Posts filed under “Bailouts”

Bring Back the Drachma!

The never ending sturm und drang over the state of Greek debt, membership in the euro zone and the potential shocks of a debt default have moved from tragedy to comedy to monotony.

The solution is simple. It won’t be fast, it won’t be easy, but it will be a huge improvement for all concerned.

Let Greece go.

Hey Greece — if anyone is listening — just default on the debt and start anew. The rest of Europe has caused the country and everyone else enough agita: just let Greece leave the euro zone in peace. Sure, it will be a long torturous process, but at least Greece — and maybe the euro region — will start moving in the right direction.

In case anyone forgot: Greece never should have been in the euro zone in the first place. Based on the formal entry requirements, it never met the membership standards. With a little help from the Wall Street magicians it lied and cheated its way in, disguising its debt levels and fiscal health. AsSpiegel wrote five years ago, “Goldman Sachs helped the Greek government to mask the true extent of its deficit with the help of a derivatives deal that legally circumvented the EU Maastricht deficit rules.” Greece should have been given the treatment a teenage drinker would get after being discovered in a bar: tossed out and not allowed in until meeting the entry qualifications.

Regardless, it is now in Greece’s own best interests to show itself the door. There should be no doubt, as Martin Wolf points out in the Financial Times, that like most divorces, this one will be acrimonious. But the sooner it starts, the sooner Greece can begin the process of starting an economic recovery.

Despite the pain — and there will be substantial pain, I assure you — the benefits are many. Here are a few that might persuade Greece to pack its bags and leave the abusive relationship it’s in with the EU:

1) Bringing back the drachma: Greece would get to manage its own currency, and it can join in the rest of the world’s devaluation race to the bottom. As is, it is tied to the euro, which truth be told works best for the region’s most efficient producer, Germany. For other nations, the benefits are more modest. For Greece, the euro has been a huge negative for the past half-decade.

Don’t underestimate the advantages of a country such as Greece having its own currency. It will give it a level of control far greater than it has now.

A new drachma would fall, perhaps dramatically, versus the euro and dollar. That creates an opportunity to sell exports inexpensively versus the competition. Plus, it’s great for tourism, Greece’s biggest industry, and would help the country’s agriculture producers. It might also give Greece an opportunity to expand the service sector. If the Brits could do it, so can Greece!

2) An independent central bank:  Don’t sell short the advantages of having a Greek version of the Federal Reserve. What fun! A Greek central bank can hold pressers, host conferences and publish research. In the U.S., we do this thing with dots that’s just hilarious! It’s all terrific stuff, and will give Greece a wonky forum to bash Angela Merkel, just for kicks.

Caveat: It is important not to cause a global financial crisis or hyperinflation. If that happens, the I-told-you-so crowd will never shut up.

3) Tax collection: I know, I know: the Greek people don’t like to pay their taxes. Who does? Evasion costs the public coffers $30 billion a year. Athenians declare poverty, yet satellite photos of the city show 16,974 swimming pools, while its residents claim to have just 324.

As amusing as that is, Greeks have a choice: follow the strictures of the EU and the International Monetary Fund, as dictated by Germany, or take control of the future and make independent decisions. The only way that is going to happen is tax collection. The country will have to grow up and learn how to do it.

The bottom line is this: There is no easy end in sight for the absurd dance Greece has found itself stuck in with its European colleagues. It needs to start fresh. To quote my colleague Josh Brown, “The reason we’re all getting sick of the Greek drama is they haven’t killed off any main characters yet and it’s already season 5.”

Before season six begins, Greece and the EU should stop delaying and move toward the inevitable conclusion of this sorry spectacle.

 

Originally: Let Greece Go  

 

 

 

Category: Bailouts, Currency, Current Affairs, Federal Reserve

In AIG Case, Panic Gets a Slap on the Wrist

After seven years, the federal government has finally received its comeuppance. U.S. Judge Thomas C. Wheeler gave the Federal Reserve a severe tongue lashing, a tsk-tsking for the central bank’s financial-crisis overreach. That ought to teach ‘em. The actual result of the case is to confirm the status quo. In “emergencies,” restraint on government adds…Read More

Category: Bailout Nation, Bailouts, Legal

Judge Wheeler: Fed Overreached with AIG, but No Damages

This is an amazing decision; you should read the entire thing!

“The main issues in the case are: (1) whether the Federal Reserve Bank of New York possessed the legal authority to acquire a borrower’s equity when making a loan under Section 13(3) of the Federal Reserve Act, 12 U.S.C. § 343 (2006); and (2) whether there could legally be a taking without just compensation of AIG’s equity under the Fifth Amendment where AIG’s Board of Directors voted on September 16, 2008 to accept the Government’s proposed terms. If Starr prevails on either or both of these questions of liability, the Court must also determine what damages should be awarded to the plaintiff shareholders. Other subsidiary issues exist in varying degrees of importance, but the two issues stated above are the focus of the case . . .”

The weight of the evidence demonstrates that the Government treated AIG much more harshly than other institutions in need of financial assistance. In September 2008, AIG’s international insurance subsidiaries were thriving and profitable, but its Financial Products Division experienced a severe liquidity shortage due to the collapse of the housing market. Other major institutions, such as Morgan Stanley, Goldman Sachs, and Bank of America, encountered similar liquidity shortages.

Thus, while the Government publicly singled out AIG as the poster child for causing the September 2008 economic crisis (Paulson, Tr. 1254-55), the evidence supports a conclusion that AIG actually was less responsible for the crisis than other major institutions. The notorious credit default swap transactions were very low risk in a thriving housing market, but they quickly became very high risk when the bottom fell out of this market. Many entities engaged in these transactions, not just AIG. The Government’s justification for taking control of AIG’s ownership and running its business operations appears to have been entirely misplaced. The Government did not demand shareholder equity, high interest rates, or voting control of any entity except AIG. Indeed, with the exception of AIG, the Government has never demanded equity ownership from a borrower in the 75-year history of Section 13(3) of the Federal Reserve Act. Paulson, Tr. 1235-36; Bernanke, Tr. 1989-90 . . .

The Government’s unduly harsh treatment of AIG in comparison to other institutions seemingly was misguided and had no legitimate purpose, even considering concerns about “moral hazard.”4 The question is not whether this treatment was inequitable or unfair, but whether the Government’s actions created a legal right of recovery for AIG’s shareholders.

Turning to the issue of damages, there are a few relevant data points that should be noted. First, the Government profited from the shares of stock that it illegally took from AIG and then sold on the open market. One could assert that the revenue from these unauthorized transactions, approximately $22.7 billion, should be returned to the rightful owners, the AIG shareholders. Starr’s claim, however, is not based upon any disgorgement of illegally obtained revenue. Instead, Starr’s claim for shareholder loss is premised upon AIG’s stock price on September 24, 2008, which is the first stock trading day when the public learned all of the material terms of the FRBNY/AIG Credit Agreement. The September 24, 2008 closing price of $3.31 per share also is a conservative choice because it represents the lowest AIG stock price during the period September 22-24, 2008. Yet, this stock price irrefutably is influenced by the $85 billion cash infusion made possible by the Government’s credit facility. To award damages on this basis would be to force the Government to pay on a propped-up stock price that it helped create with an $85 billion loan. See United States v. Cors, 337 U.S. 325, 334 (1949) (“[V]alue which the government itself created” is a value it “in fairness should not be required to pay.”).

* * *

In the end, the Achilles’ heel of Starr’s case is that, if not for the Government’s intervention, AIG would have filed for bankruptcy. In a bankruptcy proceeding, AIG’s shareholders would most likely have lost 100 percent of their stock value . . .

Particularly in the case of a corporate conglomerate largely composed of insurance subsidiaries, the assets of such subsidiaries would have been seized by state or national governmental authorities to preserve value for insurance policyholders. Davis Polk’s lawyer, Mr. Huebner, testified that it would have been a “very hard landing” for AIG, like cascading champagne glasses where secured creditors are at the top with their glasses filled first, then spilling over to the glasses of other creditors, and finally to the glasses of equity shareholders where there would be nothing left. Huebner, Tr. 5926, 5930-31; see also Offit, Tr. 7370 (In a bankruptcy filing, the shareholders are “last in line” and in most cases their interests are “wiped out.”).

 

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Category: Bailout Nation, Bailouts, Legal

The Delusional Dick Fuld

Richard Fuld, the former chief executive officer of Lehman Brothers, is the Shaggy of finance. On the cause of the financial crisis and the collapse of Lehman Brothers, his claim is, “It wasn’t me.” Seven years after he drove the 158-year old firm he ran with an iron fist into bankruptcy, he has reappeared to…Read More

Category: Bailout Nation, Bailouts, Corporate Management, Crony Capitalists, Legal, Really, really bad calls

Institutional Recidivism

Dissenting Statement Regarding Certain Waivers Granted by the Commission for Certain Entities Pleading Guilty to Criminal Charges Involving Manipulation of Foreign Exchange Rates Commissioner Kara M. Stein May 21, 2015   I dissent from the Commission’s Orders, issued on May 20, 2015, that granted the following waivers from an array of disqualifications required by federal…Read More

Category: Bailout Nation, Bailouts, Legal

Past, Present, and Future Challenges for the Euro Area

Past, Present, and Future Challenges for the Euro Area Vice Chairman Stanley Fischer At the ECB Forum on Central Banking conference “Inflation and Unemployment in Europe” Sintra, Portugal  May 21, 2015       It is an honor and a pleasure to participate in the ECB Forum on Central Banking, and I thank you, President Draghi,…Read More

Category: Bailouts, Currency, Think Tank

The QE Era

I am on the road this week in San Francisco, but I wanted to share this wonderful collection of charts from Jim Bianco of Bianco research:

 

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There’s much more after the jump

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Category: Bailouts, Federal Reserve, Markets

Druckenmiller: Look for Three Market Surprises in 2015

Stan Druckenmiller is betting on the unexpected. With one of the best long-term track records in money management, he is anticipating three surprises: Improving economy in China, Rising oil prices, and no Federal Reserve interest rate increase in 2015.

Stan Druckenmiller: Zero-Interest Rates Unnecessary

Category: Bailouts, Federal Reserve, Investing, Video

“I come not to bury bonuses, but to praise them”

I come not to bury bonuses, but to praise them. Yesterday the New York State Office of the Comptroller released itsannual report. The report is chock full of great tables and charts (seethis, this, and this). The key takeaways include these data points: • The bonus pool for securities industry employees who work in New York City grew…Read More

Category: Bailouts, Wages & Income

Investment in the Euro Area: Why Has It Been Weak?

Category: Bailouts, Economy, Think Tank