Tag Archives: Zombie Banks

The Geithner Approach

Calculated Risk has a great post with graphs, illustrating Tim Geithner’s plan to stabilize America’s financial system into a constellation of zombie banks and welfare queens.

The Geithner approach is to keep injecting capital into the banks to cover the losses. This is known as the “Zombie” bank approach.

In essence the balance sheet looks like this with liabilities greater than total assets. To make the zombie balance sheet “balance”, I’ve added “??????” to the assets.

These “??????” assets are either future retained earnings or additional money from the government. Although the bank is balance sheet insolvent, the bank will never be business insolvent because the government will continue to provide money to cover losses.

via Calculated Risk: Bank Balance Sheet: Liquidity and Solvency, Part II.

A “Part I” is also available,

The latest awful idea from Timothy Geithner

You have to read this New York Times article.

The summary at Calculated Risk barely begins to cover what Timothy Geithner is planning.

Here is Geithner’s plan: for every $3 investors put up, the government will match $97. Investors cannot lose anything beyond their initial investment, so the worst outcome for investors is losing that intial $3. The government money will be form of low-interest loans (secured against that $3), so nearly all the profits will go to private investors.

Geithner’s political ability has not imrpoved after the AIG fiasco:

The uproar over the American International Group’s bonuses has not stopped the Obama administration from plowing ahead. The plan is not expected to impose restrictions on the executive pay of private investors or fund managers who participate.

The best part? Only bailed-out zombie banks / primary dealers, like Citi, can participate. So if you want to get in on this, you need to (a) be rich enough to be a hedge funds and (b) pay the appropraite fees to Citi, which will take you on if it wants. You better not hire foreigners, either.

The Focus on AIG

Many people are talking about AIG. Some are losing focus. One is Chris Dodd, who denied writing the portion of the Obama Stimulus that protected AIG bonuses, before “remembering” that he did write it at the behest of Geithner.

Another person losing focus is Barack Obama, who seems to be poorly served by both his Treasury Secretary Timothy Geithner:

The Weekly Standard
At his bizarre town hall last night, President Barack Obama joked that “Washington is in a tizzy” over AIG and the $165 million in bonuses to be paid to its executives. The New York Times yesterday quoted White House chief of staff Rahm Emanuel complaining that the whole affair was a “distraction.” At Tuesday’s press briefing, White House press secretary Robert Gibbs could not even provide a rough timeline of the administration’s handling of the AIG affair.
Yes, it’s true that the bonuses represent less than one percent of the total bailout money that has gone to AIG. And yes, there are legitimate points to be made about retention bonuses in general and (though less persuasive) retention bonuses for these AIG employees. But it has been clear for a while that something — an event, a comment, a cable news tirade, a speech — was going to focus the growing public anger over bailouts and government giveaways.

Sadly, some people losing focus on AIG are my friends. Some people even think that taking the bonus money back from AIG solves anything!

For instance, my friend Adrian writes :

And regarding the scariness of punitive tax – there’s nothing wrong with following the letter of the law. The IRS code says “reasonable” salaries are deductable for tax purposes. These bonuses are obviously not reasonable. So, don’t allow AIG to deduct them, problem solved.

Of course, Adrian is wrong. Adrian’s suggestion is as sensible as punishing a women who has been raped by stoning her, or (if your wallet is lifted) withdrawing some more cash from the ATM, and considering everything back to normal.

While some AIG stock is still held by non-government investors (about 20%), this is easily wiped out (and should be too). AIG’s largest stockholder – and largest creditor – is the US government. Making AIG pay back the bonuses, or making AIG to pay more tax, or whatever, is as sensible as responding to a theft against the federally owned United States Postal Service (USPS) by making USPS pay taxes to the federal government.

The best thing to do is to levie a 100% excise tax on these bonuses.

Of course, this will hurt AIG and similar zombie banks. It will make individuals doubt the ability of these firms to actually follow-through with contracts, and deprive AIG, zombie banks like Citi, and others of talent. Hurting AIG and zombie banks is a good thing. The TARP-funded zombies are a complete disaster, a guarantee by the federal government that as long as you have government friends, you can never go bankrupt. TARP-funded Zombies like AIG and Citi should be so eviscerated that any company thinking of a bailout will be s o afraid of arbitrary and capricious federal oversight that it will not ask.