Everywhere I watch and read, pundits, economists and armchair market experts (I do fall into the latter group) pronounce the banks are hoarding the money given them through the bailouts.
That is completely and utterly false.
The banks are not hoarding the money. What they have been, and are, doing with that money is using it, as per what little regulatory guidelines that were not gutted by our congressional folks, for the reserves of the assets they hold.
From my article "Downgrading Tomorrow";
"Any publicly traded company or any fund used for investment must have reserves matching the risk represented in the securities they hold for investment. Bond issues (which all debt based derivatives are) rated AAA need very little capital to be held in reserve as a safety net should that bond issue go belly up. This is because anything rated AAA is assumed to have little or no risk of failing. As a bond issue loses its AAA rating, each downgrade significantly raises the amount of money needed to hold in reserve by the holder of that bond.'
"In the 4th quarter of 2008, $2.3 Trillion more of these bonds were downgraded. So, the reserves needed rose, in some cases, dramatically. Please, do not think of this in terms of only the 4th quarter 2008. There have been a lot more before this, and there will be a dramatic amount after this.'
"Guess where all that money from the "bailouts" is going. That's right, almost every penny is going to the reserve accounts as these derivatives are downgraded. That money cannot be used to lend out, because it is already covering part of the loss in value of these derivatives."
In no way am I defending the banks. Their ability to make bad decision after bad decision is rather astounding. I am suggesting that unless you understand what the exact problem is, how can you possibly construct a solution?
CNBC, FOX, CNN, all the major broadcast media, and all the major print media keep parading "experts" in front of us. I have yet to hear, except by a few astute folks in the blogging world, any one of these "experts" say these words: "Before we give any money to the banks or any corporation, level3 assets must be cleared from their books. For any money given them will go directly to their reserve accounts, and cannot be used to increase productivity."
To claim the banks are "hoarding", and ignore the collapse of the assets they hold, which will require more money in the future as they are downgraded more, is at best a lie. Maybe, just maybe with some, it is a lie of ignorance. When the Chairman of the Federal Reserve or the Secretary of the Treasury intimates the banks are hoarding, that is an outright lie, and they know it.
Again, every penny given in all the bailouts is lost forever. It is, at best, a lie to suggest the American taxpayer will realize a gain on any of this bailout money. At worst, if you are a politician or able to influence investment, it is a felony to suggest this.
Until these derivatives are forced out into the open, and can be cleared from the system, our economy, no, the global economy, has no chance of recovery. Every day that goes by the losses mount. Every dollar that goes to help hide these derivatives is lost, because tomorrow they will be downgraded more.
It is hard for me to believe only a few of our congresspeople are able, or willing, to put their career on the line for the sake of our country. Those that have talked about the problem, ie Ron Paul and Brad Sherman, are ridiculed by the head in the sand majority.
Pelosi, Reid, Boehner, and McConnell all seem to be utterly clueless about the problem. Pelosi and Reid are under the devastatingly false idea that if the government creates jobs, that will fix the problem. Boehner and McConnell both voted for the first bailout package, which is a 100% loss of taxpayer money, and are only feigning disgust now because a Democrat is in the Oval office. If McCain had been elected, how do you think they would vote on the second half of the bailout program?
What did we elect them for?
I guess it is so they get to lead the lifestyle of an elite, and get a benefit package, for the rest of their life, which will allow them to never have to worry. Even in a depression.
That's a very nice gift to them, from the electorate, which pays the taxes. Especially in light of this simple fact; Over the last 15 years, congress has removed the laws that prevented the banks from leveraging themselves into oblivion. In 1998, most banks could only borrow at a 10:1 ratio. By 2006, they could leverage to a 72:1 ratio (JPMChase), 35:1 (Bear Stearns), 40:1 (Lehman Brothers), 28:1 (Citi), 32:1 (Merill Lynch), 39:1 (Wamu), 34:1 (Bank of America), and many more that are leveraged 20 times borrowed money to assets, and more.
And, in a fitting twist of gratitude, congress, along with the previous administration, decided to double your tax burden to cover their bad decisions.
Your great-grandchildren may have choice words about all of this. Unless, of course, our educational system is gutted further. The growth of private schools that teach children dinosaurs did not exist has grown by more than four hundred percent in the last ten years. Should that trend continue, your great-grandchildren may not be able to perform their multiplication tables, let alone develop independent critical thinking abilities.
The best part about the rise in these private schools - they get 60-70% of their funding from the government. So, we get kids who know who Esau was, but will never be able to calculate exponent functions of interest over time.
Funny, I guess we already have that.
4 comments:
wells fargo turned down tarp$$ last week? why turn down a freebee?
Under the rules set by Paulson and Bernanke, the banks did not have to disclose where that money went.
Obama has taken that aspect away from Bernanke, and now any entity that receives TARP/EESA or any other relief money must fully disclose how that money is being used.
There are many banks that DO NOT care to show where the money is, and is what this article is about. If they have to show where they are using the money, the market may realize how bankrupt they really are, and punish their stock immediately.
At this moment the banks still tell us they are "fundamentally sound." Every bank that has gone under in the last 18 months has said the exact same thing, often days before imploding.
The new rules impede, just by a little, an extension of that lie. It is enough of an impediment for Wells to turn it down.
Many people believe their exposure to California and Florida with pick-a-pay option ARMs is enough to doom them.
Buying Wachovia will turn out to be devastating.
Very nice post rick. Just going to add my 2 cents here...
Also lost in the conversation about "banks not lending" is the fact that banks lend less during a recession (and rightfully so). Add this to the fact that less loans are being securitized and sold on the secondary market and its no wonder that lending is down. The run-up was so large prior to the burst that ofcourse lending will be down relative to the recent past.
You are right. The banks are slowly moving back to guidelines used decades ago. The run up was so large, and it was the only fuel our economy had.
Somewhere in the mix the understanding that you must have a sufficient manufacturing base must be realized. When you begin trading good paying jobs for cheaper imports to spur business development, you eventually run into a problem. At some point, you will run out of enough good paying jobs to trade.
At that point, you must increase debt to fuel economic activity. It will work for a time, until you have pulled forward demand so much, that no one NEEDS to buy anything else. That is the point we are at now.
Bad thing is this - Since the market makers have little left to make enormous profit on, I fear for food and commodity prices.
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