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Rationalize The Banks!
Barack Obama's plan to subsidize failing banks is a bad deal. Instead, the US should take posession of them
Leaks in the media indicate that the banks are about to inhale another helping of taxpayer dollars. This round is likely to be considerably larger than the $350bn they swallowed in the bail-out last October.
The leaks from Obama administration officials without names suggest that the money will provide a further subsidy to bank executives and shareholders and may not even resolve the banks' financial crisis. In other words, the banks may yet come back for more.
The rumored plan is for the government to buy up hundreds of billions of dollars of bad debt from banks and place it in a "bad bank". The bad bank would then resell these assets for whatever price it could get from private buyers.
The basic problem with this sort of plan is that it requires that the government overpay for the bad assets. If we just pay Citigroup, Bank of America and the rest what their assets are worth, then they would be bankrupt. They have taken enormous losses on these assets. If they had to own up to their losses, it would wipe out the capital of many, if not most, of the banks in the country.
Recent estimates from Goldman Sachs and Nouriel Roubini put the cumulative losses to the banking system at around $2tn. There is a lot of room for guesswork in such estimates, but there can be little doubt that this number is in the right neighborhood.
We are in the process of losing $8tn in housing bubble wealth. Most of this will be absorbed by homeowners, but if just 10% of this loss accrues to banks, that would be $800bn. In addition, banks have lent $3tn to support a bubble in commercial real estate. If one third of these more speculative loans go bad, and half of that loss is incurred by banks, that gets us another $500bn. Add in $200bn each in losses on credit card debt, car loans and small business loans, all of which are now far shakier because borrowers no longer have home equity as a backdrop, and you get to the $2tn neighborhood.
This $2tn loss compares with bank capital of just $1.4tn, a large portion of which is rapidly disappearing "goodwill". In other words, the losses to the banking system will almost certainly vastly exceed its capital. This is why the banks need to tap our wallets.
If we go the bad bank route and pay too much for bad assets, then taxpayers are effectively subsidizing bank shareholders, who would otherwise be wiped out, and bank executives, who would otherwise be looking at big pay cuts or unemployment.
But it gets even worse. There is no reason to think that the bad bank route will be sufficient for resolving the banks' problems, at least not in round one, because they may not come clean with all their bad assets.
It is important to remember that these banks are run by people who could not see an $8tn housing bubble. It is likely that they still don't know the full seriousness of their problems. (The same can be said of Treasury secretary Tim Geithner and national economic adviser Larry Summers, the bad bank's designers.)
Many of their loans have not yet gone bad - for example, underwater mortgages that are still current. The bad news on these loans will come when homeowners have to make short sales, which could leave banks with losses of $100,000 or more per loan. This means that the bad bank created under this plan will have to be an ongoing business, handing out more taxpayer dollars for the banks' junk over the next several years.
There is a simple alternative, which can be called "bank rationalization" in order to avoid the "n" word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market. It is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can't let them be tied up in bankruptcy proceedings for years.
Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.
While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.
To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.
In short, bank rationalization is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognize this fact.
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20 Comments so far
Show AllCheney wanted to steal trillions of dollars from the Iraqis for the benefit of the oil companies. Geithner and Summers want to steal trillions of dollars from US taxpayers for the benefit of those in the financial industry. Are they trying to get revenge for the Iraqis or what? My guess is that Geithner and Summers will be handsomely, very handsomely, rewarded for their work after they leave government "service."
This sounds much too reasonable. Overlooked is the likely vast suffering that would occur in the field of political contributions.
I love how the banks helped push laws to limit personal bankruptcy and then sometimes put their own customers into bankruptcy through their outrageous credit card interest rates (going as high as 36% from what I've heard--aren't the same banks also in on the check-cashing and quick loan scams, too?). They get to make a killing for decades, then when they lose $, they get to avoid bankruptcy themselves by taking money from the people (but heaven forbid we actually get to exercise some control over our own $ thereafter). I guess that's what you get when you have enough money to buy the Congress and enough of a monopoly on finance to take down the world's largest economy if you fall.
What do we expect from people like Summers, who is a free trade imperialist who once argued that the best solution for toxic waste was to dump it in the third world, since it will cost less money there in terms of litigation (the third world people have no money or political resources to fight it, and thus, the disposal is a "cheap" and therefore "good" solution for businesses). It didn't take long for me to lose faith in Obama with his appointments of Summer, Daschle, and Vilsack to some of the most important and powerful posts in his administration. Sigh...
Yep. Summers wanted to dump toxic waste on the powerless people in the third world and wants to dump toxic assets on the powerless people in the US. He is a piece of work.
I, too, have "commercial paper". I got it at the 99 cent store. It comes in a roll and I hang it next to my toilet which has a sign on it that says "Bank of the United States".
Pretty soon, US Dollars will have the same use as your "commercial paper".
Rather than the public being forced to eat the losses of banks, conservatives should be forced to eat the "n" word – without ketchup.
The foxes in the henhouse (Summers and Geithner) even look like sleaze-bags. Wake up Obama, and replace them with someone like Dean Baker. And, let the rationalization begin!
Dean would be the best choice or maybe Paul Krugman.
I think it's more complex. I think these men really think they can FIX the broken banking system. They're arrogant. That they'll save the bankers was always a given. Do any of you really think anyone in Gov't was ever going to do anything but bail out the rich?
If this was being done in secret and we attempted to expose it; we would be called conspiracy nuts.
Perhaps watching Grignon's Film on "Money = Debt" gives a longer,although more compelling rationale for "rationalizing" the banks. At least, it's a more "honest" reasoning. Until we can get the general public to learn the real issues behind the banks, I despair of any real change.
http://video.google.com/videoplay?docid=-9050474362583451279&q=money&hl=en
The bank we are talking about is BOA. The government, Dems and Repubs basically talked them into buying ML with the promise they would be getting bailout money. Bailout money they didn't need until they did what the politicians were begging them to do. Now that they are receiving the bailout money, there is talk from anti-business, big gov pols and short selling traders that the government should seize the company because of it. That would be one hell of dirty trick. Basically, the government should have let ML fail. The banks that were going to fail have failed and the government already made its decision and developed a plan. Seizing banks at this point would not be because the banks failed, it would be because the government's bailouts and deals with the banks from last year failed. And if the government is such a failure at managing things, why would want to give them even more power. Best to just see things through with the current plan as horribly conceived and executed as it was than make things any worse than the government already has. Nationalization of banks would be a disaster.
Oh, c'mon. Going with the Bush plan is by definition a disaster in progress. The horrors of government-by-people-who-hate-government started with Reagan, and except for a sorta slight reprieve with Clinton, has continued now for more than a generation. Poor choices for government service has been the rule, but its time to begin moving in the other direction. And get real for goodness sake. Pointing at government failure is actually quite laughable compared to the truly pathetic job the private sector has given us in their march to insanity, tower of babel, Ponzi idiocy of never ending skyrocketing real estate values and money manipulations.
I've just opted out
I stopped paying the credit cards when I lost work and they raised the rates to 30%
I stopped trying to talk to the reps. They never deviated from the script. It was useless to continue answering the calls. They didn't care why I didn't have the money. The meager sum I could pay them was apparently beneath their notice. I rent my apartment. I signed my car over to my wife and the work truck is in my bosses name. I work off the books. I don't have taxes taken out. I have no assets to seize, no wages to garnish. If I run out of work I don't qualify for unemployment. I also don't have any health insurance so I guess it all balances out. I'll send the IRS an IOU again this year with my tax return. To all these politicians making decisions in my name I am invisible. I am numbers on a screen and some papers in a file.
Hi Mr. King. Check your state laws. There is a statute of limitations on credit card debts. Usually it's somewhere between three to five years or so. So after the statute of limitations is reached, you can tell your bill collectors, "what debt?", or you can tell them to "stick it".
theinitiate
There is no rationalizing with greedy people. It's mind boggling to me that these execs feel they are entitled to millions a year while the country goes down the toilet...But Pluto in Capricorn- what transformation we are in for!!! THis country was born during the last transit of pluto in CApricorn-Born through revolution... Now, we are to be reborn...
Yes To Public Ownership Of Banking & Finance
"Why?"
"Profit-making social service* is an oxymoron."
"Based on?"
"Greed."
*including, among others, health care and education
theinitiate
Just reading the past actions of these people infuriates me so much.But then i say to my self , well you knew this was coming. Civilization needs a transformation, a restructuring. The thing is, before the melt down- one would hope that all involved could reflect and see the error of their ways and therefore take PROACTIVE MEASURES. But alas, it seems that the most negative human characteristics have been at the forefront in creating this slow slide to oblivion. Now, we will REAP what we have sown. It's too bad that most will suffer at the hands of those that held the most power in creating this. But I will say this. The lessons to be learned here are many. ALL OF US ARE GUILTY OF UNCONSCIOUS LIVING. So now we have an opportunity to peel away the blinders, from the richest and most powerful to the poorest who dreams someday to be the richest... Yes, there are those who knew and did not engage in the social contract that has turned out to be so...false.
Greed, lust for power, keeping up with the jones, these traits reside in all of us and they have been woven into the fabric of our very civilization. We are taught to compete on the financial playing field to "win" as much monetary and material loot as we can. We are taught that this is the RESPONSIBLE THING TO DO. If you do not attain this level of competancy in the material world, you are considered less, less important, less valuable, less competant, less, less, less.
Nothing is more permanent than change.
Hank B
I'm not too oppoased to bailing out the banks, but I would feel much better if a few conditions would be added to the bailout packages. Every officer's wages should be set and frozen. Allowing stock bonuses is OK provided the institution is operating in the black, no deficits, but when they finally get to sell the stocks they should be taxed as straight income, not capital gains. Since executives are supposedly hired for their expertise, like physicians who don't perform correctly, they should be subject to the same kind of malpractice legal action. Finally, there should be a limit on the amount of debt a person may carry on credit cards, not just on one credit card. Interest charged should be in line with other loans and service charges set to reflect the actual handling and billing charges.