Wed 2010-08-25 08:41 EDT

2008 Bailout Counter-Factual | The Big Picture

Barry Ritholtz

...My disagreement with the Zandi-Blinder report is not its theoretical underpinnings -- it is by definition a hypothetical counter-factual. Rather, it is the counter-factual Blinder/Zandi chose to use: ``What would the economy look like now if we had done nothing?'' Instead, I propose a better counter-factual: ``What if we had done the right thing, instead of nothing -- or the wrong thing?''...In my counter factual, the bailouts did not occur. Instead of the Japanese model, the US government went the Swedish route of banking crises: They stepped in with temporary nationalizations, prepackaged bankruptcies, and financial reorganizations; banks write down all of their bad debt, they sell off the paper. In the end, the goal is to spin out clean, well financed, toxic-asset-free banks into the public markets...One by one, we should have put each insolvent bank into receivership, cleaned up the balance sheer, sold off the bad debts for 15-50 cents on the dollar, fired the management, wiped out the shareholders, and spun out the proceeds, with the bondholders taking the haircut, and the taxpayers on the hook for precisely zero dollars. Citi, Bank of America, Wamu, Wachovia, Countrywide, Lehman, Merrill, Morgan, etc. all of them should have been handled this way...

2008 Bailout Counter-Factual; Big Picture.

Mon 2010-05-24 10:11 EDT

Hussman Funds - Weekly Market Comment: Don't Mess with Aunt Minnie - May 24, 2010

John P. Hussman

...Last week, we observed an Aunt Minnie featuring a collapse in market internals that has historically been associated with sharply negative market implications....Treasury Secretary Eddie Haskell/Timothy Geithner has scheduled a trip to Europe this week to urge European leaders "to pay better attention to potential market reactions to policy moves, and to accelerate the European rescue program." This promises to be a fiasco. What could European leaders possibly find more arrogant than to be lectured on bailout policy - not simply by the U.S., but specifically by a one-trick pony bureaucrat whose chief trick is the ability to smoothly talk the language of prudence while simultaneously pillaging the fiscal stability of an entire nation for the benefit of bondholders who made bad loans?...Providing Greece (and possibly some of its neighbors) a graceful exit from the Euro requires greater courage but lower ultimate cost - particularly to the citizens of Greece itself - than a policy of forcing heavy austerity, dislocations, and internal deflation within Greece. The effect of austerity policies will be to damage the revenue side of the Grecian economy enough to leave the deficits little changed in any event. One would like to go back a decade in time and choose different policies that would have allowed Greece to maintain the Maastricht deficit limitations, but it is far too late to push a full-grown genie back into an itty-bitty bottle...

2010; 24; Aunt Minnie; Hussman Funds; Mess; weekly market comments.

Sat 2010-05-22 20:00 EDT

"Drop Dead Economics": The Financial Crisis in Greece and the European Union

Michael Hudson

Financial lobbyists are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. The Greek bailout should be thought of as a TARP for German and other European bankers and global currency speculators. Almost $1 trillion is being provided by governments (mainly Germany, at the cost of its own domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks. They will make a killing, as will buyers of hundreds of billions of dollars of credit-default swaps on the Greek government bonds, speculators in euro-swaps and other casino-capitalist gamblers. (Parties on the losing side of these swaps now will need to be bailed out as well, and so on ad infinitum.) This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The ³sanctity of debt -- sacrificing the economy to pay bondholders -- is to be used as an excuse to slash Greek public services, pensions and other government spending...

Drop Dead Economics; European Union; Financial Crisis; Greece.

Thu 2010-05-13 13:39 EDT

The People v. the Bankers

Michael Hudson

Financial lobbyists here in the U.S. are using the Greek crisis as an object lesson to warn about the need to cut back public spending on Social Security and Medicare. This is the opposite of what the Greek demonstrators are demanding: to reverse the global tax shift off property and finance onto labor, and to give labor's financial claims for retirement pensions priority over claims by the banks to get fully paid on hundreds of billions of dollars of recklessly bad loans recently reduced to junk status. Let's call the ``Greek bailout'' what it is: a TARP for German and other European bankers and global currency speculators. The money is being provided by other governments (mainly the German Treasury, cutting back its domestic spending) into a kind of escrow account for the Greek government to pay foreign bondholders who bought up these securities at plunging prices over the past few weeks...This windfall is to be paid by taxpayers -- ultimately those of Greece (in effect labor, because the wealthy have been untaxed) -- to reimburse Euro-governments, the IMF and even the U.S. Treasury for its commitment to predatory finance. The payment to bondholders is to be used as an excuse to slash Greek public services, pensions and other government spending. It will be a model for other countries to impose similar economic austerity...

bankers; people.

Credit Writedowns Sun 2010-05-09 09:06 EDT

Guest Post: Possible Misunderstandings about Municipalities and their Bonds

Frederick Sheehan

Problems of state and municipal finance worsen. Governors announce new spending cuts at press conferences but inspire little confidence. The fury of emergency announcements leaves the listener (as well as the governors) in a daze. Research reports offer broad explanations but have left bondholders, as well as employees and local residents, unprepared for discontinuities. In other words, there will be instances when these constituencies will find themselves marched to the slaughterhouse without warning...

bonds; credit writedowns; Guest Post; municipalities; Possible Misunderstandings.

Wed 2009-11-25 09:59 EST

Hussman Funds - Weekly Market Comment: "Should Come as No Shock to Anyone" - November 16, 2009

John P. Hussman

The big picture is this. There is most probably a second wave of mortgage defaults in the immediate future as a result of Alt-A and Option-ARM resets. Yet our capacity to deal with these losses has already been strained by the first round that largely ended in March. The Federal Reserve has taken a massive amount of mortgage-backed securities onto a balance sheet that used to be restricted to Treasury securities. The purchase of these securities is reflected by a surge in cash reserves held by banks. Not only are the banks not lending these funds, they are contracting their loan portfolios rapidly. Ultimately, in order to unwind the Fed's position in these securities, it will have to sell them back to the public and absorb those excess reserves, so to some extent, the banking system can count on losing the deposits created by the Fed's actions, and can't make long-term loans with these funds anyway. Increasingly, the Fed has decided to forgo the idea of repurchase agreements (which require the seller to repurchase the security at a later date), and is instead making outright purchases of the debt of government sponsored enterprises (GSEs such as Fannie Mae and Freddie Mac). Again, the Fed used to purchase only Treasuries outright, but it is purchasing agency securities with the excuse that these securities are implicitly backed by the U.S. government. This strikes me as a huge mistake, because it effectively impairs the Fed's ability to get rid of the securities at the price it paid for them, should Congress change its approach toward the GSEs. It simultaneously complicates Congress' ability to address the problem because Bernanke has tied the integrity of our monetary base to these assets. The policy of the Fed and Treasury amounts to little more than obligating the public to defend the bondholders of mismanaged financial companies, and to absorb losses that should have been borne by irresponsible lenders. From my perspective, this is nothing short of an unconstitutional abuse of power, as the actions of the Fed (not to mention some of Geithner's actions at the Treasury) ultimately have the effect of diverting public funds to reimburse private losses, even though spending is the specifically enumerated power of the Congress alone.

2009; comes; Hussman Funds; November 16; shocks; weekly market comments.

Thu 2009-07-30 00:00 EDT

Hussman Funds - The Destructive Implications of the Bailout - Understanding Equilibrium - May 18, 2009

-- ``The Treasury has issued an enormous volume of debt into the frightened hands of investors seeking default-free securities. This has allowed the Treasury to finance a massive and largely needless transfer of wealth to bank bondholders so easily over the short-term that the longer-term cost has been almost completely obscured...transferring wealth from those who did not finance reckless loans to those who did... the Treasury and Federal Reserve have crowded out more than a trillion dollars of gross investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.''

18; 2009; Bailout; Destructive Implications; Hussman Funds; Understanding Equilibrium.

Tue 2009-04-21 00:00 EDT

Mish's Global Economic Trend Analysis: Geithner's Plan Can Succeed

...in avoiding a hit to bondholders at seemingly any taxpayer cost

Geithner's plan; Mish's Global Economic Trend Analysis; succeed.

Tue 2009-04-21 00:00 EDT

naked capitalism: Guest Post: Moral Hazard Now Biting GM

``GM bondholders are probably wondering why they need to take a haircut on their bonds when the counterparties of Bear Sterns, Lehman, and AIG are being made whole at par after investing in far riskier securities''

Biting GM; Guest Post; moral hazard; naked capitalism.

Tue 2008-09-23 00:00 EDT

Hussman Funds - Weekly Market Comment

An Open Letter to the U.S. Congress Regarding the Current Financial Crisis, by John P. Hussman; ``the plan advocated by Treasury is essentially a plan to bail out the bondholders of financial institutions that made bad lending decisions, with little help to homeowners that are actually in financial distress''; Paulson bailout plan

Hussman Funds; weekly market comments.

Mon 2008-07-14 00:00 EDT

Mish's Global Economic Trend Analysis: Operation "Rescue Fannie" Underway - Paulson a Blatant Liar

"likely the start of a U.S. Taxpayer Bailout of China. Disgustingly it is a U.S. Taxpayer bailout of PIMCO as well." "It is a moral hazard to the highest degree, for bondholders to be made whole in this mess."

Blatant Liar; Mish's Global Economic Trend Analysis; operations; Paulson; Rescuing Fannie; underway.

Mon 2008-03-31 00:00 EDT

Hussman Funds - Weekly Market Comment: What Congress and Investors Should Understand About the Bear Stearns Deal - March 31, 2008

"Protecting the bondholders of investment banks is not an efficient way to help homeowners."

2008; Bear Stearns Deal; Congress; Hussman Funds; Investors; March 31; understanding; weekly market comments.

Tue 2008-03-25 00:00 EDT

Mish's Global Economic Trend Analysis: Debate Over Bear Stearns: Hussman vs. Mauldin

"this deal still stinks to high heavens...Not only were existing shareholders deprived of rights to reject the deal, JP Morgan and the bondholders should be the ones taking risk, not the Fed and not taxpayers."

Bear Stearns; Debate; Hussman; Mauldin; Mish's Global Economic Trend Analysis.