by anderson
[Warning: the follow contains a passage of repetitious, possibly tiresome, vulgarity, entirely directed toward the Federal Reserve, and Wall Street generally. Please have patience while this is worked out of the system, and thank you for your indulgence.]
Here's a shocker: did you know that the shit the Fed bought up was the same shit that everyone knew was shit and said
was shit, but which Bernanke's Federal Reserve said was all
"investment-grade" shit, not the shit everyone said was shit, but the shit that Bernanke got a hold of was some sort of secret, good shit nobody else knew about? Well, all of that was shit.
Check out some of the
Great Big Shit Pile the Federal Reserve bought from banks, and thence
told the American public that they were not only going to get repaid but
would make a small profit! Woo hoo! This'll be great! Who could
possibly complain about a "bailout" if you were going make a profit?
Ahh, those precious Wall Street wizards really were on our side.
Except,
it was all a load of shit from the Great Big Shit Pile, the same shit
pile everyone knew was a shit pile, a big one, that had not morphed into something other than a shit pile, and that the banks were
desperately trying to keep covered with leaves, straw, and denial, lest
anyone feint, or riot, at the sight and smell of it.
Case: Maiden Lane LLC ,
the American taxpayer-owned, once $28.8 billion "asset" closet, is now
worth a whopping $27 billion and shrinking fast:
The
so-called assets included collateralized debt obligations and
mortgage-backed bonds with names like HG-Coll Ltd. 2007-1A that were so
distressed, more than $40 million already had been reduced to less than
investment-grade by the time the central bankers testified. The
government also became the owner of $16 billion of credit-default swaps,
and taxpayers wound up guaranteeing high-yield, high-risk junk bonds.Maiden
Lane ... was created to hold the assets the central bank acquired to
facilitate JPMorgan Chase & Co.�s purchase of Bear Stearns.When
Bernanke and Geithner testified in April 2008, $42 million of the CDO
securities the Fed would eventually buy had been downgraded to junk,
data compiled by Bloomberg show. By the time the central bank funded its
$28.8 billion loan to Maiden Lane 12 weeks later, about $172 million of
such securities the Fed purchased were rated below investment gradeMore
than 88 percent of Maiden Lane�s CDO
bonds and 78 percent of its non-agency residential mortgage-backed debt
are now speculative grade ...
Maiden Lane also contains
commercial real-estate loans and other mortgage debt.
American
tax payers own commercial real estate paper! Now, that is great
news.
Federal Reserve Chair, Ben Bernanke, "received a
doctorate in economics from the Massachusetts Institute of Technology,
..." Never has a "piled high and deep" attribute been more assiduously
assigned to so appropriate a person as Ben Bernanke. MIT
ought to stick to programmable mechanical robots, stop spitting out
programmable economic ones.
If this is coming as a surprise to you, Anderson, you might think about getting out a bit more.
ReplyDeleteWhen an asset suddenly drops more in value than the balance sheet of a firm can sustain, the firm is technically bankrupt. Usually, one closes it down. But suppose that it's impossible to close the firm down. Then there are two ways to proceed: if the firm is profitable, even though bankrupt, one can re-capitalize the firm. However, if the asset's drop is only temporary and its value will recover with time, then one can simply decline to mark down the asset. If the firm is profitable, then even if the asset's decline is permanent, with the grace provided, it may be able to earn enough to re-capitalize itself.
With the financial crisis, we did a little bit of all three options. The Lehmann option-- closing the firm down-- was disastrous-- causing panic and a collapse of the prices of quite sound assets. The AIG option-- re-capitalizing the firm-- was politically disastrous and, depending on how it was done, extremely expensive. The Maiden Lane option was relatively cheap, assuming that the Fed eventually is made whole, either by assessing the banks or directly.
The case of vapors that the right-wing and the media are having about what was done in 2008 is coming a lot too late. If they had been reading Calculated Risk, Nouriel Roubini, or even our humble blog, they would have understood Maiden Lane for what it was in real time.
Hmm, I thought the sarcasm was a bit more evident. Apparently not. Sorry for the confusion.
ReplyDeleteActually, I'm going to respond at length to Charles' unnecessarily ingracious remark. Firstly, the article is centered on how the Fed kept, and continues keep, everyone in the dark about "asset composition," even though everyone knows it's a bunch of crap. Why is that? Why are American tax payers being refused information about what it is they purportedly "own"? If history serves lesson, it is because things are much worse than publicly acknowledged.
ReplyDeleteSecondly, this specious notion that these assets will "recover value" exists on the presumption that the housing bubble will refill. "Recovery," I think is the popular idiom. Much of this MBS-CDO junk is founded on mortgage contracts with bubbleized face prices, which means, you must realize, that what is really counted on is a return of value on these assets, is that the housing bubble bubble up again.
However, Charles, you might be right. Maybe things will recover. America continues to amaze the world with its ability to deceive, the world and itself.
I'm sorry that my remark seemed ungracious, Anderson. It wasn't intended to be so at all.
ReplyDeleteThe people who run things believed that they were doing the only things that could avert a much worse crisis, the kind where you can't withdraw money from a bank to buy groceries or use your charge card.
Now, I disagree with their view of the world. From the beginning, I said we needed to write mortgages down to realistic values and spread the pain between homeowner, taxpayer, and lender. But the people who run things understand the world in a different way. They see it from the standpoint of the large investment banks. Repair asset values, and everything else follows.
The reason they hid what they were doing is not, in my opinion, because the asset values have fallen much lower than we think. It's because the public simply could not understand what they're doing... which is rational, even if I don't think it's the right approach.
Asset prices are a bit of a fiction. A gold bar that's worth $1500 an ounce in New York City might be worth just a cup of cool water on a desert island. So, if one is on a plane ride from New York City to desert island back to New York City, it's important to pretend that the gold bar is worth millions of glasses of water while one is on the desert island.
I agree with you that the re-flation of the asset bubble is unlikely to happen. Bad assets will have to be written down. If the owners are given enough time to do that, they can. I hope that the owners are mostly still the banks. But that question--who the real owner of the bad assets is--is what we really need to answer. We already know pretty much how bad the assets are, which is pretty bad. I did a recent post about it two weeks ago, giving specific figures and references.
Charles,
ReplyDeleteThanks for your response. Indeed, as many have argued, write-downs, cram-downs, etc., must happen for there to be any stress relief of bad debt clogging balance sheets. But that didn't happen for the most part, with due deference being paid to banking interests. That deference has given us Wall Street's approach, which has been to conceal that debt, or most of it, pretend it's all good and hope things reinflate. I quite agree with you that this is entirely the wrong approach directed at the wrong target."The reason they hid what they were doing is not, in my opinion, because the asset values have fallen much lower than we think. It's because the public simply could not understand what they're doing."Yeah, that is probably dead on, since we've already seen this attitude pop out recently in the remarks of Kartik Athreya, when she advised us all to shut up because economics is "really hard."
I'll leave this with some words from Evans-Pritchard:Dr Athreya�s assertions cannot be allowed to pass. The current generation of economists have led the world into a catastrophic cul de sac. And if they think we are safely on the road to recovery, they still fail to understand what they did.
Central banks were the ultimate authors of the credit crisis since it is they who set the price of credit too low, throwing the whole incentive structure of the capitalist system out of kilter, and more or less forcing banks to chase yield and engage in destructive behaviour.
They ran ever-lower real interests with each cycle, allowed asset bubbles to run unchecked (Ben Bernanke was the cheerleader of that particular folly), blamed Anglo-Saxon over-consumption on excess Asian savings (half true, but still the silliest cop-out of all time), and believed in the neanderthal doctrine of �inflation targeting�. Have they all forgotten Keynes�s cautionary words on the �tyranny of the general price level� in the early 1930s? Yes they have.
They allowed the M3 money supply to surge at double-digit rates (16pc in the US and 11pc in euroland), and are now allowing it to collapse (minus 5.5pc in the US over the last year). Have they all forgotten the Friedman-Schwartz lessons on the quantity theory of money? Yes, they have. Have they forgotten Irving Fisher�s �Debt Deflation causes of Great Depressions�? Yes, most of them have. And of course, they completely failed to see the 2007-2009 crisis coming, or to respond to it fast enough when it occurred.
As much as I would like to enter this conversation I hesitate, knowing how little I truly understand of macroeconomics. When card-carrying experts with impressive credentials cannot agree during a crisis it really is too late for pebbles to vote.
ReplyDeleteThat said I have two thoughts.
First, the past method of paying off debt was doing so with inflated money. Inflation has its downside as everyone knows, but one of the positives is that debt obligations, like fruit on the vine during a drought, shrinks and falls to the ground almost worthless. (High interest rates go hand in hand with inflation, though. So anyone with a bit of cash is in a position to keep ahead of inflation simply by paying attention. I still recall the regret I felt about 1982 when a CD bearing fourteen percent matured and the best I could get to replace it was down into single digits.)
Second, I come across few or no references to "velocity," or how rapidly money replicates value in the larger economy. The neologism stagflation comes to mind. Buried in the debate also is the uncomfortable reality that there is no way out of the quagmire we are in that doesn't affect everyone in some way. Those at the top, as usual, are insulated from too much pain (one or two fewer vacation properties, postponed cosmetic surgery, etc.) but the rest of us, all the way to the bottom, cannot escape getting pinched no matter what happens. Even those with no debts and good incomes will be affected as they are called upon to assist family members, neighbors and even strangers in their local community. As in the case of falling interest rates when inflation tapers off, even paid-for assets (un-mortgaged property, paid-off cars) and a modestly adequate income also really do lose value.
I hear that this exercise of Bernanke propping up the financial industry has a precedent involving one Grigory Potyomkin and one Empress Catherine II.
ReplyDeleteShhh... DADT is still officially in effect.
ReplyDelete