An oft-quoted investment banker e-mails us: “There is no capital in the entire global financial system. None. When I say ‘financial,’ I mean banks, hedge funds, private equity funds, homeowners and other leveraged players. There is some capital among the ‘real money’ players such as sovereign wealth funds and central banks. And the U.S. can ‘print’ some. But that's it. … The problem with the distressed assets is not that there are no buyers. There are plenty of buyers; I speak to them every day. The problem is there are no sellers; that is, the banks won't sell. Because to sell is to book a loss on what you have sold and what remains. And to do that is to die. That's what it means to be insolvent.”
Just to clarify those last sentences: The banks bought the bad assets at high prices. They need to sell them at low prices. But this banker is arguing that they are too financially stressed to absorb the losses that would entail. Conversely, so long as they don't sell the assets, they can pretend they haven't lost any money on them, as they can pretend that they will rebound to a better price once the mania is over. The other way of putting this is that much of the banking sector is already insolvent, it's just not prepared to admit it.
There are various ways to tell this story, but the punchline is always the same. The financial institutions are insolvent. For some time many of the people in them perhaps honestly believed that it was a temporary liquidity issue, that the assets were worth more than they could sell them for. That time has long passed. They bet it all on Big Shitpile and lost. And they know it.
Robert Kuttner of Geithner's plan:
The plan is a convoluted mess, but here is the essence: The basic problem is that America's largest banks are insolvent. They owe more than they own. Geithner's strategy is to disguise this reality. His problem is that Congress is in no mood to legislate another nickel of bailout funds. If his latest plan were written as legislation, it could not get even a majority of Democrats. So his scheme takes $100 billion of the Treasury's remaining $350 billion in TARP money, uses the Federal Reserve's enormous funds, which are outside congressional control, to leverage that sum to $1 trillion, and then uses that money to insure private purchases.
If that sounds complicated, it is. And it’s complicated because Geithner expressly rejected the more straightforward solutions: He explicitly ruled out direct government ownership of the big banks, or even giving the government majority seats on bank boards. Rather, under his plan, regulators will subject bank balance sheets to intensified study to determine just how bad things are -- something that regulators should have been doing all along. Then, Geithner hopes to use loans from the Federal Reserve and guarantees from the remaining TARP funds "as a bridge to private capital," as Geithner delicately put it.
The basic point is extremely simple. We have a large number of bankrupt banks. We have a public interest in keeping the banks functioning, but we have zero public interest in giving taxpayer dollars to bank shareholders or to the executives that wrecked the banks they ran.
Geithner can design as complex a dog and pony show as he wants, but if his plan takes up hundreds of billions of taxpayer dollars and does not involve wiping out the shareholders and sending the bank executives packing, then he has ripped us off.
Obama on temporarily nationalizing the banks, a la Sweden:
Sweden, on the other hand, had a problem like this. They took over the banks, nationalized them, got rid of the bad assets, resold the banks and, a couple years later, they were going again. So you’d think looking at it, Sweden looks like a good model. Here’s the problem; Sweden had like five banks. [LAUGHS] We’ve got thousands of banks. You know, the scale of the U.S. economy and the capital markets are so vast and the problems in terms of managing and overseeing anything of that scale, I think, would — our assessment was that it wouldn’t make sense. And we also have different traditions in this country.
Obviously, Sweden has a different set of cultures in terms of how the government relates to markets and America’s different. And we want to retain a strong sense of that private capital fulfilling the core — core investment needs of this country.
And so, what we’ve tried to do is to apply some of the tough love that’s going to be necessary, but do it in a way that’s also recognizing we’ve got big private capital markets and ultimately that’s going to be the key to getting credit flowing again.
Now I'm on the record as being decidedly pro-nationalization, but this is as clear and well-argued a case for not nationalizing as you could hope to get.
Yes, Obama is impressively articulate and well-informed — and his response shows that he has actually considered the issue. It’s light-years better than what we’ve grown accustomed to in recent years.
But his two main arguments aren’t actually very good. Yes, we have thousands of banks — but the problems are concentrated in a handful of big players. In fact, the Geithner plan, such as it is, already acknowledges this: the “stress test” is to be applied only to banks with assets over $100 billion, of which there are supposed to be around 14.
And the argument that our culture won’t stand for nationalization — well, our culture isn’t too friendly towards bank bailouts of any kind. Yet those bailouts are necessary; and even in America they may be more palatable if taxpayers at least get to throw the bums out.
Oh, and not a week goes by without the FDIC taking several smaller banks into receivership. Nationalization is actually as American as apple pie.
All this talk of “culture”, “traditions”, and so on are an opaque way of saying that Democrats are terrified of nationalization because they worry about Republican name-calling.
Some sort of nationalization is inevitable. Why the Obama team thinks it's a good idea to light a pile of money on fire first is beyond me.
A quick update on the Obama Admin's decision to continue asserting Bush's expansive state secrets argument in order to have lawsuits dismissed...
The NYT slams Obama for 'defending the indefensible:'
The Obama administration failed — miserably — the first test of its commitment to ditching the extravagant legal claims used by the Bush administration to try to impose blanket secrecy on anti-terrorism policies and avoid accountability for serial abuses of the law.
He called up "administration officials," granted them full anonymity to defend their position (without bothering to explain why anonymity was warranted here), did not offer a single identifying fact about who these "officials" are, and then faithfully wrote down what they said, without a word of questioning or skepticism. He then found two independent sources who also praised Obama's decision. He did not cite or quote a single source critical of any of these claims -- including even the ACLU's Wizner, who he never bothered to call to ask for comment. It was a completely one-sided act of uncritical administration-amplifying stenography -- "anonymous administration officials say X and I'm going to write that down and pass it on uncritically and then praise it" -- which is exactly what many Beltway reporters have long meant when they praise themselves for doing "original reporting."
Rachel Maddow talks to an attorney for one of the torture victims whose lawsuits would be dismissed:
Zadie Smith ruminates on Obama's use of language and bridging cultural divides
It's my audacious hope that a man born and raised between opposing dogmas, between cultures, between voices, could not help but be aware of the extreme contingency of culture. I further audaciously hope that such a man will not mistake the happy accident of his own cultural sensibilities for a set of natural laws, suitable for general application. I even hope that he will find himself in agreement with George Bernard Shaw when he declared, "Patriotism is, fundamentally, a conviction that a particular country is the best in the world because you were born in it." But that may be an audacious hope too far. We'll see if Obama's lifelong vocal flexibility will enable him to say proudly with one voice "I love my country" while saying with another voice "It is a country, like other countries." I hope so. He seems just the man to demonstrate that between those two voices there exists no contradiction and no equivocation but rather a proper and decent human harmony.