March 26, 2009

The Bailout War IV: Toxic Bank Assets and the Bailouts


(See also the rest of the five-part series)


For a long time I didn’t understand the toxic asset issue. I basically took the conventional frame for granted. This is that America needs for the big banks to get this toxic paper off their balance sheets at some elusive but extant acceptable price; that this is necessary for the good of the economy, of society, for posterity, etc. But it’s become clear that it’s not economically or socially necessary to do anything with this paper. It’s only claimed to be such by those who stand to profit from a massive handout and their agents in the media.
The point of all this policy angst is supposed to be to get the big banks lending again. The banks claim to be on board with this project. That’s what the government and the pundit pen have said from the start. That was how they sold the first $700 billion bailout, and that’s how they defend the $3+ trillion in secret loans the Fed has made. So why didn’t all this money do what it was supposed to do? If the idea was that the bad paper stinking up the banks’ balance sheets was crippling their lending abilities, the infusion of government money was supposed to be an end-run around this. There seems to be no reason the banks can’t lend and just let the “assets” sit. But they haven’t used the money to lend. They’ve hoarded some of it, and boasted that they’re hoarding not out of fear, but to be ready to use that money to seize acquisition opportunities. They’ve spent the rest: quite a bit on acquisitions, and more famously on bonuses, parties, golf outings, stadium sponsorships, airplanes…It seems the banks are not particularly nervous about their financial position. So what gives?
The truth is that before they are willing to resume lending, these bankers are demanding to be bailed out of these toxic paper positions. This is a stick-up. A ransom demand. The banksters are on strike. They are holding America hostage, and their demand is that America buy them out on their own terms. They’re saying, “You want us to lend? Gives us our profits first.” Until then it’s a work stoppage.
The big banks are insolvent. Their assets exceed their liabilities only in fantasy league accounting. If they actually had to obey their vaunted “market” and sell this paper at its real value they’d be bankrupt. They could have used the bailout money to recapitalize as they wrote down this paper, or they could have done the same while selling the paper to the government at marked-down value. This was in fact the original advertised bailout concept. But the irremediable obstacle is that the banks have always privately refused on principle to consider such a thing, while the Bush and Obama administrations were lying when they claimed otherwise. The banks, the administration, and the MSM with few exceptions refuse to accept anything short of a complete public buyout of these assets at fantasy model value. They haven’t yet figured out how to get away with this, although this week Geithner and Obama are trying again.
So given this impasse so far administration policy has sought to prop up the big banks with the minimum necessary but still massive welfare, and the implicit promise that one way or another the administration, in an act of top-down civil war, will redistribute from the people to the bankster elite however many $trillions are necessary to satisfy them. That’s why these are called “zombie banks”. Paul Krugman calls it a new kind of voodoo economics, “the belief that by performing elaborate financial rituals we can keep dead banks walking”.
This is unjust and an incalculable moral hazard (which in spite of its name is a practical concern, not a moral one; the powers that be seem to have closed ranks on this point, that whatever else they may debate, actual morality should have no place in the discussion; thus we get the supercilious tone even from nationalization advocates where it comes to “populism” and public rage).  
Meanwhile the cabal is seeking a new bubble. The fantasy among most in the government is that somehow this will all work out with a new bubble, new debt creation; the banks will be able to pay back the loans, perhaps all that paper can even be reinflated for a taxpayer profit and so on. It’s the exact fix any Ponzi schemer eventually finds himself in, except until now Ponzi schemes didn’t have full government support. But now the government is the top schemer, and who’s going to bail it out? America is running against a greater headwind all the time in selling its debt to China, and China’s looking for a way out.
It doesn’t matter right now. This is their policy and they’re sticking with it. Obama agrees which is why from the moment he was elected he tacked 180 degrees from “Change” to “continuity”. That’s why today we have the “new” Geithner plan, which is really just as retreaded from last September as Geithner is.
I’ll give a quick synopsis of the Geithner plan. They’re going to have an auction of this toxic paper. The bidders will be ostensibly private members of a “Public-Private Investment Program”. These private bidders will have to put up very little of their own money. The bulk of the money is to come from an FDIC bubble: Treasury will pledge some ridiculous amount, and the already precariously leveraged FDIC will match it 6:1. (They say FDIC isn’t happy about this. Nor should we be. It’s already questionable how readily FDIC, the bedrock of stability for America’s deposit banking system, could actually pay out claims in a commercial bank crisis. And now they’re going to use its balance sheet as a toxic asset shooting gallery. Sociopathic.) The rest of it will come from the $75-100 billion of TARP money still left. The private bidders can default on the loan portion of this at will. So they stand to profit if this paper ever goes up in value in some mythical future, while they have almost no risk. Meanwhile the Taxpayer’s exposure is overwhelming and completely negative. (OK, they too can profit if they turn out to have bought low. The chances of winning the lottery are better. Indeed, this is as if you gave somebody a million dollars to buy lottery tickets, only making him chip in a hundred bucks or so, and then gave him 20% of the tickets, and said he only had to pay you anything back if one of his tickets won.)
In addition to this bailout, the plan calls for the Term Asset Lending Facility, already dispenser of gargantuan sums, to lend the banks another $1 trillion or so, at generous terms and with no real collateral.
Of course the real and intended winners here are the banks. The auction is supposed to be the vehicle by which they can trump up an inflated price for these assets. The private bidders, bidding with taxpayer money, are intended to bid the price up to whatever figure the banks choose. Then the adminstration happily shovels out that much money in a monumental loot conveyance, while claiming “the market” discovered that price, and that this is what we need to do to put the financial system on solid ground. As Yves Smith wrote, they must really think we’re idiots.
We must be clear that these “securities” have little if any real value. They never had more than a fantasy value. Now that the fantasy has been dispelled, the market has correctly priced them at or near zero. But the administration’s top priority is to bail out the banks, so they want to hand out as much public money as is politically possible. Beyond that, they’re like hippies trying to levitate the Pentagon. They want to levitate a new debt bubble. They believe we can resume exponential growth. Even the best of them is intellectually bankrupt. This is all they have. Reinflate, levitate. Indeed, the fantastical alleged taxpayer upside is completely dependent upon reflating the “growth” bubble, meaning the debt bubble. (America has not in fact legitimately grown in this century, it has only bubbled up debt.)
The bankers concur with the administration that their profitable bailout be the #1 priority. Only then will they too join in seeking the next bubble, and embarking upon new disaster capitalist expeditions.
The real public-private relationship can be seen in comparing these two quotes:
Geithner from February: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”
At around the same time, Citi’s Vikram Pandit: “We completely remain in day-to-day charge of the company. We are going to run Citi for shareholders.”
Citi has to date received over $350 billion in handouts and loan guarantees (another kind of handout). It seems Pandit and Geithner are simpatico. Geithner only needed to add that where it comes to financial policy, the administration as well is run and managed by private shareholders, and they want to do their best to preserve that system.
Here we have explicit public-private confirmation of a corporatist coup. 
The stock market stands ready as enforcer. How did the Lehman failure cause a market crash? Or the failure of the first bailout vote in the House last September? It was market terrorism, a corrective blow, the infliction of punishment upon society for misbehaving. The market insists that every policy step have private investor profit with socialization of all losses as its overriding goal. It demands that unlimited public resources be used up for this purpose. When the government misbehaved and allowed one of the fraternity to fail, the market launched a retaliatory strike against America. You could view it as a terrorist attack. And you should consider that when you see how the market rewarded the announcement of the new PPIP. As Naomi Klein wrote back in November, “The markets can be relied on to vote in precisely the opposite way that Americans have just voted….Any and all moves to change course will be met with short term market shocks.” When the media knuckles under and parrots the dogma, Bailouts Uber Alles, we have Too Big To Fail joining with appeasement.
So that’s the bottleneck we face: an extortion racket, bankers demanding that their private profit be the #1 concern of public policy; and an administration which is ideologically sympathetic but which is under political constraint such that it can’t directly convey the loot. It needs to find ways to redirect and launder it. This is the  source of the “public-private” concept, with these Potemkin “private ” investors who are really in effect extremely well paid agents earning a guaranteed salary for playing the role of capitalists. The result is an administration which is malevolent in principle, bumbling and ad hoc in practice. Willem Buiter gets it just right: the bailouts are “without redeeming social value”. (I add, this thereby places them in the legal category of obscenity.)
Fundamentally, the concept that these assets have to come off the books at a profit level dictated by the banks is a theological tenet. The zombie banks and the financial/insurance/real estate (FIRE) trust as a whole are existential and psychological obstructions to any kind of real solution. All their actions are devoted to further consolidation and more intensive rent-seeking – the consolidation and intensification of a new feudalism.
As for our general problem, it’s that everyone in positions of power or influence have one and only one pseudo-idea: always, always more lending, more debt, more bubbles.
The numbers no longer have meaning: $100 billion more from TARP, plus a lot more from new Treasury borrowing, and that amount to be sextupled by even more borrowing in the name of the FDIC, oh and don’t forget another $1 trillion in sweetheart loans. This is clinical insanity by now.
I’m convinced the “leadership” has actually given up all reality-based hope of saving the situation. Where not bolstered by ideology, their nerves have caved in completely. They can only see, only think, only scream “More debt!” It’s a depraved latter-day degeneration from the call Marx imagined them hearing in the capitalist heyday, “Go on! Go on!” toward more production, more profit. Today they can only go on under the hypnosis and artificial stimulant of debt.
Anyone not psychologically sealed in the insanity must look at this Tower of Babel of debt, being built ever higher and ever more top-heavy by the day, and know that it can never reach whatever heaven the bingers are seeking.
If we are to try to constructively unwind the exponential debt civilization, the first thing to do is detach in our minds from the lies and craziness, as well as the seductions and promises, of this delusion. The seductions are only a mirage; no amount of propping up dead banks, no matter how profitable for the bankers themselves, is going to bring back the greed circle of debt which for a few years swept everyone along. People’s material conditions are now being forcibly simplified, but this can all be for the better if not the good if we use this pivot to simplify our aspirations as well.
The world can be a beautiful place, and no one needs the debt civilization to live there. But first we must free ourselves, and a good place to start is to stop fearing the threats of bankers.
[Next up: Nationalization]

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