By Simon Johnson
We live in an age of unprecedented bailouts. The Greek package of support from the eurozone this weekend marks a high tide for the principle that complete, unconditional, and fundamentally dangerous protection must be extended to creditors whenever something “big” gets into trouble.
The Greek bailout appears on the scene just as the US Treasury is busy attempting to trumpet the success of TARP – and, by implication, the idea that massive banks should be saved through capital injections and other emergency measures. Officials come close to echoing what the Lex column of the Financial Times already argued, with some arrogance, in fall 2009: the financial crisis wasn’t so bad – no depression resulted and bonuses stayed high, so why do we need to change anything at all?
But think more closely about the Greek situation and draw some comparisons with what we continue to learn about how Lehman Brothers operated (e.g., in today’s New York Times).
The sharp decline in market confidence last week – marked by the jump in Greek yields – scared the main European banks, and also showed there could be a real run on Greek banks; other Europeans are trying to stop it all from getting out of hand. But there is no new program that would bring order to Greece’s troubled public finances.
It’s money for nothing – with no change in the incentive and belief system that brought Greece to this point, very much like the way big banks were saved in the US last year.
If anything, incentives are worse after these bailouts – Greece and other weaker European countries on the one hand, and big US banks on the other hand, know now for sure that in their respective contexts they are too big to fail.
This is “moral hazard” – put simply, it is clear a country/big bank can get a package of support if needed, and this gives less incentive to be careful. Fiscal management for countries will not improve; and risk management for banks will remain prone to weakening when asset prices rise.
If a country hits a problem, the incentive is to wait and see if things get better – perhaps the world economy will improve and Greece can grow out of its difficulties. If such delay means that the problems actually worsen, Greece can just ask Germany for a bigger bailout.
Similarly, if a too-big-to-fail bank hits trouble, the incentive is to hide problems, hoping that financial conditions will improve. Essentially the management finds ways to “prop up” the bank; on modern Wall Street this is done with undisclosed accounting manipulation (in some other countries, it is done with cash). If this means the ultimate collapse is that much more damaging, it’s not the bank executives’ problem any way – their downside is limited, if it exists at all.
The Greeks will now:
- Lobby for a large multi-year program from the IMF. They’ll want a path for fiscal policy that is easy in the first year and then gets tougher.
- When they reach the tough stage, can’t deliver on the budget, and are about to default, the Greek government will call for another rapid agreement under pressure – with future promises of reform. The eurozone will again accept because it feels the spillovers otherwise would be too negative.
- The Greek hope is that the global economy recovers enough to get out, but more realistically, they will start revealing a set of negative “surprises” that mean they miss targets. If the surprises add to the feeling of crisis and further potential bad consequences, that just helps to get a bailout.
- The Greek authorities will add a ground game against the European Central Bank, saying things like: “the ECB is too tight, so we need more funds”. We’ll see how that divides the eurozone.
In their space, big US banks will continue to load up on risk as the cycle turns – while hiding that fact. Serious problems will never be revealed in good time – and the authorities will again have good reason (from their perspective) to agree to the hiding of issues until they get out of control, just as the Federal Reserve did for Lehman Brothers. Moral hazard not only ruins incentives, it also massively distorts the available and disclosed information.
As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.
The Baseline Scenario 
Thank you Mr. Johnson for the commentary. I 100% agree w/you.
Has the EU been captured by a caball of Greek shipping magnates who are all related distantly to the Kennedy’s? If we use the state capture theory to account for the abyssmal lack of accountability in the US shouldn’t we also use it in the Greek case? Or is there a difference between a country and a bank?
We have seen it all before. First the IMF comes in, markets rally, the Greeks, of course, CANNOT shrink the public deficit (it is NOT a matter of will), then the IMF gives them a waiver. Eventually they will default and pull out of the Euro.
This the SAME process Argentina went through in the late 90s (except their ratios were much better).
How long have you been ghost-writing for Geithner?
“We cannot build a system that depends on the wisdom and judgment of future regulators.”
The worst part of the bailout of US banks was that they were not taken over, their management fired, broken up, and new management installed along with strong regulatory changes.
The bailout fortune should have at least contained the above !!
Great Comment!!
engineer27-
Is that really a complete thought?
I know I already put this up in another comment but I think it’s worth another post.
The issue is their debt maturity profile as much as anything. The EU funds are dramatically cheaper for 2yr or 3yr than longer, but what Greece really needs is 8yr or 10yr funding at reasonable levels. The EU doesn’t want to give that because it wants way out. Maybe the IMF can. If Greece just borrows (say) €75mio for 3yrs from the EU, that just kicks the can down the road. Look at the way the market has focused on the rollover of €30bio of debt – imagine what that would be like for more than double the amount.
Greek CDS is going to get triggered this year somehow. The moral hazard implications of it not being triggered are just too dire.
Mr. Johnson
Your arguments become as lame as your prognostications false. Barely 2 days ago you were spouting the end of the universe in Greece- all 3 options you presented were armageddon scenarios yet today we see the Greek bond debt getting a fine reception.
Your fellow idealogues were advocating for a complete nationalization of the US banking system in Dec 08 and today we see every one of their apocalyptic predictions proved wrong, and the general success of the programs put together by the FED and the treasury.
You can keep screaming- break up the banks- but neither the administration nor the general polity are buying it.
this is from washingtonsblog.com As I wrote to the Ny times the other day. The IMF or any entity will always come to the rescue with a package. This has to happen because the entire system is a sham. To not do so reveals that the emporer has no clothes. Do you expect the central bankers/financial industry to expose their own fraud. it will never happen. This of course explains the behavior of every western actor. When you run a con game, you can’t have it exposed. no help from iMF exposes the congame. what happens to the game when Greece, Iceland, etc decide they aren’t going to play along anymore. end oif game!!. why do you think they had to punish argentina. INstead of being shocked, I find it to be exaclty the expected action. Mr. Johnson, you have admitted it is a con game in your atlantic article (not in such words). would you expect th con artisists to stop it? (LOL)
Look at we we learned from Citi, and now from Wamu. the abandoned their own internal controls effectively lending to those they know couldn’t pay back. fraudulent lending. This is the scam. the banks lend regrdless, and know they get bailed out. Lat america debt, etc. would you expose the con if you made hindreds of millions like Rubin, Paulson, et al. Look at Lehman transactions. the whole system is a con.
Debt Repudiation: Good Idea or Bad Idea?
As I noted in November:
Debtors are revolting against exorbitant interest rates and fees and other aggressive tactics by the too big to fail banks. See this, this, and this.
Congresswoman Kaptur advises her constituents facing foreclosure to demand that the original mortgage papers be produced. She says that – if the bank can’t produce the mortgage papers – then the homeowner can stay in the house.
Portfolio manager and investment advisor Marshall Auerback argues that a debtor’s revolt would be a good thing.
And even popular personal finance advisor Suze Orman is highlighting the debtors revolt phenomenon on her national tv show.
Walking away from home mortgages has actually become mainstream, being trumpeted by:
CBS
CNBC
The New York Times (and New York Times Magazine)
The Wall Street Journal
MSN
NPR
The Arizona Republic
Many others
In addition, as I pointed out in February:
There is an established legal principle that people should not have to repay their government’s debt to the extent that it is incurred to launch aggressive wars or to oppress the people.
Matt Taibbi wrote Monday:
As powerful as these Wall Street banks may seem, they are also exquisitely vulnerable. Right now virtually all of them are dependent upon the government keeping accounting standards lax enough for all of them to claim to be functional businesses. It is generally accepted that if the major banks on Wall Street were forced to mark all of their assets to market tomorrow, they would all be either insolvent or close to it.
Thus their “healthy” financial status is already illusory. So imagine what would happen if large numbers of those dubious loans on their balance sheets that they have marked down as “performing” were suddenly pushed ahead of time into the default column. What if Greece, and the Pennsylvania school system, and Jefferson County, Alabama, and the countless other municipalities and states that are wrapped up in these corrupt deals just decided to declare their debts illegitimate and back out?
I think it’s an interesting question and would like to hear what knowledgeable people in the field have to say about it. But the big picture, to me, is that these companies are almost totally dependent not only upon the continued good faith of aggrieved debtors, but upon the government recognizing the (sometimes fraudulent) loans made to those debtors as fully performing.
Similarly, Gregor MacDonald argued in February 2009:
The private sector debt in the United States exerts the same power over the banking system as the public debt of the United States exerts over our international creditors. Collectively, the debtors are in control. Not the creditors. This is why the the Creditors, not the Debtors, will be making most of the concessions in the years ahead. Whether the US public debt is inflated away, rescheduled, or repudiated–or some combination of all three–it doesn’t matter much. The process is already underway.
Former Managing Director and board member of Wall Street investment bank Dillon Read, president of Hamilton Securities Group, Inc., an investment bank, and former government servant Catherin Austin Fitts wrote Tuesday:
Look up “fraudulent inducement.” My position as the former Assistant Secretary of Housing-Federal Housing Commissioner and then as lead financial advisor to the U.S. Department of Housing and Urban Development is that the majority of the mortgages originated in the United States after 1996 were fraudulently induced.
The way to deal with criminals is to treat our contracts with them in a manner reciprocal to how they have treated their contracts with us.
Will a growing movement to abrogate contracts with institutions who have broken the law be disruptive? Yes. Will that require painful adjustments? Yes. That is the price we pay to deal with the challenges we face. This includes the fact that the banks have sold criminally originated debts to our pension funds and retirement accounts as well as to allies and institutions around the world.
It is much less painful, however, than the price we will pay if we continue to operate by a double standard whereby large institutions and a small group of people are permitted to live and operate above the law. So let’s address the lawlessness in the financial sector, face the national security issues involved in using our financial markets for economic warfare and begin the transformation.
Austrian economist Murray Rothbard wrote in 1992:
I propose … out-right debt repudiation. Consider this question: why should the poor, battered citizens of Russia or Poland or the other ex-Communist countries be bound by the debts contracted by their former Communist masters? In the Communist situation, the injustice is clear: that citizens struggling for freedom and for a free-market economy should be taxed to pay for debts contracted by the monstrous former ruling class. But this injustice only differs by degree from “normal” public debt. For, conversely, why should the Communist government of the Soviet Union have been bound by debts contracted by the Czarist government they hated and overthrew? And why should we, struggling American citizens of today, be bound by debts created by a … ruling elite who contracted these debts at our expense?
***
Although largely forgotten by historians and by the public, repudiation of public debt is a solid part of the American tradition. The first wave of repudiation of state debt came during the 1840’s, after the panics of 1837 and 1839. Those panics were the consequence of a massive inflationary boom fueled by the Whig-run Second Bank of the United States. Riding the wave of inflationary credit, numerous state governments, largely those run by the Whigs, floated an enormous amount of debt, most of which went into wasteful public works (euphemistically called “internal improvements”), and into the creation of inflationary banks. Outstanding public debt by state governments rose from $26 million to $170 million during the decade of the 1830’s. Most of these securities were financed by British and Dutch investors.
During the deflationary 1840’s succeeding the panics, state governments faced repayment of their debt in dollars that were now more valuable than the ones they had borrowed. Many states, now largely in Democratic hands, met the crisis by repudiating these debts, either totally or partially by scaling down the amount in “readjustments.” Specifically, of the 28 American states in the 1840’s, nine were in the glorious position of having no public debt, and one (Missouri’s) was negligible; of the 18 remaining, nine paid the interest on their public debt without interruption, while another nine (Maryland, Pennsylvania, Indiana, Illinois, Michigan, Arkansas, Louisiana, Mississippi, and Florida) repudiated part or all of their liabilities. Of these states, four defaulted for several years in their interest payments, whereas the other five (Michigan, Mississippi, Arkansas, Louisiana, and Florida) totally and permanently repudiated their entire outstanding public debt. As in every debt repudiation, the result was to lift a great burden from the backs of the taxpayers in the defaulting and repudiating states.
***
The next great wave of state debt repudiation came in the South after the blight of Northern occupation and Reconstruction had been lifted from them. Eight Southern states (Alabama, Arkansas, Florida, Louisiana, North Carolina, South Carolina, Tennessee, and Virginia) proceeded, during the late 1870’s and early 1880’s under Democratic regimes, to repudiate the debt foisted upon their taxpayers by the corrupt and wasteful carpetbag Radical Republican governments under Reconstruction.
Ambrose Evans-Pritchard wrote in 2009:
In the end, the only way out of all this global debt may prove to be a Biblical debt Jubilee.
Economist Steve Keen is also calling for a debt jubilee, stating:
We should write the debt off, bankrupt the banks, nationalize the financial system, and start all over again.
We need a twenty-first century jubilee.
[We’re going into] a never-ending depression unless we repudiate the debt, which never should have been extended in the first place.
If we keep the parasitic banking sector alive, the economy dies. We have to kill the parasites and give a chance to the real economy to thrive once more and stop the financial [crooks] doing what they did this time around ever again.
And economist Michael Hudson – who also calls for a debt jubiliee – wrote yesterday:
The only way to resolve the [European debt crisis] is to negotiate a debt write-off…
The most cynical (but not necessarily inaccurate) view of debt I’ve seen is that banks loan out imaginary money they don’t really have, which money is “collateralized” by capital they do not really have, which is, in turn, based upon central bank printing presses which create money out of thin air which the central banks don’t really have. But then when debtors have trouble repaying onerous loans, the bankers seize real assets. See this and this.
Indeed:
In First National Bank v. Daly (often referred to as the “Credit River” case) the court found that the bank created money “out of thin air”:
[The president of the First National Bank of Montgomery] admitted that all of the money or credit which was used as a consideration [for the mortgage loan given to the defendant] was created upon their books, that this was standard banking practice exercised by their bank in combination with the Federal Reserve Bank of Minneaopolis, another private bank, further that he knew of no United States statute or law that gave the Plaintiff [bank] the authority to do this.
The court also held:
The money and credit first came into existence when they [the bank] created it.
(Here’s the case file).
Justice courts are just local courts, and not as powerful or prestigious as state supreme courts, for example. And it was not a judge, but a justice of the peace who made the decision.
But what is important is that the president of the First National Bank of Montgomery apparently admitted that his bank created money by simply making an entry in its book …
The judge voided the mortgage, since he found that the bank hadn’t given any real consideration, but simply created money out of thin air.
In other words, according to the most cynical view, the entire debt-money system is a scam … and should be repudiated.
Look at we we learned from Citi, and now from Wamu. the abandoned their own internal controls effectively lending to those they know couldn’t pay back. fraudulent lending. This is the scam. the banks lend regrdless, and know they get bailed out. Lat america debt, etc. would you expose the con if you made hindreds of millions like Rubin, Paulson, et al.
As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.
Condemned to repeat it? Cadres like Geithner are fully committed to Bailout America as the veritable new order. They have no policy left that could either work to keep the financialization tower propped up, or which by now would be ideologically acceptable now that they’re fully, permanently committed to a psychopathic level of gangsterism.
People need to understand that this is not and was never intended to be some temporary crisis measure. Just as the Global War on Terror is intended to be the permanent basis of foreign policy and domestic intimidation, so the Bailout is also meant to be the permanent basis of all American government policy as such. The two combine as the twin vehicles of radical corporatism.
(Indeed, the so-called domestic economy has become completely intermingled with the Pentagon budget by now. Any “civilian” corporation you can think of, e.g. in the food or entertainment sectors, is likely to have fat Pentagon contracts. Nick Turse has written extensively on this.
The Permanent War itself is an element of the general corporatist Bailout.)
So this is in fact “Bailout America” in the same way you might call another fascist regime “fascist Italy” or “Nazi Germany”.
Meanwhile the Dubai world bailout and now the Greek, and soon the Spanish and Portuguese and others, are extensions of the same strategy.
For as long as this power structure can it will step up the extractions from the resource base (you know, the people) in order to prop up its own existence. It will become as kleptocratic and eventually violent as it has to become to push this as far as it can possibly be pushed.
There’s an economic limit to it (all ponzi schemes eventually collapse of their own accord) and there’s its physical energy limit. These guarantee the Bailout will eventually fail, the bubble will finally be permanently burst, and everything will finally deflate back to reality.
But in the meantime this intensifying tyranny will inflict horrific suffering and pain, and maybe for years to come. How much pain will, in the end, depend upon whether or not there’s a spiritual and political limit to how much the people will suffer themselves to be looted and murdered.
I am not sure this plays out endlessly this way. Most of these countries have an open society. As such, political resistance may arise against further bailouts in countries footing the bill. At some point too big to fail meets too greedy/incompetent/etc to politically support. The same applies in this country for the big banks. Of course, blurring the lines of support for our financial system (or the Euro) and support for particular players in the system runs the risk that it could damage political support for fixing the system when the next serious crisis hits.
DWN
Greece is too big to fail? I had the impression that is too small to succeed
If you didn’t lose your job, your home, or your savings, you have every incentive to return to business as usual. If you did lose your job, your home, or your savings in the big financial blow-up, you have every reason to be afraid of returning to business as usual.
You are so factually wrong it is disturbing.
1) We did nationaize the banks in all but name only. By not doing so we made sure we couldn’t control the actions. this is why they don’t hae to lend, etc. the ppolicy was a disaster
2) bank profits are a myth. getting rid of mark to market means banks don’t have to write down assets. meaning they are appearing to make profits. 1/2 of profits go into bonuse money. this 50% should be going back to bank balance sheets to recapitalize. this delays having health banks and further weakens our economy.
3) because we dicided to use the “free market” to recapiutalize we have doomed ourselves to zero interest rates for ever as long as they keep skimming the profits intotheir pockets and don’t recapitalize. We have to keep them profitable. thios of course leads to decreased savings, futire inflation and other long term structural problems.
4) In truth it was the idealogues who won the debate about the banks. the free market idealogues who can’t have the sort of evil socialist/ communst things happeing in gods greates capitalist country. Instead we have the most inefficient, wasteful way to try and fix things. all to keep the “capitalists” happy.
5) I don’t see any apocalyptic event yet that hasn’t fit along with my predictions.
– not nationalizing would lead to real long term debt problems
-these will either be repudiated, or inflated out of
—–it is clear the system isn’t going to allow haircuts or default (which should happen so we can reform again). hence the outcome of this mess is going to be disaster inflation again. workets will be much poorer (savings destroyed), and the only people ahead in the game will be the bankers (lost social programs, long term unemployment) the bankers earn a living based on leverage/ credit extension/ inflation. real people make a living based on gains of nominal GDP.
great the system that has caused real wages to fall in the us for 25 years (except ceo’s and bankers) got rescued. Guess we should all chear that one (LOL)
Remember what you think about the ideas of Simon and his fellow ideologues when the US banks blow up again in a year or two. The underlying problems of the big bank – leverage and incentives – were not even addressed by the Fed and Treasury actions. It’s not ideology, it’s a common-sense analysis of what went wrong.
nobody seems to know what to do. Now they’ve bought themselves some time.
Like a famous budget minister of Belgium once stated: “The public debt appeared on its own, it will one day disappear on its own”
Observer forgot our old friend Mr. Deflation.
Deflation the only option for Greece: IMF chief
Mon Apr 12, 2010 EDT – excerpts
VIENNA (Reuters) – “Deflation is the only way Greece can effectively tackle its debt problems, International Monetary Fund (IMF) Managing Director Dominique Strauss-Kahn was quoted on Monday as saying.
“The only effective remedy that remains is deflation,” Strauss-Kahn told Austrian magazine profil in an interview. “And this is exactly what the European Commission has correctly recommended.
“The way out of debt in most countries is led by a reform of the pension or health care system,” he said, adding that raising the retirement age could be one way of cutting expenditure.”
http://www.reuters.com/article/idUSTRE63B1BB20100412
geckonomist wrote:
“nobody seems to know what to do”
With the exception of the financial cartel.
Like Sisyphus, society is cursed to roll a huge financial-boulder up a hill, only to watch it roll back down, and to repeat this throughout eternity.
bmeisen, that is indeed the question: Is there a difference between a country and a bank? Third world countries have been asking this for decades — and what goes around comes around. Maybe we need to take lessons from Chavez . .
Which, mine, or Geithner’s?
Follow the link for TG’s full stream of consciousness.
My thought was that TG was starting to sound a bit like Simon Johnson (although more like Mike Konczal), even if the actions don’t quite line up with the words.
We have nationalized our banks? Last I saw I JPM, GS and even Citi along with 100s of regionals were in the hands of the non government shareholders. So now you can redifne the term “nationalized banks” to suit your arguments. Fine argument sir. LOL
– “Free market idealogues vs the bank busters” You confuse the issues spectacularly, but that is par for the course in these kinds of extremist situations. Of course regulations were demonstrably lax and a big causative factor in the massive malaise that followed. But you and Mr. Johnson make this fantasic leap from “bad regulations” to ” break the banks or else the world will collapse- oh, and soon!”
I am stating this kind of alarmism was rampant by your posse in dec 08 yet today the facts indicate:
– banks are better capitalized and in PRIVATE hands ( oh spare us the redefinitions)
– size obsessions dont prove in way or form a big bank will be more vulnerable or more likely to devastatingly fail, when much better regulations and oversight are exercised.( oh Mr Johnson is that 100 billion or 400 billion to make your size hit list?
And finally, when are we the poor public to prepare for your Mayan apocalypse of the big bank collapse?
At the end of time you say?…thanks.
I think it would be worthwhile to rebut the argument that the bailout made money for the taxpayer by tallying the various subsidies extended to the banks–for instance the difference between the market value of the dodgy collateral accepted by the Fed and the value of the loans to banks made on the basis of that collateral, the interest-rate subsidization, etc.
The proponents of the bailout obviously think the “profit” shown by TARP is a powerful argument in their favor. Allowing those claims to go unanswered leaves the public with the impression that everything “worked.”
Sensationalism formula that sells books.
– Find a set of villans ” big banks” ” Jamie Dimon the most dangerous!!”
– Place them in scary situations, if history does that for you all the better.
– Trot of the heros/savors – bank busters!
– Set up an apocalyptic ending
– Package the snake oil formula in a book
– remember- Fear sells best! So beat the drums of fear to sell sell sell
and oh- ignore all empirical evidence that casts a bad light on the saviors or disturbs the plot!
I thought i only saw this on FOX :)
If bank profits happen only because of government accounting gimmicks, and allowing banks to fudge the value of their holdings, and giving them free money to gamble in the market how is that not nationalzing.
a company that only exists because of government policy that ensure they make a profit, and socialize a loss is nationalized in everything except name only. That is in fact not capitalism. That my friend is socialism/communism. in capitalism the banks would have at least taken a haircut on the losses. In capitalism they would have to recongnize the lossess and recapitalize. In capitialism they would get a free subsidy from the discount window not to lend but to play on their prop desks.
In fact you have the worst of capitalism. You have given profits to a sector, the avoiding of real reform. Where does anyone see any market discipline in this crisis?
There are many ways to sensibly recover our bearings.
And they’ve all been mentioned by all sides of the debate. We just need to choose a few things wisely and in proportion.
We need to downsize TBTF banks and rebuild firewalls between Investment Banking and Commercial Banking. We do need stronger resolution authority when, inevitably, some group of misquided souls ruin their corporation(s).
We do need stronger consumer protection laws, and we do need to haul shadow banking out of the shadows. Derivative securities do need to be traded in the public markets. All derivatives, publicly traded or not, need to be recorded with regulators who will have the power to prohibit their execution.
And possibly most important of all, investors of all kinds, and top executives of all kinds, need to be exposed to loss (and clawbacks for CEOs and Directors) for speculative investments.
Many of these reforms are politically possible because they are popular with the majority of voters.
Take a deep breath and just do it.
I can’t stand when people discuss how bad of a situation Greece is in. Or how other countries will become like Greece such as the latest interview on Bloomberg News.
How come no one ever discusses of how bad a situation the US is in. $13 trillion national debt, $107 trillion in unfunded liabilities and expenditures and $1.4 trillion budget deficit.
That’s not bad?
Mark Twain wrote:
“Let us be thankful for the fools. But for them the rest of us could not succeed.”
(1835 – 1910)
dude, you ar from aqnother planet. this isn’t in this reality.
Headlinees of past few days:
Lehman Channeled Risks Through ‘Alter Ego’ Firm
Memos Show Risky Lending at WaMu
Hussman: “The Banking System Is Still Quietly Insolvent”
http://www.zerohedge.com/node?page=1
Evidence That Primary Dealers Have Collectively Engaged In Repo 105 And Qtr-End Book Cooking Type Schemes For Years
Submitted by Tyler Durden on 04/09/2010 02:58 -040
The WSJ has compiled some data
http://www.zerohedge.com/article/evidence-primary-dealers-have-collectively-engaged-repo-105-and-qtr-end-book-cooking-type-sc
So what do we lear. all the primary dealers cook their books (No guess the NY fed didn’t know this after Dimon is only on the board, friedman, dudley, etc). Massive systemic fraud at Wamu (that aint the only one).
Of course fear sells best. why do you think dimon et al warn that the sky will fall if we get consumer regulation or audit the fed. If it aint a ponzi what i the fed hiding from and audit. Each and every reform effort the banks argu will be a disaster for our economy (lol).
You are either a person at the banks paid to write on this blog, or in need of antipsychotic drugs because your sense of reality is really distorted.
the system works of massive systemic fraud and corruption. it’s tolerated and known by the regulators (after all the revolving door between fed, treasury, wall street) how could they not know.
Perhaps ypu should read: this time is different by carmine and rogoff. they gathered 500 years of data. is that fear mongering (no it’s fact). Or perhaps see the history of money by nail ferguson on PBS. this scenario has been played out countless times. But I guess this time is different and we will pull it off right!!!
Sir
– i will chalk your specious re-definition of “nationalized” anything to ignorance- perhaps not having lived in a true socialist system, and nothing more nefarious.
– banks havent taken losses? are you a shareholder in one and have you read a 10K recently?
Your entire raison detre seems to be driven by a desire for more “punitive” losses or damages to these institutions. That is an emotional response more than a logical one.
The value of the bank assets tanked and now they have risen. That simply demonstrates the fungible nature of valuations of assets and the importance of reserves, better risk classification, reduced leverage, separation of risky practises from more stable insitutions – all the perview of regulation and oversight.
If your intentions trascend selling sensational books to shedding true light and changing minds, i humbly suggest the following-
– the banks were part of the problem, the greedy consumer and the lax regulator were parts as well. Learn to see and acknowledge all the possible causative factors and their future roles.
– I suggest you consider alternative progressions of the future to your single minded “big banks will destroy the world” storyline. More than likely you will be wrong.
– Unless you want to be deigned a soothsayer, spare us groundless apocalyptic conclusions.
All these detract from the historical facts and compelling lines of reasoning on the regulatory aspects you often provide.
Ironically, I almost bought your book until your blog demonstrated that copious historical facts are no guarantors of objective reasoning or enlightening prognostications.
Bailouts are great, as long as they come with regulation. Banks and governments could play as long as they have sufficient cash reserves to cover their probable losses – and someone to check the probability of those losses, and no shadow entities to carry the losses on their books.
Unfortunately, the regulators were asleep at the switch – they couldn’t see the housing crisis coming when it was staring them right in the face, and nobody checked the ownership of Lehmann’s shadow. It all seems awfully close to criminal.
EXCELLENT ! Probably jubilee can’t happen until things get really bad. And if we do Jubilee, let’s go ahead and establish it on ten-year cycles as it was in the Biblical Jubilee, and see what kind of system arises out of that.
greece can’t just print it’s own money. that’s the only difference we will never have to default because we can just make the dollar worthless. In fact I decided a very long time ago that analyzing the actions of bernanke he has decided to inflate us out of the debt. Otherwise his actions do not make sense. You don’t expect him to say this is the plan do you?
I want to figure out the internal angles put in play that enabled the big banks to survive. As a CFO, what angles could I concoct to get us out of the mess. This would be late 2008 and looking at 2009. The first most obvious methodology would be to free up mark to market 2008 year end reserves for inclusion in income.
That is obviously what immediately happened. Just the details are obscure. Assume that the banks were holding $1 trillion of Fannie, Freddie and Ginnie guaranteed mortgage backed securities in various stripes and configurations… but all guaranteed to satisfy their Federal Reserve Bank. Estimating here just for illustration that this $1 trillion of securities were carried at $800 bn net of mark down to market reserves.
Solution: sell these securities at par to your Federal Reserve Bank. True, you give up the income at say an average of 5 % to get a minor return on your unusable reserve deposit asset. But that asset is cash. What is the result? Well, for starters $200 bn of reserves could be reversed to income or used to mark down other assets to get the pressure off the financials. That means, that enough of the $200 bn could be reversed to income to guarantee any 2009 result desired with the rest parked as mark to market reserves for future use. Hopefully anyway. The end result beauty of the concept is that the securities will eventually be turned back to the banks to reduce the reserve deposits account to normal. Perfectly laundered: ” Clean as whistle”. The turned back securities are carried as investments at cost where they sit until the coast is clear. Then slowly liquidate them. They are after all guaranteed.
This would have been my first pass attack on the base problem of ” insolvency” if I were the CFO.
The banksters have the power. They will keep the power only by making deals with other power holders. The banksters are no different than any other power holding group like the 200 families of Mexico. You keep power by having the ability to keep it. As Bush said ” What ever it takes”.
Now that the 2009 Annual Reports are coming out, they will be great research material about CFO creativity. What makes the CFO valuable to the bankster elite.
This kind of survival is required of elites to stay elites. That includes political elites.
Using my example numbers. The banks gave up $50 bn of gross income less some costs and picked up $200 bn of reserve relief to monkey with. In 2010 and 2011 they revert to the $50 bn interest income when the coast is clear. Everything laundered and back to normal and totally legal.
Now the powerful elites must keep away other adverse events. The life of their power demands it.
Do they know how? Personally, I think they went a bridge too far. A common failing of elites. Overreach brings them down.
Not exactly, but the biggest creditors of the Greek government are German, Swiss, French and UK banks, insurance and private pension funds.
They are leveraged to the eyelashes as it is and additional writedowns might cause problems for some of the weaker ones. This would not exactly warm the hearts of shareholders or creditors (like policyholders and depositors) of the holders of Greek government debt.
So do not buy the idea that a bailout for Greece is somehow a blow against “international hedge funds” or “financial speculators” or whatever the identity of today’s anti-Euro bogeyman is.
Don’t believe the hype.
I must say you are getting me confused about what you think you should happen. Do you really believe that Greece should have been forced into a spiral of deflation and depression. If you do, then I think you are wrong. And if you think the US should have accepted the same thing too just to punish the bankers iut is not surprising that president Obama prefers Tim Geithner’s advice to yours.
There are terrific scandals in the banking bailout, which could and should have been done in a way to punish those who made bad decisions. But your remedy, much to my surprise, sounds like Andrew Mellon’s advice to hoover to liquidate everything. maybe it was just a spurt of annoyance which got you, but I am disappointed by this post.
“The end result beauty of the concept is that the securities will eventually be turned back to the banks to reduce the reserve deposits account to normal.”
The question is when can these mortgage backed securities be safely turned back to the private banks. If Felix Salmon is correct and housing prices are still 22% overvalued (*source below), then I doubt private institutions are going to be too eager to take these securities back. So because the elites in the FIRE industries basically own the government we get federal initiative after federal initiative devoted to propping up housing prices at the expense of say a more aggressive job creation/labor policy. I don’t usually think much of Austrian economic theory, but malinvestment has real costs. How long will we have to wait before the banks can liquidate their “investments?” Japan’s been waiting almost twenty years now for their balance sheets to heal. Is twenty years of stagnation the best U.S. government policy has to offer?
*source:
http://blogs.reuters.com/felix-salmon/2010/04/06/the-national-housing-survey-and-the-real-estate-bear-market/comment-page-1/#comment-13350
That link takes you to the comments section. The main article is here:
http://blogs.reuters.com/felix-salmon/2010/04/06/the-national-housing-survey-and-the-real-estate-bear-market/
Two things cause financial instability:
[1] Adverse Selection: for which we have due deligence
[2] Moral Hazard – for which we have a recipe called – restrictive covenants by some and fiscal+disciple by others
THE ABOVE IS how we should perform: but here is the skinny on descriptive:
[a] whatever we did – in category 1 -> was called sub-prime
[b] the name for [2] – came as an alibi -“systemic failure” – colloquially termed -“too big to fail”. In practical terms – it meant: a few things – one of them is called TARP by those who sort of know what finance is all about
for for lesser mortals like us – it meant the following:
(i) banks come – banks go -> a bank is not the same as a banker -> Bankers stay – they just change their bonus and their resume
(ii) Home = house arrest -> too bad – but we have to let it go
(ii) american dream for-closed
sad its not – its much worse than what went on..
this is a shame .. socialization of liabilities but Privatization of BANKER’S BONUS !!
sincerely
Olga-Lednichenko
Not sure BB’s actions imply we will inflate our debt away, except to note that it is clear that he would never force discipline if government continues its profigacy until it becomes plain that taxpayers will not pay up. In such a showdown, Volcker might have the discipline, but never BB.
It is far from clear that the measures taken have done anything but put off the inevitable. If (when) Greece defaults on its debt, the pain would be immediate and severe, but it would be a worthwhile investment in its own future.
Absolutely, these securities can be sold back to the banks. They are fully guaranteed by Fannie, Freddie and Ginnie. F &F are state controlled enterprises with broad open ended public guarantees by the United States Treasury. And open lines of credit today.
Every single loss on a base level mortgage included in the MBS’s presently owned by the Federal Reserve Banks carried a guarantee from the initial day of the security.
The FRB’s make this guarantee clear in their footnotes and on their website. That guarantee existed when the banks originally purchased the MBS’s.
For these loans not to be collectable at the bank level or the FRB level, the United States Government would have to welsch on the deal. That is a circumstance beyong going concern principles. If that happened no financial statement on a going concern basis would be operative.
These loans would be held for investment not market. They are / should not be available for sale. Hence the market value is irrelevant. It will be the responsibility of the guarantor to sell the failed loans it buys making good on the guarantee. If that does not happen, there is no going concern premise anywhere in the financial system.
Someone is going to take a loss but it will not be the FRB’s or the banks when they reacquire the MBS’s. How much? Historically, and I did a little project on this, Fannie cured between 85 % and 90 % of the defaulted mortgages they bought back to fulfill their obligation. So if ,22 % to pick a number, of mortgages defaulted a vast number would be cured or shall we say recured again by the guarantors. After that,they can look to the security. They need not sell these foreclosed and taken houses. They could easily drop them into regional REIT type vehicles for entry into the market. They could be dropped in at unrecovered cost entirely to capital. Thus, the trust holders would receive totally sheltered net distributions including Fannie and Freddie.
I can see all kinds of ingenuity coming into play to keep foreclosures outside the market. Naturally, rents would trend downward. But what is the real exposure here to cash flow losses to the system compared to losses that would exist doing nothing?
People must do something to utilize the physical asset that people live in. That asset is the real tangible value involved. But, here that would be outside the risk of the banks . Their going concern activity is protected.
Note this one was one of my favorites of today. from Yahoo business:
WASHINGTON – Top banking industry executives are skeptical about helping troubled borrowers by forgiving a portion of their debt.
The executives told lawmakers on Tuesday they are reducing the amount that troubled borrowers owe on their home loans only in limited cases. That’s because consumers who are paying their mortgages on time are likely to see such reductions as unfair, the executive said.
David Lowman, chief executive of JPMorgan Chase’s mortgage business, told the House Financial Services Committee that large-scale mortgage principal reduction “could be harmful to consumers, investors and future mortgage market conditions.”
IF WE REDUCE THE PRINCIPLE IT WILL BE BAD FOR THE CONSUMER. nOTICE NO MENTION OF THE FACT THAT IT WOULD IMPACT THEIR BOTTOM LINE. wHY WHEN THE QUESTIONING HAPPENS DOES NOBODY BRING THIS UP. nOTICE HOW THE GAME IS PLAYED. tHEY NEVER MENTION THE BOTTOM LINE, BUT THEY ALWAYS MENTION HOW THE POLICY THAT WOULD HURT THEIR BOTTOM LINE IS IN FACT REALLY HURTING THE CONSUMER. (lol). a consumer financial protection agency would hurt the consumer because they wouldn’t be able to by those fraudulent mortgages with hidden fees they want.
“As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.”
That strikes me as naive. The Geithner version is: “Those who implemented the bailout are positioned to repeat it.” Your version is the taxpayer side: It is the idiots in the voting booth that are condemned by their own disinterest and unwillingness to not vote for any incumbent. It is really simple: no matter how bad the other candidates, not a single incumbent of either party deserves to be re-elected. It should take little more than common sense, considering the bailouts – or alternatively, just a modicum of decency, considering torture, assassination and other crimes perpetuated from 2001 across 2006 and 2009 to the present.
DAPHNE MIILLAR wrote”
“I must say you are getting me confused about what you think you should happen. Do you really believe that Greece should have been forced into a spiral of deflation and depression.
There are terrific scandals in the banking bailout, which could and should have been done in a way to punish those who made bad decisions. But your remedy, much to my surprise…to hoover to liquidate everything…I am disappointed…”
This is sometimes described as being caught between the rock and the hard place.
b. wrote:
“As for Mr. Geithner, head of the New York Fed in 2008 and Secretary of the Treasury in 2009: Those who cannot remember the bailout are condemned to repeat it.”
Posted by: Steve Odem | 2009
“I just retired from the IRS this past summer. I can verily state we would have been fired on the spot if unreported income was discovered on our tax return. It is shocking that Timothy Geithner would head the IRS, the same organization that would have fired me for ANY unreported income. I am sure shock waves are rippling through my former IRS office right now to think that the new head of the IRS failed to pay $30,000 in taxes. Turbotax?
Apparently, he was guided by his attorneys to state this to shift responsibility. Turbotax is the most user-friendly software program available. It was not the mistake of Turbotax. It was the mistake of Timothy Geithner, and this mistake would have cost any other IRS employee their job.”
http://tinyurl.com/amzsvb
Geithner Jokes: I’m Doing My Taxes ‘Slightly Differently’ This Year
04-13-10 03:44 PM – Huff Post
Speaking at the American Society of Newspaper Editors earlier today in Washington D.C., Treasury Secretary Tim Geithner was asked whether or not he’ll be taking a different approach to filing his taxes this year.
You’ll recall that Geithner ran into a bit of trouble during his confirmation last year, when it was revealed that he hadn’t paid thousands of dollars in taxes during his time working for the International Monetary Fund. (Geithner later said he’d filed his own taxes using TurboTax software.)
“Thanks for raising that issue,” Geithner joked at the ASNE event.
This year, Geithner said, he has “an excellent accountant.”
“I had an accountant then too,” he added. “But I like my accountant now.”
http://tinyurl.com/y6elglx
Here is the Wiki link to “going concern”. It should do for discussion purposes.
http://en.wikipedia.org/wiki/Going_concern
Absent going concern only liquidation basis financial statements are appropriate. If that were the case just for Simon and James six big malefactor banks, the liquidating value of the big bank assets would be perilously close to zero and so would all other assets on a mark to market basis.
This is all garden variety stuff one encounters in college accounting courses.
Right now, the Treasury must make good any and all guarantees made by Fannie and Freddie. To that end, the government must force the issue on TBTF to cure retail level mortgage defaults. They are on the hook for the bulk of the retail level mortgages written in the United States. So too , for practical reasons is the ECB and Treasuries of the EU member states.
They fear a general understanding of this fact of life more than any other.
They make good or all values collapse. At the least this result forces holding of the retail debt for run off of the cash flow. Thus, the retail cash flow requirement is crucial to maintaining the system. Cash flow requires employment at levels to support the underlying retail debt. So, we have a circular problem requiring boldness and ingenuity to solve the problem.
My view is that nations might solve this problem if they get off the free market Narrenschiff that has evolved. Geithner, Bernanke, Paulson, the 13 banksters and the political leaders are the officers and mates of the huge American Narrenschiff as I see it. And utterly to be expected because the elite fools in the past set the conditions for the sinking of their own ship of fools. They must learn to discard old truths to survive to a new future. I do not think the present elites are up to the task yet.
The problem with mark to market is that the asset is then considered to be merchandise. Something you hold out to sell. That said, there must be a period of merchandise turnover. Every other holder of similar merchandise held for sale would have the same merchandise turnover period. It therefore stands to reason that the sheer amounts of merchandise held for sale would collapse the price to a liquidation market. Thus, the very concept of going concern is at risk. The big banks cannot issue a going concern financial statement , in theory. Yet, they did for 2008 and now 2009 as to be expected.
Future going concern statements will require mass conversion of big bank assets to investment status rather than merchandise. It is obvious to me that this problem is well understood by the people at the big banks.
Any given asset cannot be an investment and merchandise held for sale at the same time. Fact of life here although one can certainly play with the concept. The asset is merchandise when the price goes up and becomes an investment when the price falls. One can always try this gambit and hope that one can get away with the perfidy, I suppose. Any given 30 year mortgage ,by definition, may be merchandise only for very short periods during it’s life span. Consequently, merchandise status should be inconsequential over time. Yet, it is merchandise status where the accounting problems obsess everyone involved. Might we have a collapse driven by lack of clarity in accounting applications? That is rule by foolish concepts?
But it is the nature of things that financial claims over long terms cannot be merchandise . It is one or the other and the two different business types conflict. Glass Steagal recognized the problem after the last financial Narrenschiff sank.
“Even the smartest individuals armed with the sharpest tools will not be able to find every weakness and preempt every crisis.”
April 13, 2010 – Tim Geithner
http://tinyurl.com/y4l45cw
Disjointed reforms ‘will fail to stop financial crises’
April 14, 2010 – The Times – excerpts
“Plans in the United States and Europe to set up systemic risk watchdogs will not prevent another financial crisis, the International Monetary Fund warned yesterday. In excerpts from its Global Financial Stability Report, the IMF said that the regulators’ own behaviour needed to be controlled strictly.”
http://tinyurl.com/y2uuwd3
Why should people bear a burden of debt created by fraud, especially fraud/ineptidtude in high places by those who were expected to be responsible/experts? What exactly would happen if mortgage principal for US homeowners was written down to reflect present market value? If the banks are already technically broke (by mark-to-market) and still on government life support, what exactly would happen that would be disasterous? This is not a rhetorical question; I’m curious to hear from someone here who an expert on these matters.
Following TG’s full stream of consciousness: “Instead, the best strategy for stability is to force the financial system to operate with clear rules that set unambiguous limits on leverage and risk.”
What a conniver!
A. THere is nothing wrong with limits on leverage and risk.
B. Limits on leverage and risk and other forms of regulation are not mutually exclusive.
C. 12/1 leverage ratio rules existed prior to the crisis and the “bigger than Bear” cabal requested and received a dispensation and proceeded to triple that risk.
What does the IMF know about anything?
Case in point: Simon Johnson left the IMF in Sept. 2008. He was succeeded by Olivier Blanchard.
On Nov. 22, 2008: “The worst is yet to come,” Blanchard said in an interview with the Finanz und Wirtschaft newspaper, adding that “a lot of time is needed before the situation becomes normal.”
http://www.google.com/search?q=olivier+blanchard+11%2F22%2F2008&ie=utf-8&oe=utf-8&aq=t&rls=org.mozilla:en-US:official&client=firefox-a
And from the IMF website, Sept. 2, 2008:
Blanchard said: “If the price of oil stabilizes, I believe we can weather the financial crisis at limited cost in terms of real activity”
http://www.imf.org/external/pubs/ft/survey/so/2008/INT090208A.htm
Make up your mind Olivier…As I recall the price of crude oil declined from Sept to Nov 2008, as so did the prices of our homes and our 401k.
This is the oldest context immaginable. Very much the spoiled child scenario, such that about those who misbehave, we, as the enabling parents go: “We just can’t have this any more,” and threaten punishments, time outs, and other nasty things. Next time we say the same, make the same threats and do nothing. Then we wonder why the child continuously and regularly gives us nightmarish behavior. Greece, big banks, auto makers, etc., are like spoiled children who get their way by knowing that they will always be perceived as too important to reign in. Yes, folks, in many ways adults are like children, and so are institutions. Prone to misbehavior, always wanting to do things the same unless that becomes impossible. But the global society is the enabling parent, not understanding that if nothing continues to be done, over an extended period of time, these countries and organizations actually become like the spoiled child turned loose in society, they become more and more extreme to the point of becoming sociopathological. We remonstrate on the TARP and the Euro bailout, etc., but we refuse to take action that would effectively control such action, although many of the wise and near wise know what to do and how to do it. There are many historical precedents to use as models, and regardless of size, the problem, be it the 3-year-old or greedy bank is the same. It is called tough love, if you are a parent, it is called regulations and strict limitations if you are a society. We have been deeply wounded, and still somehow our memory is short. We seem to have forgotten that the out-of-control children burned down the house. We had the money to rebuild it that time, but now no one will insure it and the child is now playing with torches instead of matches.
I was the original “Observer” so please change your name. Or if you’d rather just stop commenting I’d be fine with that too.
4.85% for one year paper – let’s break out the champagne! Before we get too excited though, let’s see how the market bids for paper that can’t be immediately repo-d with the ECB.
did we nationalize the banks (point 1) or use the free market to recapitalize (point 3)?
Do you read your own posts?
I also would like to have a jubilee every 10 years… I’ll come to you asking for a loan in year 9 though and you’d better give it to me. Don’t worry, I won’t ask for everything you have – just all of your bank deposits.
We are in a box. Think outside of the box. Like DCB.
But the mf kid weighs 250 pounds and owns our home and controls our pay check. And has friends at city hall.
Germany says it needs law to free up aid to Greece
2010-04-14 07:20 PM – AP
“….a process that could take weeks or months…”
http://tinyurl.com/y35e4z2
Continuing this line of thinking. On the basis of actual FRB purchases of MBS’s over time during 2009, it is obvious that the six really big TBTF banks had a going concern probem with respect to securities held for sale at the end of their 2008 year. Without a demonstrated market for these securities held for sale, the auditors must have had a real problem in NOT issuing a qualified opinion for the TBTF banks. A qualified opinion on the TBTF banks would have been catastrophic. Absent a qualified opinion the audit firms were probably betting their existence.
In short, they must have needed a demonstrated market for the bulk of the inventory held securities on the bank books. This problem for the auditors would have come to a head in late February after conclusion of audit field work.
Just then Ben Bernanke announced the Federal Reserve Banks would purchase vast amounts of MBS’s from their member banks. Thus, the banks sold their inventoried holdings of MBS’s outright to their FRB in the months after February 2009. The total purchases by the FRB’s may well have exceeded, greatly exceeded, inventoried MBS’s in 2009. The point is the banks did sell what they held for sale as a subsequent event to 2008. A clean unqualified audit opinion would be perfectly in order.
Was this policy an absolute requirement of the auditor’s to issue clean opinions for the TBTF banks by the auditors?
Without this policy and actual follow through with purchases the auditors did have a problem issuing a clean opinion. Was this the main incentive for the banks to give up around $50 bn of income along with the ability to play around with release of mark to market reserves booked on the sold MBS’s in 2009. They got by in 2008 and had a huge reserve release to use as best suited in 2009.
A similar problem would exist for 2009 but the FRB’s have said they will stop buying MBS’s. That gets them by 2009 having lowered their inventories held for sale by selling them to their FRB.
If the TBTF’s buy them back, they will be held for investment and not be an inventory turnover problem.
The guru’s of big finance never comment on this. It makes me wonder why.
Greece Bonds Show EU Package May Be Tapped as Yields Increase
April 14, 2010, 5:05 PM EDT – excerpt
April 15 (Bloomberg) — “Greece bonds show the nation may have to tap a 45 billion-euro ($61 billion) international bailout to convince investors it can avoid a default.
The government’s two-year notes fell for a second day yesterday and the cost of insuring against default approached the record high of April 8, three days before euro-region finance ministers announced the aid package. The parliaments of Germany, France and Ireland will have to vote on whether to contribute their share of the loans, government spokesmen said yesterday. Dutch lawmakers will discuss Greek aid today.
“There are concerns that the money will not be available,” said Toby Nangle, who helps oversee 46 billion euros as director of asset-allocation research at Baring Investment Services Ltd. in London.
“There are people who are willing to place their own money at risk in anticipation of this thing not going through.”
http://tinyurl.com/y75y5m6
Given that our private enterprise banks are again healthy and making great profits. Can we now reinstate mark to market valuing of all assets? Write back any profits incorrectly claimed. Also can we sell back to the banks et al, at the same price, the ‘toxic’ assets? This seems pretty reasonable. Taxpayers have helped the banks survive with a temporary (stress temporary) assist.
This should make everyone happy and the banks can get on with being good corporate citizens, helping us all manage our finances most effectively.
This seems obvious to a non-banker, why not commence reversing the government intervention and getting back to a non government-intervened situation?
Apologies, I did not mean to kill this thread, rather to ask you informed and knowledgeable folk these questions.
Greece and Spain won’t pay back. The only thing Germans can do is:
REPOSES 170 Leopard 2AEX Battle Tanks from Greece, and 190 Leopard 2A6E Battle Tanks from Spain.
U.S.A must REPOSES 170 F-16 Jet Fighters from Greece, … the rest is gone with the wind …forever …
Greece must stop paying lucrative pensions with borrowed money, reform the free health care system, and cut down, 4 times the military budged.