Only 8 Senators Voted No

Byron Dorgan was one of them. From The Plank:

Department of Nostradamus
From a November 5, 1999, NYT article on Congress's passage of "landmark legislation" easing bank laws:

''I think we will look back in 10 years' time and say we should not have done this but we did because we forgot the lessons of the past, and that that which is true in the 1930's is true in 2010,'' said Senator Byron L. Dorgan, Democrat of North Dakota. ''I wasn't around during the 1930's or the debate over Glass-Steagall. But I was here in the early 1980's when it was decided to allow the expansion of savings and loans. We have now decided in the name of modernization to forget the lessons of the past, of safety and of soundness.''

If you want to ruin your morning, read the whole thing. (H/t E.H.)

--Jason Zengerle

P.S. The best quote from the Times article linked above: ''The concerns that we will have a meltdown like 1929 are dramatically overblown,'' said Senator Bob Kerrey, Democrat of Nebraska.

Stop the Madness

In response to this WSJ article this morning reporting that the administration is cozying up to the big banks, let me say this: What the fuck!?

As many have been reporting (and various blogs have been doing the math), the Geithner plan is a huge subsidy to private investors and to the very large "banks" that helped to inflate (1997 - 2006) and destroy (2007 - Now) the economy. Now, in addition to bailing them out instead of unwinding them, we are going to rely on them more? This makes me sick:

Early on, Obama aides had had little to do with Wall Street heavyweights such as J.P. Morgan Chase Chief Executive Jamie Dimon. On March 11, Mr. Dimon was ushered into the White House and Treasury Department, where advisers brain-stormed with him about how banks and markets would react to their emerging policies. The following day, at a White House meeting, business executives implored Mr. Obama to get credit flowing again. "All right," the president said, according to a transcript of the meeting. He'd have his people "talk to Jamie."

"Talk to Jamie?" Why would the government think that only JP Morgan, Bank of America, Citigroup, Wells Fargo, etc. are capable of lending? These large financial institutions already have massive and (variable, but) shaky balance sheets. Isn't this the time that the government should be thinking about ways to make these banks smaller (or put them out of their misery)? Seriously, they should find a way to re-pass the Glass-Steagall Act.

What about the thousands of small, local and regional banks that made good loans, kept them on their books and serviced them? Why isn't the Fed/Treasury using them to get credit flowing again? The Fed/Treasury should be looking to institute some kind of economic Marshall Plan, using the TALF. I point you to the highly successful lending programs from KfW in Germany. The TALF should serve as a development bank, offering low cost financing to regional banks, who can then take a small spread and offer that low cost financing to their potential borrower. While the local bank would still have all of the credit risk, they would know the borrower well and have a low cost base. That's better than succumbing to threats like, "If you want our help to get credit flowing again to consumers and businesses, stop the rush to penalize our bonuses."

I voted for Obama mostly because I thought this type of nonsense would end (or at least be curtailed, somewhat). This disappoints me greatly.

The D Squad

Close...far...it doesn't matter. I love attending professional sporting events. The Celtics just came out of a timeout with the F-squad on the floor against the Clippers.

PPIP

Here is the clearest explanation I’ve seen so far of why “competing” private entities bidding in the auction are just using government capital to increase the leverage on their investment (with little to no risk):

Geithner plan arithmetic

Leave on one side the question of whether the Geither plan is a good idea or not. One thing is clearly false in the way it’s being presented: administration officials keep saying that there’s no subsidy involved, that investors would share in the downside. That’s just wrong. Why? Because of the non-recourse loans, which reportedly will finance 85 percent of the asset purchases.

Let me offer a numerical example. Suppose that there’s an asset with an uncertain value: there’s an equal chance that it will be worth either 150 or 50. So the expected value is 100.

But suppose that I can buy this asset with a nonrecourse loan equal to 85 percent of the purchase price. How much would I be willing to pay for the asset?

The answer is, slightly over 130. Why? All I have to put up is 15 percent of the price — 19.5, if the asset costs 130. That’s the most I can lose. On the other hand, if the asset turns out to be worth 150, I gain 20. So it’s a good deal for me.

Notice that the government equity stake doesn’t matter — the calculation is the same whether private investors put up all or only part of the equity. It’s the loan that provides the subsidy.

And in this example it’s a large subsidy — 30 percent.

The only way to argue that the subsidy is small is to claim that there’s very little chance that assets purchased under the scheme will lose as much as 15 percent of their purchase price. Given what’s happened over the past 2 years, is that a reasonable assertion?

Translation: The government isn’t going to overpay for these assets, they are just going to provide enough capital so private investors can use taxpayer dollars to overpay for the assets…with little to no downside!