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October 17, 2008

What Was Obviously Going To Happen Is Now Happening

When Hank Paulson handed over $125 billion to America's largest banks, he neglected to force them to reveal and write down their bad assets, and thus kill the ones which are irredeemably bankrupt and should die. Paulson also took non-voting stock, and so we don't have the ability to dictate bank behavior that owners would normally have.

Thus, even though we were supposedly handing over our money in order to get credit markets working again, the banks were obviously going to just hoard the money.


The deepening red ink underscores a crucial question about the government’s plan: Will lenders deploy their new-found capital quickly, as the Treasury hopes, and unlock the flow of credit through the economy? Or will they hoard the money to protect themselves?

John A. Thain, the chief executive of Merrill Lynch, said on Thursday that banks were unlikely to act swiftly. Executives at other banks privately expressed a similar view.

“We will have the opportunity to redeploy that,” Mr. Thain said of the new capital on a telephone call with analysts. “But at least for the next quarter, it’s just going to be a cushion."...

But Treasury Secretary Henry M. Paulson Jr. is urging them to use their new capital soon. On Monday, Mr. Paulson unveiled plans to provide $125 billion to nine banks on terms that were more favorable than they would have received in the marketplace. The government, however, has offered no written requirements about how or when the banks must use the money.

“There is no express statutory requirement that says you must make this amount of loans,” said John C. Dugan, the comptroller of the currency. “But the economics work so that it is in their interest to do so.”

Mr. Dugan added that he would not examine how the banks used the money, but he said their actions would “be open to the court of public opinion.”

Yes, the "court of public opinion." Normally you might want to use real courts, but unfortunately the United States federal government doesn't have access to those.

—Jonathan Schwarz

Posted at October 17, 2008 01:15 PM

WHAT!!! U didn't think "kiss that 700 billion goodbye" meant that U couldn't kiss it goobbye? That it wasn't GONE? Perhaps it was only leaving for a day or two and coming back 10 fold? Its gone, let it go, forget about it. U would not fight to keep it the day it was being stolen, and U will NOT fight to get it back, its gone.

Posted by: Mike Meyer at October 17, 2008 03:08 PM

Well, getting the Maximum Leader to buy non-voting shares instead of bad assets was something of a miracle to start with. I would feel better about it if Barrack O'Inevitable was making any sense, but last I heard they were talking about keeping this Paulson jackass on board after the next quarter and not actually addressing the structure of the banking system at all. A mystery for the spring, I suppose.

Also, in case you missed it, the bad asset purchases are now being done through Freddie and Fannie at a rate of 40 billion a month (or maybe "continuing" would be a better word, the GSEs started gobbling that stuff up like mad after the bubble burst, for no believable reason). Even if the bailout appropriation was used to nationalize the banks (with, as far as I can tell, absolutely no regard for long term solvency) if the GSE purchases continue we'll end up with 960 billion in the bad paper in two years anyway, wiping out whatever remote upside there is to our lame, non-voting stock.

And all that without actually resolving any of the continuing problems in interbank lending, executive compensation, the regulatory regime, home foreclosure processing, or the socialismo rico that's transformed the financial sector into the 9 hells of moral hazard.

Posted by: buermann at October 17, 2008 04:25 PM

I dunno, it's hard for me to imagine that these things have any real significance; 700 billions, 10 trillions, 5 hundred thousand light years, 10 octillion megatons of TNT.

Those serving fries will keep serving fries, and those sailing their yachts will keep sailing, and gazillions of ones and zeros transmitted from one mainframe to another have nothing to do with that.

Well, OK, of course they do have something to do with that, but not in any rational sense. Only in a bullshit sort of way.

Posted by: abb1 at October 17, 2008 06:12 PM

Up until yer local McDonalds closes and U are out of even a McJob. Rent's due and so's a kid.

Posted by: Mike Meyer at October 17, 2008 07:29 PM

Even here, in a blog where people get it, people don't get it.

This stuff sounds imaginary. It in large part is imaginary. But its effects are anything but imaginary.

Remember those stories of the Depression? Dustbowls? Folks losing everything and heading for Caifornia, the promised land, only to land in squalor and near slavery?

Remember the list of countries that the IMF forced to undergo "fiscal discipline" over the past few decades?

Remember what's happened in Russia, where at least once everyone had a guaranteed middling slog? And where now, as I understand it (all I know is what I read) nothing is certain, and the country is run as a criminal enterprise by thugs? (Sort of like here in the US, now?)

Notice what's happening in Iceland, right now? Where people are buying up all the stuff from store shelves, with no particular promise of them being restocked anytime soon? With a national currency which is DOA? Hoping for some nice financial predator country to bail them out?

I look outside, at the beautiful faux-summer weather, and try to imagine the way things might change here very soon. I fill my car's tank with gas, and wonder how much longer the pumps will work. I turn on the water and wonder how much longer water will come out of the pipes. I hear Ahnold tell me that Caifornia will be fine as long as he can just sell a few billion dollars of bonds. Yeah, right.

I hope for the best, but fear for the worst.

Posted by: steve at October 17, 2008 08:55 PM

Folks losing everything and heading for California

First of all, folks don't have anything but debt, they are not idiots.

The story is always the same: you work, you save, you buy a cow - bandits come, rape your wife and take the cow - then the soldiers come, rape your wife again and take what's left. And Steve McQueen with Chuck Bronson won't help, they'll join the bandits.

What do you expect? This is the normal state of nature, and when it's different somewhere for a few decades - that's nothing but a freakish fluke, aberration. Things get back to normal - that's not a reason to complain.

Posted by: abb1 at October 18, 2008 03:58 AM

We bought what, 125 billion in preferred stock on Tuesday? That leaves us 50 billion after the 70 billion in annual bonuses they're handing out for Christmas. That's what I call recapitalization, yee haw.

I'm going to go hibernate for survival, somebody wake me up when the breadlines are shorter.

Posted by: buermann at October 18, 2008 04:52 AM

almostinfamous - uh, except that my understanding is that the senior bond holders will be getting first dibs. I could be mistaken in this specific case, but generally, it is all bondholders than prefered equity who get stuff. And in any event, since we are proping these zombie banks up (insolvent, but hey, let's give them money anyway), there won't be a bankruptcy to get their stuff. Since the US has no voting rights, the US can't A) make any meaningful changes to how the banks are run and B) can't vote to put the firm into bankruptcy.

You can pretty much forget about getting any money back. After all, look at what is happening at AIG. They get 80billion, then another 38billion and now they want access to the commercial paper market that the Fed has taken over. So figure that will be at least 200 billion down the toliet on top of the other bailouts (yes plural - at least 1.5 trillon has already gone to the dogs in the past month or so). You ain't never seeing that money again.

And paying for it? I'd like to see how all that Treasury paper is supposed to be sopped up without yields going through the roof at some point. Obama is fucked, no matter what he wants to do (and I'm hardly a believer that he's some crypto Leftist Saviour). 100% Debt to GDP is not good and we're about there. Unlike Japan (which is about 200% Debt to GDP), a lot of our paper is held by foreigners - spending our way out of this isn't going to be much of an option. Yeah. This will end well...

Posted by: InTheCity at October 18, 2008 06:47 AM

uh, except that my understanding is that the senior bond holders will be getting first dibs

sure, that's why you get the rotting carcass instead of the fresh one. the US government is just one of the vultures that's circling and also the most generous.

Posted by: almostinfamous at October 18, 2008 10:52 AM