Now Greenspan tells us that temporarily nationalizing broke US banks might be OK. If that doesn’t stop you in your tracks, it should. The man often called the high priest of laissez-faire capitalism is saying that he can imagine briefly taking some of the most troubled US banks into state ownership because that is better than the alternative of letting the market sort it out. That is vertigo-inducing indeed, like Lenin doing an about-face on the whole capitalism thing. It is, quite rightly, getting a lot of attention. After all, if Greenspan thinks there are problems with laissez-faire capitalism, and with market-based solutions to banking problems, what is he likely to say next? That marginal revenue doesn’t equal marginal cost for profit maximization? The economic mind boggles at the idea.
Greenspan’s Hidden Agenda [The Daily Beast]
I thought we discussed this yesterday…Greenspan is not the Francisco d’Anconia of his day, because if he were, he would have done away with open market operations funds, moral suasion and “open mouth policies” and instead tied monetary policy to gold. Read the book. Do your homework.
He’s just trying to un-f#ck up his f#ck up. It would be much easier if he would admit his mistakes and fade away…
Green Eggs and Spam
He’s just acknowledging that they are insolvent. The market based solution is to allow them to Lehman, which would be worse than nationalization.
He’s a bozo, but he’s right about this.
PIMCO.
Feb. 19 (Bloomberg) — Misha Malyshev, a Citadel Investment Group LLC trader who helped two of its hedge funds gain about 40 percent last year, resigned, according to a person familiar with the firm.
Malyshev left the Chicago-based firm this week with two members of his team, said the person, who asked not to be identified because the information is private. He was head of “high-frequency” trading, a computer-dependent strategy that is used by two of the firm’s hedge funds. Katie Spring, a Citadel spokeswoman, confirmed the departures.
Screw Greenspan. Put up the tapes the judge is releasing in the A.Duprey case.
Galts Gulch or Burnetts Bush???
Is it true his current employeer is shorting the crap out the banks? And therefore, there is personal gain behind the statement?
I’m going to start reading ‘Above the Law’ instead
oh noes @10!
Alan Greenspan shot my MONKEY.
I cannot believe CNBC just gave Greenspan a pass on this – worst of all is Liesman apparently trying to preserve his good favor with the old coot.
Greenspan has zero credibility on this because he is a paid consultant for Pimco and Paulson & Co. Both of those firms would make out nicely if the government screwed the equity and paid bondholders 100c on the $1.
That Greenspan would suggest the taxpayer pay him off but take losses in the hundreds of billions – as the taxpayer is on the line with insurance to C/BAC and preferred equity in most banks – is just insane.
”You would have to be very careful about imposing any loss on senior creditors of any bank taken under government control because it could impact the senior debt of all other banks,” he said.
What is that statement other than talking Pimco’s book?
Taking down the equity and preferred of BAC/C would immediately crush the equity/preferred of every other bank as the bondholders sought to force them into nationalization.
This is a dangerous road Greenspan proposes we take – what bank (including JPM, GS, or MS) would be “solvent” under the test he would apply to BAC or C? Do you honestly think GS could liquidate tomorrow and pay its debts?
EP your jokes are lamer than FDR’s legs
unfortunately, the ayn rand argument is lost on the ideologues, er I mean, “enlightened liberals” both here and in DC
http://money.cnn.com/2009/02/17/pf/experts_Tetlock.moneymag/index.htm
@13, your second paragraph shows you don’t understand the concept of captial structure preference.
But don’t worry, evidently you aren’t the only one.
Lies-man
Andrea Mitchell’s face has more craters than the moon.
@17 – no retard, it’s not about capital structure preference. Do you think Pimco’s bonds get paid 100c on the $1 if Citibank is wound down? What happens to other bank bonds if Citi bonds recover, say, 30c?
What Greenspan wants is for the taxpayer to step up and pay HIM off. It’s not so much a concern about wiping out lower levels of capital, it’s about deciding that “senior credit” is sacrosanct and recovers 100% and everything below that gets zero – and the taxpayer gets the tab.
“That is vertigo-inducing indeed, like Lenin doing an about-face on the whole capitalism thing.”
EP, I thought you knew some history! Lenin did in fact do a Greenspan style about-face in 1921. His program was called “New Economic Policy” and allowed for market based pricing for small business and agricultural goods. Lenin kept control of “the commanding heights.”
@20, so we all agree the banks are insolvent, but no one said everything below senior should be wiped out, but definitely the equity holders. You disagree?
Take a break and read this, a true cautionary tale: http://tinyurl.com/cvaqtw
“A Funny Thing Happened on the Way to New York
(Or: Pillsbury associates, brace yourselves.)
Thursday, February 19, 2009 11:40 AM – By David Lat”
“EP, I thought you knew some history! Lenin did in fact do a Greenspan style about-face in 1921. His program was called “New Economic Policy” and allowed for market based pricing for small business and agricultural goods. Lenin kept control of “the commanding heights.”
Watch your attribution.
@22 – obviously if anyone takes a loss it should be equity, agreed.
I do not know if the banks are really insolvent. What is the metric? I don’t have access to any of these books, but I doubt any bank – or hedge fund – would be able to liquidate in today’s market and pay off creditors.
There are simply no bids in the market and if the test is “where you could sell assets today,” then everyone is screwed.
I have talked to people who have looked at some of the toxic assets and say they are worth far more than the bids – probably not where they are being carried, but far more than the bids.
Does that justify pre-emptively wiping out the equity or, if the firms are not in immediate danger of default, do we let them live on and see if they earn their way out?
Bloomberg has comments from Lockhart speaking today who says bank nationalization is not under serious consideration.
If you believe in markets, then the toxic stuff is worth the bid. (It sounds like my neighbor who refuses to sell his house because he knows it’s worth more than what he’s been offered.) There’s a ridiculous amount of cash looking for undervalued investments so I don’t buy that argument.
Your solution sounds like Japanese &/or Garn-St Germain. Both failed horribly.
I know it’s unfortunate that our banking system is insolvent and I too wish it wasn’t. But I say let’s deal with it.
(EP should post the elegant solution that was sent to her anonymously yesterday.)
What is laissez-faire about pumping cheap money into the system for years again?
Milking that Voltaire paraphrase again, I see…
@ #8 — neither– MEREDITH’S MUFF !!!
@25
When the sum of your goodwill and deferred tax assets are greater than your common equity and you haven’t properly marked your assets, you are insolvent.
Can we please stop saying “there are no bids”. There are plenty of bids in the market for every asset, it is just that none of the bank wants to sell their asset to the market at the bid prices.
@31 – we say “there are no bids” when the markets being made are 10%’s wide.
Are any of the people bidding for assets willing to sell those same assets at bid+2%? bid+5%? I doubt it.
Imagine if the market for IBM was 59/119. Would you consider that a functioning market? Would you mark your long IBM position to 59?
@32, I would swoop in and buy it at 59 ’cause it would be a sweet deal for me.
agree with 4: C and BAC are all but legally insolvent, as shown by the fact that their equity is trading at close to $0. The market is just waiting to see how its all sorted out.
33 It may be a sweet deal but you can’t buy it for $59 – in the example here people that are selling are not willing to take less than $119. You can bid $59, but no one is going to meet you with an offer to sell. Which is the problem.
EP, please stop being yet another media type who proclaims Greenspan the “high-priest” of laissez-faire. This is like saying Richard Dawkins is the high-priest of christianity. Greenspan was head of the most ANTI-free market institution currently in existence. Trying to centrally-plan the price of capital is just as bad as trying to centrally-plan the price of butter or lawn furniture or anything else. Actually, it’s much worse, because when you inevitably set the price wrong, you devastate an entire economy (not just the lawn furniture market.) Then, the masses cry out that “the free-market has failed.” Had we let markets set interest rates, instead of a room full of old men, this entire episode could not have taken place.
“EP, please stop being yet another media type who proclaims Greenspan the “high-priest” of laissez-faire.”
Watch your attribution.
@32,
“In Houston, it’s worth 50 bucks…”
Everything I need to know about banking, I learned from a pawnbroker.
32,33,35,etc…A market price is what the public (buyer) is willing to pay. Thats all, end of story.
We need to create a need to sell. For everything. Stop giving the banks money, force assett sales. Bang! Now you have a market! And one that is moving not just continuing to sink.
It may be painful at the start but at least something is happening.
@26
I don’t think Lockhart is in the loop that he thinks he is in. However, he may be right.
“I have talked to people who have looked at some of the toxic assets and say they are worth far more than the bids – probably not where they are being carried, but far more than the bids.”
Ah, good ‘ole modeling to perfection like its 2006…
1 to 4, 7 & 36: Well put, thanks! Now, on a less technical level, Greenspan is full of gobbledygook; he talks in circles and has probably changed his econ camp/ethos a few times during his career. The modern central banker is a not a market theoretician or participant, he is a puppeteer that tries to uphold the image that a government does not influence the central bank, whatever. He jovially manages to say “we”ll have this discussion again in ten years”, well no shit Sherlock; as long as the amplitude modulation of regulation looks like a perfect sinusoid, yes we will. It’s tiring, really tiring.
-SC
@39 – it is that kind of idiotic thinking that got us into this problem in the first place.
So by your logic, in 2007 all of those toxic assets were money good because there was someone willing to pay full price for them. Now suddenly 2 years later they are all worth 80% less because that’s where the buyers are?
It was just as insane to mark these assets so high two years ago as it is to mark them so low today.
Was oil really worth $145/bbl in the summer? Should XOM have marked its reserves to $145 in July and now mark them back down to 35?
If you can’t see that you are just setting us up for the next bubble.
Boom-and-bust – yeah, it’s great for countercyclical traders. But the lack of certainty poses a massive drag on the real economy.
@41 – granted mark to model has drawbacks.
By the way, how do these magical bidders decide what these toxic assets are worth?
Santelli’s righteous indignation is amusing reading….
Where’s the righteous indignation over the inability for the US taxpayer to capture the value created by saving the US banking system… GS now trades at over $80/share comared to when they were at $47.41/share before the US taxpayer stepped in… So GS and all the others were essentially bankrupt but the taxpayer still saved them… And did we, as a nation, recapture the share price difference for the TARP recipients between Nov. ’08 and today? Nope. I love the blatant selection bias over who is and is not deserving of government help.
@44, he uses a model that he’s willing to back up with his money.
@43… I see your point. One thing wrong here though.
Take home values. The way I see it the banks, bond holders, etc are still pricing these assets at 2007 values. No incentive to sell thanks to me and you. Homes sit vacant, prices decline, more people vacate homes. They slowly trickle onto the market at market prices that will sell the asset in todays market but it’s not fast enough and prices continue the spiral to zero.
Todays bargain basement price is tomorrows I could have bought it for less.
@47 – yes, agreed, everyone who has bought an asset since September has gotten run-the-fuck-over.
So the only solution is to price things today at a level where you can be sure tomorrow’s price will be higher?
What is that price? Zero?
That’s why the only solution may be for the taxpayer to come in and say, “I’m a buyer at X.”
@44
41 here. As a magical bidder, I look at things like how much is the underlying collateral worth? What am I going to do if I foreclose on this thing? How am I going to be able to pay my investors a pref on par with the pref’s banks like BAC and C are offering?
I mean, look at it this way–yesterday Obama came out with a plan that encourages servicers to cut coupons down to 36% of the Borrower’s income. So what does this mean for me? Now I get less coupon, but now since I can’t foreclose, I’m stuck holding this thing for 5 years, at which point, I have to sell the collateral at whatever the current price will be (do you wantt to bet that houses will trade at 2007 prices?); furthermore, asking a bank to finance this purchase on my end would be complete comedy, so I have to price this thing to a pure equity yield.
Let me know if you see a whole lot of value in that… Do you think any of the banks holding these things would buy them at their carrying values?
@44
41 here,
Things to consider:
1) What’s the underlying collateral worth? If home prices have fallen 30% on average, can I bid more than 70% of par?
2) What was the original LTV? Did they lend at 80% when they should have been at 70%? Now I’m at 61%. Before factoring in PV.
3) So Obama convinced servicers to cut coupons to 36% of Income. Now I can’t foreclose for at least 5 years so I’m stuck collecting no current income on these things with the hope of being able to sell the collateral in five years for 61% of par. Welcome to the 4 handles.
4) How am I going to pay my investors? C and BAC are offering 8%+ prefs. Why would they invest in my fund if they can get that much current income owning the same assets through a bank? All of a sudden that 4 handle looks pretty steep.
Sorry, got an error on my original post so I though I had to re-write it…
I can’t believe anyone still taking Ayn Rand seriously. She’s a novelist! If her writings are your guiding light in life, you are no different than Scientologists, who believe in a sci-fi writer’s “space opera.”
@48: You’re right, the tax payer must step in. But, the problem is that populist-pandering pundits don’t understand that in order to save the system we must have some price inflation.
God help us all, this is devolving into a national catastrophe.
@41/49/50 -
Right, agreed, that’s a very logical model.
But that’s exactly the problem, as you say in point 4, you need to build in a profit spread, at least as high as the ROE you can get elsewhere on a risk-adjusted basis.
You might also look around and say, hey, there aren’t a lot of other bidders in the room, maybe I’ll back off another 5% just to see what happens.
Now if I’m a shareholder in a major bank laden with these assets, do I want to hit your bid – knowing that your bid is (FV – profit spread – risk premium – liquidity premium), which is certainly lower than where they are marked?
Or would I rather finance these things and hope that all of these government programs can inflate FV and that the profit/risk/liquidity premiums shrink?
Really the banks are doing the rational thing and holding these assets as long as possible.
That’s the real reason the Federal government become a buyer. With a lower cost of capital, lower required ROE, and has massive sources of liquidity, the government can demand a smaller concession from FV which will reduce spreads and encourage trading.
The government should not come in and pay wildly above FV for these assets, but can certainly make profitable bids well above the current market.
Having Treasury as a buyer in the market is also good for you – there is someone absorbing excess supply which prevents you from being run over if someone decides to dump a massive supply.
54…. how do we build a profit spread on something you can’t value?
You can’t!
The free market can determine these values.
Let it work! End of story!
If we can’t realize this. Good Luck! See you in the soup line! I hope the MN feeds us ferry dust with our soup!
EP,
How should I watch my attribution?
When you say, “The man often called the high priest of laissez-faire capitalism is saying…” without attributing anyone else, you are lending credence to that incredibly misguided idea. Had you said, “the man often ERRONEOUSLY called the high priest of LFC…” I would have no beef. Repeating that AG is in the free-market camp, when he’s so obviously not, harms to all, whether you believe the original statement or not.
@56
EP just wants to show how dumb you are.
You see, the entire paragraph was copied and pasted from The Daily Beast. All she provided as a hint was the link at the bottom of the paragraph. If you followed that link you’d find the entire piece with the proper byline.
Yeah I know that’s in poor style and obnoxious. But that’s EP for you.
I’m surprised she hasn’t already replied and told you “Gotcha!”
“Poor style and obnoxious” is reserved for little Randians in this case.
57-
Ah. Now I see the error of my ways.
EP-
My apologies. I don’t read so good.
@ 54,
Fair enough if you’re comapring realized losses and unrealized losses, but we’re not. The question is where banks should mark these things and whether the current bids in the market place are the actual values of these things. In that case, you’re being pretty naive if you don’t account for investor profits in your marks. Furthermore, if you’re putting a lot of weight into the offer price when determining your mark, aren’t you essentially pricing this thing at what you want it to be worth? Couldn’t you put your offer at .90 on the dollar to goose up your mark? My point is this–bids are real, offers aren’t. Nobody would lift an offer on this stuff in this market. Banks hit bids. Since this is the case, shouldn’t value be based on the bids?
In other news, Obama wants judges to be able to reset principal amounts on homes being foreclosed on to “fair market value”. Say hello to lower coupons, and longer time periods to foreclose. All of a sudden that 3 handle is looking pretty rich…