So we know the Obama administration is close to announcing yet another major bailout of the banking system, and it appears they’re going to throw all kinds of noodles, cooked at various temperatures, against the wall. Bloomberg says that asset price guarantees are built into it, WaPo says the government will perform “triage”. Whatever it is, it can all be boiled down to: Taxpayers footing the bill before shareholders and bondholders do.
Yves Smith at Naked Capitalism has a great rant about the plan, starting off with the great line: “Dear God, let’s just kiss the US economy goodbye.”
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).
Why is this a bad idea? Let’s turn to a study by the IMF of 124 banking crises. Their conclusion:
Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
In case you had any doubts, propping up dud asset values is a form of forbearance
Not that propping up the existing banks and their executives should be that surprising. Our whole approach to the economic crisis has been to try to figure out how we can get back to the status quo. How can we get home values back up to old highs. How can we get consumers to max out their credit cards again. Other than in rhetoric, there’s actually been very little interest in Obama’s favourite word: change.
More from Yves:
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 labelled 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 labour 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.
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