Comments on: The Importance of Battlefield Nuclear Weapons

By: JAMES KWAK, WRITING AT BASELINESCENARIO. COM. Responding point by point to New Yorker writer James Surowiecki’s latest column . « Want Less Blog

Mon, 11 May 2009 07:18:22 +0000

[...] I dealt more specifically with U.S. bank capital levels in another post, I did use the relevant IMF number: $275-500 billion in capital needs. $275 billion is a much [...]

By: James Surowiecki and Me

James Surowiecki and Me — Sun, 10 May 2009 16:18:31 +0000

[...] I dealt more specifically with U.S. bank capital levels in another post, I did use the relevant IMF number: $275-500 billion in capital needs. $275 billion is a much [...]

By: James Surowiecki and Me « The Baseline Scenario

James Surowiecki and Me « The Baseline Scenario — Sun, 10 May 2009 12:01:29 +0000

[...] I dealt more specifically with U.S. bank capital levels in another post, I did use the relevant IMF number: $275-500 billion in capital needs. $275 billion is a much [...]

By: Trade Jim News » Happy May Day: How Hedge Fund Greed Drove Chrysler Into Bankruptcy; Senator Durbin: Banks Own The Place; ‘Rahm Wants It’

Wed, 06 May 2009 21:46:42 +0000

[...] • Naked Capitalism cited James Kwak who explains what was going on behind the scenes and refers to a “Strategic Nuclear Weapons.” [...]

By: Simon Johnson at: baseline scenario. com. ‘DON’T JUST DO SOMETHING, STAND THERE!’ The bank stress tests are beginning to create a perception problem, but not—as you might think—for banks.” « Want Less Blog

Wed, 06 May 2009 09:20:44 +0000

[...] the banks’ financial prospects improve, their political clout picks up and they increasingly resist the Fed and Treasury on many fronts, including the stress tests. Then we find out this weekend that Charles Munger, Vice Chairman of [...]

By: All About Optics (Predicting Stress Test Outcomes) « The Baseline Scenario

All About Optics (Predicting Stress Test Outcomes) « The Baseline Scenario — Tue, 05 May 2009 11:45:13 +0000

By: apachecadillac

apachecadillac — Sat, 02 May 2009 04:05:03 +0000

Should the govt take the weakest one down, or the strongest one?

There is a great deal to be said for taking down a strong one, to show all the others that they are vulnerable.

But this is probably a move to made after the dialectic has further unfolded.

So, wait until Fall. It is still Springtime. . . or time to spring.

By: Troxel

Troxel — Sat, 02 May 2009 01:09:25 +0000

Banks are not lending because they want the economy to collapse, they then can use the money lent to them by the Fed to buy up businesses on the cheap. It is the classic boom & bust banker take-over. History is repeating itself because our Federal congress has removed the last depression era banker safe guard, namely (Glass-Steagall) Banking Act of 1933. This legislation forbids banks from creating and trading in securities. How was this safe guard removed? It was removed in the “Gramm-Leach-Bliley” Act of 1999. Many of the congressmen who voted this bill into law are still in our government. This bill was the chief device that destroyed the world economy. I encourage you to visit govtrack.com and find out if your representative was part of this bill.

By: silly things

silly things — Sat, 02 May 2009 00:45:33 +0000

Let me address #4 “CDS collateral trigger” quickly before diving into #2 vs #3.

I suspect #4 is not the issue because banks are net buyers of CDS. This makes sense since banks own a lot of mortgage back securities. The collateral triggers applied to CDS sellers like AIG.

#2 vs. #3

To start, we don’t know that all 800 billion in cash the banks are sitting on are not equity capital right? I’d agree with you if we know with certainty that the banks are insolvent today. I know this is a religious view for baseline scenario. On the other hand, the market place definitely has a lot of doubts. I think portions of the cash the banks are sitting on are equity. If you look at tangible common equity (TCE), all the major banks are at an all time high (similarly for Tier 1).

Why banks fear bank runs (liquidity) isn’t an issue?

Here is why I don’t think #2 “banks fear bank runs” is an issue. Banks fearing bank run is a liquidity problem. Even healthy banks fear bank runs. Liquidity problem was a major problem after Lehman failed last September. You can see from LIBOR that after Lehman, banks charged very interest rates lending to each other. At the time, no one knows which bank will fail next. Part of the reason WaMu (after Lehman) went under was a liquidity problem. Here is good analysis of what happen to WaMu.

http://brontecapital.blogspot.com/2008/09/reckless-irresponsible-seizure-of.html

Today, banks do not have liquidity problem. LIBOR is now significantly lower than before the crisis.

http://www.bloomberg.com/apps/quote?ticker=US0003M:IND

The Fed, FDIC and Treasury have an alphabet soup of programs all designed to increase liquidity for banks. Furthermore, the US saving rate went from below 1% to over 4%. Much of the savings went into bank deposits. At any rate, the evidence that liquidity isn’t an issue today is overwhelming.

What do banks have to fear?

A bank can continue to satisfy its creditors as long as it has enough cash on hand (e.g. keep up to date with regular repayments). Since liquidity isn’t an issue for the banks, the banks only have to fear the government. The government came up with banking regulatory requirements so that trouble banks don’t end up spending every last dime and leave the tax payers to mop up. The government wants to come in and clean up a trouble bank when there is still some value left (i.e. minimize bank failure cost).

My previous post already stated why we should relax banking regulatory requirements. I won’t repeat it here.

By: silly things

silly things — Fri, 01 May 2009 23:24:52 +0000

Bill,

Banks are definitely lending as you point out. However, banks are also sitting on a huge pile of cash. In other words, they could be lending more if they weren’t held back. I am trying to understand what could holding the banks back.

http://money.cnn.com/2009/04/28/news/banks.cash.fortune/index.htm (ht StatsGuy)

Here is an excellent analysis of BA’s cash position

http://brontecapital.blogspot.com/2009/04/mixed-up-policy-responses-and-liquidity.html

By: Despite Green Shoots, Odds Favor More Easing

Despite Green Shoots, Odds Favor More Easing — Fri, 01 May 2009 06:27:09 +0000

[...] the risks still favor additional policy easing – especially if programs such as TALF and PPIP are less successful than [...]

By: aimzzz

aimzzz — Fri, 01 May 2009 03:47:52 +0000

Wow… Obama wasn’t messing around when he called them speculators:
“What is striking to many in financial circles is how much Chrysler’s reluctant creditors gambled for what is, in the scheme of this bankruptcy, a relatively small amount of money.”
…
“The other creditors, who sought to distinguish themselves from those who have received bailout money, believed they had a stronger hand. Many of them bought Chrysler debt for about 30 cents on the dollar, long after it became clear that the company was in trouble. Most of this debt is secured by Chrysler assets — factories, equipment, real estate and the like. The thinking was that in the worst case, these assets could be sold at a profit if Chrysler were liquidated.”

The Lenders Obama Decided to Blame
http://www.nytimes.com/2009/05/01/business/01hedge.html?hp

By: aimzzz

aimzzz — Fri, 01 May 2009 03:15:30 +0000

Thanks James Kwak
I was looking for just such a discussion, but I had the naive hope that there were more tools than the stick, the carrot & the nuke.

re Chrysler, even bankruptcy & public shame won’t stop the brinkmanship– the bondholders continue their efforts to put on the squeeze…
“The issue is less whether they’ll win than whether they can cause a meaningful delay that may cause Chrysler or the government to come to an accommodation.”
from: Obama Says Chrysler Holdout Lenders Speculated on U.S. Bailout
http://www.bloomberg.com/apps/news?pid=20601103&sid=anOtOhu3yDyU&refer=news

By: Taunter

Taunter — Fri, 01 May 2009 01:07:35 +0000

Just Bulow Plan them. Once the managers find out that the great money is to be made running the Bad Bank side (with incredibly thin equity and no restrictions on business practices, it’s a public hedge fund with a permanent lockup), folks will come around willingly.

http://tauntermedia.com/2009/04/08/transparency-old-boy/

By: Taunter

Taunter — Fri, 01 May 2009 01:03:49 +0000

Absolutely right. Tighter FASB requirements would have been the “battlefield” nukes James cites, putting a steady public need to raise capital on the banks.

Going the other direction – as we did – backs the government into a corner. Since banks can now report their balance sheets however they wish, a bank such as WFC that basically refuses to recognize losses can show fantastic earnings and a high capital ratio. If the government were then to step in, WFC would jump up and down insisting “we are doing fine, we are making $3bn a quarter and have $45bn imaginary dollars of equity, how dare you communists come here”.