Subscribe to Dollars & Sense magazine. Recent articles related to the financial crisis. The Big Banks' Fuzzy MathThere's less than meets the eye to the latest reports of bank profits. Most of it appears to be the result of accounting shell games and TARP money passed through AIG. With the government handing them nearly free money and lots of people wanting to borrow it and pay interest, why can't they make an honest buck?And if you can't answer that, then maybe it's time to talk nationalization. --df From the NYT: Bank Profits Appear Out of Thin Air By ANDREW ROSS SORKIN This is starting to feel like amateur hour for aspiring magicians. Another day, another attempt by a Wall Street bank to pull a bunny out of the hat, showing off an earnings report that it hopes will elicit oohs and aahs from the market. Goldman Sachs, JPMorgan Chase, Citigroup and, on Monday, Bank of America all tried to wow their audiences with what appeared to be - presto! - better-than-expected numbers. But in each case, investors spotted the attempts at sleight of hand, and didn't buy it for a second. With Goldman Sachs, the disappearing month of December didn't quite disappear (it changed its reporting calendar, effectively erasing the impact of a $1.5 billion loss that month); JPMorgan Chase reported a dazzling profit partly because the price of its bonds dropped (theoretically, they could retire them and buy them back at a cheaper price; that's sort of like saying you're richer because the value of your home has dropped); Citigroup pulled the same trick. Bank of America sold its shares in China Construction Bank to book a big one-time profit, but Ken Lewis heralded the results as "a testament to the value and breadth of the franchise." Sydney Finkelstein, the Steven Roth professor of management at the Tuck School of Business at Dartmouth College, also pointed out that Bank of America booked a $2.2 billion gain by increasing the value of Merrill Lynch's assets it acquired last quarter to prices that were higher than Merrill kept them. "Although perfectly legal, this move is also perfectly delusional, because some day soon these assets will be written down to their fair value, and it won't be pretty," he said. Investors reacted by throwing tomatoes. Bank of America's stock plunged 24 percent, as did other bank stocks. They've had enough. Why can't anybody read the room here? After all the financial wizardry that got the country - actually, the world - into trouble, why don't these bankers give their audience what it seems to crave? Perhaps a bit of simple math that could fit on the back of an envelope, with no asterisks and no fine print, might win cheers instead of jeers from the market. What's particularly puzzling is why the banks don't just try to make some money the old-fashioned way. After all, earning it, if you could call it that, has never been easier with a business model sponsored by the federal government. That's the one in which Uncle Sam and we taxpayers are offering the banks dirt-cheap money, which they can turn around and lend at much higher rates. "If the federal government let me borrow money at zero percent interest, and then lend it out at 4 to 12 percent interest, even I could make a profit," said Professor Finkelstein of the Tuck School. "And if a college professor can make money in banking in 2009, what should we expect from the highly paid C.E.O.'s that populate corner offices?" Labels: Andrew Ross Sorkin, bank failures, bank nationalization, Citibank, Merrill Lynch, New York Times, Sydney Finkelstein Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Soros: U.S. banks 'basically insolvent'Just posted to Reuters; hat-tip to Bob F. Too bad that he says nationalization is "out of the question." But interesting in particular that Soros "warned about the danger of watering down mark-to-market accounting rules."NEW YORK (Reuters)—The U.S. economy is in for "a lasting slowdown" and won't recover this year, while "the banking system as a whole is basically insolvent," billionaire investor George Soros told Reuters Financial Television on Monday. While nationalization of banks is "out of the question," he said stress tests being conducted by the U.S. Treasury could be a precursor to a more successful recapitalization. But he warned about the danger of watering down mark-to-market accounting rules, saying this creates conditions for prolonging the life of U.S. 'zombie' banks. Soros also said the U.S. dollar is under pressure and may eventually be replaced as a world reserve currency, possibly by the IMF's Special Drawing Rights, a synthetic currency basket comprising dollars, euros, yen and sterling. China recently proposed greater use of Special Drawing Rights, possibly as an eventual global reserve currency. "In the long run, having an international accounting unit other than the dollar may be to our advantage," Soros said. He added that the system that has allowed the United States to spend more than it earns has to be reformed. "That is coming to an end and it will not be allowed to recur. There will have to be some change." While a global recovery is possible in 2010, Soros said the timing will ultimately depend on the depth of the recession. China, he said, will be the first country to emerge from recession, probably this year, and will spearhead global growth in 2010. He said world policy-makers are "actually beginning to catch up" with the crisis and efforts to fix structural problems in the financial system. The system was "fundamentally flawed, and there is no returning to where we came from," he said. Read the rest of the article. Labels: bank nationalization, banking crisis, banking regulation, financial crisis, George Soros, mark-to-market, recession Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). State-Owned Bank in ND Doing Just FineFrom Mother Jones. The comment section is worth reading; some debate about whether this is the only state-owned bank in the United States. (Doesn't the FDIC own many banks at any given time?) I weighed in, even though I am not so big on commenting on articles, just to contradict some guy who claimed that hedge funds never fail (he was arguing, preposterously, that over-regulation caused the banking crisis).How the Nation's Only State-Owned Bank Became the Envy of Wall Street By Josh Harkinson | Fri March 27, 2009 6:33 PM PST The Bank of North Dakota is the only state-owned bank in America—what Republicans might call an idiosyncratic bastion of socialism. It also earned a record profit last year even as its private-sector corollaries lost billions. To be sure, it owes some of its unusual success to North Dakota's well-insulated economy, which is heavy on agricultural staples and light on housing speculation. But that hasn't stopped out-of-state politicos from beating a path to chilly Bismarck in search of advice. Could opening state-owned banks across America get us out of the financial crisis? It certainly might help, says Ellen Brown, author of the book, Web of Debt, who writes that the Bank of North Dakota, with its $4 billion under management, has avoided the credit freeze by "creating its own credit, leading the nation in establishing state economic sovereignty." Mother Jones spoke with the Bank of North Dakota's president, Eric Hardmeyer. Mother Jones: How was the bank formed? Eric Hardmeyer: It was created 90 years ago, in 1919, as a populist movement swept the northern plains. Basically it was a very angry movement by a large group of the agrarian sector that was upset by decisions that were being made in the eastern markets, the money markets maybe in Minneapolis, New York, deciding who got credit and how to market their goods. So it swept the northern plains. In North Dakota the movement was called the Nonpartisan League, and they actually took control of the legislature and created what was called an industrial program, which created both the Bank of North Dakota as a financing arm and a state-owned mill and elevator to market and buy the grain from the farmer. And we're both in existence today doing exactly what we were created for 90 years ago. Only we've morphed a little bit and found other niches and ways to promote the state of North Dakota. MJ: What makes your bank unique today? EH: Our funding model, our deposit model is really what is unique as the engine that drives that bank. And that is we are the depository for all state tax collections and fees. And so we have a captive deposit base, we pay a competitive rate to the state treasurer. And I would bet that that would be one of the most difficult things to wrestle away from the private sector—those opportunities to bid on public funds. But that's only one portion of it. We take those funds and then, really what separates us is that we plow those deposits back into the state of North Dakota in the form of loans. We invest back into the state in economic development type of activities. We grow our state through that mechanism. MJ: Clearly other banks also invest their deposits. Is the difference that you are investing a larger portion of that money into the state's own economy? EH: Yeah, absolutely. But we have specifically designed programs to spur certain elements of the economy. Whether it's agriculture or economic development programs that are deemed necessary in the state or energy, which now seems to be a huge play in the state. And education—we do a lot of student loan financing. So that's our model. We have a specific mission that was given to us when we were created 90 years ago and it guides us throughout our history. MJ: Are there areas that you invest in that other banks avoid? EH: We made the first federally-insured student loan in the country back in 1967. So that's been a big part of what we do. It's become almost a mission-critical thing. I don't know if you have been following the student loan industry lately, but it's been very, very interesting as many have decided to leave. We will not though. MJ: So you are able to invest in certain areas because they provide a public good. EH: Yeah, or a direction, whether it's energy or primary sector type of businesses. We have specific loan programs that are designed at very low interest rates to encourage activity along certain lines. Here's another thing: We're gearing up for a significant flood in one of the communities here in North Dakota called Fargo. We've experienced one of those in another community about 12 years ago which prior to Katrina was the largest single evacuation of any community in the United States. And so the Bank of North Dakota, once the flood had receded and there were business needs, we developed a disaster loan program to assist businesses. So we can move quite quickly to aid with different types of scenarios. Whether it's encouraging different economies to grow or dealing with a disaster. MJ: What do private banks think of you? EH: The interesting thing about the bank is we understand that we walk a fine line between competing and partnering with the private sector. We were designed and set up to partner with them and not compete with them. So most of the lending that we do is participatory in nature. It's originated by a local bank and we come in and participate in the loan and use some of our programs to share risk, buy down the interest rate. We even provide guarantees similar to SBA to encourage certain activity for entrepreneurial startups. Aside from that, we also act as a bankers' bank or a wholesale bank. So we provide services to banks, whether it's check clearing, liquidity, or bond accounting safekeeping. There's probably 20 other bankers' banks across the country. So we act in that capacity as kind of a little mini-fed actually. And so we service 104 banks and provide liquidity to them and clear their checks and also we buy loans from them when they have a need to overline, whether it's beyond their legal lending limit or they just want to share risk, we'll do that. We're a secondary market for residential loans, so we have a portfolio of $500 to $600 million of residential loans that we buy. MJ: So what's the advantage of a publicly owned "bankers' bank" instead of a privately owned one? EH: Our model is we use our deposit base to help [other banks] with funding their loans, even providing fed funds lines with our excess liquidity—we buy and sell fed funds and act as a clearinghouse for check clearing activity. That would be the benefit or different model. We're a depository bank and can bring that to bear. MJ: If other states had a bank like yours, do you think they would have been more insulated from the credit crisis? EH: It all gets down the management and management philosophy. We're a fairly conservative lot up here in the upper Midwest and we didn't do any subprime lending and we have the ability to get into the derivatives markets and put on swaps and callers and caps and credit default swaps and just chose not to do it, really chose a Warren Buffett mentality—if we don't understand it, we're not going to jump into it. And so we've avoided all those pitfalls. That's not to say that we're completely immune to everything, certainly we've bought some mortgage-backed securities and we're working through some of those issues, but nothing that would cause us to be concerned. Read the rest of the interview. Labels: bailout, bank nationalization, financial crisis, North Dakota Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Time For A 'Managed Bankruptcy' For BanksFrom CEPR:Getting Lehman Wrong a Second Time Labels: bank nationalization, CEPR, Dean Baker, Lehman Brothers Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). A Couple of Items on the Bank BailoutHere are a couple of items on the bank bailout that I've been meaning to post. First is a post from back in late February (seems like years!) on Megan McArdle's blog at the Atlantic (whose spiffy redesign I admire, if not the politics of its columnists). It is a response to this post on Paul Krugman's blog at the New York Times, but it relates to Fred Moseley's cover article in the March/April issue of D&S. Here's McAdle's post in full:Lost I asked Fred Moseley (who, again, wrote our current cover article on bank nationalization) how he would respond to McArdle. Here's what he wrote back to me: My main response to McArdle is this: if it is true that the only way to avoid an economic catastrophe is to bail out the banks and their bondholders with taxpayer money, then I would say that this strengthens the case for the nationalization of systematically significant banks. If taxpayers have to pay for their losses this time, then surely we want to make sure that we never have to pay again, that we are never put in this situation again. And the best way to ensure that it never happens again is to nationalize the systemically significant banks. Then we would never again be forced to decide between bailing out the bondholders or economic armageddon. When Fred says "the only way to avoid this is real nationalization," he's including under the rubric of "nationalization" the possibility that the gubm't could set up "good banks," and I'm assuming that in that scenario the "too big to fail" banks could be allowed to whither and die (i.e. enter into bankruptcy, and let the good assets be sorted from the bad in court). This is what Joseph Stiglitz seemed to be saying in his presidential address to the Eastern Economics Association meetings a few weeks ago (about which I blogged here; his article in the current issue of The Nation seems to be more of a proposal for pseudo-(i.e., temporary) nationalization, however). Something like a "whither and die" proposal also seems to be Dave Lindorff's position in a recent piece over at Counterpunch: The futility and stupidity of the Fed's and the Obama administration's policy of pumping ever more money into failing banks and insurance companies in a vain effort to get them lending again was demonstrated—if anyone was paying attention—by the collapse in auto sales this past month, with all the leading companies, Ford, GM and Toyota, reporting sales down by about 40%. Read the rest of the article. Labels: bank nationalization, credit crisis, Dave Lindorff, financial crisis, Fred Moseley, Joseph Stiglitz, Megan McArdle, nationalization, Paul Krugman Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Confusion, Tunneling, and LootingInteresting post from the blog Baseline Scenario.Emerging market crises are marked by an increase in tunneling—i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves. Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt. Confusion helps the powerful, he argued. When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms. The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run. This is the prospect now faced by the United States. Treasury has made it clear that they will proceed with a "mix-and-match" strategy, as advertized. And people close to the Administration tell me things along the lines of "it will be messy" and "there is no alternative." The people involved are convinced—and hold this almost as an unshakeable ideology—that this is the only way to bring private capital into banks. Read the rest of the post. Labels: bank nationalization, Baseline Scenario, Corporate Fraud, financial crisis, fraud, nationalization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). The Virtues of Concentration (Doug Henwood)From Doug Henwood of Left Business Observer, responding to this op-ed from Saturday's Times. Relevant to our two most recent posted articles: Fred Moseley's article arguing for permanent nationalization of the "too big to fail" banks (vs. breaking them up), and Maurice Dufour's article on the Canadian system. Hat-tip to Larry P.On op-ed piece in today's New York Times the latest source to point out that Canada's banking system is now the most solid and stable in the world. The reasons: Canada has a very concentrated financial system, which is dominated by just five nation-spanning banks, and one that is tightly regulated. Curiously, as the author, Theresa Tedesco, point out, the Canadian national banking model was inspired by the USA's own Alexander Hamilton, a centralizer and concentrator from way back. This confirms a couple of longstanding obsessions of mine. One is that concentrated financial systems are easier to regulate than dispersed ones. This proposition has been partly discredited by the "too big to fail" doctrine, which has prompted some people, even on the U.S. left, to argue that big institutions should be broken up. But the problem is that the U.S. authorities didn't supervise or regulate, not that Citi or Bank of America got too big. Tedesco recommends using the current crisis to engineer a large wave of mergers, leaving the U.S. with many fewer banks than the 8,305 we have now (by the FDIC's count). Of course, they'd have to be kept on tight leashes, but who but a nut would disagree with that now? And the other is that concentrated ownership structures, of banks as well as corporations (something that's true of Canada), are far more compatible with social democracy than dispersed ones. Concentration can lead to greater stability and a lessened role for competition. Canada has a national health insurance system that many Americans envy (along with many other social benefits), a lower poverty rate, and a far more egalitarian distribution. The same can be said of Sweden, which is also highly concentrated and has even better income and poverty stats than Canada. It's extremely disreputable to say these sorts of things on the American left, especially its populist branches. For populists, Hamilton is the spawn of the devil, and giant banks are instruments of Satan. But the populist vision is one where everyone owns a small business and credit is practically free. For those of us interested in creating a civilized welfare state in the U.S., and taming the war of each against all ethic that governs American economic life, chucking that populist nonsense and embracing a little concentration could be a good start. Of course, concentration itself won't take us in that direction. But fragmentation virtually guarantees that we won't even get a start. Labels: bailout, bank nationalization, Canada, Doug Henwood, financial crisis Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Stiglitz Criticizes O.'s Speech, Favors Single-PayerThis seems pretty explosive to me: Nobel-Prize-winning economist Joseph Stiglitz came put in favor of a single-payer universal health program as "the only alternative" in an interview with Amy Goodman on Democracy Now!. Hat-tip to Dr. Christine Adams of Health Care for All Texas. Very interesting also that he also criticizes Obama as having "confused saving the banks with saving the bankers." (Amy Goodman's phrase, but Stiglitz responded: "Exactly.")There's also a discussion of nationalization, and from what I can tell Stiglitz calls for a Swedish-style "nationalization," which is really just temporary receivership (or what Krugman usefully calls "preprivatization"—though this is what Krugman favors too). This puts him barely to the left (on this issue at least) of Alan Greenspan, who as we've reported here, has said that "nationalization" will probably be necessary. Wish Amy had asked him about full, permanent nationalization... Click here for Fred Moseley's argument for it in the March/April issue of D&S. We'll have an article about single-payer in that issue too. Here is the beginning of the DN! transcript: AMY GOODMAN: Your first assessment of the speech last night? JOSEPH STIGLITZ: Oh, I thought it was a brilliant speech. I thought he did an excellent job of wending his way through the fine line of trying to say—give confidence about where we're going, and yet the reality of our economy—country facing a very severe economic downturn. I thought he was good in also giving a vision and saying while we're doing the short run, here are three very fundamental long-run problems that we have to deal. The critical question that many Americans are obviously concerned about is the question of what do we do with the banks. And on that, he again was very clear that he recognized the anger that Americans have about the way the banks have taken our taxpayer money and misspent it, but he didn't give a clear view of what he was going to do. AMY GOODMAN: Let's go to the clip last night. During his speech, President Obama acknowledged more bailouts of the nation's banks would be needed, but didn't directly say, as Joe Stiglitz was saying, whether the government would move to nationalize Citigroup and Bank of America. PRESIDENT BARACK OBAMA: We will act with the full force of the federal government to ensure that the major banks that Americans depend on have enough confidence and enough money to lend even in more difficult times. And when we learn that a major bank has serious problems, we will hold accountable those responsible; force the necessary adjustments; provide the support to clean up their balance sheets; and assure the continuity of a strong, viable institution that can serve our people and our economy. AMY GOODMAN: President Obama on Tuesday night. Joe Stiglitz, is he holding the banks accountable? JOSEPH STIGLITZ: Well, so far, it hasn't happened. I think the more fundamental issues are the following. He says what we need is to get lending restarted. If he had taken the $700 billion that we gave, levered it ten-to-one, created some new institution guaranteed—provide partial guarantees going for, that would have generated $7 trillion of new lending. So, if he hadn't looked at the past, tried to bail out the banks, bail out the shareholders, bail out the other—the bankers' retirement fund, we would have easily been able to generate the lending that he says we need. So the question isn't just whether we hold them accountable; the question is: what do we get in return for the money that we're giving them? At the end of his speech, he spent a lot of time talking about the deficit. And yet, if we don't do things right—and we haven't been doing them right—the deficit will be much larger. You know, whether you spend money well in the stimulus bill or whether you're spending money well in the bank recapitalization, it's important in everything that we do that we get the bang for the buck. And the fact is, the bank recovery bill, the way we've been spending the money on the bank recovery, has not been giving bang for the buck. We haven't gotten anything out. What we got in terms of preferred shares, relative to what we gave them, a congressional oversight panel calculated, was only sixty-seven cents on the dollar. And the preferred shares that we got have diminished in value since then. So we got cheated, to put it bluntly. What we don't know is that—whether we will continue to get cheated. And that's really at the core of much of what we're talking about. Are we going to continue to get cheated? Now, why that's so important is, one way of thinking about this—end of the speech, he starts talking about a need of reforms in Social Security, put it—you know, there's a deficit in Social Security. Well, a few years ago, when President Bush came to the American people and said there was a hole in Social Security, the size of the hole was $560 billion approximately. That meant that if we spent that amount of money, we would have guaranteed the—put on sound financial basis our Social Security system. We wouldn't have to talk about all these issues. We would have provided security for retirement for hundreds of millions of Americans over the next seventy-five years. That's less money than we spent in the bailouts of the banks, for which we have not been able to see any outcome. So it's that kind of tradeoff that seems to me that we ought to begin to talk about. AMY GOODMAN: So, you say Obama, too, has confused saving the banks with saving the bankers. JOSEPH STIGLITZ: Exactly. AMY GOODMAN: Should they all have been fired? JOSEPH STIGLITZ: Well, I think one has to look at it on a bank-by-bank basis. Clearly, the banks that have not been managed very well, we need to not only fire them, we have to change their incentive structure. And it's not just the level of pay; it's the form of the pay. Their incentive structures encourage excessive risk taking, shortsighted behavior. And in a way, it's a vindication of economic theory. They behaved in the irresponsible way that their incentive structures would have led them to behave. Read or listen to the rest of the interview. Labels: Amy Goodman, bailout, bank nationalization, Barack Obama, financial crisis, Joseph Stiglitz, Paul Krugman, single-payer Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Bank Nationalization (P. Krugman, F. Moseley)Paul Krugman, in his NYT column today, joins the chorus of people calling for "nationalization" of the big banks. As we have noted here, that chorus includes even the so-called Maestro himself, Alan Greenspan, who told the Financial Times last week that nationalization may be the "least bad" option: "I understand that once in a hundred years this is what you do." Krugman is at least clear on what he understands by "nationalization"; here are the last three paragraphs of his column:
We wonder whom Krugman includes in his statement, "So do we all." We just posted an article from our March/April issue (to be printed soon) in which economist Fred Moseley argues for permanent nationalization of the "too big to fail" banks. If banks are too big to fail, they should be public, and run in the public interest. Read the article here. Labels: Alan Greenspan, bank nationalization, Fred Moseley, Paul Krugman, privatization Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). Greenspan (!): Nationalize the BanksWe weren't so surprised when Noriel Roubini called for (temporary) bank nationalization in a Washington Post op-ed co-authored with Matthew Richardson this past Sunday. But now this bombshell from the Financial Times, via Naked Capitalism, with Yves Smith's excellent-as-usual commentary:Greenspan Predicts TARP Will Prove Insufficient, Supports Bank Nationalization Before readers start throwing brickbats at the mention of the name of Alan Greenspan, it's important to remember that he has become the poster boy of the policy errors that lead to our financial mess. And that isn't an accurate picture. This crisis had many parents, and even though Greenspan was one of the key actors, he was far from alone. Treasury Secretaries Robert Rubin and Larry Summers were also backers of the financialization of the economy, the permissive regulatory posture, and the strong dollar policy. Greenspan, to his credit, at least appears chastened by the mess helped create. As far as I can tell, very few of the other perps have questioned their decisions. Greenspan spoke this evening at the Economic Club of New York. Some of his comments show that he has made some considerable shifts from his libertarian, anti-regulation stance. But he hasn't had a Damascene moment; he seems to be changing his views incrementally. Nevertheless, it's remarkable that Greenspan has come out saying that nationalizing banks is the "least bad" policy option, as he did in a Financial Times interview. Now we are seeing role reversal: the loyal libertarian reluctantly admitting the need for regulation and the advantages of taking over dud banks, even big dud banks, while the Democrats tip toe around the idea of doing anything that might ruffle bankers feathers too much. Note that he stresses, as we have, the need to clean up the financial system for fiscal stimulus to be effective (as in kick the economy into a higher gear, rather than provide a temporary amphetamine hit that quickly wears off). He also sounded a warning similar to Willem Buiter's, that the US is fiscally constrained and cannot run deficits as large as we might otherwise like without incurring serious sdverse consequences. Buiter has warned of the danger of a collapse in dollar assets. Greenspan seems more concerned about immediate effects, namely, rising long term bond rates (the Fed in theory can suppress a rate rise by buying long-dated Treasuries, but I suspect in practice this policy would lead to private investors and other central banks abandoning the long end of the yield curve, knowing the Fed could not continue this strategy on an unlimited basis, and the Fed having qualms about ballooning its balance sheet to grotesque size. Even at this level, the Fed seems cautious about further balance sheet growth, even though some have argued the Fed would need to expand its balance sheet far more aggressively to combat deleveraging). From the Financial Times: The US administration will have to go back to Congress for additional funds to recapitalise the banking system to restore the normal flow of credit in the economy, Alan Greenspan, former chairman of the Federal Reserve, said yesterday.... As for the idea of increasing capital levels, it's a poor second best to rethinking what the financial system ought to look like. And it is truly sobering how little serious thought has been done on that front. As for Greenspan depicting Congress champing at the bit to reform the industry, that couldn't be further from the truth. Enacting strict limits on pay to TARP recipients is a far cry from meaningful regulatory reform. From the Financial Times interview:
However, he wimped out on cramming down bondholders (note Martin Wolf and Nouriel Roubini, among others, have advocated that step, although Wolf did warn that it would need to be done with ample preparation for temporary disruption): "You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks," he said. “This is a credit crisis and it is essential to preserve an anchor for the financing of the system. That anchor is the senior debt." Greenspan is a consultant to Pimco, and Pimco has consistently bet that the Feds would be nice to banks (I am told by someone in a position to know that they own a lot of junior bank debt). So this statement may be de facto an admission by Greenspan that he sees nationalization as inevitable and is trying to shape what form it takes. (This was the full post.) Labels: Alan Greenspan, bailout, bank nationalization, financial crisis, Nouriel Roubini, TARP program, Yves Smith Please consider donating to Dollars & Sense and/or subscribing to the magazine (both print and e-subscriptions now available!). |
