Just Let Them Die

http://www.thedailybeast.com/articles/2012/08/21/bailout-programs-return-1-5-billion.html

Four years after the Lehman Brothers crisis, housing finance remains a mess. But the Trouble Asset Relief Program (TARP), the crisis-era measures aimed at saving the banks, stabilizing credit markets, and preventing the auto companies and the insurer AIG from plunging into liquidation, have largely succeeded. And at a very low cost to the taxpayer. By and large, the recipients of cheap government capital have returned the cash they took—and with interest. The central component of TARP was the Capital Purchase Program, in which Treasury bought interest-yielding preferred shares in banks and received warrants in return. Here is the latest daily TARP update. Between the CPP and extra aid given to Citigroup and Bank of America, Treasury put $245.1 billion into banks. So far, those recipients have returned $231.11 billion of that capital. Add in dividends ($15.2 billion), proceeds from the sale of warrants ($9.19 billion), and cash raised from selling Citigroup and Bank of America stock ($9.36 billion), and the taxpayers have received a total of $264.86 billion back. That’s a profit of nearly $20 billion.
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widely held misconceptions

http://articles.latimes.com/2012/apr/25/business/la-fi-mo-tarp-bailout-losses-20120425

WASHINGTON -- The government's watchdog for the $700-billion Troubled Asset Relief Program on Wednesday disputed suggestions the bailout fund would turn a profit for taxpayers, and warned that many small banks are still struggling to repay.

"It is a widely held misconception that TARP will make a profit," said a report by Christy Romero, the special inspector general for the TARP program, known as SIGTARP.

....The Obama administration has said TARP has turned a profit on about $205 billion injected into banks, but still projects losses for the entire fund.

The report to Congress said that one recent cost estimate put TARP losses at about $68 billion and noted that banks and other financial institutions still owe $118.5 billion. And those figures don't include the potential harmful effects of the government precedent of wide-scale bailouts.

Policymakers "should not be focused alone on money in and money out. TARP's costs and legacies involve far more than just dollars and cents," the report said.

"While TARP and other government responses to the financial crisis may have prevented the immediate collapse of our financial and auto manufacturing industries, and improved stability since 2008, the trade-off is not without profound long-term consequences," the report continued. "A significant legacy of TARP is increased moral hazard and potentially disastrous consequences associated with institutions deemed 'too big to fail.'''

Romero and her predecessor in the watchdog position, Neil Barofsky, have been highly critical of the way the Treasury Department has run TARP. And they have pushed back strongly against the administration's positive stance on TARP's impact and financial outlook.

Last week, administration officials predicted that the U.S. likely would make a profit of as much as $163 billion over the next decade on all the bailout initiatives that began in 2008 to rescue the financial industry.

That result largely would be due to $179 billion in excess profit from the Federal Reserve over the next 10 years, from its extraordinary expansion of its balance sheet to help bail out the industry and stimulate the economy.

The Treasury Department did not project a profit for the entire TARP program. The administration estimated in February that lifetime losses from TARP would be $67.8 billion, largely because of the GM and Chrysler bailouts, as well as mortgage assistance programs.
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It's so convenient to redefine the sole objective of TARP as "to turn a profit on the AIG investment" once you determine that that is the only thing that it has really accomplished. Such is the risk inherent in relying on Newsweek's The Daily Beast as a source. It is a blog. Dan Gross, the author, seems to be on an "everything's fine, despite your lyin eyes and mounting bills" kick in his reportage.
 
grunion said:
It's so convenient to redefine the sole objective of TARP as "to turn a profit on the AIG investment" once you determine that that is the only thing that it has really accomplished. Such is the risk inherent in relying on Newsweek's The Daily Beast as a source. It is a blog. Dan Gross, the author, seems to be on an "everything's fine, despite your lyin eyes and mounting bills" kick in his reportage.
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Actually, that wasn't the sole objective or even the main objective. It's just icing on the cake. The main objective was to avoid a serious financial crisis that would have had severe negative consequences for the general economy.
 
Puppycow said:
Actually, that wasn't the sole objective or even the main objective. It's just icing on the cake. The main objective was to avoid a serious financial crisis that would have had severe negative consequences for the general economy.
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So we're breaking up these "too big to fail" companies now, right?
 
Puppycow said:
Here's what they did:

Dodd–Frank Wall Street Reform and Consumer Protection Act
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Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?
 
I generally agree with grinion and psionl0, the gloom&doom, "had to do it "types really haven't rationally thought through the consequences.

If these huge private banks and re-insurers had to realize THEIR losses, then they would go though the bankruptcy REORGANIZATION. Their functional operations would be spun-off and mostly owned by those who they owed. Their non-functional units closed with assets sold-off (at market prices) to less-stupid competitors (and they exist). The doom&gloomers always conflate bankruptcy with closing "dying" and that is not true.

Yes the value of the M.B.securities did drop (by ~18% at peak IIRC) ,and these are owned by both US and foreign investment institutions, pension funds, foreign central banks, etc. So if these organizations did any reasonable diversification can't take even a 2% asset hit based on MBS.

The re-insurers and AIG specifically would be way underwater in debt, and so some Federal bankruptcy court should divvy up the backing assets reasonably and sell/spin-off the none failing operations and obligations giving ownership of the new corp to those owed.

Note that the re-insurer failure does not mean the mortgage obligations are defunct. INstead the banks holding non-performing mortgages would still need to get a judgment, evict non-payers, and resell the properties, but since they are only going to recoup market prices selling into a market glut, they should rationally be inclined to be "eat some profit" on those loans that are marginally performing. No bank can afford to take a loss on it's major assets, so the kookie idea that we should somehow forgive loans cant work in any scenario. To encourage being lenient on the marginally performing loans the government should require mark-to-market pricing, so the banks can't paper-over their real losses. They have to be realized up front.

The Government controlled entitiesFannieMAE and FreddieMAC are a special case. They did not originate the problem, but they added a government imprimatur and in the end owned a large fraction of the worst assets (much higher non-performing loan rates than private banks). This is a good example of why governments should not play in private markets - they destroy competition. I can't fail to mention that these GSEs were able to donate money to some of the very same politicians who re-wrote the banking laws. They are both effectively bankrupt (FNMA & FMCC are penny stocks now) but the Government won't ever realize these loses - its politically unpleasant.

So yes the current bail-out schema not only rewards losers and creates a bad valuation of risk for future markets, but it has prolonged the pain and prevented a timely healing. It's a plan to take the bandage off over a 5-10 year period. It hides but doesn't remove the real damage, and prolongs the pain.

If they are too big to fail - then let them get small. It's part of the creative destruction that informs markets of efficient resource allocation.
 
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Segnosaur said:
Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?
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Aside from the extraordinary GM debacle, -Obama didn't put anyone in control of private enterprises. It may not always be obvious, but Obama is a president constrained by law, and not an emperor in charge of all he surveys.

The problem wrt Dodd-Frank isn't that it doesn't address currently hot issues, but that the entire approach is wrong. You can make as many rigid rules as you like and hire as many enforcers as you like and in a decade or three the important issues will have changed an ways to walk the grey-edges of the law will appear, and the people walking the edge may well pay-off politicians to not react to these changes (if they are even obvious).

No - the government should be far more interested in properly labeling of investment risk rather than regulating it. There are some fairly basic metrics of reinsurance and their tiny available capital compared to potential liabilities and an assessment of risk that should have set off alarm bells about anyone examining AIG.

Yes you need modern reporting of activities and analysis of these reports - but that needs to be better to be private since then we could sue and drive the poor evaluators out of business. Sure audits are needed.

This housing bubble and bust was caused by a demand for the MBS that offered a decent return on investment compared to bonds. Yes everyone understands you don't get better returns without taking additional risk, but that risk was underestimated. Here is a news-flash - no one ever sees that we are in an unstable bubble until near the very end - then when the realization causes a stampede to sell & crash. So the idea that we can regulate bubbles out of existence or see the risk miscalculation in advance is foolish. We are just preventing the previous problem, like generals prepared to fight the last war.
 
stevea said:
This housing bubble and bust was caused by a demand for the MBS that offered a decent return on investment compared to bonds. Yes everyone understands you don't get better returns without taking additional risk, but that risk was underestimated. Here is a news-flash - no one ever sees that we are in an unstable bubble until near the very end - then when the realization causes a stampede to sell & crash. So the idea that we can regulate bubbles out of existence or see the risk miscalculation in advance is foolish. We are just preventing the previous problem, like generals prepared to fight the last war.
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I have to disagree with this line. The risk wasn’t underestimated, at least not by everyone. The risk was systematically and deliberately hidden. Mortgage brokers found flaws in ratings agency models and exploited them ruthlessly. Ratings agencies were reluctant to fix their models for fear of chasing away clients looking for the AAA rubber stamp. And the banks didn’t care what was in the MBS as long as they could sell it as an AAA security. The whole CDO gimmick was used to launder risk, then call it “diversification”.
 
Really good coverage here from 2008-09. These guys won the Peabody and explain the crisis more clearly than anyone I have ever heard (without laying blame.) They explore every aspect of the food chain as to how the incentives were structured to lead every player, from mortgage holder to CEO, to make the decisions that led to the collapse. Definitely worth a listen.

The Giant Pool Of Money
Bad Bank
Return To The Giant Pool Of Money
 
stevea said:
Here's my question... will it be enough?

I remember hearing a lot of horror stories several years ago... Obama putting the same people in charge that failed to prevent the meltdown in the first place, regulations that were seen as too limited, offices set up to enforce regulations that had no staff, etc...

Has all that been handled?
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Aside from the extraordinary GM debacle, -Obama didn't put anyone in control of private enterprises. It may not always be obvious, but Obama is a president constrained by law, and not an emperor in charge of all he surveys.
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Yes, I know Obama did not (and could not/should not) appoint people to to leadership positions within various companies.

I was referring more to things like his own economic advisers. For example, he had brought in Lawrence Summers, who was one of the people who was pushing for deregulation of financial markets under Clinton, and was brought back in by Obama into his National Economic Council. Or Ben Bernanke, who was made head of the Federal Reserve by Bush, and was reappointed by Obama (even though he has been criticized, rightly or wrongly, for not forseeing the market collapse.)

The problem wrt Dodd-Frank isn't that it doesn't address currently hot issues, but that the entire approach is wrong. You can make as many rigid rules as you like and hire as many enforcers as you like and in a decade or three the important issues will have changed an ways to walk the grey-edges of the law will appear, and the people walking the edge may well pay-off politicians to not react to these changes (if they are even obvious).
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Hey I agree... people will always try to "walk the edge" in order to maximize their returns. But you can try to minimize the potential damage that can be done by those engaging in risky behavior.

No - the government should be far more interested in properly labeling of investment risk rather than regulating it.
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I agree with this too, in a way. I do think the housing crisis could have been avoided if companies like Standard&Poors were reporting the risks of the derivatives properly.

Looking through the Dodd-Frank act on Wikipedia, it does look as if the bill does have provisions for closer inspections of the credit rating agencies. (I'm not sure if all of the provisions have been put in place though.)
 
So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.
 
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Basically, no business in the world today operates on cash -- they all operate on bank-based credit and rely on the banks to sort where the money goes. Wal-Mart, for example, has managed to cut its prices and margins so low precisely because it "owns" almost none of the merchandise on the shelves and never had to pay for it. Instead, it basically acts as a consignment store; when you buy an item, the money that you spend goes directly (via the banks) to the wholesaler or manufacturer. The wholesalers and manufacturers, in turn, can manage to put their goods on the shelves because the banks have fronted them operating credit, so they can manufacture against expected profits when things are finally sold.
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Just jumping in to say that's not true. I operate my business entirely on cash in hand, and I know hundreds of other people who do, too. If I shut down tomorrow, I don't owe a single person or company a single cent. I'm profitable and I have never had to borrow from anyone for business reasons.

The simple fact is: too much money is more poisonous to a lot of business models than too little. Too little means forced creativity, forced investment in products or services that have been proven profitable, and sound, carefully considered decisions. Too much money means being willing to part with it for expensive products and services that may or may not contribute to the bottom line -and usually don't.
 
grunion said:
OK, can you tell me what we're getting for our trillion dollars? I haven't heard an answer that makes any sense yet, other than the usual variations on "if we didn't do it then all hell will break loose."

Do you think it makes sense for bankers to be the ones in charge of fixing the banks?
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Who would you put in charge? Janitors? Engineers? Rocket scientists? Doctors?
grunion said:
The "bailout" is the woo.
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Manopolus said:
So what about letting AIG and Citi fail and bailing out the folks they owe money to, instead? Seems logical to me. That way we get rid of the cause of the problem without the systematic failure. Epic failures like these deserve non-existence as a result.
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I think the risk is that people need credit... most people can't buy a house without a mortgage, some businesses cannot get off the ground without a bank loan.

If you let the banks fail, it may be morally justified (after all, AIG/Citi were the ones who screwed up). However, after such a failure credit might be hard to come by.... people may not deposit money in their banks (which means no money to make loans with) for fear of loosing their deposits.
 
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