Dec. 16: A date that should live in infamy

WND ^ | December 03, 2012 | Joseph Farah

[Perseverando]

Everyone knows we’re approaching a date that lives in infamy in American history – Dec. 7, 1941, when the Japanese attacked Pearl Harbor.

But there’s another more recent date in American history that should live in infamy.

It’s Dec. 16, 2008.

That’s the date on which President George W. Bush admitted what he did with the bailouts of the major investment firms and banks that were “too big to fail.”

Here’s what he said in that infamous admission: “I’ve abandoned free-market principles to save the free-market system,” Bush told CNN, saying he had made the decision “to make sure the economy doesn’t collapse.”

“I am sorry we’re having to do it,” Bush added. “I feel a sense of obligation to my successor to make sure there is not a, you know, a huge economic crisis. Look, we’re in a crisis now. I mean, this is – we’re in a huge recession, but I don’t want to make it even worse.”

We now have four years to reflect on that action and those words and ask ourselves collectively if Bush made the right call.

There is not a doubt in my mind he pushed the panic button, ensuring his successor would be Barack Obama and the economic misery would increase.

Let’s not kid ourselves. It was Bush who did this, with the backing of the entire political establishment. He removed virtually any chance of a Republican successor and set the stage for more bailouts, more squandered “stimulus” spending by Washington and more retreat from free-market principles.

It was Bush. It was Republicans who led the way. It was the GOP establishment that gave us Barack Obama and all the excuses he needed to continue on the destructive march toward socialism. After all, if socialism worked to solve economic problems,

[1rudeboy]

STFU, Farah. Like it or not, it worked.

[tet68]

Right, all Bush’s fault. Got it.
That however does not explain the hoseing we have gotten
for the last FOUR YEARS and are going to get for the
NEXT FOUR years.

Sorry Joe, it won’t wash.

[1rudeboy]

You gotta love the way he slips that it, “set the stage for more bailouts.” I blame President Harding.

[a fool in paradise]

“Bush’s fault”?

He was handling the pen but the Occupant of the newly created “Office of the President Elect” named Baraq Hussein Ubama was wetting his pants throwing temper tantrums for Bush to do this. And now Obama whines like a little bitch about how much money BOOSH spent (at his insistence).

[Toddsterpatriot]

He removed virtually any chance of a Republican successor and set the stage for more bailouts

Bailouts that were paid back and saved the banking system.

Now if only we could eliminate bailouts that don't work and cost trillions, we could balance the budget and pay off the debt.

[conservativefreak]

"STFU, Farah. Like it or not, it worked."
--1rudeboy

"Bailouts that were paid back and saved the banking system."
--Toddsterpatriot

The bailouts worked at covering over the losses of the banks, and socializing risk, but subsidized a dysfunctional banking system, along with zero percent interest rates. We would have had a better banking system now without the bailouts if we took the medicine and wrote off bad debt in 2008.

Here's a quote from Steve Randy Waldman from his article Yes, Virginia. The banks really were bailed out.

But who has lost anything from the bailouts? Wasn’t it a win-win? This all sounds very abstract. Where are the transfers?

If the government borrowed or printed a trillion dollars and gave the money to me, would there be any losers? If you don’t think there has been a wealth transfer, if you don’t think ordinary people have lost, please call your Congressperson and ask her to cut me a trillion dollar check. In some abstract sense, this policy of giving me money would push government debt higher. But that is so very vague a cost! I promise I’d do great things with a trillion dollars. My ideas are so much cooler than Goldman Sachs’, despite all the wholesome commercials they are running.

During the run-up to the financial crisis, bank managers, shareholders, and creditors paid themselves hundreds of billions of dollars in dividends, buybacks, bonuses and interest. Had the state intervened less generously, a substantial fraction of those payouts might have been recovered (albeit from different cohorts of stakeholders, as many recipients of past payouts had already taken their money and ran). The market cap of the 19 TARP banks that received more than a billion dollars each in assistance is about 550B dollars today (even after several of those banks’ share prices have collapsed over fears of Eurocontagion). The uninsured debt of those banks is and was a large multiple of their market caps. Had the government resolved the weakest of the banks, writing off equity and haircutting creditors, had it insisted on retaining upside commensurate with the fraction of risk it was bearing on behalf of stronger banks, the taxpayer savings would have run from hundreds of billions to a trillion dollars. We can get into all kinds of arguments over what would have been practical and legal. Regardless of whether the government could or could not have abstained from making the transfers that it made, it did make huge transfers. Bank stakeholders retain hundreds of billions of dollars against taxpayer losses of the same, relative to any scenario in which the government received remotely adequate compensation first for the risk it assumed, and then for quietly moving Heaven and Earth to obscure and (partially) neutralize that risk.

The banks were bailed out. Big time.

[Toddsterpatriot]

The bailouts worked at covering over the losses of the banks

How do you figure that?

[Graewoulf]

Socialist GWB File.

[1rudeboy]

Do you remember laughing about how TARP1, TARP2, and TARPx were going to be combined into a universal vortex of suck?

[conservativefreak]

When the US Treasury injected money into the banks (regardless of the health of the bank) via what was basically forced equity stakes using the Capital Purchase Program, it shielded Citibank from dealing with its skeletons in the closet. Citibank should have been liquidated, but wasn't. Furthermore Goldman Sachs shouldn't have been give 100% restitution for the insurance it bought from AIG.





The above image from the Congressional Oversight Panel's February 2009 report page 7. Notice in the above image the average subsidy in injecting capital to these banks was 22%. We know now that it was paid back with interest (except for Citi, which need more capital injections).

To complete the incestuous circle, banks made money by borrowing from the Federal Reserve at near zero interest rates and buying government bonds. Banks were the first ones to take advantage of the Federal Reserve's Zero interest-rate policy. I've wondered if TARP would've made money if interest-rates would reflect the inherent risk in the market at the time (2008-2010).

[Toddsterpatriot]

it shielded Citibank from dealing with its skeletons in the closet.

No it didn't. It didn't cover any losses, banks still wrote off hundreds of billions.

Citibank should have been liquidated

Why?

Furthermore Goldman Sachs shouldn't have been give 100% restitution for the insurance it bought from AIG.

So?

To complete the incestuous circle, banks made money by borrowing from the Federal Reserve at near zero interest rates and buying government bonds.

Near zero? The discount rate is 0.75%.

Banks were the first ones to take advantage of the Federal Reserve's Zero interest-rate policy.

But banks can't borrow from the Fed at near zero.

I've wondered if TARP would've made money if interest-rates would reflect the inherent risk in the market at the time (2008-2010).

I wonder why people think a collapse of the banking system, similar to the Great Depression, would be better than the profitable bank TARP that prevented a banking collapse.

[Notary Sojac]

The real criminals - the rating agencies who slapped "AAA" on all those junk mortgages, deceiving the banks and the nation - are still at large and doing business at the same lying stand.

[Notary Sojac]

We should never have gotten to the verge of "collapse".

Anybody with three functioning brain cells knew by say, late 2005, that the housing market was wildly overvalued. Anyone who said otherwise was either ignorant, or lying out of self interest.

All George Bush had to do was to make it clear in late '05 or early '06 that there would be no bailouts, that the banks' owners were 100 percent at risk for any bad investment decisions they had made.

[Toddsterpatriot]

All George Bush had to do was to make it clear in late '05 or early '06 that there would be no bailouts, that the banks' owners were 100 percent at risk for any bad investment decisions they had made.

That's an excellent idea. And the bad decisions the government pushed them into would be paid for by whom?

[Notary Sojac]

the bad decisions the government pushed them into

You know, I'm getting weary of hearing that.

I knew that the housing bubble was gonna pop when I saw the houses on my block go from the low $200's to the high $400's between 2001 and 2005. (And I sold out at the peak, too).

None of the people in my town who refi'd their houses and pissed away all the proceeds were tomato pickers or welfare moms. They were without exception white, middle class, employed people who were greedy or stupid or both.

When the true history of the housing bubble is written, I believe we'll find that the fraction of bubbliciousness coming from the CRA and associated programs was perhaps one-fifth, perhaps much less.

[Toddsterpatriot]

They were without exception white, middle class, employed people who were greedy or stupid or both.

I'm not worried about those people. You already convinced me that bank owners should have to eat those losses. Hey, wait a minute, they already did.

When the true history of the housing bubble is written, I believe we'll find that the fraction of bubbliciousness coming from the CRA and associated programs was perhaps one-fifth, perhaps much less.

Great. Who reimburses the banks for that one-fifth?

[conservativefreak]

it shielded Citibank from dealing with its skeletons in the closet.

No it didn't. It didn't cover any losses, banks still wrote off hundreds of billions.

Between December 1, 2007 and July 21, 2010, Citibank borrowed 2.513 trillion dollars from the Federal Reserve. If it didn't have any skeletons, why did it borrow from so many credit lines instituted by the Federal Reserve (more than any other financial institution)?

Sheila Barr in her book "Bull by the Horns" nicknames Tax-cheat Timmy the "Bailouter in Chief", who was on the phone with Citibank's CEO more than any other bank. Furthermore, she asserts that Citibank was the only bank that needed help from the TARP bailout. So, yes I think we can assert that the bailout and actions by the Federal Reserve shielded Citi from its own ineptness. Here's a quote from NY Times review of Bair's book that sheds light on my assertion:

Early on in the crisis, she said, Mr. Geithner wanted Ms. Bair’s agency to financially support Citigroup’s planned $1-a-share acquisition of Wachovia. In turn, the F.D.I.C. would receive $12 billion in preferred stock and warrants.

Mr. Geithner and Citigroup held private talks about the deal without telling Ms. Bair, according to her account. Regulators then planned to allow Citigroup to count the stock as capital, a boost to the bank’s “sagging capital ratios.”

When Wells Fargo swooped in with a higher offer that required no government backing, Ms. Bair indicated her support for the new deal. Mr. Geithner, she said, was “apoplectic” and wanted the F.D.I.C. to stand behind Citigroup, which then raised its bid. The Fed ultimately approved the Wells Fargo deal and Citigroup required two infusions of government capital.

As Citi continued to suffer in 2009, Ms. Bair pressed for the bank to put its troubled assets into a “bad bank” supported by private money. Ms. Bair said she received no support from other regulators, who feared it would unnerve the markets.

In essence, the US Treasury was subsidizing the risk and indeptitude of Citibank.

Citibank should have been liquidated

Why?

Sheila Bair answers your question here. Again, it's not the role of taxpayers to subsidize badly run businesses.

Furthermore Goldman Sachs shouldn't have been give 100% restitution for the insurance it bought from AIG.

So?

Any other market-based payout would not have been 100-cents on the dollar for all the insurance AIG insured to Goldman and all of it's other counterparties.

To complete the incestuous circle, banks made money by borrowing from the Federal Reserve at near zero interest rates and buying government bonds.

Near zero? The discount rate is 0.75%.

The Federal Funds Rate is between 0.00% and 0.25%

Banks were the first ones to take advantage of the Federal Reserve's Zero interest-rate policy.

But banks can't borrow from the Fed at near zero.

Yes, the banks did borrow from the Federal Reserve at near zero rates. Under the TAF Program Citibank borrowed money at 0.2% in late 2008, 2009. It wasn't until March of 2010 when the Federal Reserve raised the interest rates to 0.50%. The Primary Dealer Rate is now 0.75%, and you're technically right...it's not zero. That doesn't mean that low-interest rates are not a subsidy to banks.

I've wondered if TARP would've made money if interest-rates would reflect the inherent risk in the market at the time (2008-2010).

I wonder why people think a collapse of the banking system, similar to the Great Depression, would be better than the profitable bank TARP that prevented a banking collapse.

The banking system would not have collapsed if TARP was not passed, bad assets would've been written off a lot quicker. Bair puts it like this,

“Our bailout strategies didn’t clean out bad mortgage assets, and we didn’t force banks to take losses,” she says. “We imposed no accountability and did no fundamental restructuring. We were Japan, and I think we have a Japan-like recovery because of it.”

TARP was unnecessary, if the US Treasury wanted to spend money, it should've issued tax refunds not cash to a mismanaged financial institutions. Individual taxpayers have to bear the brunt of the risk taking, mismanagement, rate subsidization, debt-guarantees of the government to the financial institutions, not necessarily to stimulate the general economy (which financial institutions do) but to encourage rent seeking, (i.e. borrowing from the Fed at low rates, loan the Federal government, and make money on the spread.).

I wonder why people want to prevent forest fires at all times, even when the forest is filled with overgrowth, especially when if more forest fires were allowed, afterwards the forest would be more vibrant and promote growth.

[conservativefreak]

When the true history of the housing bubble is written, I believe we'll find that the fraction of bubbliciousness coming from the CRA and associated programs was perhaps one-fifth, perhaps much less.

Great. Who reimburses the banks for that one-fifth?

Actually, I agree that the banks should sue the politicians who voted the CRA and the regulators. Legally, it would be an uphill battle. The banks would have to prove that without the CRA they wouldn't have loaned to certain people, and that the cost of those certain people purchasing houses during a certain time lead to over-inflated housing prices, market distortions that posed an existential crisis to the bank and hindered the bank from fulfilling it's fiduciary responsibility. You'd hear cries and wailing from the left since a disproportionate amount of those people would be low-income minorities, and thus the banks would be labelled "racist".

[Notary Sojac]

Who reimburses the banks for that one-fifth?

You are confusing the roles of the parties involved.

The overwhelming majority of the actual liar loans written under the CRA, and most of the junk loans in general, were written by dodgy firms like Countrywide etc., who didn't give a damn about the soundness of the borrower or the soundness of the house's value, because they intended to sell that note within days of its being executed.

Then those loans were combined into "tranches" and assigned fantasy ratings of "AA" or "AAA" by Moody, S&P, and their fellow criminals.

Then the banks who were bailed out by TARP stupidly bought these stacks of feces at face value, although no law passed by Democrats or anyone else required them to do so. So allow me to break out the world's smallest violin in sympathy for their plight......