Holy Profitable Bailouts, Batman!
Sep. 30th, 2010 11:07 am![[personal profile]](https://www.dreamwidth.org/img/silk/identity/user.png)
Wonders will officially never cease.
As of early this morning, AIG (remember them? the people who thought it was a good idea to insure every mortgage-backed security in the country, and promised to make good to the MBS investors if the homeowners didn't pay their mortgages? used to be the largest insurer on the planet) has prepared a plan for paying back the Federal Bank of New York and the US Treasury. We had expected that AIG was going to be one of the two remaining sources of losses in the 2008 federal bailout of the US financial system.
We were wrong. Now both Chrysler and AIG are expecting to return profits to the federal treasury, instead of losses. The dickering now going on between the Fed, the Treasury, and AIG, is about how much money the US Gov't will make on having prevented the world bond market from collapsing. Pretty neat.
Although it does present a problem for Tea Party governance - if we're actually making money on the financial system bailout, stopping that spending won't improve the state of the federal treasury. (As a side note, we've also come out ahead on the Chrysler deal, which is actually more surprising than AIG making money - a bunch of economists were reporting at the time of the AIG bailout that the Feds should make money on it, but should and three bucks will get you a cup of coffee at Starbucks. No one was nearly that optimistic about Chrysler)
As of early this morning, AIG (remember them? the people who thought it was a good idea to insure every mortgage-backed security in the country, and promised to make good to the MBS investors if the homeowners didn't pay their mortgages? used to be the largest insurer on the planet) has prepared a plan for paying back the Federal Bank of New York and the US Treasury. We had expected that AIG was going to be one of the two remaining sources of losses in the 2008 federal bailout of the US financial system.
We were wrong. Now both Chrysler and AIG are expecting to return profits to the federal treasury, instead of losses. The dickering now going on between the Fed, the Treasury, and AIG, is about how much money the US Gov't will make on having prevented the world bond market from collapsing. Pretty neat.
Although it does present a problem for Tea Party governance - if we're actually making money on the financial system bailout, stopping that spending won't improve the state of the federal treasury. (As a side note, we've also come out ahead on the Chrysler deal, which is actually more surprising than AIG making money - a bunch of economists were reporting at the time of the AIG bailout that the Feds should make money on it, but should and three bucks will get you a cup of coffee at Starbucks. No one was nearly that optimistic about Chrysler)
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Date: 2010-09-30 06:29 pm (UTC)Believe me, I'm not calling them stupid. I rely on educated synopses from people like you to tell me these things myself. But I think half the friction with the Tea Party is a difference in basic administrative philosophy, and the other half is sheer mistrust of The Other Side(tm) such that I'm not sure you *could* convince them that the bailout was a good idea even if you had the books right there.
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Date: 2010-09-30 07:12 pm (UTC)But I neglected to answer your basic question, how to boil the bailout figures down: To keep the entire banking system of the country from going under, and to keep the entire Midwest from going into a much, much more serious depression, we've spent less than $200 per person in the country. That sounds like pretty good value for money.
But I still think it's the wrong argument - it's arguing about how they feel about the past, and those kinds of arguments rarely end well.
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Date: 2010-09-30 11:37 pm (UTC)no subject
Date: 2010-09-30 11:47 pm (UTC)Cue Demon Sheep
In 2008, Washington gave bankrupt Detroit Auto Companies and Wall Street Banks $800 Billion dollars. In 2009 and 2010, they gave $850 Billion back.
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Date: 2010-09-30 11:53 pm (UTC)"Democrats earned $25* for me by investing in America"
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Date: 2010-10-01 09:09 pm (UTC)no subject
Date: 2010-10-01 11:34 pm (UTC)no subject
Date: 2010-10-01 11:58 pm (UTC)No, I just think the current narrative (we gave the banks all this money and look what it got us) is sufficiently well stuck in people's heads that for them to be able to see contradictory data will be basically impossible en masse.
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Date: 2010-10-01 11:59 pm (UTC)no subject
Date: 2010-09-30 11:06 pm (UTC)no subject
Date: 2010-09-30 11:34 pm (UTC)no subject
Date: 2010-10-01 03:12 pm (UTC)no subject
Date: 2010-10-01 12:53 am (UTC)Now, as some one with Ahem-teen years in the finance industry, and in the investment side, I have always spoken of it as a 'loan'. Especially when people shout about 'bailout Main Street' - I counter with 'so, you want a loan you have to payback in the next 2-3 years? How much do you want loaned to you?'
And, yes, you're right, they get confused. Or they tell you that you're wrong.
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Date: 2010-10-01 08:35 pm (UTC)no subject
Date: 2010-10-01 08:42 pm (UTC)I'm trying to figure out how a hypothetical homeowner could recover from a 30% drop in the value of their home combined with a need to move to find work, because the region they're in now has far too many unemployed in their sector. I can imagine a middle-income homeowner recovering from a 30% drop in putative home value over 10 years, but certainly not in 3. And that presumes more job and wage stability than is probably appropriate.
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Date: 2010-10-01 08:46 pm (UTC)Chrysler was a much bigger risk, but we did it anyway.
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Date: 2010-10-01 08:53 pm (UTC)Can you pose a hypothetical someone who your proposal could help?
Please show your math.
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Date: 2010-10-01 08:55 pm (UTC)no subject
Date: 2010-10-01 09:03 pm (UTC)The assumption set I'm making is:
In those circumstances, what sort of loan could improve their situation?
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Date: 2010-10-02 12:00 am (UTC)no subject
Date: 2010-10-01 08:54 pm (UTC)Erm, that only works if the problems are cyclical and not structural - if they're structural, stretching the resolution out over time makes it suck more, not less.
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Date: 2010-10-01 08:57 pm (UTC)Er, really? Buying into Chrysler was purely about downside protection - treat the money as simply gone, as the mechanism whereby a serious industrial collapse of the entire Midwest would be prevented, then be pleasantly surprised that we got any money back. The risk was not do we get the money back, the risk was do we destroy the entire US auto economy - and evaluated that way, I'm comparing the guaranteed destruction of 20% of the economy or so vs. merely the possibility of losing 20% of the economy. Which seems like very simple math to run, not so much a risk calculation per se.
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Date: 2010-10-01 09:00 pm (UTC)no subject
Date: 2010-10-01 09:06 pm (UTC)no subject
Date: 2010-10-01 09:56 pm (UTC)no subject
Date: 2010-10-02 12:02 am (UTC)no subject
Date: 2010-10-02 12:11 am (UTC)no subject
Date: 2010-10-02 12:32 am (UTC)(from WIkipedia's Fannie Mae page, more conveinent than digging through us.gov:)
As Daniel Mudd, then President and CEO of Fannie Mae, testified in 2007, instead the agency's underwriting requirements drove business into the arms of the private mortgage industry who marketed aggressive products without regard to future consequences: "We also set conservative underwriting standards for loans we finance to ensure the homebuyers can afford their loans over the long term. We sought to bring the standards we apply to the prime space to the subprime market with our industry partners primarily to expand our services to underserved families.
"Unfortunately, Fannie Mae-quality, safe loans in the subprime market did not become the standard, and the lending market moved away from us. Borrowers were offered a range of loans that layered teaser rates, interest-only, negative amortization and payment options and low-documentation requirements on top of floating-rate loans. In early 2005 we began sounding our concerns about this "layered-risk" lending. For example, Tom Lund, the head of our single-family mortgage business, publicly stated, "One of the things we don't feel good about right now as we look into this marketplace is more homebuyers being put into programs that have more risk. Those products are for more sophisticated buyers. Does it make sense for borrowers to take on risk they may not be aware of? Are we setting them up for failure? As a result, we gave up significant market share to our competitors. "
We don't have solid numbers on predatory lending, partly because "predatory lending" is a poorly defined term, and partly because it's very difficult to prove that I deluded poor old senile Grandma Susan into signing for an outrageous subprime ARM even though she was eligible for prime. But IMO, the fact that the subprime market was predominantly nonwhite, first-timer, low-education-level signers is indicative that the likelihood is strong that those signers had no idea what they'd gotten into. Add in the incentives that lenders were offering their salesforces (bonuses for selling subprime loans etc) and it looks very ugly to me.
Re: Buy low, sell high.
Date: 2010-09-30 06:59 pm (UTC)Meanwhile...
Date: 2010-09-30 11:07 pm (UTC)Thoughts?
Re: Meanwhile...
Date: 2010-09-30 11:44 pm (UTC)no subject
Date: 2010-09-30 11:36 pm (UTC)And Chrysler, yeah, boggled.
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Date: 2010-10-01 01:07 am (UTC)As we've discussed before, Richard, we both know that if there hadn't been support in the forms of loans to BoA and JPM, They would not have bought Merrill or Bear Stearns. Or rather, they likely still would have, later, after their value had dropped far further than it had at the time of the agreements, pennies on the dollar, after an economic freefall. The damage done by that event would have been devastating.
That many more banks were given loans to do other things, and that the government in fact pushed some who did not want to take the loans to do so, is not something that is spoken loudly. But for the most part, what businessman would refuse something offered to them, that their competitor is getting? Why put yourself at a disadvantage you don't have to?
I saw many lies in the media. After the loans were approved, and agreements signed to take over the failing investment companies, but BEFORE they were handed out, was when the politicians talked to the media. They got the first say in. That is something to think on. Also... If not for talking BoA and JPM and others into helping, the Gov't would have had to step in directly. There really was no other option. Letting them fail, people really don't realize what that would have meant to the economy. Politicians did what they do best, spread around the 'blame'.
I also know that a bank I used to work with was worked over in the media for 'taking these bailout funds they didn't need and going and buying another bank (a failing one in Ohio)'. in the end of 2008. I know from internal email, they were planning on buying that bank, had even looked over it's financial position in April of 08. Well before the bailouts. It was planned well before the bailouts were even mentioned. Yet...
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Date: 2010-10-01 01:51 am (UTC)no subject
Date: 2010-10-01 08:50 pm (UTC)Which is uniquely poorly suited to 30-second soundbite advertising.
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Date: 2010-10-01 02:24 am (UTC)no subject
Date: 2010-10-01 08:39 pm (UTC)no subject
Date: 2010-10-01 08:48 pm (UTC)The best I've been able to come up with is either a) that the people trying to take out the GSEs believe that those people wouldn't be able to move into their neighborhood if only the GSEs weren't underwriting their mortgages, or b) that they believe the GSEs are undercutting the prices for which they would otherwise offer the same service, and therefore they want the GSEs to stop spoiling pricing in the marketplace. And both of those motivations seem really, really weak.
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Date: 2010-10-01 08:50 pm (UTC)no subject
Date: 2010-10-01 09:11 pm (UTC)no subject
Date: 2010-10-02 12:15 am (UTC)I am not necessarily espousing this idea myself, but I can see why folks with some industry knowledge believe that it might be a better idea to just ring-fence F&F and start over a bit more sanely.
Which is not the same attitude as "I don't believe the gubmint should encourage poor people to buy nice homes", of course.
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Date: 2010-10-01 01:57 pm (UTC)http://www.whitehouse.gov/whiteboard
First one is two minutes long. Take a look.
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Date: 2011-11-30 05:04 pm (UTC)Yes, they were loans. But the loans themselves were gifts.
The thing that the article doesn't mention is the big, bad consequence of the bailout: the too-big-too-fail banks are now even bigger and more powerful (relative to the market, and to their competition that didn't enjoy the same level of support).
I do think the bailouts were necessary to avoid total economic meltdown (though only because deregulation - notably the repeal of Glass-Stegal). And in that context, they were a bargain at any financial price. But of the price that was paid, any financial cost is minor relative to the cost of leaving the banks intact so they can do it again, which is the road we are headed down now.
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Date: 2011-11-30 08:25 pm (UTC)It's a somewhat frustrating article, to me - I agree with his basic thesis that the large US depository and investment banks were protected from well-deserved commercial failure. I have severe problems describing it as a 'bailout,' because that term has the connotational meaning gift of money which is called a loan to save face and the reality is importantly different from that. That is to say, I'm on the side of the argument that the problem with TARP et al is that the support was provided at too cheap a price, not that it should not have been done.
And using the term 'bailout' leads, I think nearly inexorably, to the rhetorical position 'no bailouts!'
Which is deeply flawed - if my only choices are a collapse of the banking and monetary system or a deeply corrupt support of that system which allows the existing operators to continue to skim large sums of money off the top, I'm going to have to vote for the latter. Which is not to say that I like that latter choice, just that it's clearly the better alternative.
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Date: 2011-11-30 09:49 pm (UTC)At the time of the bailouts, I agreed with you statement that they were the least-bad alternative. Now I am far from sure. The terms of the deal were so generous that they no only did nothing to alleviate the problem, they actually made the underlying structural issues worse. They also served to reinforce the cultural problems within the finance industry, namely that the people there really do think they are doing God's work and should be compensated accordingly. (Yes, I do think that this level of permanent-vacation-from-reality arrogance among leaders is inherently dangerous.) The combination of these two factors means that a repeat performance is simply a matter of time. And the problems associated with living beyond ones means get harder to deal with the longer we put off doing so.