One way to treat a recovering drug addict is to force him to go
through cold turkey. Another is to prescribe him a substitute for the
original poison, such as methadone. America’s long-awaited effort to
relieve banks of troubled assets leans towards the second approach,
aiming to entice private buyers by offering the same supercharged
leverage that coursed through the veins of the financial system during
the credit boom. Paradoxically, at a time when the private sector is
furiously cutting back on debt, the government sees the copious
provision of cheap financing as the best way to loosen up the market
for illiquid debt. Keynes' Bancor might be better termed Wancor, as
bwanking replaced banking long ago. The public-private partnership
announced on March 23rd marks a revival of sorts for the asset-buying
component of the Troubled Asset Relief Program (TARP), a $700 billion
rescue fund created last October which was quickly refashioned into a
bank-recapitalisation vehicle. This time, however, the buyers will be
money managers and insurers, not the government, though they will have
plenty of help, through co-investment by the Treasury (the
quantitative easing), cheap loans from the Federal Reserve and
guarantees from the Federal Deposit Insurance Corporation (FDIC). For
every private dollar invested, the taxpayer will provide a matching
dollar of equity and up to $12 of other financing. Investors can walk
away from their debts if a deal loses money. So a programme of no
change here then! In theory, private buyers, bidding against each
other, should be better than the government at determining the real
value of assets. But some economists have denounced the plan as a
disguised subsidy posing as a market solution. The taxpayer is on the
hook for most of the losses but gets only half of the profits. This
is allegedly a price worth paying to unclog banks’ balance-sheets. And
this is a cost that America has swallowed before to get out of
trouble. Like the new plan, the Resolution Trust Corporation, an
entity set up to resolve the savings-and-loan crisis, used auctions
and government co-investment to attract buyers. Some of them made
fortunes, but the mechanism helped the market to clear and was deemed
a success.
This time, too, the sweet terms have piqued the interest of big fund
managers, such as BlackRock and PIMCO. The biggest obstacle to their
participation is no longer financial risk but the political sort,
thanks to the bonus frenzy over American International Group (AIG).
The Obama administration may have toned down its Wall Street-bashing,
and Congress is rethinking its plan to tax bonuses at up to 90%. But
many still worry that they could become a target if they reap big
windfalls. Some fear that low-cost leverage might tempt buyers to
overpay. Barclays Capital thinks it could lift market prices by
10-20%. The Treasury argues that these prices are artificially
depressed because of illiquidity, though more pessimistic types
suspect that they merely reflect future losses. Such concerns explain
why, although stockmarkets leapt when the plan was announced, credit
markets—generally a more reliable barometer—reacted less
enthusiastically. Indices linked to risky mortgages remained near
record lows. If the plan falls flat, however, it is more likely to be
because of a lack of sellers. Many banks are still holding assets,
particularly whole loans, at values far above their market price
because, under accrual accounting, losses can be booked over several
years. Even with government help, bids may not be high enough to tempt
banks to deal, since any price below the carrying value would force
them to take a write-down and deplete precious capital. Wells Fargo
has written its portfolio of variable rate mortgages down to around 70
cents on the dollar. The market price is half that. With leverage, a
buyer might be prepared to pay close to its estimated “economic value”
if held to maturity. But this is only perhaps 60 cents. Why sell now,
and take an immediate ten-cent hit, when you can spread out the pain
by holding on to the loans? What should be scaring us all is whether
our homes are worth anything. Some fear that the plan may not be big
enough. $1 trillion may sound a lot, but much more than that amount is
in danger of souring in America as consumer credit deteriorates and
more companies default. With little chance of wringing more bail-out
money from Congress, barring a stunning change of mood, the new plan
could hit a funding wall. Some of the sums are known. Just under
half of the TARP’s $700 billion has been disbursed. Add in the toxic-
asset plan, and the total climbs to as much as $608 billion. With
large dollops needed to plug banks’ capital holes once the stress
tests are completed, and other industries clamouring for help, the
remaining $92 billion may fall short of what is required. One hope of
topping up the pot may lie in an expansion of the FDIC’s emergency
credit line, from $30 billion to as much as $500 billion, though that
would require congressional approval.
The alternative chosen by Britain, to leave the assets in place and
insure them for a fee, has many proponents—indeed, America did just
that with the worst assets of Citigroup and Bank of America, but
rejected it as a system-wide solution. Others continue to push the
nationalise-and-recapitalise option, though this remains politically
unpalatable in America. World leaders must hope that, in banking as in
narcotics, there are numerous paths to rehabilitation. The number of
drug addicts, of course, rises amongst much-vaunted initiatives.
I've long thought economic analysis of this kind reveals only
pathology. How are the bwankers who bought all this 'non-stuff'
supposed to develop brains better than those that got us all into the
mess? I'm reminded of the art world ('Lucky Kunst' by Gregor Muir and
'The $12 Million Stuffed Shark' by Don Thompson). Many people who
bought overpriced 'stuffed shark art' have been left holding
potentially valueless assets. You buy your 15 foot tiger shark for
beer money from an Aussie fisherman, stick it in a glass tank full of
formaldehyde and call it 'The Physical Impossibility of Death in the
Mind of Someone Living'. By the time a number of transactions through
branded auctioneers and gallerists have been securitised through a
gullible media, some berk buys the shark for $12 million. By now the
actual animal is rotting and has to be replaced. Whole shed-loads of
stuffed shark art buyers must now be feeling like a right load of
bwankers.
On 28 Mar, 05:30, archytas <[email protected]> wrote:
> Greenback was the evil frog in Dangermouse, responsible for many world
> domination plots, foiled by a white mouse with an assistant with a PhD
> in knee-trembling. Now the Chinese have sights on dealing with the
> greenback. Mr Zhou’s proposal is China’s way of making clear that it
> is worried that the Fed’s response to the crisis—printing loads of
> money—will hurt the dollar and hence the value of China’s huge foreign
> reserves, of which around two-thirds are in dollars. We may all come
> to regret 'quantitative easing' - which sounds like something that
> should only be done in private in a toilet. Zhou suggests that the
> international financial system, based on a single currency has two
> main flaws. First, the reserve-currency status of the dollar helped to
> create global imbalances. Surplus countries have little choice but to
> place most of their spare funds in the reserve currency since it is
> used to settle trade and has the most liquid bond market. This allowed
> America’s borrowing binge and housing bubble to persist for longer
> than it otherwise would have. Second, the country that issues the
> reserve currency faces a trade-off between domestic and international
> stability. Massive money-printing by the Fed to support the economy
> makes sense from a national perspective, but it may harm the dollar’s
> value. The UK is at it too.
>
> The dollar’s reserve status should be transferred to the SDR (Special
> Drawing Rights), a synthetic currency created by the IMF, whose value
> is determined as a weighted average of the dollar, euro, yen and
> pound. The SDR was created in 1969, during the Bretton Woods fixed
> exchange-rate system, because of concerns that there was insufficient
> liquidity to support global economic activity (now there was a
> prediction!). It was originally intended as a reserve currency, but is
> now mainly used in the accounts for the IMF’s transactions with member
> countries. SDRs are allocated to IMF members on the basis of their
> contribution to the fund. It would take years for the SDR to be
> widely accepted as a means of exchange and a store of value. The total
> amount of SDRs outstanding is equivalent to only $32 billion, or less
> than 2% of China’s foreign-exchange reserves, compared with $11
> trillion of American Treasury bonds. In Dangermouse terms, the yellow
> peril has been taking over as we looked the other way.
>
> The USA will resist, because losing its reserve-currency status would
> raise the cost of financing its budget and current-account deficits.
> John Maynard Keynes’s proposal in the 1940s was for an international
> currency, the “Bancor”, based on commodities, and central to Keynes’s
> idea was that a tax be imposed on countries running large current-
> account surpluses, to encourage them to boost domestic demand. I
> suspect what we really need is substantial debate on world government
> and sensible living. War has been the standard and economics war by
> other means for too long. Anyone want to sponsor my green custard
> throwing in London during the G20 next week?
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