Wednesday, February 04, 2009

Undercapitalized

I think that the banks have been investing wisely. Wall Street paid enormous amounts to put The Precious into the White House. They are getting their dividends now. Yves Smith of naked capitalism has been going hammer and tongs at the proposals coming out of the White House. Read the whole article, but here are some key points from his her recent post, The Bad Bank Assets Proposal: Even Worse Than You Imagined (my emphasis throughout):


Dear God, let's just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the Washington Post's latest report is accurate, is about to embark on a hugely expensive "save the banking industry at all costs" experiment that:
1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.

The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

***

What we have from Team Obama is a bigger abortion of a :"throw money at bad bank assets" plan that I feared in my worst nightmare. And (when we get to the Post preview), they have the temerity to invoke triage to make what they are doing sound surgical and limited.

Those who remember the origin know that triage means focusing on the middle third of the wounded on the battlefield : leaving the goners to die, leaving those wounded but stable to fend for themselves for the moment (they were in good enough shape to wait to be transported or hold on to be treated later). The middle third, those in immediate danger but who might nevertheless be salvaged, got top priority.

The concept of "triage" recognizes that resources are limited, tough decision need to be made, and some are beyond any hope. But in Team Obama Newspeak, triage means everyone can be saved because resources are presumed to be unlimited:

***
So we the taxpayers are going to eat a ton of bank losses that should instead be borne first by stockholders and bondholders This program should be labeled the Pimco bailout plan, since the giant bond fund holds a lot of bank debt. That show what a fiction Obama's populism is. It's mere posturing and empty phrases. Look at where the dough goes, and it is going first and foremost to the big money end of town.

Now I do no labor under the delusion that there are cheap or easy ways out of our financial sinkhole. People are suffering, and we are only partway through the process of contraction and writeoffs. I heard of a suicide today, a jewelry dealer who was $400,000 in debt (also owed a lot of money but unable to collect) who threw himself off 10 West 47th Street (from someone else in the building, this is no urban legend). A tragedy, and a visible one, and there is plenty of less acute but no less real trauma afoot.

But Team Obama is taking the cowardly approach of distributing the costs among the most disenfranchised group in the process, namely the taxpayer, when there far more obvious and logical groups to take the hits. Shareholders and bondholders bought securities KNOWING there was the possibility of loss. A lot of big financial institutions have been on the ropes for over a year. A security holding is not a marriage. When conditions change, prudent investors reassess and adjust course accordingly. If anyone is long a lot of dodgy bank paper now, they have only themselves to blame. Any why are rank and file bankers still exempt from pay cuts when the workers in another failing US industry, autos, expected to take big hits?

***

The most amazing bit is the government acts as if it has no leverage. Look how Paulson sent teams in to inspect the accounts of Fannie and Freddie and put them into conservatorship. The reason it is obvious that this program is a crock is that it has ben cooked up in the complete and utter absence of any serious due diligence on the toxic holdings of the big banks.

As we discuss in a separate post, the one punitive element, executive comp restrictions, are mere window-dressing. Welcome to change you can believe in.
Ah, yes, the triumph of Whole Foods Nation, where we will all be progressive, exercise regularly and floss after every meal, where the Blogger Boyz will call the shots and rule the world with their mad posting skillz. Eh, not so much.

An inability to escape conventional wisdom, along with weak-kneed capitulation to the myth of "bipartisanship" combined with a lack of political vision is what Krugman warned us about as regards The Precious about this time last year and damn if the Shrill One wasn't right. Paul needs to change his name to Cassandra.

We are already 10% of the way through the first 100 days of the Obama administration (and I'm only counting business days, mind you) and we are watching him squander the political capital of the election.

Anglachel

PS - And the Shrill One welcome Yves Smith into the Ancient and Hermetic Order of the Shrill:

Shock and oy

Martin Wolf has it right:

First, focus all attention on reversing the collapse in demand now, rather than on the global architecture.

Second, employ overwhelming force. The time for “shock and awe” in economic policymaking is now.

Unfortunately, what is coming out of the US is desperately discouraging. Instead of an overwhelming fiscal stimulus, what is emerging is too small, too wasteful and too ill-focused. Instead of decisive action to recapitalise banks, which must mean temporary public control of insolvent banks, the US may be returning to the immoral and ineffective policy of bailing out those who now hold the “toxic assets”.

You know, it was widely expected that Obama would have a stimulus plan ready to pass Congress even before his inauguration. That didn’t happen. We were told that this was because the economic team was working flat out on the financial rescue.

In fact, when it comes to bank rescue it’s hard to see much evidence that anything was accomplished during all that time; the team is still — still! — running ideas up the flagpole to see if anyone salutes. And the ideas look remarkably bad. (Welcome to the Ancient and Hermetic Order of the Shrill, Yves.)

Meanwhile, when it came to stimulus legislation, when Obama finally introduced his economic plan he immediately began negotiating with himself, preemptively offering concessions to the GOP, which voted against the plan anyway. (And Obama appears, in the name of bipartisanship, to have thrown away a Senate vote he may well need.)

As a wise man recently said, failure to act effectively risks turning this slump into a catastrophe. Yet there’s a sense, watching the process so far, of low energy. What’s going on?

9 comments:

Shainzona said...

I read two things this AM that left me rather shocked, er, I mean, surprised. NOTHING shocks me about Obama.

First, the Greatest Stimulus Plan Eveh is not BO's plan - but was put together by Dems in Congress. Hence, BO has no policy and that's why he's using "shuttle diplomacy" between the Repubs and Dems...he gives with one hand and takes with the other.

And second, the Greatest Executive Compensation Plan Eveh does not apply to those companies that have already received bail-out funds. Say what?

Falstaff said...

Welcome back, Anglachel. You've been missed.

Alice said...

You are, as always, right on the money. It is the rape of our future. Obama seems to be paying off Wall Street for financing his election. If you listened to the whistleblower today, you would be even more sick. What is so insane is how Markopolis talked about how "corrupt FINRA" is. And who did 0bama appoint to head the SEC? None other than Mary L. Shapiro, the former head of FINRA. I guess we can now expect an incompetent SEC to be incompetent AND corrupt!!!!!
We are done. Stick a fork in us now.

show me said...

What a relief to see you back!

It appears the only thing Obama can sell is himself. Unlike Shainzona, I have been shocked at his seeming cluelessness.

Since the beginning so many have been extolling his intelligence and I have never really seen it. I know he is bright but everything with him is self referencial.

For the last week I have been engaging in wishful thinking...the Clintons could maybe save us. But sadly for the country and our children and grandchildren they will never get the chance.

salmonrising said...

Naked Capitalism blog star, Yves Smith, is a GIRL, former trader, very very smart and gorgeous as well. Her female identity was unknown to most regular readers, including moi, until she linked to a video in which she appeared about 4-5 months ago. Male readers could not refrain from commenting on their surprise that (1) she's a woman and (2)good looking as well as brainy ...sigh.

Anglachel said...

Salmonrising,

Um, do you mean she's a woman? A girl is a child. No, I did not know, as Yves is a traditionally male name and I didn't see the video you mention. Thanks for the info.

Anglachel

Koshem Bos said...

It feels like a class reunion; it was way too long and the blogs diet was not too satisfying.

Beyond the mystic air around Obama and his great transmission, there was thick fog and emptiness.

Daschle and Geithner showed two inept tax cheats leaving Bill as the only vetted guy.

Obama lacks vision and depth. We knew that a year ago although way too many choose to be blind. He doesn't understand what it takes to get the country going again; he still basically believes in the old powers and fails to see that Citi, BofA and Chase may have to go.

So, Yves is good looking. Why would I care?

CutePeachPanda said...

Yves Smith on an econobloggerb panel last year: http://video.google.com/videoplay?docid=-5465105011761307606&hl=en

Double Jointed Fingers said...

Welcome back. An excellent assessment of a bad package. But, then again, it's about the marketing, isn't it?