfare grifters, two really stand out: Morgan Stanley and Goldman Sachs.

    Neither of these investment banks were deposit takers serving the general public. It was a scandal, in the midst of the 2008 crisis, that the 30-day waiting period was illegally waived, and they were permitted overnight to rebadge themselves as ‘banks.’

    Yeah, these two flagrant imposters are ‘banks’ like I’m a brain surgeon or a rocket scientist.

    To this day, these conniving welfare-Cadillac corporate chiselers suck at the Fed’s zero-interest sugar tit. SMASH THEM!

  28. argh says:

    well, the FED is properly the ‘lender of last resort’. this prevents bank runs when the back has ample assets of good quality, but is temporarily illiquid.

    “the lender of last resort should lend freely, at a penalty rate, on the basis of collateral that is marketable in the ordinary course of business when there is no panic.”

    the question here is, what was the collateral (if any) and penalty rate (if any) for these $1.2T loans? if it was sub-prime mortgages and their derivatives, then the loans should not have been made (and banks taken over by the FDIC), or if lodans made, should have been called in when it was clear that they were no longer “marketable” at a price that would secure the loans.

    so, have the loans been repaid? what was the collateral, and what was it worth? how much unmarketable collateral does the fed still hold?

  29. lalaland says:

    I betcha that even after this data Jamie Dimon still won’t STFU about how his bank didn’t need any assistance and how Bernanke is a mean old man by insisting on regulation…

  30. DeDude says:

    The Fed served their role as lender of last resort in a crisis, as they should. But they should have used higher rates and not have relaxed their rules of acceptable collateral as much as they did. Demands for sufficient credible collateral for each of these loans would have taken out a couple of the weak sisters in our banking system – and that would have created room in the banking business for some of the more competent companies to expand. It would also have prevented the moral hazard issues – you just have to let at least one big one fail to keep the fear alive in the future.

    In cases of extreme credit freeze there may be a case for lending of money to non-banks, however it was not done right either. There should have been at least a 2:1 demand on collateral from them, and again at much higher rates and stricter rule on what was accepted as collateral. The right to unwind any entity big enough to be a systemic risk should have been in place before any help to non-bank entities.

  31. Than says:

    Actually, Barry, it’s exactly that cut-and-dry. The devaluation of the Krona didn’t ONLY affect bank bondholders (which would be the only way your argument could make any sense) — the devaluation affected ALL creditors holding Krona-denominated bonds. The devaluation of the Krona was a broad stimulus measure, and was in no way part of the bank nationalization package.

    There’s nothing “nuanced” about your argument. It’s wrong. Give it up.

  32. DeDude says:

    Than;

    It turned out the Swedish banks were good enough to both pay back the government (with eventual sale of stocks) and the bond holders. But if they had not had sufficient assets to cover all the bond holders – would those bondholders not have had to take a loss?

  33. klhoughton says:

    I’m with dsawy. The word that is most out of place in your piece is “slowly”:

    “We have in fact turned Japanese, abiding in the recession (and awaiting the next and the next).”

    There. Fixed.

  34. Francois says:

    Than,

    Banks and banksters who gamble like drunken asshats while engaging in systemic control fraud deserve to be wiped out. (and thrown in jail too BTW) Any argument to the contrary is wrong. Give it up.

  35. rktbrkr says:

    When the banks finally face the reality of their worsening home loans situation that will be the time to take the 3 steps. Wonder what kind of crud the Fed still has buried in it’s vaults as collateral.

    1. Fire the senior management of the banks (see this)

    2. Banned all lobbying activity as a condition of any aid (see this)

    3. Forced a Swedish style prepackaged bankruptcy (see this and this)

  36. brianj997 says:

    “I’ m turning Japenese … I think I am turning Japenese … I really think so” — The Vapors

  37. Christopher says:

    …..and then pour gasoline on the mess and light it off….hopefully some banksters get roasted slowly….

    Personally, I’d like to see some banksters hanging from lamp posts in NYC….that would be bottom indicator to me….
    —————————————————————-

    machinehead Says:
    August 22nd, 2011 at 3:25 pm
    Among this Hall of Shame of corporate-welfare grifters, two really stand out: Morgan Stanley and Goldman Sachs.

    Neither of these investment banks were deposit takers serving the general public. It was a scandal, in the midst of the 2008 crisis, that the 30-day waiting period was illegally waived, and they were permitted overnight to rebadge themselves as ‘banks.’

    Yeah, these two flagrant imposters are ‘banks’ like I’m a brain surgeon or a rocket scientist.

    To this day, these conniving welfare-Cadillac corporate chiselers suck at the Fed’s zero-interest sugar tit. SMASH THEM!
    —————————–

  38. TLH says:

    History will regard this as the greatest robbery of all time.

  39. [...] Money-manager Barry Ritholtz  says what the Bush and Obama administrations should have done was: [...]

  40. jrs59 says:

    I can’t believe the United States of America taxpayers are happy with the results of the bailout. We gave these crooks more money to do the same thing all over again only in Europe this time. Just when my Ira was starting to recover from the 2008 issues and it is happening all over again and the wall street crooks are taking our money all over again.
    Not one of these wall street bankers has been prosecuted for breaking the law and stealing our hard earned money.

  41. Tarkus says:

    jrs59 Says:
    ……..
    Not one of these wall street bankers has been prosecuted for breaking the law and stealing our hard earned money.

    —————

    Don’t worry! !
    Eric Holder is hard at work on the ca……
    Eric Holder is hard at work….
    Eric Holder is.
    :D

  42. “Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants”

    Every few weeks or so when you say something like this I ask myself does he really believe this?

  43. “Imagine if the government and the Federal Reserve were run not by knaves and fools and Wall Street sycophants”

    Every few weeks or so when you say something like this I ask myself does he really believe this?

  44. NotAnEconomistButPlayOneOnTV says:

    Imagine if Whistle Blower laws applied to employees of the Fed – 10-30% of $1.2Trillion, now we’re talking real money.

  45. ToNYC says:

    @Woof

    “do we have the opportunity to finally ‘go Swedish’ in the great tradition of ‘fool me once shame on you, fool me twice”

    We could just get local and historically useful and appropriate “go William K. Black” in the great tradition of using what worked beautifully in 1989.
    Good Bank, Bad Bank, and Carry On.

  46. willye says:

    According to the Bloomberg story, the peak of 1.2 trillion was reached in Dec. 2008. The president was Bush, the Fed chairman was Bernanke (appointed by Bush), the Secretary of the Treasury was none other than Henry Paulson former head of Goldman Sachs.

    Blame Obama all you want. I don’t think this story would have made the headlines if someone hadn’t been trying to cast the current administration is a bad light. This post made no mention of the timing.

  47. [...] Financial Crisis:Forget TARP: Wall St. Borrowed $1.2 Trillion from Fed (The Big Picture)→ The covert bailout of Wall Street’s too big to fail banks was revealed by Bloomberg via [...]

  48. [...] Now be prepared to be even more outraged: foreign banks were bailed out as well. Barry Ritholtz rightfully rants: [...]

  49. [...] intervention was for the banking system and in particular existing banks and the management at The Big Picture. It has links worth pursuing as [...]