Tag Archives: banks

Obama pretends to be tough

Politico has a quote little piece about how Barack Obama is pretending to stand tough against Wall Street’s raid on the treasury.

Of course, the only reason Wall Street is actually raiding the Treasury is because of Obama and Obama’s Treasury Secretary, Timothy Geithner.

Obama has already spent tens of billions on corporate welfare on his favorite banks and other financial institutions, such as Citi and Goldman Sachs, all while every week sees the federal government seize local and regional banks.

Citi and Goldman Sachs have enough money to spend on Washington lobbyists, and butter up the Obama administration.  More honest bankers do not.

Bailing out Citi

When people say that Geithner’s plan is needed or that mark-to-market is “unfair” because the banks have assets that they have to price at $0, they are telling untruths.  This may be because they wish to exaggerate for rhetorical effect, are ignorant, or else are lying.  Geither’s plan and the rollback of mark-to-market transparency both exist because banks bought assets at bubble-era prices, and but they can no longer sell them at bubble-era prices.

Tim Geithner is trying to change this. 

. Despite bank and Administration smoke-blowing to the contrary, the problem with the so-called toxic assets on bank balance sheets is NOT that they cannot be priced, but that banks do not like the prices on offer from willing buyers. We have read anecdotes suggesting that the gap is as big as bank valuation 90-95 cents on the dollar versus market prices of 30 cents, but the typical example is bank holding price of 80 cents versus market of 30 cents.

So let us repeat, the purpose of this program is NOT price discovery, and any claim along those lines is a lie. The purpose is to keep the banks from recognizing losses that already exist, by reversing them via unloading the paper at a fictitious high price and dumping the loss on the taxpayer.

via naked capitalism: Treasury Trying to Defend Bank Gaming of Public-Private Partnership.

With our corrupt politicians serving zombie banks, it’s no wonder the top three banks in the world are now Chinese.

A Novel Criticism of “Mark-to-Market” Accounting Rules

One of the many ways hat Obama is artificially inflating the value of bank stocks is by allowing “mark to market” accounting rules.

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Bankers often complain about mark-to-market accounting rules these days. To see what they wish for, and how they would have to value their assets in order to operate like other actors in the global marketplace, consider the following thought-experiment.

Say you have $6. You spend $5 of that monie on a can of coca-cola, because you are foolish and easily tricked. You now want to go into the insurance business, but because this means that the quality of life of many people you do not even know would be in your hands, the government has regulations to make sure no fly-by-night insurance companies run by foolish and easily tricked CEO get off the ground.

“You can be in the insurance business,” the government official says, “as long as you prove to me you have at least $3. This way, we know you aren’t a complete fraud or loon.

“No problem!” you say. “I have $6! $1 in cash, and $5 worth of one can of coca-cola!”

At this point, the government regulator gets a headache from your attempt to make him as recklessly optimistic about pop can futures as you were, and points you to a sign. “Mark-to-market accounting rules only.” “I’m sorry,” says the regulator,” but unless you can prove that someone, somewhere, is selling the can of pop for $5, you can’t say it’s worth $5 to me. That means, you can’t go into the insurance business!”

This is what bankers are complaining about. Why aren’t the assets they bought for a price accounted for according to that price? Why can’t their wishes become your reality?

But, in this thought experiment, you go outside, and check all the stores, gas stations, and pop machines for their prices. Walmart is selling pop for a quarter. The machine at Target is going for 50 cents, and the machine at your kid’s school is at 60 cents. In the mall a can costs $1, and at the airport across town is a machine selling a can of coca-cola for $2.

Eureka! You found it! You can go into the insurance business! And if a plane crashes, a trail derails, or a comet strikes, you’re covered! You can just sell your cans of cola for $2!

Now for several years these are going well. Of course, you complain that the government is only allowing you to “mark-to-market.” Go to the movie theatre (it’s closer than the walmart, and you need them now!), buy a can that cost about 12 cents to distribute, and is for sell elsewhere for 50 cents, for $5 (as I said, your foolish and easily tricked). Account for it as $2 (because that’s what their charging for it at the airport), and sell insurance policies. You’ll need to borrow money for this, but you secrelt know (somehow) that the real value of the pop can is at least $5. For every $2 in policies you sell, you “cover” it with $2 worth of a pop can you paid $5 for, but expect to get rich from in the future! What a profit! life is good!

But then tragedy strikes. A plane crashes, a trail derails, and a comet strikes. Many houses burn down. People look to you for money. You don’t have it. Cash if fact, capital is theory, and you are sort of funds and way long on pop cans.

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So what do you do? Declare pop cans to be “toxic assets,” go on the Treasury Department, and demand a bail-out. Blame mark-to-market accounting while you’re at it, because the market price for pop cans (a measily $2, according to your accounting) is artifiicial low! You paid $5 for them!

Fortunately, in this thought experiment you have made the right friends, and your pals in the White House and Congress give you billions to cover the cost of insurance policies you sold, but could never cover in the first place. At first the government says you need to pay them back (the government takes preferred shares in exchange for the money), and then when you complain loudly enough, the government clarifies that you only will need to pay some fraction of the profit you make when pop cans magically cost more than $5 (by converting the preferred shares into common shares).

So what do you do? Go on CNBC, and complain about mark-to-market accounting rules! They are making you account for your wealth at only $2 a can, instead of $5, even when there are “no buyers.” (By this, you mean that only people nearly as optimistic and risk-taking as you will pay $2).

This is how mark-to-market accounting rules work. Mark to market accounting rules work as a bailout to banks, buy allowing them to list assets at prices too high to sustain regular market operations. The price of the marked-to-market assets only appears to be as high as it is because the banks aren’t selling the assets they do have. The price required to find many buyers is much lower than the price to find just a few buyers. In the same way, you can probably find someone willing to pay $2 for a can of coca-cola. If you want to sell a million cans, however, you’re looking at something closer to 50 cents.

Why Obama wants to bail out the banks

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If Obama is President, it’s a fair guess that there’s a new plan to give your taxmoney to shareholders in banks

Calculated Risk: WSJ: Leaked Details on Public-Private Entities Buying Bad Bank Assets
By offering low interest non-recourse loans, these public-private entities can pay a higher than market price for the toxic assets since there is no downside risk. This amounts to a direct subsidy from the taxpayers to the banks. It is amazing how many different ways they’ve tried to recycle the same bad idea.

Now, I don’t think this is because of campaign loyalty to bankers (though I am sure they gave far more to Obama’s campaign than you and your friends did). And it is not because Obama is setting up an administration of hacks and toadies (though he is, why else do you think a political nothing like Kathleen Sebelius was chosen as HHS chief over Governor / Chairman / Dr. Dean?).

It is because Obama does not know what he is doing.

As I said wrote in June 2008

An Obama Presidency offers a reasonable hope in the Establishment: a vote for Obama is a vote for the status-quo. As the status-quo is one of the best in world history, that’s a solid argument.

As it relates to Obama, many commentators are now raising the hope that Obama will be bureaucratically captured in the same way that Petreaues and Gates were. Even better for us, Obama will have little operational control over what actually happens.

When America elected Barack Obama, it said by a majority vote, “We like the powers that be as they are!” Given this, it’s natural that Barack Obama should divert funds from the treasury to banks. In the Age of Obama, this Age of the Establishment, the simple fact that banks made catastrophically bad decisions is no reason they should lose money, power, and influence.

Is financial innovation worth it?

Half Sigma’s post has face validity, but I am aware of my lack of knowledge of how the financial system works.  So instead of agreeing with it, I will ask for comments so I can learn more.

Government run industries tend not to be very innovative, but the only useful innovation to come out of the banking industry in the last century is the ATM machine. Otherwise, when banks innovate, that’s when it’s time to hold on tight to your wallet. Bank innovation tends to fall into two categories: (1) sneakier ways to trick people into getting into more credit card debt and pay more outrageous credit card fees; and (2) complicated financial products like mortgaged backed securities and derivatives which have led to the recent financial collapse which not only ruined that banking industry but took down the whole economy with it.

via Half Sigma: What’s wrong with nationalized banks?.

Thoughts?

Bank Nationalization

This sounds like a good idea (really):

Fed eyes Nordic-style nationalisation of US banks – Telegraph
The Fed has been criticised for its rescue of Bear Stearns, which critics say has degenerated into a taxpayer gift to rich bankers.

A senior official at one of the Scandinavian central banks told The Daily Telegraph that Fed strategists had stepped up contacts to learn how Norway, Sweden and Finland managed their traumatic crisis from 1991 to 1993, which brought the region’s economy to its knees.

It is important that neither the owners nor the upper management of failed banks be bailed out. Capitalism is the processing of risk through profit: allowing failing companies and executives to profit turns the free-market on its head. Currently in the United States, bad companies and executives are able to hold the economy hostage, because if they go down, their companies go down, and so do their lenders and borrowers.

“The law was amended so that we could take 100pc control of any bank where its equity had fallen below zero. Shareholders were left with nothing. It was very controversial,” he said.

Here here for confiscatory nationalization of failing banks and investment houses!