Banks Find New Way to Hold Up Government

From The Wall Street Journal today:

Some bankers say they turned the conversations into complaints about the antibonus crusade consuming Capitol Hill. Some have begun “slow-walking” the information previously sought by Treasury for stress-testing financial institutions, three bankers say, and considered seeking capital from hedge funds and private-equity funds so they could return federal bailout money, thereby escaping federal restrictions.

Ummm . . . if they could get capital from hedge funds and private-equity funds, wouldn’t they have done so already? And they are now resisting the stress tests? Simon is usually more negative about banks’ recent behavior than I am, but I’m catching up.

Distressingly, the article is mainly about how the administration is trying to “fix” this situation by offering greater access to Wall Street leaders. Apparently they actually tried to freeze out the bankers early in the administration, but recently changed course.

By James Kwak

24 responses to “Banks Find New Way to Hold Up Government

  1. You’re kidding, right? “If they could get capital from hedge funds and private-equity funds, wouldn’t they have done so already?”

    Because, um, government money with virtually no strings attached is a much better funding source than private investors who actually know how to crack a whip.

  2. “And they are now resisting the stress tests?”
    ____

    Bill Black and Jamie Galbraith have dispositively pointed out that you cannot do meaningful stress testing without first at least analytically examining a defensible representative sample of the original loan files comprising “toxic assets.”

  3. Ah, the gun is still being held to our head.

    I think the Bernanke/Geithner request for more regulatory authority for the non-banking sector is probably to deal with the back-stop policy that they have – if they are forced to take over something like Citigroup, they’d need the additional powers to unravel the business.

    So, when Geithner says absolutely that this plan will work — he doesn’t believe it either, although he mostly will give it a better chance of succeeding than Nobel-prize-winning economists.

  4. What is to prevent banks who will benefit from the Geithner plan from helping to fund it? For example, Bank of America could make nonrecourse loans to Hedge Fund A using Asset Backed Securities (ABS) sold by Wells Fargo. Wells Fargo could do the same for Hedge Fund B to buy “legacy” assets from Bank of America.
    Such arrangements would allow the hedge funds to put up even less than the seven percent currently envisioned by the government. Their upside would increase (in percentage terms) and their downside would decrease (in real terms). The hedge funds investments would be backed by three parties: the Treasury, the loans from banks and the FDIC.
    Banks would benefit from getting higher bids for their toxic assets. They could also entice the hedge funds to participate by offering them better lending terms on the other investments the funds might make.

  5. Kirk, what you described is exactly what they will do.

    The whole plan is destined to be a giant scam.

  6. Harry Cheddar

    How are these suckholes gonna give the bank boys more access? Im mean without a medical device like a retractor or something?

  7. Bill Bradbrooke

    Renee

    By “Nobel-prize-winning economists” do you mean Fischer Black and Myron Scholes?

  8. For the securities, there is this provision: “Each Fund Manager may only purchase Eligible Assets from sellers that are not affiliates of such Fund Manager, any other Fund Manager or their respective affiliates or any private investor that has committed at least 10% of the aggregate private capital raised by such Fund Manager.” That will limit self-dealing, although I’m sure people will come up with clever ways around it.

  9. Of course they will find clever ways around it. It’s not that complicated. Offshore funds etc. They’ve found clever ways to at each point in the crisis to funnel money away from the taxpayer, and the rest of the country, into the hands of a few banks.

  10. Professional hand-ringer

    It is a sad day when all you have to do, is read any plan from either the fed or the treasury and as you read it, you can immediatly see through the language, and know that the words are lies, nonsense and deception.

  11. Kirk…the truth is that No Company or Country is ‘to big to fail’ (history is full of the ‘bones’ of both)…here’s the problem…
    The same people who got us in this mess are now tying to get us out…this is humanly impossible of course…they will, and have instead spent most of the time & money trying to cover-up the industry’s underlining behavior. (normal human behavior)

    That’s why we need an elaborate system of rules & regulations with absolute ‘transparency’ throughout. Remember President Reagan’s slogan re the Russians…’trust but verify’…that’s means a system of verifications, checks & balances, and a whole lot of transparency.

    What we’ve witnessed here and around the world in the financial sector (and every other sector) is a complete collapse of most proper ‘rules & regulations’ and a surge of ‘systemic corruption’.

    Above all else, we the people need to be absolutely involved in the solutions…and for the first time in history we have the media/information tools to participate.

    So lets start finally Restructuring (nationalize, fix, resell) these financial institutions, the FDIC does it all the time. Only ‘Restructuring’ can give us the necessary ‘Transparency’ to get out of this crises.

  12. And Robert Lucas and Gary Becker and the late James Tobin and Thomas Schelling and Prescott and Joseph Stiglitz and Daniel Kahneman (with or without the late Amos Tversky) and Amartya Sen and James Heckman and most especially Robert Mundell and bunch of other people who would probably be proud to add their name to the above list, including the IO guys who won in 2007.

    Including most especially George Akerlof, who knew better than to look at a lemon and say “pooling equilibrium.”

  13. Listening to the bankers on Wall Street, I am strongly reminded of the reaction of the American public to the rise of Big Business during the late 19th and early 20th centuries, a reaction on Main Street that put Progressive Democrat Woodrow Wilson into office in 1913. (Progressive Republican T.R. Roosevelt had by that time left the Republican Party, of course, to Howard Taft and Big Business.)

    Today, the Big Bankers complain that the public is undermining capitalism, but that is not true. As any economics student might tell you, capitalism in the form of pure competition does not permit the rise of large corporations–or for that matter of any business firms at all. Business firms and especially large corporations are bureaucracies whose goodness for society depends not upon markets but instead upon management.

    Now management mistakes have been made. Real “we’re going to need a bigger boat” whoppers. Is it incorrect for the public to demand an accounting (now being “slow walked”) not to mention accountability? Or should we defer to Big Banking’s sense of, well, entitlement? Tough decision.

  14. Very well said vanron100. Clever to utilize Reagan in that way to soften the reflexive response of his admirers to scream SOCIALISM at the slightest hint of increased regulation. Twenty eight years of intense efforts to make the word “regulation” a profanity is going to make extricating ourselves from this crisis much more difficult than it need be.

  15. The big banks are frozen and seem to be threatening to go Galt unless we stop trying to regulate them and stop saying nasty things about their bonuses. But the top 20 banks are only 50% of the finance market in this country. I also hear everyone saying that we don’t want banks that are too big to fail. So how about instead of rescuing the big banks to get capital flowing, the US Government was buy up some of the outstanding loans from mid-sized banks to give them capital to lend? I mean the real issue is to get loans going out to businesses once again. Wouldn’t it be easier to get the banks which are not buried in toxic assets to loan, rather than wait for CITI to get its mojo back?

  16. Professional hand-ringer

    Your solution is sensible and low cost but, it wouldn’t funnel money to the stakeholders of the monopoly guys and that’s the plan that has been in motion since last fall.

  17. Charles R. Williams

    It is time to stop demonizing bankers. Just pull the plug on insolvent banks and send the bankers away with a handshake, a nice plaque and a good-bye dinner.

    The Geithner plan amounts to TARP done with off-balance sheet financing. The plan in principle is no different from the Fannie/Freddie fiasco. Heads, investors win big; tails, the taxpayer loses. The one advantage is that you get an independent, competitive, market-based evaluation of the toxic assets. We still have the issue though of the lack of information required to properly value toxic assets. And then again, what motivation do the banks have for selling assets for less than the value carried on their books?

    Really, the Geithner plan is nothing but an end-run around Congress. In spirit, it is anti-Constitutional, even if it is not in fact unconstitutional.

    As time passes the need to “fix” the big banks passes as well. Solvent banks can and should be counted upon to pick up the slack. If there are creditworthy borrowers being denied credit, the profits on these loans should attract investors to solvent banks like flies. The issue may not be lack of supply of credit but lack of demand for loans.

    The real barrier to economic recovery is not the financial sector, it is the need of consumers to make a drastic, permanent reduction in consumption spending. Any plan that saves the banks by increasing the federal debt is at best a transfer of wealth from the prudent to the imprudent. The only prudent response to these policies is to increase savings further.

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  19. You know, it’s funny (in the ironic, I want to gouge my eyeballs out sort of way) how badly these financial institutions need federal dollars, after presiding over a set of political actions that virtually assured the government would not be able to stop thier . . . oh well, you get the idea.

    Look, as a taxpayer, and a federal employee, I an getting very weary of these institutions unwillingness to solve the crisis they created. If they can’t get $$ on the private side, and they aren’t willing to admit and correct their mistakes, they shouldn’t get anymore $$ on the public side. There’s what, $1T rolling around for financial institution rescue right now? SO let’s close the fed’s discount window, and let these guys twist. Eventually the good ones will do the right thing, and the bad ones will whither.

  20. “Simon is usually more negative about banks’ recent behavior than I am”

    That’s because you don’t know these guys as well as he does. Nor do I, but I have had enough contact with them to know that they truly are the asshole kings of the universe.

  21. Good point.

  22. “If they can’t get $$ on the private side, and they aren’t willing to admit and correct their mistakes, they shouldn’t get anymore $$ on the public side. There’s what, $1T rolling around for financial institution rescue right now? SO let’s close the fed’s discount window, and let these guys twist. Eventually the good ones will do the right thing, and the bad ones will whither.”

    Amen, Brother. Bank managers are not going to reveal their valuations of these marginal assets for fear of triggering more short sales of common stock, and subsequent need to raise additional capital. The President is right…. patience will force the bankers to accept unpleasant offers as more and more unemployed workers cannot meet their commitments. This chicken dance may run another 90 days.

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