Sheila Bair Listens to Me

Yesterday I said that Tim Geithner or Sheila Bair should come out and slap down the idea that banks will be allowed to bid on their own assets. And today she did! Rolfe Winkler, in a guest post at naked capitalism, did the hard work transcribing the audio of the press conference. 

Although banks cannot buy their own assets, Bair did say, “I think there have been separate issues about whether banks can be buyers on other bank assets and I think that’s an issue that we continue to look at.” As I said yesterday, and as Winkler also said, I think this is also a bad idea. Even if you successfully deter outright collusion, you can still have outcomes where the industry as a whole is using subsidies to overpay for its own assets and shift the loss onto the government.

And no, I don’t actually think that Sheila Bair reads this blog, much less listens to what I have to say.

By James Kwak

21 thoughts on “Sheila Bair Listens to Me

  1. If the objective of this program is to rid banks that are considered too big to fail of risky assets, then other banks that are considered too big to fail should not be able to purchase risky assets. If the program is not providing an opportunity for profit, what is the point of recycling the problem assets through other TBTF institutions?

    I agree that this program should not exist at all. If the federal government wants to pretend that the banks are sufficiently capitalized to withstand the losses associated with their holdings, they should also act as if the banks are sufficently capitalized to withstand the losses associated with their holdings. Enough already.

  2. James, never say never. I copied your entire entry and e-mailed it along with some of my own commentary to my Senators Feinstein and Boxer and my House Representative, a Ms. Pelosi. So it is possible someone of influence did see your blog. Keep up the good work!

  3. Obviously it doesn’t get the assets off the banks’ books if one bank buys them from another bank. Is this a program to get the assets off banks’ books, as advertised, or is it just another complicated public subsidy for the banks?

  4. If there was no subsidy, there would be no reason to be concerned about banks buying their own assets, and of course, they wouldn’t be interested in doing that.

    But, while the subsidy exists regardless of who purchases the assets, presumably the banks who own them now have insider knowledge of them and are better able to value them. Which means they’ll be better positioned to rip off the taxpayer than your average bear.

    Of course, this information can easily be passed around or traded back and forth, and so the whole argument may be moot.

  5. Not only would allowing banks buy each other’s assets not remove the toxicly troubled legacy assets but it reeks of collusion. In allowing Bank A to bid for Bank B’s asset which is similar to a host of assets on Bank A’s balance sheet, Bank A has every incentive to overpay. In the process all of the banks can bid up prices restoring the value of their assets and further exposing taxpayers. Kill PPIP

  6. James,
    I’m actually hoping Ms. Bair will be in Hong Kong, or at least a senior representative from the FDIC in October this year for a discussion on accounting and supervisory issues within FSI’s.
    I note Ms. Bair’s power and influence has grown exponentially as a result of the present crisis, and that many of the issues being raised on these boards are of grave concern to many bankers here in Asia.
    One is somewhat taken aback by some of the ideas emanating from the zombie banks, specifically with regards purchasing their own debt.
    Given the reinterpretation of Rule 157 and efforts at price discovery in markets for debt that are currently non-functioning, it seems from my side of the world that the banks are not only trying to have their cake and eat it, but also are trying to eat much of the US$12 trillion the US taxpayer has been forced to utilise to prop up the very edifice that caused the current problems.
    Whilst your own bankers and government officials seem incapable of grasping the serious issue at hand, I’m glad to report this is not the case in much of Asia – obviously excluding Japan.
    Indeed, the liquidity crisis and credit crunch has passed most of Asia by, unfortunately, as many bankers here themselves note, Asian funds will not be freed up to flow to the US until risk levels have been reduced, and this means major reforms of the current financial services structure in the USA.
    A good starting point may be to look to Canada rather than Europe, who’s regulatory environment has just been praised by the IMF.

  7. From my March 10 col in the New York Observer:
    “I just don’t think the taxpayer should be put in the business of writing a “make whole” for either pigs or vultures, who in many cases may now be one and the same.”

  8. Sheila Bair CONFIRMED that the whole PPIP will be a DISASTER for future taxpayers.

    To hear her say that bank A buying bad assets from bank B, while bank B buys from bank A is a SEPARATE issue compared to bank A buying from itself is a SHOCKING sign of HYPOCRISY !! It is exactly the same, just like bond girl and others above have said.

    James, will the outcome be any different if outright collusion is prevented but collusion is not? If the outcome is the same, then there is no reason to implicitly compliment FDIC/Treasury/FED with preventing outright collusion.

    If Obama had not extended the Bush tax cuts (allow them to expire), people might be more up in arms. Now the huge burden is being laid on future taxpayers’ shoulders.

    This PPIP should be STOPPED!

  9. Carol: “To hear her say that bank A buying bad assets from bank B, while bank B buys from bank A is a SEPARATE issue compared to bank A buying from itself is a SHOCKING sign of HYPOCRISY !! It is exactly the same, just like bond girl and others above have said.”

    Perhaps we are seeing Bair’s legal perspective here. Collusion is illegal, but acting in concert with no communication between the banks about doing so is probably legal. In that case it would be a legally separate issue, even if the effect is the same. But surely it would also be legal for the gov’t to say, we will not partner with any of the banks that are selling assets. And that is what the gov’t should say.

  10. I commented yesterday that the reason this trial balloon is being floated is because no self-respecting private equity firm (TARP banks are no longer really private) will partner with the government. And for good reasons—firing Wagoner, forcing Bank of America shareholders pay $15bn more than Merrill stock was worth, subverting the legal rights of bondholders in favor of unions, attempting to cap executive pay for non-TARP institutions, etc., etc., etc.

    Swagel’s apologia first cited by JK or SJ in this blog is worth rereading, especially page 37 of 52.

  11. Oh, I forgot to add that yesterday’s WSJ reported on page C3 that three private equity firms were vying for 20% of GOME, a Chinese retailer. Evidently, these firms have less fear of interference from the Chinese government than from Washington, D.C.

    Bair commented in the same issue of WSH of “reticence” and “fear the program’s rules will change” on the part of prospective buyers.

  12. Exactly, Joe: This gives these guys a “print” against which to value the toxic assets and prop up their balance sheets. The higher the “print” the better it is for the banks holding this trash on their balance sheets. Much of this stuff will never pay out and these guys know it — the poor saps hoodwinked into signing mortgages they couldn’t pay down in 10 lifetimes are never going to provide the cashflow against the instruments created to tranche up the risk. Most of these instruments have been written down to zero (on the real books the banks all keep), but if any of these banks can sell them to another bank at a price > zero, they’re back in business: Life is breathed back into their balance sheets, and they can start borrowing, lending and “investing” again. It’s a wonder. Truly.

    This is malfeasant collusion at its most egregious. This is so obvious and so apparent in its duplicity one wonders it wasn’t shut down at first mention. The fact that Sheila Bair (or Geithner, or Summers, or Obama) does NOT shut this idea down immediately, but assures us it is something she “continue to look at” — whatever that means — truly is sobering. The fact it is being proffered by various interests with an obvious interest in seeing it enacted is not unexpected: There is a sort of feral, uncultivated aspect to the greed the apologists display, as if being so grasping and blatant somehow makes this rapaciousness seem like they’re discussing a legitimate proposal to restore soundness to the banking system. The whole notion the banks’ll “participate in the upside” also is another red herring meant to convey a willingness to risk capital in the pursuit of profit, when, in point of fact, the endgame is tofind a way to shift the burden to that great unthinking mass of humanity known as taxpayers.

    I am, sadly, in the camp of Stats Guy, who, in a related post on the 27th, said, “After this, we will finally know who really owns the Obama Administration – the public, or the banks. If it’s the banks, I will be eating a bit of crow, and will think two or three times before defending them again.” If the luminaries of the Obama Administration truly are change-agents, one could argue it is the taxpayers’ interests, finally, that have to be prior to a particular vested interest’s (banking being only one of them, albeit — at > 40% of S&P500 profitability only a few years ago — a powerful one). Otherwise we, as a society, run the risk of taxpayer alienation, and the destruction of the vital bonds that give our form of government its cohesion. This is not trival, as the history of Europe — particularly France under the Third Republic — so aptly demonstrates. There still are people alive today who can testify to this. For those who weren’t there, or cannot remember, William L. Shirer’s “The Collapse of the Third Republic, An Inquiry into the Fall of France in 1940” is especially recommended. Book One is important, but Book Two is what you want to concentrate on.

  13. You have to wonder if anybody else has buyer’s remorse over this. The plan to sequester the banks’ toxic assets was either stillborn or died in infancy. For whatever reason Paulson preferred the direct capital injection stepchild to his own flesh and blood. While that may have stabilized the banks the real or perceived need to cleanse them of their bad assets persists. Since for various reasons the assets are going nowhere fast, even with PPIP, the gov’t is now entertaining ideas to detoxify the assets in situ. The taxpayer was always going to fund this either way, and in doing so some benefit was going to flow to the bank shareholders (whoever they are – the shares trade hands kinda fast). But this was sold as “good for main street.”

    What’s the alternative? Nationalization, right? Is it too late? Is there another? Do nothing I guess. Ironically, we are witnessing a “partial nationalization,” and I don’t mean the de facto/de jure interests the gov’t has in certain institutions. No, we are nationalizing the losses, that’s all. Pretty cool, eh?

  14. Min: “Perhaps we are seeing Bair’s legal perspective here.”

    To me, this is not about the distinction between legal and illegal.
    It is about the distinction between right and wrong, and justice and injustice.

    The misnomered “consumer deposit protection act”, rushed through congress a week before PPIP was announced, authorizes FDIC to borrow $ 500 billion (!), not to protect consumers deposits, oh no, but to give money to the banks in exchange for the PPIP off loading of bad assets. The looting of the taxpayers was clear from the start.

    Perhaps you saw – just as an example – Bill Moyers’ interview with William Black (inside experience from clearing up the savings and loan debacle). Black has written a book about the US situation: “The best way to rob a bank is to own one”. In the interview ( ) he clearly explains the fraud going on.

  15. James, you wrote:”And no, I don’t actually think that Sheila Bair reads this blog, much less listens to what I have to say.”

    Just in case she does – HIGH FIVE to YOU ! *****

  16. James, don’t be too sure that Sheila isn’t reading your blog – just the other day Bill Clinton confirmed that he reads “a lot of blogs”…

    Of course, he has a bit more time on his hands these days…

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