Britain Announces 2nd Banking Rescue Plan..

[Sam Spade]

http://biz.yahoo.com/ap/090119/eu_britain_bailout.html

As I have said before, most banks in the world, especially most major banks in the world, are insolvent and should fail.  Propping up these dead bodies, like a bad Weekend at Bernie's movie, will only worsen the contraction and puts the stability of our governments' borrowing abilities in severe danger of collapse (i.e. bond market dislocation and possible debt default). 

For a preview of what could occur with the continued stupidity I see, examine what's happening and about to happen in the Ukraine (I do suspect the Ukraine will rejoin with Russian sometime in the near future - of course Russia's economy is no better in reality)

http://www.bloomberg.com/apps/news?pid=20601109&refer=home&sid=a1JVGaW3TqqA

Also, remember - the US has it bad, Europe/UK has it worse.  That's the story for this year, at least.

Anyway, this "rescue" will work about as well as the first one (which got such useless praise)...

Also - European/UK banking stocks got gangraped again today (they got gangraped last week too).  More here.

http://online.wsj.com/article/SB123235217494094623.html?mod=yahoo_hs&ru=yahoo

[Purple State]

Paul Krugman hit this nail on the head in his Op-Ed piece for the NYT today, found here.

In short, these banks are completely insolvent but refuse to admit it. They are valuing these toxic "assets" (if we must actually call them that) at far above their actual market price, creating a situation in which they claim to be solvent when in truth they have already failed.

The solution would be to either a) take control of these banks, purge their systems of bad assets, and sell them back to new owners OR b) separate the bad assets from the good ones into a "bad" company, have the government buy this bad company at a "fair value" (which is doomed to be overpriced in order to actually be effective and keep the banks solvent), and eventually hope to make a profit on it when the market rebounds. Krugman prefers the first option. It seems that the US is likely to follow the second option (slightly more risky for taxpayers, but possibly large rewards e.g. Clinton and Mexico). Meanwhile, Europe/UK seem to have their heads shoved in the sand and are choosing a third option: throw money at the banks until they really are solvent. That may work, but it is a huge hit to taxpayers and there is no guarantee these banks will actually rebound. More likely than not they will fail a little down the road because they have no reason to change their reckless activities.

[Sam Spade]

Of course the European/UK solution won't work, but neither will the first two.  The same result occurs - in the end the government is left holding the worthless bag of assets (or in the case of Europe/UK solution, creates debt to uphold the assets before the banks fail), for which it paid trillions and trillions of dollars for (and yes, there are multiples of multiples of trillions of worthless assets out there, which grow by the day).

Unfortunately (or fortunately, depending on how you look at) for all of us, the bond market will revolt before we get to the end of this "plan".  That will end all of this silliness for good, while screwing our citizens.

[k-onmmunist]

It's either we bail the banks out, or the pound becomes worthless.

The UK is on the threshold of economic collapse.

[Sam Spade]

It's either we bail the banks out, or the pound becomes worthless.

The UK is on the threshold of economic collapse.

By bailing the banks out, you ensure economic collapse.  In fact, you ensure that it's worse than if it were to happen now.  Remember also, UK banks are more highly leveraged and less transparent than in the US.  Means probably all of them are insolvent. (well, all are insolvent in the US too, obviously, but maybe *less* insolvent - lol)

It just kicks the can down a little ways.  Can't say how long with any certainty - 3 months, 6 months, 1 year, 2 years.  I highly doubt it's much longer than that and probably within one of the shorter time frames.

The only workable solution I have read about which I think makes sense (mathematically at least), is to use the government money that is presently being used to bail out the banks (actually the UK is to the point in quantative easing where they are directly purchasing the assets) to create new banks while the other ones fail.  There should be a couple of others out there with similar results.

The key connection point in any workable plan is that the bank's insolvent debt must be defaulted.  It cannot be transferred to the government through a "bailout" or through "creation of bad banks" or whatever.  This "hide the sausage" (no serious joke intended) game only makes it worse.  It must be purged.

It will be painful.  Very.  But it will be less painful than playing this game which threatens to screw the whole of Europe (and eventually the US).

[opebo]

It's either we bail the banks out, or the pound becomes worthless.

The UK is on the threshold of economic collapse.

By bailing the banks out, you ensure economic collapse.  In fact, you ensure that it's worse than if it were to happen now.  Remember also, UK banks are more highly leveraged and less transparent than in the US.  Means probably all of them are insolvent. (well, all are insolvent in the US too, obviously, but maybe *less* insolvent - lol)

It just kicks the can down a little ways.  Can't say how long with any certainty - 3 months, 6 months, 1 year, 2 years.  I highly doubt it's much longer than that and probably within one of the shorter time frames.

The only workable solution I have read about which I think makes sense (mathematically at least), is to use the government money that is presently being used to bail out the banks (actually the UK is to the point in quantative easing where they are directly purchasing the assets) to create new banks while the other ones fail.  There should be a couple of others out there with similar results.

The key connection point in any workable plan is that the bank's insolvent debt must be defaulted.  It cannot be transferred to the government through a "bailout" or through "creation of bad banks" or whatever.  This "hide the sausage" (no serious joke intended) game only makes it worse.  It must be purged.

It will be painful.  Very.  But it will be less painful than playing this game which threatens to screw the whole of Europe (and eventually the US).

[Beet]

Eh. I suspect that allowing the existing banks to go into technical insolvency ("purge" them so to speak) would screw the whole of Europe and the US. At least this is how the governments here are thinking. Look at the eligibility requirements for the Treasury's $306 billion Targeted Investment Program:

"1. The extent to which destabilization of the institution could threaten the viability of creditors and counterparties exposed to the institution, whether directly or indirectly;
   2. The extent to which an institution is at risk of a loss of confidence and the degree to which that stress is caused by a distressed or illiquid portfolio of assets;
   3. The number and size of financial institutions that are similarly situated, or that would be likely to be affected by destabilization of the institution being considered for the program;
   4. Whether the institution is sufficiently important to the nation’s financial and economic system that a loss of confidence in the firm’s financial position could potentially cause major disruptions to credit markets or payments and settlement systems, destabilize asset prices, significantly increase uncertainty, or lead to similar losses of confidence or financial market stability that could materially weaken overall economic performance; and
   5. The extent to which the institution has access to alternative sources of capital and liquidity, whether from the private sector or from other sources of government funds."

In other words, the government believes that if one of these institutions goes down, then entire financial system goes down, unless the government spends trillions of more dollars to shore it up. And all of this would likely happen within a very short time- within a week or two, even if large spending by the Fed.

It's hard to see how the government can create new banks to fill these roles-- after all, the new banks would theoretically not be in any of the derivative positions that the old banks are, and thus the creation of new banks would not prevent panic on the derivative markets. Nor would the new banks be able to get up and running in a short enough amount of time. In short, the government would have to create an entirely new financial system out of scratch, and whichever new entities it created would probably not lend in sufficient quantities as is desired anyway.

Unless of course, we all move to central planning and socialism.

[Sam Spade]

Eh. I suspect that allowing the existing banks to go into technical insolvency ("purge" them so to speak) would screw the whole of Europe and the US. At least this is how the governments here are thinking. Look at the eligibility requirements for the Treasury's $306 billion Targeted Investment Program:

"1. The extent to which destabilization of the institution could threaten the viability of creditors and counterparties exposed to the institution, whether directly or indirectly;
   2. The extent to which an institution is at risk of a loss of confidence and the degree to which that stress is caused by a distressed or illiquid portfolio of assets;
   3. The number and size of financial institutions that are similarly situated, or that would be likely to be affected by destabilization of the institution being considered for the program;
   4. Whether the institution is sufficiently important to the nation’s financial and economic system that a loss of confidence in the firm’s financial position could potentially cause major disruptions to credit markets or payments and settlement systems, destabilize asset prices, significantly increase uncertainty, or lead to similar losses of confidence or financial market stability that could materially weaken overall economic performance; and
   5. The extent to which the institution has access to alternative sources of capital and liquidity, whether from the private sector or from other sources of government funds."

In other words, the government believes that if one of these institutions goes down, then entire financial system goes down, unless the government spends trillions of more dollars to shore it up. And all of this would likely happen within a very short time- within a week or two, even if large spending by the Fed.

It's hard to see how the government can create new banks to fill these roles-- after all, the new banks would theoretically not be in any of the derivative positions that the old banks are, and thus the creation of new banks would not prevent panic on the derivative markets. Nor would the new banks be able to get up and running in a short enough amount of time. In short, the government would have to create an entirely new financial system out of scratch, and whichever new entities it created would probably not lend in sufficient quantities as is desired anyway.

Unless of course, we all move to central planning and socialism.

Beet, I understand your points and certainly something is to be said for it.  But IMO no financial institution is large enough to be kept from failure.  That was the mentality that got us the Great Depression because Hoover did the same damn things that we're doing right now, just not in as great of sums spent.

I agree that there are some issues with the government capitalizing banks that you mentioned.  And being fundamentally a free-marketeer who believes in strong government regulation of the capital markets (which is not contradictory, btw), at some point I would push for these banks to be sold off to the private sector with Glass-Steagall recreated and strong leverage limits (and pre-1980 lending requirements). 

But I cannot agree with protecting the derivatives markets *whole hog* from collapse.  Why?  Because the derivatives house-of-cards is largely going to collapse anyway, regardless of what we do (yes, you might be screwed JPMorgan Chase).  The Feds should be examining the books of all the companies invested to see the value of the derivatives and whether or not those investing in them can be saved as companies.  In the future, there are but two solutions to derivatives: 1) Regulate the hell out of their transactions through the SEC or some similar organization; 2) Forbid them entirely.

As an alternative, I would think there might be some way to keep the institution going while purging all of the toxic debt without letting that debt get on the government books (as it has been) through some sort of pre-packaged bankruptcy, but I have no clue how it would work itself out.  This would end up screwing the shareholder but might restore some confidence. 

Our attempts so far to prop these things up have gotten us nowhere.  In fact, we're now trillions of dollars in terms of debt payments out and the banks are worse.  Heck, for all I know, the banks may collapse tomorrow, which would mean at minimum another 2-3,000 point drop in the DOW, and Europe/UK being completely screwed.  Whether it happens or not, it's going to happen at some point now as the banks are obviously insolvent.  We're just postponing the end point and making it worse for ourselves, as we open ourselves up to bond market dislocation. (and other countries open themselves up to debt default - we may too, but they're first)

[The Man From G.O.P.]

The end of boom and bust.

[Sam Spade]

Ambrose Evans-Pritchard is a perma-bear, but here he's right on in his concern here.

http://blogs.telegraph.co.uk/ambrose_evans-pritchard/blog/2009/01/20/seriously_alarmed

After re-looking at the situation, I have come to the conclusion that England is ****ed royally (no pun intended).  If it continues in the present manner by pumping liquidity, it is only a matter of time before England will experience a bond market dislocation and debt default (see Iceland).  The better solution is to let the banks go under, which will only screw their lending systems and their economy, but not their government.

Anyway, as politics goes, Labour is done for the next generation, at least.  If the Tories don't improve what will be a horrific situation after the 2010 elections, 3rd parties are not out of the realm of possibilities.

[Purple State]

Just to address everything mentioned above:

If the government continues to throw money at these banks it is, indeed, just prolonging the wait until true economic collapse. It is not plausible and should be abandoned completely as a strategy. On the other hand, these banks cannot be allowed to fail completely. The results on the entire global economy would be an incredible wave of fear and destruction. The best analogy would be Superman's reversal of the Earth's rotation: the global economy's growth would turn into rapid recession on an unprecedented level. Lending would freeze completely, investment would end, and entire branches of economic function would cease to exist.

While I agree that passing incredible debts on to the governments and citizens of the world, it is far better and far more manageable to place this debt in the hands of national institutions. Governments can burden debt far better than companies because governments, unlike companies, do not fold and collapse on their economy, but on the public. It may create a dire situation for the country's economy, but that is already the situation and that debt can be paid-off over the long run. Meanwhile, the governments will continue to exist and maintain the rule of law and popular institutions of the public will. This needs to end with the government and no one else.

[Matt Damon™]

Given how the finance sector is fundamentally parasitic and opposed to the real economy I see no problem with what you propose re: shutting down bailouts and forcing them to pay back every red cent.

[Beet]

Sam, I agree that the current solution is unsatisfactory.

But the alternative, allowing the institutions to fail, is equally unsatisfactory. Yes, the banks are in worse shape now, and yes, the governments have taken on much more debt than before. But the banks are in worse shape because they have lost money on capital markets, commercial real estate, and taken further losses in residential real estate. None of this would have been prevented if the bailout had not occurred: the losses, as you have said, are inevitable and built into the system. In fact, it is almost a sure thing that without the bailout, psychological panic factors would have made the losses far steeper than they already are: we would overshoot to the negative.

And then what? How do you rebuild the economy? Oh yes, government borrowing-- with a greatly reduced tax base. So you are back to square one.

The financial system as it is today, is functioning nevertheless much better than it would if the banks had been allowed to fail. Loans are down, but they are still being made. Interest rate spreads have come down. Companies are able to raise some money on the commercial paper market. Consumer rates are up but they are still able to get loans. The FDIC has not had to be massively recapitalized with potentially trillions of dollars. The money markets are functioning. Time is being bought for fiscal stimulus packages to kick in. Some regional and local banks are still solvent. And the government can potentially loan directly to secondary dealers if the large banks do not step up.

None of this would be the case if the financial institutions had been allowed to fail. In that case, I think, we would have seen a monumental collapse worse than any in history- far worse than anything that happened in such a short time span during the Great Depression, and a much sharper increase in unemployment and deflation.

Of course, it is possible that all of this improvement is only temporary, and the fundamental pattern of debt-deflation mean that the debt will have to be 'defaulted on' eventually. But even if this is true, the end result ( [public] bond market dislocation, as you say) is not much worse than what would happen in any case. In one case, the financial institutions default, in the other case, the government defaults. I do not see a government default, in this case, as being far worse than a private sector default. The net total loss is still the same (catastrophic). In the latter case, the government would still have massive debt needs to do things like simple shoring up of demand deposits and providing unemployment benefits, and restoring employment.

The primary difference, is that in the case where the government acts to try and stabilize the market, is that there is a chance the catastrophic situation can be averted. How it might be averted I will admit to not having an answer for. So you could be right about the end result. But at least it gives a window of time for policymakers to think of possible responses. When the government does not act, there is no chance.

This is a fascinating idea:

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