On the Bailout
Everyone and their brother has put in their two cents on the Geithner’s U.S. economy bailout plan. I thought I’d add mine here.
First, no one knows how had things really are. They are all guessing.
Second, I really like Obama but I think he’s making a huge strategic error here (and one large enough that it may outweigh all the good he does). All the banks that don’t have the cash to continue operations should be unwound and the assets sold off. There should be forced bankruptcies for most of the largest banks.
The executives should be fired and then equity holders should be wiped out. Then pay the creditors in order like any normal bankruptcy.The way to get the “toxic debt” off the books of the bankrupt banks is to transfer the debt to creditors. Let them decide whether or not to sell it at fire-sale prices or wait until it returns to its “real” value.
In some cases where one could justify a Chapter 11 bankruptcy the feds could provide DIP (debtor in possession) financing for the bankruptcies but I don’t see many banks worthy of this treatment. Most anyone who played with mortgages or CDOs is wiped out, plain and simple. They are bankrupt, we just haven’t acknowledged that yet. Having taxpayers foot the bill to subsidize the banks is a big mistake.
Anything less than letting the banks fail is simply pretending that reality is something other than it really is. It may feel better in the short term but it is only going to prolong the pain and make things worse.
- Curtis
9 Responses to 'On the Bailout'
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on April 8th, 2009 at 2:24 am
Its good to know you support the capitalistic model for dealing with failed business. Jim Rogers has been a strong critic of the bailout plan and foresees dire consequences down the road. Ive come to respect his opinions after reading his books. He keeps a distant perspective on society and its position in larger historic terms. He compares the bailouts, and the resultant “zombie banks” to what Japan did in the past and sees similar ill affect.; Prolonging what should be a shorter painful process into a long period of stagnation. The bailouts and the coming higher taxes are akin to taking from the competent and giving to the incompetent. If the banks were allowed to fail, the strong competent survivors could take over the assets as you mention. That said, I’m comfortable to follow what trends develop and keep an optimistic attitude. I hope the inflationary predictions are overstated. I hope the dollar isn’t doomed and that excess regulation doesn’t spell the end of free markets. But mostly, I hope I’m quick enough to get out of the way if things do fall completely apart. We do live in interesting times…
on April 10th, 2009 at 12:53 am
Unbridled capitalism is not very good at creative destruction of large companies. They have too much money and too much political influence. So they get bailouts and handouts.
We have a lot of corporate socialism here.
- Curtis
on April 10th, 2009 at 12:12 pm
No argument with any of your post, that’s pretty much my opinion as well. However, I was a bit surprised that you didn’t discuss the change from mark to market accounting rules. I thought this was one of the more important developments, so I’m curious to hear your thoughts on its significance.
on April 10th, 2009 at 9:06 pm
“They have too much money and too much political influence” C.F.
Such a tangled web…
…
I’m about 1/3 into the risk book. Very interesting. I have always noted similarities between front line professionals. Its interesting that those Ive encountered at least, have had a hard time explaining their success. It wasn’t something they were taught in school. But just a part of who they were inside; perhaps from lifes own experiences they were dealt growing up.
on April 10th, 2009 at 9:26 pm
I hope you like the rest. If you do, and you have time, I’d appreciate a review on Amazon.
- Curtis
on April 13th, 2009 at 4:34 pm
Great stuff, Curtis. Welcome back, Sir!!
Cheers,
eD
on May 8th, 2009 at 11:23 am
The central role in this mess is OTC (over the counter) derivatives. If this was a normal creditor/debtor problem it could be worked out in the way you suggest but with OTC derivatives there are other (Investment) banks that own calls/puts exotics on these mortages. To un-wind them would mean a collapse of their balance sheet. This is the paradox, the damage is huge but the collateral damage will be huge.
If you look at AIG, whats really happening is that the govt is giving them money to pay of MTM (marked to margin) for their derivatives products, which in turn supports their (highly leveraged) balance sheet. They cannot un-wind these coz the liquidity is dead. I think this is why this mess is becoming a little tricky to solve.
But as of this time, people are sounding optimistic, so lets see.
ps. one of the most entertaining books i’ve ever read and your postings on another forum are gems. thanks for everything.
on May 18th, 2009 at 8:46 am
Read the new book, “House of Cards” about the collapse of Bear Sterns and you will know how bad Wall Street can really be, and how lies are dolled out regularly. I would like to say this was an isolated moral issue but unfortunately, all thru history the Wall Street bankers have tried to rip people off.
on September 8th, 2009 at 6:38 pm
It’s a shame your just now seeing what I saw in Obama before he was elected. This man is clueless to economics 101.
Dan