Posts filed under “Bailouts”
What do Greece, Ireland and the U.S.have in common?
Each experienced what was termed at the time a “new financial era” that produced an enormous expansion of its finance sector. This led to an intoxicating combination of aggressive lending, leverage and recklessness. In each case, the era ended in a financial crisis; perhaps most important, each crisis ended with a bailout of lenders, bondholders and bankers.
This hat trick of bank bailouts hasn’t gone unnoticed in Greece. Yanis Varoufakis, who just resigned as finance minister of Greece, might be a provocateur, but he is apparently no fool. Earlier Monday, in a blog post, he said “the Greek ‘bailouts’ were exercises whose purpose was intentionally to transfer private losses onto the shoulders of the weakest Greeks, before being transferred to other European taxpayers.”
This astute (albeit little known) insight has been echoed by a small number of insightful analysts. My favorite of these is Steve Randy Waldman. His take on the Greek bailouts includes an in-depth discussion of the 2010 assistance program as “largely a bailout of European banks, initiated to prevent a wider banking crisis.”
Alas, bailing out banks as a way to fix a financial crisis is standard operating procedure. What was called the “Mexican bailout of 1982” was, in fact, a bailout of the U.S. banks that made improvident loans to Mexico (as well as to Brazil and Argentina) that had gone bad.
As if to prove all parties were unwilling to learn from their experiences, a repeat of almost the exact same errors with the same players — bankers, Latin American borrowers and the U.S. — unfolded in 1994. The emerging market crises in 1997 weren’t identical, but displayed similar themes of leverage, recklessness and loans gone bad.
Continues here: Greeks Stand Up to ‘Lemon Socialism’
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….Read More
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
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.”).
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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.”).
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
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
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