Economics Round-Up, or: Why We are All Screwed
I don’t know about anybody else, but this whole treasury/bailout/banking thing is just mind-numbing and overwhelming and I find myself in turns going from angry to confused to depressed to giggling and I’m just not sure what’s going to happen, but it doesn’t seem promising. My wife remarked to me earlier that a lot of this economic stuff is probably just going over my head – which it is, to be sure – but I remarked back that maybe the very fact that so much of this is so bloody complicated and hard to understand is part of the problem itself. There is really no reason economics should be terribly complicated. It should be difficult to put a finger on, as it is really just a study of human behavior and interaction which are mercurial subjects by nature – but it shouldn’t be so outrageously complicated that an entire nation gets suckered and then can’t make heads nor tail of half the terminology used to explain what the hell just happened.
Economics really ought to be the study of trade; and trade really boils down to two things: people buying and people selling. That’s what a market is. That’s economics. When it gets as messy as all of this you know you’re dealing with black magic and deceit. When we depart from the realm of good, tangible exchange of goods and services and enter the realm of derivatives and bailouts and TARP funds and pension scams and ponzi schemes and an overarching system that, quite frankly, is built upon a mountain of bad, bad capitalism, then you know that something’s wrong. The thieves are all around us – in the highest halls of business and government – and they’re getting away with some of the biggest thefts in history. Perhaps this is why the ancients warned against usury. “Neither a borrower nor a lender be.” Perhaps this is why we need a radical economic realignment.
Now for some link madness:
Here’s the problem with all the hoopla over the $135 million in AIG bonuses: This sum is only less than 0.1 per cent – one thousandth – of the $183 BILLION that the U.S. Treasury gave to AIG as a “pass-through” to its counterparties. This sum, over a thousand times the magnitude of the bonuses on which public attention is conveniently being focused by Wall Street promoters, did not stay with AIG. For over six months, the public media and Congressmen have been trying to find out just where this money DID go. Bloomberg brought a lawsuit to find out. Only to be met with a wall of silence…
There are two questions that one always must ask when a political operation is being launched. First, qui bono — who benefits? And second, why now? In my experience, timing almost always is the key to figuring out the dynamics at work….
The moral should be: The larger the crocodile tears shed over giving bonuses to AIG individuals (who seem to be largely on the healthy, bona fide insurance side of AIG’s business, not its hedge-fund Ponzi-scheme racket), the more they will distract public attention from the $180 billion giveaway, and the better they can position themselves to give away yet more government money (Treasury bonds and Federal Reserve deposits) to their favorite financial charities.
1. The government is opening up the tax money spigot for market intermediary vehicles (hedge funds and other PPIFs or public-private investment funds) to buy up virtually all toxic assets with no accounting for default risk or loss assumptions, on the bet asset prices (i.e.the market) will go nowhere but up from this point onward. This is a huge gamble as macro economic conditions indicate we are nowhere near a bottom.
2. PPIFs use taxpayer provided leverage to agree with the Treasury that this is, indeed, the market bottom.
3. If this, gasp, is not the real bottom, hedge fund losses are limited as the TALF is non-recourse and non-remargining in nature and PPIF first-loss downside is at worst roughly in the 10% ballpark (of course they get to keep the spoils if the ploy succeeds), all the while no collateral has to be posted.
4. Banks and other companies offload all their toxic assets to these leveraged vehicles.
5. In the meantime the FASB is adjusting accounting rules to make sure that whatever assets remain can take advantage of Hummer-size FAS 115 loopholes and mark them at par.
6. Also in the meantime, the FDIC is buying up non-securitized toxic products (whole loans), and providing government backstopped capital to banks via the TLGP, all the while Sheila Bair is complaining that the Deposit Insurance Fund (DIF) is at or near zero.
7. Investors, whose deposits currently have no statutorily-required insurance as per the above point, are supposed to believe that banks are healthy, the accounting opacity is the new transparency, that the soon to be $15 trillion in total new bailout-related government debt and guarantees is sustainable as China bails and the Fed is left to purchases it own treasuries, that the FDIC will restore its DIF from fees banks pay for TLGP issues (even though banks will soon be able to issue debt cheaper in the Eurodollar market, until such time as LIBOR spikes again), and are expected to buy up equities and fixed income securities
8. As more and more buy into this all is good “new-age bull market” rally, the PPIFs will suddenly decide to sell off their resecuritized toxic garbage at a profit to themselves, people will ask just what these toxic legacy assets are really worth (again) and the whole system will crash once more, this time with the implicit guarantee of tens of trillions of US debt.
But the Mother of all scams happened way before AIG, GM, Citigroup and others received bailout funds. That’s right, now that the alternative investment bubble has popped, the end of the great pension con job has exposed the pension Ponzi scheme that dwarfs the Madoff scam.
For years, Goldman Sachs and other investment banks, hedge funds, private equity funds and real estate funds received billions in fees from pension funds chasing “alpha”. The marketing ploys were sophisticated as they kept touting “absolute returns that are not correlated to stocks and bonds”.
The investment banks and private funds made a killing in fees but the for the most part, pensions got suckered into believing the garbage pension consultants were feeding them, exposing them to some serious downside risk. And don’t kid yourself, the collective actions of pensions funds shoving billions of dollars into alternative investments contributed to this systemic crisis we are now living.
If this isn’t Newspeak, I don’t know what is. Since when is someone who puts 3% of total funds and gets 20% of the equity a “partner”?
And notice the hint of skepticism from the Times regarding the Administration’s supposition that the bidding will result in fair prices. Huh? First, the banks, as in normal auctions, will presumably set a reserve price equal to the value of the assets on their books. If the price does not meet the reserve (and the level of the reserve is not disclosed to the bidders), there is no sale; in this case, the bank would keep the toxic instruments.
Having the banks realize a price at least equal to the value they hold it at on their books is a boundary condition. If the banks sell the assets as a lower level, it will result in a loss, which is a direct hit to equity. The whole point of this exercise is to get rid of the bad paper without further impairing the banks.
So presumably, the point of a competitive process (assuming enough parties show up to produce that result at any particular auction) is to elicit a high enough price that it might reach the bank’s reserve, which would be the value on the bank’s books now.
And notice the utter dishonesty: a competitive bidding process will protect taxpayers. Huh? A competitive bidding process will elicit a higher price which is BAD for taxpayers!
Dear God, the Administration really thinks the public is full of idiots. But there are so many components to the program, and a lot of moving parts in each, they no doubt expect everyone’s eyes to glaze over.
So now we have a bank crisis. Is it the result of fundamentally bad investment, or is it because of a self-fulfilling panic?
If you think it’s just a panic, then the government can pull a magic trick: by stepping in to buy the assets banks are selling, it can make banks look solvent again, and end the run. Yippee! And sometimes that really does work.
But if you think that the banks really, really have made lousy investments, this won’t work at all; it will simply be a waste of taxpayer money. To keep the banks operating, you need to provide a real backstop — you need to guarantee their debts, and seize ownership of those banks that don’t have enough assets to cover their debts; that’s the Swedish solution, it’s what we eventually did with our own S&Ls.
Now, early on in this crisis, it was possible to argue that it was mainly a panic. But at this point, that’s an indefensible position. Banks and other highly leveraged institutions collectively made a huge bet that the normal rules for house prices and sustainable levels of consumer debt no longer applied; they were wrong. Time for a Swedish solution.
But Treasury is still clinging to the idea that this is just a panic attack, and that all it needs to do is calm the markets by buying up a bunch of troubled assets. Actually, that’s not quite it: the Obama administration has apparently made the judgment that there would be a public outcry if it announced a straightforward plan along these lines, so it has produced what Yves Smith calls “a lot of bells and whistles to finesse the fact that the government will wind up paying well above market for [I don’t think I can finish this on a Times blog]”
See? Mind-boggling and outrageous. Between the orchestrated outrage we may be experiencing and the very real outrage that many people feel as their livelihood and savings and pensions are destroyed I’m not sure where all this national anger is supposed to be channeled. Or at whom….