Posts Tagged ‘bailout’

Keynes pulls a Lazarus

8 December 2009

MSNBC.com:  “Obama outlines bailout for Main Street”

President Barack Obama outlined new multibillion-dollar stimulus and jobs proposals Tuesday, saying the nation must continue to “spend our way out of this recession” until more Americans are back at work.Without giving a price tag, Obama proposed a package of new spending for highway, bridge and other infrastructure projects, deeper tax breaks for small businesses and tax incentives to encourage people to make their homes more energy efficient….

A major part of his package is new incentives for small businesses, which account for two-thirds of the nation’s work force. He proposed a new tax cut for small businesses that hire in 2010 and an elimination for one year of the capital gains tax on profits from small-business investments.

Obama also proposed an elimination of fees on loans to small businesses, coupled with federal guarantees of those loans through the end of next year. He called for more government spending on infrastructure projects such as roads, bridges and water projects and for new tax breaks for consumers who invest in energy-efficient retrofits in their homes.

Works for me.  While I’d prefer to see more direct job creation in the form of federal jobs programs a la the Works Progress Administration or other New Deal agencies, my main reaction is what a difference a couple of weeks makes.

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Well, it’s a start

16 July 2009

Two of the most odious contributors to the financial crisis were the government’s too-big-to-fail policy and the brazenness of many financial institutions, including the credit rating agencies, in helping to disguise and then market so many garbage securities.  So two of this week’s developments look like good news, however small:

(1) The federal government refused a second bailout for The CIT Group. (You can read about their first bailout, last December for $2.3 billion, here.)  CIT is expected to file for bankruptcy, which isn’t great news, as CIT is the largest lender to small businesses and some of that lending may stop, and as the government/taxpayers’ $2.3 billion stake gets wiped out. But it may be the lesser of two evils.  As the WSJ points out, CIT is only one-tenth the size of Lehman Brothers,and the systemic risk in refusing this request seems much less than the moral hazard risk of granting it.  (I must admit, the WSJ does seem to have the best conservative editorial page in the business. Not that that’s my highest compliment.)

(2) Calpers, the largest pension fund in California, is suing the three leading credit rating agencies for providing “wildly inaccurate” AAA ratings of structured investment vehicles (SIVs) of various dodgy assets including subprime mortage-backed securities. The amount of the suit wasn’t disclosed, but Calpers bought $1.3 billion of bad SIVs in 2006, so that’s a good lower-bound estimate. While market discipline would be preferable to billion-dollar lawsuits, that horse escaped from the barn a long time ago. This is the first I’ve heard of anyone holding these agencies accountable.

Trophies for everyone!

26 April 2009

“Too big to fail” evidently means “too big to fail a stress test,” too.  Although the results of the recently conducted stress tests on the nineteen largest U.S. banks won’t be made public until May 4, the advance word on Friday, April 24 was a Whole Lotta RosieFrom the NYT:

‘On Friday, the Federal Reserve reported that the banks whose books it had analyzed recently had enough capital to offset a raft of new losses, . . .’

So everybody’s solvent!  And those toxic assets are both nutritious and delicious!  I bet my students would love it if I could get Tim Geithner or the Fed to write my final exams — nobody would be allowed to fail.

‘. . . reinforcing the belief that the government would support the largest banks even if their financial health eroded, and buoying the stock market.’

Um, didn’t the government already do that, to the tune of $700 billion, not counting the Fed’s waves of loan/subsidies?  But of course those subsidies came with some conditions, from the understandable ($500,000 pay cap) to the asinine (don’t hire no foreigners), so the big banks are naturally eager to pay back those loans and return to looting.  As long as they can still count on a fresh round of bailouts when their losses become too gaping to hide, they’re in a perfect position.  The old mantra of “privatize the profits, socialize the losses” doesn’t quite convey the apparent duplicity at work here.  It leaves out the “fabricate the profits” and “hide the losses” steps.

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Geithner 3.0: What a difference a day makes

24 March 2009

This is the most sensible thing I’ve heard from him yet — a proposal for FDIC-type powers for the government to temporarily take over too-big-but-failing-anyway financial institutions like AIG, clean house, and sell off their remaining assets.   I once thought the FDIC already had those powers, but apparently that’s so only for regular commercial banks, not bank holding companies or other financial Goliaths.   (FDIC Chairperson Sheila Bair explains it here.)

The new proposal doesn’t necessarily conflict with anything in yesterday’s plan to subsidize the worst financial institutions by overpaying for their worst assets, but it does suggest that the Obama Administration really does have plans to regulate them and is not kidding itself (Pollyannish recent rhetoric  to the contrary) that all of them are fundamentally sound.

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Aieeee, AIG! (Part 2)

18 March 2009

Excellent-sounding suggestion about how to stop those abonimable AIG bonuses, from Bill Black, Tom Ferguson, Rob Johnson, and Walker Todd (The Huffington Post, 16 March 2009).  Even if it doesn’t succeed in stopping the bonuses, their suggestion to break off AIG’s toxic Financial Products Division (like a hedge fund attached to an insurance company, as Ben Bernanke described it) from AIG’s main business, and then treat the Financial Products Division like the bankrupt entity it is, is very appealing.

Dean Baker makes much the same point:  bankrupt companies don’t get to pay bonuses.

The NYT has another sensible editorial about AIG and who it’s been paying off with the $170 billion in bailouts it’s received so far.   Under the bailout, the company has been paying off many credit default swap (CDS) holders in full, which is a great way to burn through hundreds of billions of dollars with lightning speed.   And now we know that a good chunk of those billions went to CDS creditors like Goldman Sachs who, like AIG, are wards of the state.  (To be fair, a substantial but smaller amount of CDS payouts went to state governments.)  The only relief I can think of is Herb Stein’s old line:  the good thing about something that can’t go on indefinitely is that it won’t.

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Aieeee, AIG! (Part 1)

15 March 2009

$61 billion in fourth-quarter losses, tens of million in new bonuses, mostly to people in the most toxic financial products division on Earth, namely their Financial Products division.

And the bailouts just keep on comin’.   Word is that the bonuses will be restrained in the future, but why not in the present, when AIG has already received $170 billion in government funds?  AIG’s line is that the bonuses were contractual obligations made before the company’s implosion, but aren’t bonsuses supposed to be paid out of company profits?  AIG has gone from hosing its shareholders to hosing the taxpayers.  And if the government has a plan for dismantling this atomic bomb of a company, it’s doing everything in its power to suggest otherwise.   Seems that “Welfare Cadillac” was written about forty years too early:

UPDATE, 16 March 2009:  Sunday’s NYT had a sensible editorial on the matter.   News of the backlash and the identities of AIG’s counterparties was all over the wires on Monday.  Warren Buffett’s warning that credit derivatives were financial weapons of mass destruction looks truer than ever — AIG’s bottomless obligations now seem to be married to the federal government’s bottomless pocket.   While the systemic risk from letting AIG fail was huge (and no doubt still is), is it really a worse risk than all-out banana-republic bankruptcy for the U.S. government?

UPDATE, 17 March 2009: Actually a week old, but James Hamilton’s AIG analysis and recommendations on Econobrowser are worth pondering, as is the long comments thread.

Counterparty confidence

7 March 2009

Seen on a church sign in Clay, NY:

SOME TRUST IN JOBS

SOME TRUST IN THE BAILOUT

WE TRUST IN OUR GOD

Jon Stewart is a national treasure

6 March 2009

Jon Stewart’s takedown of Rick Santelli and CNBC on “The Daily Show”

Hat tip: Terry.

UPDATE, 13 March 2009:  CNBC’s answer to Dick Vitale, Jim Cramer, returns fire, opening the door for another hilarious Stewart takedown (don’t miss the “Dora” clip at the end).  And last night’s “Daily Show” included what sounds like a hard-hitting interview with Cramer (I haven’t watched it yet); the much longer unedited version is available on Comedy Central’s website.

Shock therapy for the banks?

19 January 2009

Thomas Friedman has a thought-provoking column in Sunday’s New York Times, titled “Time for (Self) Shock Therapy.”  Unfortunately, one of the thoughts provoked is “A lot of this is oversimplified,” but there are still some good ideas and some good exposition in it.  On the eve of the inauguration, Friedman suggests that President Obama’s first White House meeting should be with the presidents of the 300 biggest banks, and he should tell them there’s a new sheriff in town.  The first paragraph of Obama’s imaginary indictment of the bankers is nicely put, especially the heart metaphor:

“Ladies and gentlemen, this crisis started with you, the bankers, engaging in reckless practices, and it will only end when we clean up your mess and start afresh. The banking system is the heart of our economy. It pumps blood to our industrial muscles, and right now it’s not pumping. We all know that in the past six months you’ve gone from one extreme to another. You’ve gone from lending money to anyone who could fog up a knife to now treating all potential borrowers, no matter how healthy, as bankrupt until proven innocent. And, therefore, you’re either not lending to them or lending under such onerous terms that the economy can’t get any liftoff. No amount of stimulus will work without a healthy banking system.”

Friedman then has Obama announcing a thinning of the herd, kind of like FDR’s bank holiday of 1933, whereby the healthy banks would be recapitalized and the sick banks liquidated: (more…)

Geithner’s tax problem, Goolsbee’s solution?

14 January 2009

I’d been expecting Treasury Secretary-designate Tim Geithner to come up for some grilling in his confirmation hearing, over his role in the TARP bailout and in the orgy of deregulation of the late 1990s.  (Neither of those things is necessarily disqualifying in my eyes, as long as he can show that he’s learned from his and other people’s mistakes.)  But as with past nominees, from John Tower to Zoe Baird and Kimba Wood, it’s the small stuff of dubious relevance that tends to blow up — and distract Congress, the media, and the public from issues of actual substance.   The main distraction this time: Geithner failed to pay $43,000 in federal taxes.

On the surface, this looks pretty bad:  the guy who would be the head of the agency that oversees the IRS, failing to pay his Social Security and Medicare taxes for four years in a row (2001-2004).  But not so fast.   Most of us have those taxes withheld directly from our paychecks and don’t think about them otherwise.   Geithner, by contrast, was working for the International Monetary Fund (IMF), where employees don’t pay federal income tax.  Several of my grad school friends went to work for the IMF, and I distinctly remember them saying, it’s great, we don’t pay taxes.  The incoming administration’s talking points on the matter (take them with a grain of salt if you want) note that this confusion is very common among IMF employees.

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