I am always happy to be instructed in these dark arts. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Imagine the following scenario: the Dodd plan is adopted, Paulson and Bernanke overpay for the assets and early in Obama's administration they sell the assets at a loss and take over the banks (all the existing equity gets wiped out and Tresury owns 100% of the assets). A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The US Government has already taken charge of Freddie and Fanny. The portion of performing loans in their portfolios is not yet public knowledge. The location of the bottom for real estate prices is not known yet. It is possible that prices in some of the largest markets have another 20% drop ahead. It is not inconceivable that they could be $1 to $2 Trillion underwater by the time the bottom is reached. Who knows the extent of liability due to leverage on CDOs and MBSs which they own or which they have already guaranteed? May they be small to non-existent!
AIG could be in the same range of damage potential due to a larger portion of their obligations being leveraged. Even $40 Billion leveraged at 30 to 1 gives $1.2 Trillion. Then there are all of the banks lined up at the FDIC's door. Even if they end up only 10% under water on the typical 60% of their assets which are mortgages, could that total another $1 Trillion?
It seems to me to be far more responsible to insure that any more expenditures go towards efforts where the size and extent of the damage is well defined. That should start with a cold eye on the books of the Fed. If indeed, as Jerome's correspondent suggests, most of the demanded $700 Billion goes just to re-capitalizing the Fed, then that is just pissing into a hurricane unless the Fed is ordered to cease and desist in its policies of buying toxic trash for good money, as Market trustee suggested? How can we know the adequacy of the proposed solution if we don't know the size of the problem?
I can see that it is possible that the mortgage problem can be worked out over time. I do not see how leveraged financial instruments can be saved unless they miraculously save them selves by all netting out to zero. I fear they might be several Trillion dollars off. And that is in today's dollars. As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
"Mitigate collateral damage from defaults" = "recapitalization"
A distinction without a difference? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
That is, because stuff was given investment grade ratings that should never in a million years have been given investment grade rating, all sorts of institutions that are only allowed to hold investment grade securities are on the hook if the house of cards is just allowed to collapse and then pick up the pieces later.
That includes pension funds, car insurance, fire insurance, annuities ... the Main Street finance sector, still operating, obscured by all the financial fireworks.
Example, five pools of mortgages each are supporting a family of five assets each. In each family, the senior member has first claim on the income, until it meets its face value income stream, then the next eldest, then the middle, then the second youngest, and the youngest is last in line.
Because the youngest is first in line for any shortfall, it sells at the steepest discount, and yields a high return up front. But it is not rated as investment grade.
Now collect the youngest members of all five families and send them off to school, with their allowances in tow. They pool the allowances, and set up a pretend family in their classroom, with the senior desk having first claim on a share of the pool, then the next senior desk, then the middle desk, then the fourth desk, then the last desk.
For random events ... "a tree fell on our house, we have to fix the roof, I can't bring in any allowance this week", the senior desk is well shielded by its position at the top of the ladder, "upgrading" it in terms of sheltering it from random risks. But if something hits all five families equally, then there may be no allowance at all.
No matter how you follow rules set down to create "security class" assets as the senior claim on a pool of income, if its a senior claim out of a pile of assets overexposed to systemic risks, you are concentrating exposure to systemic risk. And concentrated exposure to systemic risk is not supposed to be what institutions are supposed to be holding if they are limited to holding investment grade assets.
So a lot of those AAA ratings were big fat lies in terms of the regulatory intent of the restriction. But quite often very stylish lies told following all proper forms and so quite possible legally permissable lies ... "this is the kind of things we are allowed to rate as AAA, under established practice (even though you would be silly to treat this AAA as being really truly equivalent to that AAA)." I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
From a current stock holder, the plan is not very convincing. As your example makes clear, even with a positive balance sheet, you may end up wiped out, if you participate (the 25 bn equity is wiped out by the 20 bn loss). Only the lower borrowing costs help the company, so current stock holders might encourage the management to muddle through as long as they can.
This undermines the purpose, why the banks are rescued at all. There need to be banks making new loans or extending existing loans beyond the ones already made.
Yet another problem, how to account for gov't changes on mortgages. If the gov't says, it reliefs people by cutting down the mortgage they hold, they are producing losses for the banks, which might argue, without the gov't these losses wouldn't have been so big.
Another question is, when the toxic waste is sold, isn't there a large incentive for the banks to buy there toxic waste back at too high prices? As they have just purchased the stuff, there is no reason to book it lower than the fantasy price. If the bank doesn't know if it will go bust in the long run, they might even buy themselves once again into insolvency terrain, which means, the long term borrowing costs of the banks won't go down really much, once a company has started to participate into the plan. If the gov't forbids banks to buy its own debt back to overvalued prices to prevent that the bank just unmakes the plan, once it has profitted from the lower interest, then you prohibit as well that such a bank finds another source of refreshing its equity. Or the banks make one to the left accounting, every bank takes the assets of its neighbouring bank for a fantasy price and everybody is happy. So the fed would have to hold the portfolio to maturity, which might be long times.
One possibility is as well, that a CEO, who knows he is running a fundamental insolven bank (but not illiquid as the toxic stuff is at the fed), might pillage his bank by selling fundamental sound stuff to another bank. If we have really an undervaluation problem right now, this selling would be below the recovery value. That means, the CEO would ride his bank deeper into the shit, but as the bank is anyhow a gov't owned bank the moment the fed sells the bad stuff, that doesn't matter for him. The bank taking the good stuff might be grateful to him, still (or his private hedge fund).
I think the best plan would be to buy bank of America (e.g. 95%) and just provide real economy credit via that bank by introducing a huge amount of equity, while leaving other banks to themselves. The Dodd plan might be better than the Paulson plan, but might not help to bring the financial market to function again. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
OK, admittedly there the zero is supressed, but still scary. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
From a current stock holder, the plan is not very convincing. As your example makes clear, even with a positive balance sheet, you may end up wiped out
Isn't this why the Tarp retains the right to sell the assets when it see fit? If the bank is insolvent, then it sells to get senior equity and obtain the proceeds from the liquidation. If the bank is not insolvent, it sells assets to get the profits until the difference between the price paid for the toxic asset and the sell price.
The equity holders therefore only loose money if the bank is insolvent, which is reasonable. OR maybe I just get this wrong. Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
So the fed would have to hold the portfolio to maturity, which might be long times.
Apparently when a US financial institution holds a debt instrument it can claim it "holds it for investment" in which case it doesn't get market to market but instead retains its original purchase price (the "hold-to-maturity price"). Maybe this is just a way to allow banks to change the classification of the assets. Because that is cheating, the Treasury gets equity in exchange. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
But I doubt there will be a lot of house price inflation. The recent high (CPI) inflation numbers were mostly due to increases in the price of tradable goods. A dollar decline creates inflation in the tradable goods sector, but unless Asians and Europeans start to buy houses in the USA, this won't help the house prices to increase. Only a wage price spiral could do that. Not in sight. The last quarters US GDP deflator was ~0.8% Japan has not had a cumulative GDP deflator of 25% in the last 20 years. In a medium bad case scenario, the US would develop Japan-like. Probably still better than a great depression. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Buying the mortgages is effectively what the bailout plans want to authorise, and the Dodd version contains some specific provisions about preventing foreclosure on mortgages that the tresury buys, as well as giving the Tresury the contingent equity. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
While the Dodd plan may help to prevent forclosures, which may be helpful for the banks, especially those which don't know who their debtors really are and therefore can't make a deal with them, I'm pretty sure, it don't foresee an equity stake in the houses. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
No, the treasury buys the mortgages at par and then the banks hope that the house prices reinflate so that the Treasury doesn't have to exercise its option. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
But under the Dodd plans the equity is realised over months or years, and Obama can be blamed for nationalising the banks :-)
Under the Paulson plan, the Tresury simply loses money. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
So if the economy doesn't run well the next 4 years, because of the mess that is, it will be blamed on Obama's socialism. Maybe the Dodd plan isn't that bad, as there is a scapegoat to prevent anti-capitalistic spin. I only hope Obama is really elected and the mess doesn't fall McCain on the feet ;-) Maybe I should change my signiture, but I think by now it are anyhow only the masochists left favouring McCain. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Won't help a lot. The bad mortgages will go bust rather soon. A rapid house price increase in the longer term would help only, when the banks would go for a Chris Cook style solution, where they essentially foreclose the homes, but don't sell them, but instead rent them out.
Not quite.
My solution is in fact a transfer of title by the Banks to a quasi REIT and then for the banks to sell off their Units in the affordable rental streams flowing through these REIT's.
The outcome of this "asset-based" solution is far more advantageous to the banks than any conventional "deficit-based"solution involving new credit.
In this model,the properties themselves will never be sold again, remaining in "custody".
However, the "Co-owner" Occupiers may change, and the "Co-owner" Investors may change, particularly as Occupiers may gradually become Investors as well, simply by buying Units....... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The key is always to use language which is understood, and not only do I tend to write "financespeak" but it's UK "financespeak".
The proposal also has elements of what I have heard called an "evergreen lease" (not a UK expression).
Sort of an "evergreen lease to buy" "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
However, I think that a few "worked examples" set forth in common language would help, also. My biggest problem has been understanding how your system would work in practice. We have been taught to believe in "marketplace competition." Why should that competition not extend to the very nature of ownership in society? As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Why shouldn't we unlearn what we've been taught? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Why shouldn't we unlearn what we've been taught?
The reason is that there are no returns going to unnecessary "rentiers". This is what the Cooperative movement calls the "Cooperative Advantage".
The competition that I foresee is not for pieces of paper representing IOU's/claims over wealth made by intermediaries, but competition for "Quality" instead.
There is no Profit and no Loss within a partnership framework, merely creation and exchange of "Value" in all its forms (and "Money as Debt" is not one of them).
Such a "cooperative of cooperatives" partnership model would IMHO be what Yunus calls "Not for loss".
Here's an example.
A portfolio of 5,000 25 year mortgage loans @ 6% pa average $200,000 to a total value of $1 billion. Each borrower must currently repay $1303.77 per month or $15,645.24 pa for the life of the loan. A rental is set at an "affordable" level - (say) an average "affordable" rental of $500 per month or $6,000 pa and this rental is then Index - linked. This gives a total Rental Pool of $30m in the first year, rising with inflation. This Pool is "Unitised" into (say) a million "Units" or "millionths". Each Unit consists of one millionth of the economic interest / "ownership" of the pool of properties and carries an income of $30.00 in the first year, rising with inflation thereafter. It is now simply a question of the market price of these Units: at $1,000 per Unit the initial return is 3%. The proceeds of a sale at this price would be $1bn, and this would pay off the debt at 100 cents on the dollar. At $750 per Unit the initial return would be 4% and the proceeds $750m or 75% of the nominal value of the debt. And so on.
A portfolio of 5,000 25 year mortgage loans @ 6% pa average $200,000 to a total value of $1 billion. Each borrower must currently repay $1303.77 per month or $15,645.24 pa for the life of the loan.
A rental is set at an "affordable" level - (say) an average "affordable" rental of $500 per month or $6,000 pa and this rental is then Index - linked. This gives a total Rental Pool of $30m in the first year, rising with inflation.
This Pool is "Unitised" into (say) a million "Units" or "millionths". Each Unit consists of one millionth of the economic interest / "ownership" of the pool of properties and carries an income of $30.00 in the first year, rising with inflation thereafter.
It is now simply a question of the market price of these Units: at $1,000 per Unit the initial return is 3%. The proceeds of a sale at this price would be $1bn, and this would pay off the debt at 100 cents on the dollar.
At $750 per Unit the initial return would be 4% and the proceeds $750m or 75% of the nominal value of the debt.
And so on.
The key point is that the higher the level at which the initial "Capital Rental" return is set, the less likely it is that it will be paid in its entirety, and therefore the less "certain" it is, and the more risky it is.
Risk does not lead to Reward: Reward leads to Risk. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
the Doods' plan will carry beside it an informal FBI watchdog to detect those practices. they can be detected now that there are on investment baks.
And we shoudl remember that nobody cares abut hedge funds as long as no private bank holds stakes on them... and soon they will not have it.
Another point, even if a hedge fund with no oversight wanted to follow the path you indicate because he has at the other side a bank too big to fall, the FEd and the FBi can crack him down if the problem is not systemic (if the banks depend signficatively on hundred of ehdge funds revenues for part of their assets , then I think nationalization is the only option).
but if hedge funds effects are low (as I think theya re),a dn the FEDs go with the FBI, the Dodd bill seems workable if we put the tag at a couple trillion dollars at the end of the day.
A pleasure I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude
And for common shareholders, the size of the public authority preferred holding is known up front, rather than being a subject of speculation regarding how the sale of the shitpile will work. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
This is a scam by having a Dodd plan vs. Paulson Plan. Look at the players-Dodd is the Senator from Connecticut who has been bought by the finance and insurance industry. Paulson when he was CEO of GS was shorting the same financial instruments they were selling the previous year.
You cant trust people who are saying they want to save a banking system which has allowed the greatest inequality of income since the 1930's and contribute only 7% to the GDP but take home 40% off all corporate profits.
Why even compare. The government should nationalize all the deposits and good loans of these financial institutions and let the banks go under with the bad loans. When the banks try and come out of bankruptcy;they have a choice either they have stringent regulations on who and how they will loan and will get back the previously government nationalized deposits and good loans if the depositors and good loans wish to go back to the bank or the bankrupt banks start from scratch or dont come out of bankruptcy.
The government then creates its own national credit unions or whatever and has the good deposits and loans secure there.
What these criminals-not one indictment in this whole mess so far nor any reregulation in exchange for previous bailouts-want is to be able to keep a sick system alive.
And we havent even factored in the coming defaults of the Alt A mortgages which are due for resets over the next 16 months.
What are we doing listening to these guys trying to extend their criminal practices with our continued operation because they are threatening to blow up the world finance system which doesnt work anyway and regardless of a bailout; the finance system will have to be completely overhauled if finally the people are to be protected instead of a proverbial few bankers compared to the hundreds of millions of people they have harmed.
The whole thing smells like the way Bush rammed (sorry about the verb) home the Iraq Invasion.
Call them on their bluff and see ifthey dont come back for a much smaller handout to use for their cronies with total oversight.
Or more like, I just wasn't inventive enough to fit it into my rant!
See The Shawshank Redemption. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
The point of the BoJ action was to drive the cash rate down as low as it could go ... effectively 0.1%. That led to the swing in the Yen exchange rate from an Importers rate to an Exporters rate, which supports the monetary policy.
No monetary policy ever works one-handed, and the other half of the policy to allow Japan to weather the storm caused by the massive restructure of production by Japanese corporations from roughly 90% domestic value added to roughly 60% was an extended period of very high deficit spending.
That massive restructure knocked the legs out of domestic investment in plant and equipment in Japan for a decade. But without the move to the for-most-intents-and-purposes 0% cash rate and big government stimulus, the "lost decade" would have been a Depression rather than a decade of relative stagnation punctuated by three recessions. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
(One question: what exactly is the "cash rate"?) *Lunatic*, n. One whose delusions are out of fashion.
