The New York Times reports:
Two weeks after closing its purchase of Merrill Lynch at the urging of
federal regulators, the government cemented a deal at midnight Thursday
to supply Bank of America with a fresh $20 billion capital injection
and absorb as much as $98.2 billion in losses on toxic assets,
according to people involved in the transaction.
federal regulators, the government cemented a deal at midnight Thursday
to supply Bank of America with a fresh $20 billion capital injection
and absorb as much as $98.2 billion in losses on toxic assets,
according to people involved in the transaction.
Where will it end? Who is in charge of deciding what is necessary vs. what is helping the shareholders of Bank of America? Where is the accountability?
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{ 41 comments }
We need a new cliche to describe this. "Raid on the Treasury" is not adequate to describe it.
This is like the Savings and Loan debacle. Many sound S&Ls were forced to merge with sick ones. Eventually they all went belly up.
It will end when some force compels it to end. Right now, candidate forces look like:
- collapse of the currency
- voters with pitchforks storming Washington
So it will probably keep going for some time to come… of course, the longer it goes, the worse the ultimate outcome.
And under the theory that the market corrects, three current headlines from Drudge:
Consumer prices fall again in December…
2008 Inflation Slowest Since 1954…
Gasoline price plunge pushes consumer prices down…
I was shouting at my radio the whole time I listened to the Fazzari "Keynesian" interview. Looking at the world from the macro point of view long enough is like being an atomic scientist without a microscope. You only observe phenomena that have nothing to do with individual actors.
As well, you inevitably wind up with the believe that we must constantly "grow". I think as we come up with increasingly marginal improvements on life, we'll be less compelled to "demand" so much. There is nothing inherently good in the aggregate economy growing at some given percentage. It is perfectly possible for many people to be content at any of several levels of savings and/or consumption.
A $98 billion loss would completely wipe out the firm's equity and then some. Not only is this helping shareholders but it's helping the debt holders as well (the Feds have guaranteed all bank debt).
Equity holders should be wiped out and debt holders should take a haircut.
The real cost of these bailouts is far greater than the number of dollars handed out, because they are creating a misallocation of resources on a massive scale.
Resources are being redirected to companies selling goods and services for which there is not enough demand. Bailouts may allow these companies to temporarily and artificially suppress prices, but eventually the money will dry up and these companies will be back in the same predicament.
The frustrating thing is that there are banks out there–BB&T is a great example–which made the right decisions and are not being rewarded for it. BB&T's chairman was repeatedly pushed to do the same thing that other banks were, and refused to do it. As a result, BB&T hasn't needed federal bailout money and is in a relatively strong situation.
BB&T ought to be able to have the benefit of its good decisions — it ought to be able to buy of the remnants of the banks that made poor decisions, for pennies on the dollar.
The Accountability Bubble busted sometime in the 90s.
I have 2 daughters (one's 2 and the to the is 4mo) and when I think of the amount of debt that's been forced on to their shoulders by gov it just makes me sad.
One day boomer will be synonymous with beggar
At least now we now know who the real welfare queens are, the next time the Republicans want to cut back on food stamps for the needy. I read with chagrin the impending bankrupcy of Circuit City. There's one just a few blocks from where I live. The article mentioned that the current bankrupcy laws make it difficult if not impossible for a firm to recover. Was it not the Republicans who only a few years ago rewrote the bankrupcy laws to punish the profligate credit card users? Didn't they, in a well-meaning way of course, also help put companies like Circuit City out of business and send their 30,000 employees to the unemployment line and welfare offices?
TrUmPiT –
Recognize that Circuit City's going under means that Best Buy will pick up market share and will lay off fewer people than it otherwise would have. Sure, 30,000 people will be fired from Circuit City. But, the alternative is a restructuring where only 15,000 are laid off from Circuit City and where Best Buy, HH Gregg, Sears, Staples, etc… collectively lay off another 15,000 people. (Still sucks if you're a Circuit City employee.)
The current bankruptcy laws make it TOO EASY for a firm to recover, at least in normal times — Circuit City is being forced to liquidate because there's nobody available to buy any assets and DiP financing isn't really available right now.
Judges would rather keep companies as going concerns instead of letting them fail so their assets can be redistributed. Northwest and Delta airlines are two recent examples of this.
Incidentally, the 2005 reforms to the bankruptcy code were almost all put in to deal with a perception (incorrect, IMO) that consumers were racking up huge credit card debts and then using bankruptcy to weasel out of them. The resulting changes had very little effect on Chapter 11.
Usually I like to play devil's advocate on this particular website, but I simply can't muster the energy given these recent developments.
Tarp II and the stimulus package really are madness and corruption gone wild.
You don't have to be a radical libertarian like the rest of y'all to see that.
Time: A few years ago
Place: Circuit City Corporate Headquarters Conference Room
Scene: Circuit City President and Executive Staff in a weekly status meeting
President: What a wonderful time to be running Circuit City! Just look out over the Circuit City campus and see the wonderful Rainbows and Unicorns frolicking together. What a Joy and Pleasure it is to bring consumer electronics goods to the general public for fair and reasonable prices! Nothing could be better than this!
Executive Staff (in unison): Hear, hear! (Raising their glasses of Ambrosia).
President: Why, we are running our company so efficiently and well that nothing can go wrong! It is Happiness and Joy and Good Business forever!
Executive Staff (in unison): Hooray! (Clink)
(Meanwhile, the Legion of Doom, aka Republicans, are gathered together to discuss the situation at Circuit City)
Place: Legion of Doom Conference Table at the Legion of Doom Headquarters
Scene: Evil Republicans talking about Evil
Evil Republican #1: Oh how I hate that Circuit City with their Efficiently Run Company and their frolicking Rainbows and Unicorns.
Evil Republican #2: I hate them too… something must be done. But what?
All Evil Republicans: (grumble, grumble, grumble)
Evil Republican #3: Aha! I have it! It is an Evil Plan that will surely bring Circuit City to their knees!
Evil Republican #1: Are you sure it will work? This is Circuit City we’re talking about. Have you seen their Rainbows and Unicorns? Do you know how well they are running their company?
Evil Republican #3: It can’t fail because it will be well meaning, of course! Plus, it will allow us all to cut back on food stamps for the needy. You see, it all starts with bankrupcy [sic] laws and the profligate credit card users…
——
Time: Present Day
Place: Circuit City Corporate Headquarters Conference Room
Scene: Circuit City President and Executive Staff in an emergency meeting
President: Oh no! The news is horrible. Have you seen? The Republicans have rewritten the bankrupcy [sic] laws to punish the profligate credit card users. Do you know what this means?
Executive Staff (in unison): You don’t mean…
President: I do mean! No more Rainbows and Unicorns. No more Efficiently run company. No more anything. There is only one choice: Bankrupcy!
Executive VP: But, can’t we just recover?
President: No, you fool. The current bankrupcy laws make it difficult if not impossible for a firm to recover. Didn’t you read the article? Oh, woe is us. The Republicans, in a well meaning way, have helped put use out of business.
Executive Staff (in unison): NO!!!
President: We mustn’t think of just our 30,000 employees or ourselves. We need to think of those poor profligate credit card users who have been punished. And think of poor TrUmPiT with a store just a few blocks from where he lives… if he reads of this he may be chagrined!
Executive Staff (in unison): Oh, poor TrUmPiT. Poor, poor TrUmPiT.
(Meanwhile, the Legion of Doom gathers to gloat…)
Place: Legion of Doom Conference Table at the Legion of Doom Headquarters
Scene: Evil Republicans laughing evilly
Evil Republican #1 (who was promoted from Evil Republican #3): See, I told you it would work. Now 30,000 employees will be sent to the unemployment line and welfare offices. We now have all the money we need for the real Welfare Queens.
Evil Republicans (in unison): Hooray!
Evil Republican #1: But the best part is that we have chagrined TrUmPiT! He must have read about the impending bankrupcy [sic] by now. There is a store just a few blocks from where he lives.
All Evil Republicans laugh Evilly.
Bank of America made a good choice when it bought Merrill-Lynch, and it did this without expecting bailout money. But, B of A would be foolish to turn down bailout money that's given to it. The justification for the bailout money was that Merrill-Lynch had nearly 100 billion dollars in iffy mortgage securities, but B of A had already taken that into account when it purchased Merrill-Lynch for approximately 25% of its previous worth. The federal government's tossed a freebie to B of A because it feels a need to put more cash into the economy, not because B of A is in financial trouble. (Remember, this was one of the big banks that didn't want to take federal money last fall.)
There is indeed a term to describe this – it is "the financial enslavement of our grandchildren". There was once a time when this sort of behavior would have been considered morally repugnant. I fear our children and grandchildren will end up cursing us for not looking out for them, as adults should. And I predict they will object to their slavery, resist, and ultimately revolt out of a perfectly human desire for self-preservation. Think about that, if you are counting on them to pay for your comfortable retirement and all the expensive medical care you want.
"The current bankruptcy laws make it TOO EASY for a firm to recover, at least in normal times — Circuit City is being forced to liquidate because there's nobody available to buy any assets and DiP financing isn't really available right now."
Yes, that the evil Republican irony. Circuit City can't get the financing it needs in hard times to forestall bankruptcy, yet B of A gets manna from heaven. Where is the evil Rethuglican outrage? Welfare queens, indeed. Good riddance, Mr. Bush! Boo, hiss …
Russ,
It isn't going to end…
This paragraph from this CBS story is by far the most telling thing that I've read this week:
"When asked in an exclusive interview with CBS Evening News Anchor Katie Couric Wednesday whether his stimulus package would be successful, Mr. Obama said, "failure is never an option. Not in America."
http://www.cbsnews.com/stories/2009/01/15/politics/main4723147.shtml
So in the words of the next President, in America, success is about not failing… as apposed to risk taking with the possibility of failure.
Can someone tell me how to short silicon valley?
Where is the evil Rethuglican outrage?
Of course we're pissed. But don't confuse Republican with conservative/libertarian. Fiscal conservatism appears to be completely unrepresented in Washington at this time.
Brilliant, Evil Repubican.
In response to the title: would it be completely inappropriate to say "THIS IS SPARTA!!!"
?
Circuit City is bankrupt because their business model sucks, not because the evil Republicans conspired against them.
Their management, at least when I worked there about 5 years ago, were still running the electronics equivalent of a mid-20th century Sears, where you had fine commissioned salespeople with a wealth of knowledge to help the befuddled customer.
Except – in 2004 the salespeople were rather lacking in knowledge about the product and/or demoralized by corporate mgmt. repeatedly changing their compensation package (there were other erratic moves long before that infamous firing of the high-paid employees). Also the customer of the 2000s could just as easily deal with the less pushy people and better selection over at Best Buy, or get the stuff cheaper yet on eBay, or go to a smaller high-end retailer that might actually have personal service.
In any case Circuit City's bankruptcy/liquidation has been a long time coming, and unlike the current crisis investors knew this years ago (when I worked there C.C. and Best Buy had almost the same revenues, but Best Buy's market capitalization was 5 times Circuit City's. Go figure).
For the first time in my adult life I'm seriously considering moving out of the country. Not now, but after I get my degree (I'm going back to college this year).
Seriously. Not because I hate Obama and am having some kind of reverse Bush-hating, I'm-going-to-Canada tantrum, but because if this kind of thing continues, I don't want to be here when the tanks start rolling through the streets.
My dad phoned me the other day, worried about the government using inflationary financing to pay social security debt. He said "I wonder which states are going to break off first?"
Neither he nor I are paranoid, survivalist type freaks. But there's a lot to be worried about.
I have no idea how many pennies a nominal "dollar" of these remnants is worth.
Could be worse. They could be Japanese.
Sweep aside the politics and finance, and a labor shortage looms large. Our children should benefit from this shortage, but they won't if the rent-seeking class smothers them in new rents, as the Bushniks have done so fiercely in the last decade.
The Social Security safety net is not enough for our "Capitalists". They must convert their dubious promissory notes into taxpayer obligations too, and if taxpayer obligations are too few, they must create more of them, by the trillions per year if necessary, never mind that growth in the real tax base is dwindling almost to nothing while demand for entitlement to tax revenue explodes. It's all "Capital", and "Capital" is good, right?
And the demand isn't coming primarily from welfare queens. It's coming from the "Capitalists" in the Repugnican, as well as the Demoncratic, party. If you still think they're your libertarian champions, you're out of touch with reality.
Quote from Jacob Oost: "For the first time in my adult life I'm seriously considering moving out of the country."
Where are you going to go? Really, I'm looking for ideas.
Martin – do you require to put everyone in nice easy boxes like "capitalist" and "rent-seekers", etc… Does that make life easier for you?
Mezzanine,
Martin and I have our share of disagreements, but he is dead-on accurate when identifying the Political Class (either Party) as rent-seekers. There are a few exceptions on the national stage, but rent-seeker is an apt description of at least 500 of the members of Congress.
brotio – no matter what you say, they are human beings with human emotions. To reduce them to economic units is immoral on the face of it.
Mezzanine,
I don't disagree about politicians being human beings with human emotions. That is not incompatible with also noting that the first impulse of (most) politicians is to consolidate their power. And that is typically done by increasing rents, either through direct taxation or increased regulation.
Some of them may have altruistic motives but it's easier to assume they're after your wallet until they prove otherwise.
geoih, so far I'm thinking of Ireland, Australia, and New Zealand, with Australia in the lead. They are stable, wealthy countries that speak English, so it won't be like moving to Mars. Plus, they rank high on the Index of Economic Freedom (which I think seriously *under*estimates America's corruption level). England would be nice but it's out because in five years it could be the Islamic Republic of Great Britain OR 1984, in spite of their economic freedom ranking.
I'm also thinking of Singapore. Bryan Caplan talks about it from time to time and everything I hear makes me wish we had their government. The politicians' pay, as I understand it, is linked to the performance of the economy.
Mezzanine,
"…do you require to put everyone in nice easy boxes like "capitalist" and "rent-seekers", etc… Does that make life easier for you?"
I prefer "productive" to "capitalist", as not all the productive have access to any great amount of capital. And I use "political" instead of "rent seeker", but by political I do mean exploiter, rent seeker, etc. The categorization doesn't make life easier, but it does make for a clear moral perspective. That is, I would rather be thought of as productive than political, even though the political offers its rewards with less effort and risk. Others choose the categorization "society" to guide their moral perspective. From my perspective this is simply a rationalization to justify exploitation and rent seeking.
Is the fact that these deals keep happening at the 11th hour, midnight or over the weekend supposed to provide us comfort? "Sure we're bankrupting our future, but look how HARD we're working." Work smarter, not harder gents. Do bailout czars receive overtime pay?
For that matter does evil republican receive overtime pay?
Some of them may have altruistic motives but it's easier to assume they're after your wallet until they prove otherwise.
These are the worst, for their actions are sanctified by "good" intentions and they are always speaking of sacrifice.
You prefer other labels for the entities named? What upsets you about "capitalist" and "rent-seeker" specifically? Does avoiding these labels make life easier for you?
So the commanders of tax revenue and other rents are immune to criticism, or even accurate description, because they're feelings could be hurt? That's "libertarianism", these days?
The productive have access to their own labor, and labor is real capital, as opposed to an entitlement to command real capital, like money. A parcel of fertile land is similarly real capital, while title to the property is a record of entitlement.
… their feelings could be hurt …
True enough, Martin. Both a janitor and an investment banker are and can be referred to as productive, and both do control capital and can therefore be referred to as capitalists. Its just a rhetorical preference.
Reading this:
"The productive have access to their own labor, and labor is real capital, as opposed to an entitlement to command real capital, like money. A parcel of fertile land is similarly real capital, while title to the property is a record of entitlement.
Posted by: Martin Brock | Jan 18, 2009 12:54:23 PM"
one has to conclude from your own words that you do indeed believe that the productive are capitalist. The evidence is right there in your own words. I don't think you realize just how you twisted back on your own trail.
Perhaps as you try to split hairs the productive at the lowest level are capitalist with a small c, unlike Bill Gates who has managed to become a captialist with a capital C.
Capitalist is capitalist, everything else is just a matter of size.
All laborers are capitalists. All capitalists are not laborers. That's not hair splitting. It's simple logic.
Accountability?? Where's the ACCOUNTING?