The Stickup Note
On Friday, NPR aired a longish segment (almost 8 minutes) of reporting on bank bailouts via a research note set out by a Deutsche Bank economist:
A single piece of paper may just be one of the most surprising and illuminating documents of the whole banking crisis.
It’s a one-page research note from an economist at Deutsche Bank, and it outlines in the clearest terms the kind of solution many bankers are looking for. The basic message: We should forget trying to get a good deal for taxpayers because even trying will hurt.
“Ultimately, the taxpayer will be on the hook one way or another, either through greatly diminished job prospects and/or significantly higher taxes down the line,” the document says.
In other words, the paper says, if the government tries to save taxpayers money, many people will lose their jobs and the whole economy will suffer.
I strongly recommend listening to the whole thing — in this one note you can see exactly why investors keep dumping bank stocks. Not only do they not know what is going on on their balance sheets, but the thing that they all expect the government to do — sweep in with more money — isn’t happening. Yet.
Someone in this piece characterizes this missive from the Deutsche Bank economist as something of a thug’s threat: “Nice global economy you got there; be a shame to lose it….”
The original TARP I thought was largely designed to keep banks and shareholders whole — in the interim, shareholders have taken a bath on bank stocks and I doubt that is over. Several of the big banks are barely standing, small banks are failing at a rate of about 2 per week and the entire system seems to be holding its breath to see what will happen to these banks. I think that these Stress Tests are key though — not because they’ll tell you anything new, but that I think that they’ll provide some cover/rationale for whatever Geithner has decided to move on.
(If you’ve an hour, this week’s episode of This American Life is a simply fantastic overview of the banking situation done with their usual quirky apomb. You can get this as a podcast over at iTunes for free, but only for a week.)
Tags: Bailouts, Banks, Bush's Fubar Economy
this is all happening because Obama said the economy was bad and has been negative the past 30 days.
if he would just say something positive, we’d be out of the woods
I heard that story too on NPR (highly recommended) and I had the same angry reaction at first. But I found myself agreeing with the Deutsche Bank analyst when he spoke. He was basically saying the banks are f*cked and we’re going to have to suck it up and fix it. So true! We’re just arguing about the details now. I just wish Geithner and Summers would just go ahead and do the right thing already and stop trying to prop up zombie banks.
People are overlooking one very important aspect of the banking crisis people overlook is it is going to get a lot worse.
What is causing the problem is banks have too many toxic assets on their books. A toxic asset is another name for a loan that cannot be paid. And the unemployed are more likly to be in that situation. It`s impossible to predict who will lose their job and how much debt they will not be able to pay but one thing is certain, unemployment world-wide is soaring. Just this week we had the biggest weekly claim number since the defense plants were laying off after WW II. So they really have no idea how much of a bailout they will need in the future, but you can bet it will be more than todays amounts.
STI, that’s why I think we need to have some form of national debt forgiveness. Something like 20%, up to $20,000 for all American taxpayers. That way the people who aren’t in trouble are rewarded as well and we can clear a lot of these “toxic assets” off the books. I’m much more in favor of helping Main St. directly instead of trying to indirectly save us by helping banks.
U.I., I agree but how much would work, would 20% be enough, I don`t know. A few people on the economic blogs have been proposing that the whole world be declared bankrupt and we all start over. That`s not as far fetched as it sounds because corporations and businesses as well as government and individuals are not going to be able to pay back their debt.
Yeah STI, I have no idea if 20% is enough. It’s a scary thought that maybe it isn’t.
Capitilism without capital is impossible, world wide socialism could be the only choice left. Trillions of dollars of capitol are going up it smoke on a monthly basis. If you think about the decade of the 30`s we basicly lived under socialism, only the government created jobs, no new wealth was created by the private sector. They built the empire state and the chrysler buildings but neither made a profit till the 1950`s Television and central air could not be marketed because there was no disposable income. It`s not the best alternitive but it beats having homeless totals in the hundreds of millions.
What is causing the problem is banks have too many toxic assets on their books. A toxic asset is another name for a loan that cannot be paid. And the unemployed are more likly to be in that situation.
Toxic assets = bad mortgages
When the home goes into foreclosure, it turns the “asset” “toxic.”
To fix that, they write it off as bad debt, and take a loss.
What the banks want is a new way to absolve them of these toxic debts without taking a loss on them.
They want to sell them off to the government, and let THEM take the loss when they fail. Seeing as though the gov’t has ways of changing the rules that banks don’t, that is why they want that to happen.
In other words, take my bad decisions, change the laws to renegotiate the mortgages and take the hit for us, please. Until then, we’re stuck, and have no money to lend.
Or… just keep giving us cash, and we keep taking the loss as we write the debt off the books. Our investors run like scared sheep, and we we lose more investors, which cause more to run like scared sheep… and the cycle continues.
Brian; not meaning to nitpick, your correct in all you said, but it`s not mortages alone, it`s also derivitive swaps and loans of all types that are turning toxic. Which is why I feel we are throwing money into a black hole for no future benefit for anyone except the bank employees and stockholders.
Someone should telegraph the WH: take the banks, dump top management (including Geitner) and the stockholders and start lending.
Why can’t companies that are “too big to fail” be broken up as part of their governmental assistance?
STI: I agree, it is money well wasted. I am still in the “Screw them, let ’em fail” camp.
A few targeted bailouts are fine if they help a critical company get back to health. But the mass bailouts are beginning to backfire; they are creating moral hazard on an unprecedented scale. At this point it’s just a money grab.
Bail out individuals, not corporations. Let the corporations fail and liquidate the investors; let new businesses emerge from the ashes to compete for consumer dollars.
I agree with Shoe Thrower! I have heard other economists say we should just end it and start over…it would end the worldwide depression that will occur anyway if we don’t. Why is the guvmint buying up the toxic’s and not just nationalionizing the banks so we have the profit as well?
Brian,
I think we’re actually getting backdoor nationalization right now. AIG is already being broken into pieces as we speak. A lot of the issue with the AIG bailout is that the money is just going to the banks (Goldman Sachs was a big beneficiary).
I hate to say it, but I think Geithner and Summers need to go, or they need to get some more diverse voices on their team.
Part of the “too big to fail” problem is in pricing the toxic assets. It is very difficult for investors to know what to price as long as no one really knows how to value those assets.
In many ways, not working at valuing those assets is the equivalent of not opening your mail when you know you have a delinquent bill. The assets that are being unwound and sold are going for 5 to 20 cents on the dollar, which means GIANT Haircuts all around. Too many of them are trying to preserve the illusion of some solvency which they can’t do once that stuff gets a real market price.
UI, I think you are right about this backdoor nationalization. Citigroup they bought a large share of at $3.00+ per share when it was trading at about $1.00+ per share. Crazy.
I agree Cassandra. I think it’s the uncertainty about these so-called toxic assets which is delaying the bottoming out (of the stock market at least) and delaying the recovery. As long as the banks think they’re going to get something for them through a bailout we’ll continue in this uncertainty for a while.