Fixing the bank crisis is the easy part
January 23rd, 2009By David Goldman
In lieu of a blog post today, I summarized and expanded on the themes developed here in this programmatic essay for Asia Times Online.
We have another day with weak stock AND weak Treasury prices — an extremely ominous sign, especially with gold and oil rising. As I wrote, I do not believe that the authorities will let matters go that far. The collapse of the pound sterling is a terrible warning to Washington as to what will happen if this is mishandled.
AFLAC’s travails over the past several days also are worth noting. The largest US seller of supplemental insurance fell from over $40 on Jan. 13 to $22.90 at yesterday’s close due to exposure to UK banks’ hybrid securities. If banks are nationalized and hybrid securities vaporize, the consequences for the insurance sector will be dire — but then again, so will be the consequences for G7 sovereigns.
Governments have got to find a way to get bank equity to float. The only available strategy is laid out in my essay.
January 23rd, 2009 at 12:58 pm
I read the article. Thanks. I was wondering, if there’s positive cash flow in these assets and they are great buys for the banks (and the Fed I guess) right now, why is their market value so low? Shouldn’t investors be scooping them up?
As a side I’ve been short treasuries and long gold. This is my best day in a while.
January 23rd, 2009 at 1:56 pm
jim, i was wondering about the same question you raised above. Is it because of buyers of the past, hedge funds, are deleveraging??
Dan, Thanks for the article
January 23rd, 2009 at 2:07 pm
David, Sorry for goofing up on your name. rv
January 23rd, 2009 at 9:48 pm
In addition to Jim’s question above, I was wondering why Japan simply didn’t use this “black-box” bank model?
Also, With treasury bond prices falling recently, the Fed will need to buy out longer on the curve in order to keep rates low (there simply won’t be enough demand for all their upcoming treasury auctions). Buying out the curve would be hugely inflationary. I don’t see how the US can keep low interest rates and avoid inflation. We’re not like Japan where the American people can finance the government debt.
January 24th, 2009 at 12:35 am
Sir,
Thank you for another highly instructive essay.
“There is no reason to believe that the banks do not wish to lend to consumers or business; as noted, they never stopped lending during the present downturn. The bigger problem is that American consumers do not wish to borrow. ” That argument is persuasive, and quite contrary to the gist of what one reads both in the financial and general media.
However, despite having re-read several times the essay that Mr. Sisci and you wrote last last year about a new mode of US-China collaboration, I am still baffled as to how you hope to reverse the direction of financial flows across the Pacific without “protectionism” — which you denounce. You call for a treaty formalizing cooperative intervention to redirect markets by both the U.S. and Chinese governments. Perhaps we are separated by semantics. In your usage, is state constraint of international market forces not protectionism when two state collaborate at it, rather than one state doing it alone? My sense is that China needs protection from recent folly no less than the U.S. — and one might call the solution mutually beneficial collaborative protectionism.
To be sure, sex is not autoerotic when two collaborate at it. But it is nevertheless not chaste, and the “free trade” legacy of Ricardo is severe it its rigor: there is no substitute for virginity. You, sir, seem to counsel marriage. But that you are not not defending the chastity of free markets — which, alas, have proven rather sterile of late in directing international financial flows — seems plain. If you were to moderate your anathemas against “protectionism,” perhaps that might be more readily apparent, and you might appeal more readily to the left, not merely to the right. Given who controls Washington now, that might merit consideration.
January 24th, 2009 at 10:31 pm
If Citi’s assets are virtually the same as the FED’s, it seems we have the potential to pour infinite amounts down the black hole. Someone is making a ton of money on those bailout funds, and its probably the CDS dealers. From IRA and Karl Denninger:
Unless and until Chairman Bernanke and the other regulator are willing to tame the CDS tiger, there will be no success in bringing stability to the US banking system or foreign banking markets. And the longer Bernanke & Co refuse to say an emphatic “no” to Goldman Sachs (NYSE:GS), JPMorganChase (NYSE:JPM) and the other CDS dealers, the financial crisis affecting global banking institutions will continue to worsen. Making this change may force GS and other dealers into mergers or liquidations, but such is the cost of reform. The US economy can live without the major Sell Side dealer firms, but we cannot survive without commercial banks, insurance companies and commercial companies, all of which are targets for the CDS Mafia and the unlimited leverage that they use as weapons against us all to generate speculative gains. We have the power to fix this aspect of the financial crisis immediately, but do our leaders have the courage and the vision to close down this reckless, speculative market before it destroys what remains of our economy?”
It certainly is nice to hear more voices rise against this madness.
The CDS monster has not only been left alone he has been eating firms by the day. This has been and remains a serious problem as Credit Default Swaps permit players to effectively short firms at an infinite leverage ratio as there are no capital requirements to place these trades, no margin supervision and no mark-to-market requirements.
Many people have railed about “naked shorting”, which is the illegal practice of selling short shares that do not in fact exist. That is, instead of borrowing shares and then selling them (an ordinary short) the person abusing short sales in the “naked” fashion literally counterfeits the shares. This places incredible downward pressure on the share price as the naked shorter has literally diluted the “float” of common stock by pretending that there are more shares outstanding than were issued. Taken to extremes any firm’s stock price can be collapsed in this fashion!
“Naked” CDS, that is, swaps written or purchased not to hedge a bond or other business relationship but instead to speculate on the firm’s fortunes are effectively the same thing as a naked short, in that there are NO boundaries on how many CDS contracts can be written against a firm and by having them cash-settle they amount to nothing more or less than a gambling contract with no limit as to the leverage that can be employed.
Now consider that in the present situation what Treasury and The Fed are doing is allowing speculators to write checks of infinite size against the taxpayer! That is, by declaring that they will not allow these institutions to fail, backing that claim up with real money (both Citi and Bank America have received multiple infusions of TARP money and credit guarantees in the hundreds of billions of dollars) Treasury and The Fed are allowing a certain select few dealers to plunder the Treasury by entering into what amount to synthetic short positions against the bonds of these firms, with Treasury and The Fed on the hook for the bill when values decline.
January 25th, 2009 at 4:22 am
The chart showing increased lending by the banks was most interesting. The data seems to contradict the general sense that it is virtually impossible to get credit. I think the data you show can be squared with the seeming tightness in credit when one considers that bank lending was a small portion of total global lending made possible by the legion of hedge funds, pe funds, money market funds, securities firms, CLO’s, insurance companies, and other non-bank financial intermediaries which comprise what is generally now referred to as the shadow banking system which has imploded. No matter how much banks have picked up the slack, it would be a small amount relative to lending that disappeared with the demise of the shadow banking system.
Allowing the banks to rebuild their equity accounts over time worked nicely in the past and in places like Japan. In Japan, the credit market was extremely limited during that rebuilding phase, but the Japanese consumer had plenty of savings to cushion the lack of credit. Today, it does not appear that Americans have the luxury of time to have limited credit as they don’t have any savings, which you point out. Once one eliminates credit and the ability to roll the credit portion of your balance sheet, credit quality deteriorates, and defaults become imminent. This is the vicious cycle that nationalization might alleviate combined with government directed lending, the thought of which chills my spine, to kick start the credit markets.
It seems that we simply don’t have the luxury of time now.
January 26th, 2009 at 10:11 am
Jim,
If you have significant amounts of capital to put to work (i.e. can take individual positions in seven figures) and real expertise, you can do very well in subprime AAA’s with dollar prices in the $30s — if you are interested in income. The risk is cramdown (arbitrary changing of terms). Prices may go all over the map. I haven’t refreshed prices for investment-grade collateralized loan obligations, but JPM bought a boatload in December, Bloomberg reported. So, yes — there are good bonds to buy (no such thing as a bad bond, only a bad price). And the numbers suggest that the banks are buying aggressively.
January 31st, 2009 at 2:04 am
[...] Inner Workings » Blog Archive » Fixing the bank crisis is the easy … (blog.atimes.net) - January 23, 2009By David Goldman. In lieu of a blog post today, I summarized and expanded on the themes developed here in this programmatic essay for Asia Times Online. We have another day with weak stock AND weak Tr… [...]