Relevant and even prescient commentary on news, politics and the economy.

I Told You So

Robert Waldmann is pleased to note that he was right and that Paul Krugman and Joeseph Stiglitz were wrongggg. They claimed that PPIP was a huge giveaway, because purchases of toxic assets would be 85% financed by no-recourse loans from the FDIC. I noted that this financing would only be available if the FDIC (not just Treasury) agreed, and that the FDIC had no intention of being taken to the cleaners.

Now I read that, so far, PPIP has generated a 36% annual return for the Treasury. That’s not the point. The point is that it has generated approximately no profit or loss for the FDIC, because the FDIC refused to be played for suckers. They key sentence is

The Treasury is an equal equity partner in each of the funds and provided debt financing for the $29.4 billion program.

Note that the acronym FDIC doesn’t appear.

*Sorry for the brief uninformative title. I foolishly precommitted to the title:

OK so Masaccio is a great painter but I don’t know if he is right about the final outcome of the legacy loan portion of the Geithner plan. If he is I will write a post entitled “I Told You So.”

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Accounting for Scott Sumner

Robert Waldmann

This whole post is after the jump as my accounting is not ready for prime time.

Scott Sumner thinks he is the first to note that the cost to the US government of bailing out the big banks is more likely to be a profit than a cost. Clearly he doesn’t read angry bear much, as I have been predicting that for months.

His accounting strikes me as very odd. Last I hear, the total cost of bailouts (including GSEs, AIG, GM and Chrysler) was predicted to be $87 billion. This does not include the cost of the FDIC honoring its contracts which was not discretionary and not a bailout by any normal use of the word.

Now Sumner reports the good news that the cost not including GM and Chrysler will be only 158 billion ?!?

Huh what happened ? First I think he forgot about roughly 125 billion when he wrote “Last time I wrote on this subject the eventual cost to the government from bailing out the big banks was estimated at a negative $7 billion–in other words a profit to Uncle Sam of $7 billion.” I believe that when he wrote “the government” and “uncle Sam” he meant “The Treasury”. Uncle Sam also has this little organization called the Federal Reserve Board. Last I heard it was predicted to make a profit of 125 billion out of its bailout efforts. Not all of that involved big banks, but I just don’t believe that the government made only 7 billion out of its direct interactions with big banks. In any case, the 125 billion (or probably more now) seems to have escaped Prof. Sumner’s notice entirely.

The news which he reports is that the current guess is that the cost of bailing out AIG is going to be about zero. That is, the amount AIG owes is roughly equal to the expected present value of future repayments.

Sumner gets his huge loss overall because he describes the cost of bailing out Fannie and Freddie as “$165 billion and rising.” I believe this is the amount they owe the Treasury minus zero. Sumner argues that big banks and AIG were OK investments and GSEs weren’t because in one case he includes expected discounted repayments and in the other he decides they are zero.

It is worth noting that the GSE rescue involved loans at 10% per year and the GSE debt is not equal to money transferred from the Treasury to GSEs plus the interest the Treasury paid on that extra debt. Oh no. It is the amount transfered plus penalty interest rates charged on that amount.

Basically, I beleive that Sumner did not stick to a consistent definition of “cost” and redefines the word so as to generate meaningless numbers which confirm his prejudices.

Also he doens’t understand the extent of the US government and thinks it is just the department of the Treasury.

One of us is profoundly confused.

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Wall Street Bailout comparison

… While it will be many years yet before we can put a hard number on the amount of taxpayer dollars actually lost in the bailout, the Center for Media and Democracy’s latest assessment of dollars disbursed in the bailout graphically illustrates the extraordinary lengths to which the federal government went to bailout the financial sector.

The silence from deficit hawks is deafening on this point, even on how to have the money returned eventually…except, it appears, for Social Security and unemployment insurance. Are you really going to put up with this from either party? Looks to be yes, of course! (update: sources of numbers found at Sourcewatch)

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AIG, Logic, Insanity, and Tim "I Saw Nothing" Geithner

Go read:

  1. If you’re only reading one post, see FT Alphaville, which incorporates and expands upon…
  2. Tom Adams and Yves Smith’s posting at Naked Capitalism discussing the document and the reality of the situtation.
  3. the document itself is available from either The Long Room or the Huffington Post.

If the FRB of NY really believed that their only option was payment in full and not telling anyone about it, then Tim Geithner’s leadership abilities make Ben Bernanke look like Dwight Eisenhower.

BarryO is, apparently, finally trying to make clear the distinctions between TARP, TLGF, TALF, CPLF, Maiden Lane, Maiden Lane II, Maiden Lane III, etc. and the actual Stimulus Package. A good place to start: One was a huge giveaway that has led to overreported profits and high taxpayer expenses. The other was passed by Congress.

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Would Have Been Hoisted from Comments Elsewhere

But Steve Randy Waldman already did the heavy lifting:

several of the other officers had been stationed at the height of the housing bubble at facilities located near D.C. in Northern Virginia. They lived in very modest homes which were removed from their workplaces by substantial driving distances, but these homes were nevertheless particularly pricey for someone with a family and on a military salary. The humble homes ate significant chunks out of those salaries as the commutes did to the (already scarce) time these men had to spend with their families….

While we were away, about halfway through our deployment, the crash began and something mysterious had gone horribly wrong with the machinery of America. The small equity positions these men has invested in their respective residences were wiped out in a matter of months. By the time they were close to returning to these homes the men were all badly underwater by over one hundred thousand dollars and, what was worse, the Army had reassigned them….

Their instinct was that if they had borrowed money from a friend or a neighbor they would feel a deep, almost sacred, obligation to make good on their debt and pay it off in full plus interest as soon as they could manage it….That was, after all, the “right thing to do” as they had been taught by their parents and grandparents.

But then the bailouts with taxpayer money started. The “too big to fail” talk began, and then the wave of foreclosures and layoffs and emerging scandals of the unjust excesses of the financial industry, and so on. And these men began to feel that from the personal scale of their little world, their family was also perhaps “too big to fail” by the forfeit of their hard-won life’s savings.

They also started to question how the bailouts could make sense without some of the benefits flowing to innocent and responsible men such as themselves….

Go Read the Whole Thing.

Note:I mentioned this near the end of my last post, but it really deserves to be seen and read by more than the six people who might read to the end of that one.

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Are TBTF Banks Out of Danger? The Market Doesn’t Think So

Down here it’s just winners and losers
And don’t get caught on the wrong side of that line

This will be a long post. Even with all the pictures above the fold.

It started with a finger exercise during my daughter’s swim team practice:

Just in case you thought I was picking on The Big C in my previous post, let us look at the other major financial institutions (Too Big to Fail, or TBTF, Banks) over the same time period.

The Remaining Investment Banks:

While Goldman Sachs—as with most of the other so-called Winners—shows a significant upturn and major gains since the beginning of 2009, Morgan Stanley’s appreciation has been rather less apparent. However, both have returned only to approximately the price they held during the interregnum (after Bear Stearns fell but while Lehman Brothers ignored the warning and decided not to right the ship).

The Mortgage Lending Leaders:

Both firms show an increase in stock performance beginning in Q1 of 2009. Wells Fargo had a precipitous dive after LEH filed bankruptcy, but recovered in a similar amount of time. JPMorganChase, having acquired Bear for either a song or too much money, remains below the level it reached during the interregnum, but solidly in the middle of its range since 2006.

The Consumers-as-Profit-Center (“Retail”) Banks:

As is apparent, Capital One’s stock decline was not precipitated by the proximate solvency crisis itself, but rather by the decline in earnings and profits, and deflation in wages, that was in full swing by early 2006. While Bank of America does not have that preamble, it sees a similar decline in its stock price from the middle of 2007. By the time the recession is officially declared, the trend has started. And while Bear’s fire sale to JPM causes a decline in bank stocks, it is not until LEH that BAC mirrors its competitors above. More like MS than GS, BAC’s recovery to less than one-half of its pre-recession trading price suggests that the market is less confident than management that the firm’s major issues are behind it.

But one thing abides. The market isn’t happy.

Even as we might divide this squad into Winners (GS, JPM, WFC), Losers (C, MS), and Also-Rans (COF, BAC), six of those seven (exception: JPM) appear to be viewed by the market as no stronger than they were during the interregnum, the time when everyone was waiting to see if the other shoe would drop.

There are certainly other reasons the stock price might be down: insider selling at the firms is at record or near-record levels, and sooner or later people will figure out that when insiders are selling at 82:1 levels is not the best time to buy. Their loans are down (post on that coming soon) while, as Linda notes at ataxingmatter:

A recent study suggests that big banks in the TBTF category now enjoy a significant cost-of-funds spread compared to other banks. That is, they can borrow money more cheaply, leading to greater ability to make profits, than can other banks, because of the implicit guarantee that the federal government will step in and save them because they are TBTF and pose a systemic risk. That advantage may amount to as much as 48% of the TBTF banks’ profits this year (or as ‘little’ as 9%, on very conservative assumptions). The government, by the way, gets nothing for this implicit guarantee–unlike a commercial guarantor, it is not being paid a regular premium for the service.

So maybe investors believe that this advantage will go away. (Or, as noted above, maybe investors have figured out that the Big Banks aren’t taking advantage of this opporunity, expecting that it will never go away.)

The one certainty is that, with all of their advantages (the refusal of the Administration to support cramdowns for non-investment properties, leading to perverted accounting that makes banks solvent and mortgageholders underwater at the same time on the same property; the continuing payment of interest on Reserves in a deflationary environment, which has created a perverse incentive for the TBTF Banks not to lend; charging their smaller competitors for the TBTF Banks’s failures by raising their FDIC contribution and collecting three years of it upfront after not having saved for a rainy day; having Administration economic policy run by Larry Summers, whose last foray into the financial markets was too embarassing even for him to explain (h/t Felix); Ben Bernanke having decided that doing only half his job should be enough (h/t Brad DeLong); and the general delusion that the banks are necessary to and helping with a recovery. And that’s off the top of my head.

As The Epicurean Dealmaker observed last week vin a post eeryone should read:

Chancellor [of the Exchequer Alistair] Darling could not have been clearer:

“I’m giving them a choice. They can use their profits to build up their capital base, but if they insist on paying substantial rewards, I’m determined to claw money back for the taxpayer,” he said.

[H]e plans to do this by making banks choose between their employees and their shareholders…

Economists have made this point repeatedly: the first priority of people who run a business should be their responsibility to their shareholders. (See Steve Randy Waldman’s post yesterday for a clear explanation. And then see the post he pulled from comments after that, which saves me the trouble of hoisting from another person’s comments again for the real ramifications of TARP and the bailout. Why do Megan McArdle and the Administration hate the troops?)

Paying large bonuses while the banks themselves remain near insolvency is bad for the shareholders. Goldman Effing Sachs realizes that, even if they didn’t quite go far enough.

Why do I believe the state of the TBTF Banks ranges from near insolvency (C, MS) to on the edge of insolvency? The market tells me so.

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Much to My Amazement

UPDATE: It gets even stranger. The bankrupt-since-October-2008 Lehman Brothers is going to pay $50,000,000 in bonuses for this year. (h/t alea’s Twitter feed)

It appears all of the “gosh, we really made a lot of money from bailing out rich bankers who socked it to their customers” rhetoric is having a small problem in the realization:

The U.S. government abruptly shelved plans to start trimming its 34% stake in Citigroup Inc., after investors demanded a price so low that the Treasury Department would have lost money on the deal….

The huge offering encountered a lukewarm reception on Wall Street, where investors were skeptical of the company’s earnings prospects…

Gosh, golly, gee. Really? I wonder if that’s a recent phenomenon:

(Recession period—still not officially over—shown in cyan.)

Hmmm. Guess not. Ah, well, there’s always next year. Or the year after. Or…

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Hoisted from Comments (thought not here)

UPDATE: D-Squared chimes in, saying in less than 100 words what took me a couple of thousand (though with no quotes):

After the “first hundred days” in the term of a new Democratic President comes the next stage; the almost impreceptible transition among his supporters from saying

“of course, he’s been hampered by all sorts of obstacles to date, but he’s about to start delivering on all those promises he made to his supporters on the left”

to saying

“well, he never really promised anything and it’s terribly naive to think he was ever going to deliver anything to his supporters on the left”

Apparently we’ve reached it.

That’s why he gets the big bucks, folks.

Brad DeLong attempts to attack Matt Taibbi’s facts. Tao Jonesing replies in comments (DeLong starts; Jonesing in bold) :

  1. The financial reform bill that just passed the House is not nearly as strong a bill as the Treasury wanted. The reason is not that Obama and Geithner did not push for a stronger bill, but rather that the members of congress balked at a stronger bill. What financial did Obama and Geithner “push for,” exactly? And don’t point us to speeches. What did they push for, i.e., actually apply the pressure of the bully pulpit? Unless there’s some way to establish that they brought pressure to bear, I think this fact is an opinion.
  2. Citigroup did not receive a $306 billion bailout as the first major act of Obama’s presidency. First, where does the $306 billion number come from? The number I associate with Citigroup is $45 billion of TARP money. Certainly Citigroup would be bust and gone if not for government aid extended to it during George W. Bush’s presidency–aid that Obama endorsed–but it now looks as though Citigroup will pay everything back: that the government will profit from the aid it extended to Citigroup.Clearly, Taibbi is including the backstop in his number, which you realize in 8.*
  3. James P. Rubin is not James S. Rubin.
  4. The James Rubin whom Mike Froman brought in to staff the economic policy search was not Bob Rubin’s son. 3-4. Taibbi admits this error.**
  5. The Obama economic policy inner circle–Tim Geithner, Gene Sperling, Larry Summers, Christie Romer, Peter Orszag–is not “a group of Wall Street bankers.” It is only 5% Wall Street banker–only 1/4 of Larry Summers can possibly count as a Wall Street banker.You misread what Taibbi said, which was that two people in Obama’s economic policy inner circle–Goolsbee and Kornbluh– were replaced with a group of Wall Stret bankers. Taibbi did not say that the all of the inner circle were Wall Street bankers. So, your fifth “fact” is actually a strawman. Perhaps you are focused on the subtitle? I can’t lay the subtitle at his feet because editorial staff make that decision. Note from Ken: Brad is incredibly generous in the case of Geithner, whose dinner plans while at the NY Fed were consistently at the homes of Wall Street bankers, and Summers, whose work since attempting to destroy Harvard’s endowment has been with Goldman, D. E. Shaw, and other paragons of Wall Street. Summers may have worked for years without being on Wall Street, but it has been his primary source of income since his divorce.
  6. Mike Froman staffed the economic policy search. Mike Froman–a very smart and capable man–did not lead the economic policy search. He was not some corrupt Svengali who foisted advisors who would whisper evil in the innocent Obama’s ear. Obama led the economic policy search. Come now, Obama led the search? Really? What did that leadership entail, delegating the day-to-day responsibilities to somebody else? Froman, maybe? Since you seem to know, what did Froman actually do? And Taibbi never said or implied Froman was a corrupt evil Svengali. His point was that Froman was a Citi insider. Overall, this fact seems more like opinion.
  7. Austan Goolsbee’s absence from the transition staff was not notable. Austan Goolsbee does have a senior subcabinet appointment. And Austan Goolsbee is not a voice on the economic left–this is the man who told the Canadians not to take Barack Obama’s claims that he wanted to renegotiate NAFTA seriously. I don’t know the story of Karen Kornbluh.Your opinion of Goolsbee’s departure is an opinion, not a fact. I don’t know whose opinion is correct, although I’d bet on yours.
  8. Ah. Taibbi says: “the government also agrees to charge taxpayers for up to $277 billion in losses on troubled Citi assets.” First of all, $277 + $45 = $322, not $306. But a guarantee is not money at risk and money at risk is not money lost. As I said, it looks like the government is going to make money off of its support of Citi. (Albeit not off its support of AIG.) Clearly, Taibbi is including the backstop in his number, which you realize in 8. Note from Ken: This is, by the way, bullshit, since it’s actually another example of the Rubinesque “contracts are only valid if they favor Wall Street firms.” What is being counted as “profits” are deeply-discounted equity options that have value because of the mass amount of subsidization and drug money that has gone into the banking system without in the least being passed on to the consumer who is footing the bill.
  9. Tim Geithner was not hired as Treasury Secretary by Mike Froman. Tim Geithner was hired as Treasury Secretary by Barack Obama. You are correct that Obama hired Geithner. Nobody else could have, at least in the end. But who proposed Geithner? And what weight did Obama give the opinion of the people who proposed him? Did Obama just rubber stamp the recommendation after meeting Geithner? Who else was on the list? While there’s no doubt that Taibbi was making a lot of assumptions about Froman’s role and level of influence to jump to the obviously false conclusion that Froman hired Geithner, the fact that the conclusion was obviously false does not detract from ugly optics that Taibbi was attempting to magnify.
  10. According to CBO, the ARRA so far is not worth 640,000 extra jobs as of September 2009 but rather 1.1 million plus or minus 500,000–and that number will grow.You got your number from the CBO, but Taibbi says he got his number from the White House. There is a website managed by an executive branch agency that proclaims the 640,329 job number used by Taibbi.

So that scores as 5 (or 6, since I’m inclined to count [2] in the Taibbi column) to 3 (3, 4, and arguably 7) against DeLong, with (8) called a draw (I would give it to Taibbi—the guarantee covers $306B in “assets” without cherry-picking, so potential buyers are seeing “support”-level offers for the entire $306B. But there is a specific issue in using the $306B number, and Dr. DeLong correctly notes that the actual backstopping was greater than Taibbi reports. Whether this makes his interpretation here preferable is left as an exercise.)

Hint for the future: if you’re going to claim you’ve got fifty corrections, lead with your ten best.

*From the comments later, Our Own Rusty lays out the details:

Wall Street Journal 11/24/2008…Under the plan, Citigroup and the government have identified a pool of about $306 billion in troubled assets. Citigroup will absorb the first $29 billion in losses in that portfolio. After that, three government agencies — the Treasury Department, the Federal Reserve and the Federal Deposit Insurance Corp. — will take on any additional losses, though Citigroup could have to share a small portion of additional losses…In addition, the Treasury Department also will inject $20 billion of fresh capital into Citigroup. That comes on top of the $25 billion infusion.

So it didn’t happen during Obama’s presidency, but it did happen post-election, and during the time that the Obama Administration was—by its own declarations—actively holding discussions with the parties.

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In Good News, the Race to the Bottom Got Harder

Remember the argument that we shouldn’t tax people because they’ll just move elsewhere?

The British government appears not to believe it.

Will the Geithner/Summers axis continue lying that “we can’t do that”? Since it really is a Windfall Profit, taxing it seems a reasonable idea. And now we won’t even be able to pretend that workers will just “move to the U.K.”

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