Robbery Note – From The Banking Oligarchs This Morning

The modern bank robber calmly hands a note to the teller, asking for money and making a moderately specific scary threat.  The robber, of course, expects the teller to hand over unmarked bills without a fuss.

This morning’s “research” note from a major international bank is entitled, “Falling Short: The government needs to buy toxic assets,” and the heart of their one page argument is, with the emphasis as in the original,

One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook. However, this should not be the standard by which we judge the efficacy of the plan, because a more prolonged deterioration in the economy will result in a higher terminal unemployment rate and a greater deterioration of the tax base. As such, the decline in tax revenues will crimp many of the essential services provided by the government. Ultimately, the taxpayer will pay one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line to pay for the massive debt issuance required to fund current and prospective fiscal spending initiatives. We think the government should do the following: estimate the highest price it can pay for the various toxic assets residing on financial institution balance sheets which would still return the principal to taxpayers.

Tell me if you think I am overreacting – it has been a difficult week – but I interpret this as saying: “give us as much money as you can, or else.”  And the “or else” appears to be unemployment up around 20% and debt/GDP in the red-for-danger zone.

Can bankers really trump the American government in this fashion?  It’s painful to read, but probably helpful that the oligarchs put their cards (and notes) on the table so brazenly.  This is, after all, a critical fight to save American democracy, and it’s good to know what we are up against.

Update: I talked, on the record, with the author of this note.  To hear our conversation – also involving Adam Davidson of NPR – click for the post (it’s two above this post) and follow the link (the Podcast should be available from Friday afternoon.)

51 thoughts on “Robbery Note – From The Banking Oligarchs This Morning

  1. We absolutely cannot stand for this! All the more reason for our gov’t to force the banks to put all their cards on the table. Nationalize…or whatever you want to call it. But get rid of the mgmt that got us into this mess! I just don’t understand the logic that these guys will do a better job of managing our (taxpayer) money than they did their own.

  2. WTF? Wrong way around: Gov to tell all banks that all dodgy assets be placed in new SIVs and written off in main books, then to recapitalise themselves privately. Otherwise the FDIC is coming in to wind you up (aka N word). Sorry, but our voters have spoken and are giving us no choice.

  3. No, Simon, you are not overreacting. This is appalling, and to me, looks like a symptom of serious structural flaws in the country’s policy-making apparatus. The banks surely think there is a good chance they can get away with this. I hope, against hope, they are wrong.

  4. Why doesn’t the gov. just say, we are going to save 4 of 5 banks. “Last guy to convince us thate we are making a good deal for the taxpayer goes under. Go.”


  5. Sorry, but haven’t they been saying this from the beginning? “Stop, or I’ll shoot,” as they hold the gun to their heads?

  6. It’s better to suffer the consequences they propose than to acquiesce to their demands. If you give in to terrorists or blackmailers, you just embolden them.

  7. You got it exactly right. Their threat is “hand us enough money or else, because we are too big to fail, we’ll pull down everything around us as we go under,” and (verbatim quote)”the taxpayer will pay one way or another..” But in fact one way is not the same as the other. We could hand out some taxpayer money now but in ways that remake the banking sector so that we have end up with a more efficient and competitive system that has fewer or no ‘too big to fail’ mega-banks so that we don’t face this kind of extortion again. In the long run that is the only formula to protect the taxpayers interests and save the country from our robber bankers.

  8. “One main stumbling block to the purchasing of troubled assets has been pricing, specifically how does the government price a diverse set of assets in a way that does not put the taxpayer on the hook.’

    What are these assets? After googling hard I cannot find a photograph of a single one of these assets which our government has purchased for in excess of 1 trillion dollars. As a taxpayer, am I not a part-owner of these investments? Where’s MY asset?

    Tired of the suspense, I went out last weekend and bought an asset. A Chinese toaster. It replaces my two year old Chinese toaster which works half the time and emits blue sparks. After searching high and low, I found that toasters are no longer made in America. The last one, Toastmaster, left our shores several years ago.

    Instead of buying more mirages, I suggest that the government follow my example and spend bailout money on a tangible asset. An American toaster factory. They would then own concrete and steel that produces American toasters as well as American jobs.

    And I’d recommend that they recoup their investment by selling those toasters directly to the public. Let WalMart keep the China trade for themselves.

  9. I’m going to check The Onion. This quote is too good. But check this out from Clusterstock:

    BofA’s Bernstein Calls For His Own Eventual Layoff (BAC)
    Dan Colarusso

    So let us get this straight. Bank of America stock strategist Rich Bernstein says the Federal government’s bank rescue plan won’t work and that Washington should let the failing ones…well….fail.

    That may cause some teeth-gnashing by his boss, Ken Lewis. As Bernstein’s note hit the wires, his corporate master was testifying about his own Girl Scout cookie sales and work with Mother Teresa (at least that’s how our new hero, Rep. Michael Capuano parsed it). Bernstein said the government should increase deposit insurance, seize assets, shut “large” banks and encourage takeovers.

    His note also said:

    “The history of bubbles clearly shows that the significant consolidation of the financial sector is inevitable. The latest Treasury program is simply another attempt to stymie the consolidation process.”

    I really can’t believe what I’m reading.

  10. > Ultimately, the taxpayer will pay one way or another

    The ant is going to work to feed the grasshopper, or starve?

    Might be time to see if fried grasshopper tastes any good.

  11. .gov has decided the key to recovery is getting banks to lend. They’ve pushed this in all their talking points, and the mass media echo chamber has repeated it ad nauseum.

    It seems B&G (Bernanke and Geithner) have concluded (based on some papers) that increases in the money supply lead/drive recovery. The modern money supply is largely driven by the capital/assets ratio and the reserve multiplier (e.g. lending) because the governments have largely ceded to private banks the ability to create money (through credit expansion). One would think the Fed could easily expand the money supply, but they prefer to keep this power in private hands.

    Hence, their strategy is: get banks to lend, increase money supply, and the economic fundamentals will magically fix themselves. (aka, “restoring credit is the key to a successful recovery”)

    Their belief was that banks would lend if they had more capital. The brutal reality is that banks are sitting on it (big surprise there) because investment opportunities are lousy. Now their hope is they can “jawbone” the banks into lending more… Wow. Just like a former governor of Texas promised he could jawbone the Saudi royalty into dropping the price of oil.

    B&G, like Darth Paulson before them, do not seem to truly believe that improving economic fundamentals (or the _expectation_ of improvement in fundamentals) gets banks to lend. Their view is driven by a primal belief that the money economy drives the real economy. (Note just how little traction Sheila Bair’s fundamentals-focused plan has gotten.)

    The competing view argues that the “restoring credit is the key” argument is hog-turds. It focuses on fixing fundamentals – unemployment and the crushing debt burden. This view proposes investment (if not private, then govt) to drive employment, and reflation to restore asset values to more closely approach nominal parity to debt. This is the “conventional” approach that pragmatists like Warren Buffet had assumed we would take – and which .gov seems unable to move on.

    The deep question is why? Is it because B&G have bought into a particular theoretical argument, or because there are strong interests prevailing upon them to avoid reflation?

    Either way, the lack of substantive action has been a tremendous letdown.

  12. My questions remains the same, and I was hoping someone here could give a clear answer. What are these toxic assets which we are paying so dearly for? Are they tangible: vacant strip malls, abandoned RV campgrounds, partial government stakes in banks and investment firms, etc.? Or are they intangible: stock in bankrupt companies, valueless mortgage secured paper, etc.?

  13. Simon –

    You are not overreacting. But since there is no viable market for these so-called “toxic” assets why should the taxpayer endorse the purchase of same by the government? I’m still waiting for some people to go to jail. Why are we putting up with this kind of crap?

  14. I will slightly paraphrase what i overheard from a couple of anarchist students saying “The world will be freed when the last capitalist oligarch strungles himself with the intestines of the last beauraucrat”
    The ball is now on the bearaucrats’ terrain, lets hope they dont throw their intenstines to the game

  15. So, last week around the macro-econ world of Cambridge–the rumours were that the US gov’t already owns about 30+% of mega-bank shares. If true, of course, this is nearing a functional nationalization–although I have not heard Simon talk to this figure.

    These guys (the bankers) are greedy enough that I’m feeling more and more confident that they might just self-destruct.

  16. Simon,

    This is painful for me to read, but I interpret it different from you. The most painful thing to me is the title and the use of the word “need” The government “needs” to do nothing for the banking industry and it should not make any decisions that give excess weight to preserving the current system. But the government does have an obligation to the citizens of this country to do what they can to preserve our economy and prevent disaster. To that extent, somebody should be working to provide an estimate of what the cost of the frozen credit markets is, and what the cost to the economy would be if 1 or more major banks collapsed. They should also have economists working on an estimate of the cost to the taxpayers would be for “nationalization”. Everything I have read seems people believe nationalization would be cheaper, but I would appreciate somebody explaining why that is necessarily so. Nationalization means ultimately that the government and taxpayers would bear 100% of the losses in these institutions going forward, so there is a cost, I just don’t know what it is.

    It is hard to defend the writer of this note, but he/she does not actually seem to be saying,”if you don’t give us money, we will pull the trigger.” The banking industry does not have a gun and this note does not say that the banks should actually do something active to cost the taxpayers money if they do not give in to their demands.

    Here is my analogy. I have a broken window and I hire somebody to replace it. When he shows up he runs his truck through my front door and parks in my living room. He then gets out, says “looks like you got a big mess here, let me give you a 2% discount off my full price to fix this.”

  17. Simon, you’re on the right track, but you haven’t gone far enough. This is not about money or the government, it’s about the culture. How is the bailout any different from what the banks did? How is this any different from the massive swath of young black men in prison? America has lost the connection between earning and having.

    We (banks) collected bonuses for originating loans to people we knew couldn’t pay and then ran off with the cash. Now we’re deep in unpayable debt.

    We (government) want to hand out dollars to our buddies and not raise taxes, so we pass stimulus bills and give away money we print in the basement. Now we’re debasing our currency.

    We (all of us) didn’t like prudish morality so we had kids without marriage. Now we throw the boys in prison because the first male authority figure they meet who will take action is a cop.

    It’s not about the money. It’s about the culture. We’ve done this to ourselves and will keep on doing it until we reestablish the connection between work and rewards.

  18. K T Cat – I think that’s a bit of a logic jump.

    But my question is: who, besides Geitner, thinks this is a good idea? Why do they think so? Based on comments on this blog, it seems like a bad idea. But I want to hear the other side.

  19. Nadine, point me to a link showing how any of the bailout supporters discuss paying back the money they’re going to spend. As far as I can tell, it’s all free. We can do anything we want and never take responsiblity for it.

  20. K T –

    So far most, if not all of the money given to the banks has been in the form of preferred stock with a set dividend that must be redeemed for original value. i.e. the banks must make interest payments to the government until the original money is paid back. Concerning the purchase of toxic assets, I do not think even supporters are talking about paying book value. If the government thinks it is in the best interest of the economy as a whole to buy those assets, it needs to set a price at market value (which is hard because nobody knows what they are worth), or at some level that would not cause the the whole financial system to collapse. The only reason it should do that is if it determines that not buying the assets and letting the banks fend for themselves would be significantly worse for the entire economy.

  21. Let me revise and extend.

    I’m at the front lines of the other battle. I have an adopted child and I’ve spent an enormous amount of time and money helping fatherless children. I’ll be working with foster kids in the future.

    So you guys are upset at the bankers and the politicians simply robbing time and money from you so they can live large, are you? It’s all free and easy and groovy for them and all work and sacrifice for you, is it?

    Welcome to my world.

  22. Simon
    What a relief! I thought I was the only person thinking along these lines. Just last week I gave a talk to a group of investors in which I described the bank bailout plan as a legal form of theft, a massive transfer of wealth from the taxpayer to Wall Street. But I seemed to be the only one in the world saying this and I wondered if maybe I was a little crazy. Well, now I know that if I am, at least I have some pretty good company. And you’ve brought a bit more detail to the discussion. Thanks.

    Now, the really big question is, what do we do about it?

  23. Joe
    The Lehman Brothers failure brought the real fear of God into the hearts and minds of investors worldwide. The question is, why? My answer is that it is less systemic than emotional. What I mean is that the Lehman Brothers failure did not do much damage direct to the financial system, but it destroyed confidence. Up until then it was widely believed that institutions like this would be saved. Lehman’s failure sent the message that it wasn’t necessarily true. The saving of these institutions had come be known as the Greenspan put. In other words, it was safe for institutions to take ever bigger risks, and for investors to own shares in them, because if the risks failed, Greenspan would save them. Early in the unfolding crisis it seemed the Bernanke and Paulson were continuing the Greenspan put. But when Lehman failed, the shock was that the Greenspan put was no longer in place. And so suddenly all kinds of shaky institutions became much more suspect, and credit stopped.

    But Lehman was not a bank. It was an investment banker, which is basically an investment house. As Simon pointed out on Bill Moyers, what we could do, and which would not in anyway threaten the system, or the Greenspan put, is to let the banks fail, and have a more muscular FDIC take them over with the same smooth operation as they did with Indymac.

    Goldman now says it is on the road to giving the government its money back.

    I think the thought that is circulating, that if we let more fail it will be like Lehman or worse, is wrong. I think that most, if not all of the investment houses that are left will survive on their own, and the banks that are insolvent will either fix themselves quickly, or, if they are unable, will get nationalized through the FDIC. It will cost us a lot of money but they way things are now, we will be spending at least that much or more, and we are leaving the same management in place that got us into this mess, and is taking our money home in the form of multi-million dollar bonuses.

    Let’s have some courage. Fire the bankers that manage themselves into failure, and let the very capable Sheila Bear of the FDIC do what they were designed to do. I think we will find it all much less painful than we are fearing.

    Markets, both stock markets and credit markets, hate uncertainty. The longer we continue in this same rapidly shifting crisis mode, the worse things will get. If we let the banks fail, take them over, and move on, I think we will be amazed at how fast things get better. Once everyone knows what the new rules are, and that they are not going to change, we will all adapt and get on with the business of business.

  24. I keep reading about these “tip of the ice berg” problems. Maybe it would be better termed “symptom” problems. These “latest developments”. I guess I wonder about the point of discussing these symptoms. My site discusses symptoms of addictions and behaviors. I must discuss these, only to agree that they are there. Once that’s done we look at cause. Most (not all) treatment for addiction deals with symptom manipulation. Even when they claim not to. This is not for lack of good intention but rather a lack of “knowing cause”.
    If we “know the cause” of all financial malady (which we do) why discuss various “symptom manipulations” as remedy? Is it a business? Of course it is. I watch very closely to see how cause manifests itself in society. I guess all I can do is watch the film unfold and talk with those who want to talk. It has been interesting – watching. But, we’re entering a more crucial period. The ugliness we generated used to take shape far from home and we saw it on TV. Now it is in our backyards. It may well be time to stop discussing the probability of making a silk purse out of a sows ear. It’s time to kill the pig.

  25. Midwest –

    THanks for your thoughts. I am no expert on this, and quite frankly am just trying to give myself an education. One thing I am trying to figure out is what exactly the definition of “Nationalization” is. If it means saying to a bank that can’t meet its obligations that it has to go through reorganization under the FDIC, then I have no real issue. But it seems to me that nationalization is more than that. But if the government takes a step and says ” I know you met all of your obligations today, and can meet them tomorrow, but we are worried that 6 months from now you might have insufficient capital, and so we are going to take you over now and just get it over with…” then I have an issue. Government has no obligation to give money to any firm and can absolutely let one or all of them fail if they can’t survive on their own, but wiping out a private company that has not defaulted on any obligation is something I am wary of.

    Also, I am looking for some sort of empirical evidence that the Nationalization route is in fact the cheapest and most effective way to go. I am not saying its not, its just that I would be curious to “see the numbers”. If nationalization gets our economy righted in the quickest most efficient way, then go for it.

    The other issue I am trying to sort out is the idea that the managers of companies like JP Morgan, Wells and B of A absolutely have to go. As a taxpayer I want to blame somebody. But managements of Fannie, Freddie, Bear Stearns, Lehman, Merrill, Countrywide, Wachovia and dozens of sub- prime lenders have all disappeared. It seems like the guys who are left standing were the strongest players, and are mostly guilty of buying crappy companies that were going down the tubes.

  26. midwest–very good…I’m with you and have asked friends why B&G caved…the only plausible excuse I have heard has been that during the period of time between “failure” and FDIC intervention a massive run for cash withdrawals would be overwhelming. Any opinions on this one?

  27. When do we start sharpening our pitchforks? Why are there not protests movements that gather enmasse at the oligarch offices and predator class homes? Something unusual or beyond the normal processes must alert the Obama leadership to the fact that they are operating in a bubble peopled predator class Wall Street insiders alone, and only hearing the sound of one hand clapping. There are no counter voices, or opposing ideological positions anywhere in Obama’s economic advisory team. The message must somehow be delivered that the oligarchs and predator class operators are responsible for the economic crisis, they are accountable for thier failures, – the predator class must suffer and recongize the pain and losses of those FAILURES, – and the predator class operators must be removed from positions of leadership because of those FAILURES and financial malfeasance, or perfidy.

    Heaping all the pain, the imponderable debts, and terrible losses on the American taxpayers and our children; and then having the gall to award the predator class operators who are responsible for conjuring, cloaking, profiting wantonly from, and exacerbating the economic crisis bonus’s for FAILURE is absurd, conduct unbecoming and reprehensible.

    Predator class heads must roll.

  28. With regard to the “toxic assets”, these are primarily long-term assets/mortgages that are “underwater” now as market values are as much as 50% lower than face value. However the key is Long-Term, say 25-30 years. Long-term assets should be valued/amortized over the long-term. Is there much doubt that the assets/mortgages will recover most of their value over the longer term?? Probably not. A $200,000 house today ($400,000 mortgage) will not be selling for less than $200,000 in 10-20 years. The prices on these “toxic assets” that I have seen are absurdly low, and I have only seen 2. One was the Lone Star deal which was I think 22 cents on the dollar with something like an 11 cent/per loss guarantee. Another I saw on TV did some type of cash flow/NPV analysis and concluded the losses were as high as 98.6% can’t tell me a house that has/had a $400,000 mortgage before is worth 400K x 1.4% = $5,600. I doubt that would be even close to reality in even what is probably the worst residential market in US, likely Detroit. Not sure what the total value of these “toxic assets” are but I seem to remember estimates of something like $5 trillion”. Seems more logical to me, that since these are LT assets/liabilities they should be handled with a LT focus. Fed/Treasury could become the mortgage lender of last resort for these idiot banks and let them take out a say 15-30 year “mortgage” on all their “toxic assets” at some low rate like 2-3% with the toxic assets as collateral. If it takes $5 trillion … give them the $5 trillion as a LT mortgage with the toxic assets as collateral. Then they can make make monthly mortgage payments on their giant mortgage loan just like the rest of us. Leave the idiot banks who created the mess the time and responsibility to clean it up and take any losses if need be over the next 15-30 years. However, the banks will utlimately be responsible for repayment of the entire $5 trillion Fed/Treaury mortgage regardless of whether or not they ultimately recover all of their toxic assets or not. Leave the bank salary caps, perk restrictions, etc in place until such time as they totally repay their LT mortage and thus give them some incentive to get this resolved much sooner that the 15-30 year time frame.

  29. Perhaps it is time to call their bluff. I’ve decided they are not playing with a “full deck” anyway.

    I think we should stress test them as hard and mercilessly as we can. No more Mr. Nice Guy as we citizens are ready to rise up in revolt to their selfish me-ism demands.

  30. Hi Dan,
    Yes, my opinion is that we are afraid of the bogie man known as the Great Depression. It is a serious risk and so every shadow of it makes us jump. We handled the failure of Indy Mac, Wachovia and Washington Mutual with no runs on any banks. Everyone’s money was in tact. What I don’t understand is why has the government guaranteed $300 billion of loans to Citibank? Why don’t we handle them the same way we handled Indymac and Wachovia? Wachovia’s securities division was sold to one company, and the bank folded into another. If Citi is too big for another bank to take it over (which it is) then let the FDIC take it over and then break it down into regional segments with new management. We don’t need Vikram Pandit (whose only qualification was that he ran a failed hedge fund) to turn Citi into the next Merrill Lynch. If Bank of America screwed up and paid too much for Countrywide and Merrill and now needs government help, why does Ken Lewis get to stay in his job and receive bonuses? He screwed up, he should lose his job, just like any other working stiff. Why does it make sense to still have the same guy in charge that got you in trouble in the first place, and then let him pay himself a bonus after the taxpayers saved his company?

    As Corey points out, this is a very complex problem. On the one hand it is maddening that assets are valued so low. In some cases you have packages of mortgages that are 2 or 3% in default, but are being valued at 30 or 40 cents on the dollar. I am no accountant, but it does seem to me that there are possible accounting solutions.

    But at the end of the day, I am with Simon. Break up the big banks, let the weak ones fail, and let the FDIC pick up the pieces. It will cost trillions. But it seems that we just spent $380 billion to no effect and we are about to spend another $1.1 trillion (the rest of the TARP and the new $800 billion stimulus) and we have no idea if it will work. Re-formulating the banking industry will work because the money will go into cleaning up the industry and thereby restoring industry wide confidence, which will, in turn, re-start lending, which, in turn, will re-start the economy. I believe Simon when he says that doing it the way they (Bernanke and Paulson) have been doing it so far will prolong the problem for a decade or more.

    People keep telling me this is different than Japan, but I am not so sure. Didn’t they have massive bad loans on the books of the banks, and the banks stop lending, as real estate drastically devalued? And they kept the banks going even though they were not lending, and hence the term “zombi banks”? There are differences, but they seem rather small to me.

    I thought Sheila Bear should have been Treasury Secretary. As it is, I say, let her do her job and clean up the banks.

  31. How do we value these assets?

    Look by taking a step back. This entire “fire sale” is orchestrated, has been and will not change. It is set on a charted course. Yes there are uncertainties for the inside players just like in a poker game but it is important to remember this is an insiders game and they all know where the extra cards are when needed. Everyone asks for answers to the how’s, whys and the like.

    1) Immediately step in to secure the “Real” economy which is labor and industry. the real producers of real assets in a viable economy and conscientious society. Do this by Stopping the foreclosure bleeding by 1-year mortgage foreclosure reprieves and reestablish based on existing market current values with realistic terms or repayment.

    2) Take immediate actions to set controls for the return of TARP funds already given away through a direct combination of repays from liquidations and reevaluations.

    3) Break these “Click” (To Big To Fail) bank groups up! Dissolve the deficiencies by discounting their holdings based on “real” street values via determinations after taking overall inventory and categorizing of holdings as regards to good or trash. Good repays treasury.

    4) Take these and whatever decent measures are necessary to derail any attempts to make greater the accumulations and centralizing of the concentrated funneling of our basal economies into the palmy hands of a class which would make renters out of all of us and our children to come.

    too small to succeed?

  32. In the referenced instance if the note the bank robber presents to the teller is written in memo format then the loss suffered from handing over the unmarked bills is simply accounted for as an impairment to goodwill.

  33. As I said on another thread, the first thing to do is to tell the Obama administration to remove all the former bankers, insiders, and lobbyists they have taken on staff, probably including Mr G himself.

    We cannot expect these people to act in the public interest. They must go so that the administration can hire people who will clear the toxic management of all these institutions.

  34. > A $200,000 house today ($400,000 mortgage) will
    > not be selling for less than $200,000 in 10-20
    > years. The prices on these “toxic assets” that I
    > have seen are absurdly low

    The inflation calculator says:

    What cost $200,000 in 1987
    would cost $360,532.62 in 2007.

    Also, if you were to buy exactly
    the same products in 2007 and 1987,

    they would cost you $200,000 and $110,090.23 respectively.

    Do you want to do another calculation?

  35. There must be some laws on the books that can be used to prosecute these banker elites. Any lawyers know what laws are applicable?

    Can we attach there future wages and compensation so that they have to pay back the damages that they have caused?

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