Tuesday, August 30, 2011

Banking System Going Downnnnn: Wrong (Always) Crazy Pundits/Beltway Wisdom(?) Dumb - Join Israeli Army!

“Socialize the banks. They have been bailed out over the past 30 years to the point the billionaires are the largest recipient of federal welfare.” (Stolen from a commenter on the essay below. Thank you "ilsm.")

If you aren't already familiar with Barry Ritzholz, you should be. He calls the banksters for what they are and have been and what they ought to be. And what we as a strong country should ensure that they are in the future. And he's not afraid to tell them where to go. AWAY!

And they are. Very slowly. (And I always return to my favorite theme at times like this: the banksters, investors, etc., are not any smarter than  most of the rest of us are. We can see the problems clearly. They just think they are sooooo clever that they can buy their way out of their current troubles (pay someone off well enough) long enough to have them either evaporate or be replaced with much different and much scarier ones - thereby making the public fools forget about the money already wasted (owed to them).)

This week’s Washington Post column is out, and it's a look at the Buffett’s bailout of Bank of America, and what it means for the overall financial systems.

“Many investors assumed the Wall Street bailouts of Bank of America and the other big banks more or less healed the sector. All it took was few trillion dollars in liquidity and a few $100 billion in recapitalization. Voila!

In fact, the banking system was not saved. The massive injections of liquidity temporarily salved the day-to-day operations of banks, but they did not repair the more profound troubles. Indeed, pouring billions into nearly identical management teams that mismanaged risk, overleveraged exposure and drove banks off the cliff in the first place was an invitation for another crisis.

In past weeks, Bank of America has been under increasing pressure from investors. Its already damaged stock was cut in half, and commentators including myself argued that the bank was headed back toward the rocky shoals of insolvency.”


For anyone who thought the U.S. banking sector was healthy, Warren Buffett’s $5 billion investment in Bank of America should be a wake-up call.

Many investors assumed the Wall Street bailouts of Bank of America and the other big banks more or less healed the sector. All it took was few trillion dollars in liquidity and a few $100 billion in recapitalization. Voila!

In fact, the banking system was not saved. The massive injections of liquidity temporarily salved the day-to-day operations of banks, but they did not repair the more profound troubles. Indeed, pouring billions into nearly identical management teams that mismanaged risk, overleveraged exposure and drove banks off the cliff in the first place was an invitation for another crisis.

In past weeks, Bank of America has been under increasing pressure from investors. Its already damaged stock was cut in half, and commentators including myself argued that the bank was headed back toward the rocky shoals of insolvency.

On Thursday, Buffett stepped in, at least temporarily, to save Bank of America’s bacon. He was inspired, Archimedes-like, in the bathtub — an image I will likely carry with me for the rest of my days. Buffett has put together a deal on terms similar to those he offered Goldman Sachs and General Electric: A fat 6 percent yield on preferred (not common) stock, and warrants to buy 700 million Bank of America shares at $7.14 each, good for 10 years. 

A few items leapt out:
●Despite its repeated claims to the contrary, Bank of America needed both capital and a reputation reboot. Buffett provided a little of both, though I’m not sure which they needed more.

●With the Fed offering banks capital at nearly zero percent interest rates, why would BofA take money at 6 percent? This gives lie to the claim that BofA did not need more capital. (The counterargument is this was about the stock slide, not the capital structure, which remains opaque.)
 
●Investors are cautioned that unless you are buying on the same terms as the billionaire, you are making a very different bet than he is.

But all of this goes back to the failures of the 2008-09 bailouts. Consider what was actually done then, and you will understand why none of the underlying problems have been fixed:
 

Bank holdings: They remain stuffed with declining assets, primarily in housing and derivative holdings. Another leg down in housing could be nearly fatal.
 
Transparency: Balance sheets are unnecessarily opaque. Eliminating fair-value accounting via FASB 157 did not fix balance-sheet problems, but instead allowed banks to hide them.
 

Capitalization: This remains too thin. Leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1. Management does not keep adequate capital unless forced to do so (“sufficient” capital reserves cuts into profits).  

Misaligned incentives: Compensation and bonus schemes were not significantly changed after the bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but they do not have the downside risks, which remains on shareholders and taxpayers.


If this isn't clear enough for you, I have a friend who will make it much clearer right now.

If there's one thing harder to say for a pundit to say than "conservatives deserve the overwhelming share of the blame on this," it's "I was completely, utterly wrong."

The conservative base is mean, crazy and dumb, while the chattering class is mostly dumb, decadent, craven and vain. They view themselves as savvy, worldly and smart, of course. Upton Sinclair said that "It is difficult to get a man to understand something when his job depends on not understanding it."
From my esteemed friend and honored source of informed opinion, Batocchio at Vagabond Scholar:

Let's recap. These Very Serious People somehow completely ignored the lessons of the Great Depression, one of the seminal events of the 20th Century, and they don't understand the Keynesian economic principles that drove America's recovery. They're hardly alone in that, with austerity being all the rage these days (for the lower classes only, of course). However, it's further proof that the Beltway Conventional Wisdom is often pretty dumb, and the chattering class just does not know or care much about policy – even if that policy is absolutely crucial. They actually thought (and still think) that cutting government spending in a recession is a great idea.

These Very Serious People also thought that taking a routine but vital action, raising the debt ceiling, and holding it hostage, was a good idea. Seriously. They thought threatening the very functioning of the government and the American economy was a good idea.

The Very Serious People also thought, somehow, against a mountain of evidence, that the Republican Party was at its heart reasonable, and would never actually go all the way through with their threat – a threat the VSPs were cheering on. Even though many of these people are paid to cover politics, they completely misread GOP inflexibility and insanity, which is nothing but, oh, the major political development of the past 10-30 years.

Lastly, the Very Serious People refused to report the debt ceiling situation accurately, continually insisting that "both sides are equally to blame." This made the situation even worse. Needless to say, they also ignored their own culpability in egging it on.

In rough stupid-evil-crazy terms, that would be a whole mess of stupidity, followed by astounding recklessness and irresponsibility, followed by are-you-fucking-kidding-me stupidity, followed by gutlessness and dishonesty.

Unfortunately, this is a recurring pattern, in general terms, at least. Most glaringly, consider media conduct leading up to the Iraq War and afterward. The chattering class does not value policy. That would take time. Plus, as a privileged class, most policies that hurt the middle class will not after the political class much. This means they've both unable and unwilling to make fact-based, qualitative judgments about most political issues. Others will suffer, not them.

Meanwhile, even if they're not right-wing, or don't identify themselves as such, they are often simpatico with the right-wing's goals. At the very least, they are strangely indulgent of, oh, threatening the government's basic ability to function, cutting tax cuts further for the rich and calling war skeptics traitors.

Finally, they whitewash their own role in creating these messes. How many Iraq War cheerleaders have truly repented, and detailed how they were wrong? I can think of a handful, but not many. Many reporters offered unduly rosy accounts of Iraq years after the invasion, I suspect because they thought it would somehow vindicate their colossally poor judgment. They were likewise subservient in the coverage of the Bush administration's torture regime. Similarly, even now, many reporters are reluctant to point out exactly how disastrous the Bush administration was economically.

So, how many supposedly "serious" and "objective" cheerleaders for the debt ceiling hostage situation – an inexcusably irresponsible move – have owned up to their role in manufacturing that crisis? I'm guessing that number is about nil.

It's a Herculean struggle to get accurate media coverage due to journalists' dishonest, shallow, continual insistence that "both sides are equally to blame." But what makes that struggle downright Sisyphean at times is that very often, the media is also to blame for creating the mess itself. If there's one thing harder to say for a pundit to say than "conservatives deserve the overwhelming share of the blame on this," it's "I was completely, utterly wrong."
The conservative base is mean, crazy and dumb, while the chattering class is mostly dumb, decadent, craven and vain. They view themselves as savvy, worldly and smart, of course. Upton Sinclair said that "It is difficult to get a man to understand something when his job depends on not understanding it." That's true, and it's also true that it's hard to get someone to admit error, even (or especially) a glaring one, when that will shatter their entire self-image.

(Related posts: "Extremism in Defense of Nihilism is a Vice" and "Partisanship, Policy and Bullshit.")

Addendum: Chait's piece isn't the whole story. Digby points out that Obama wanted to make a "grand bargain" cutting programs to at least some degree, and wasn't forced as much as Chait portrays. David Dayen adds more to the picture, exploring how conservative "blue dog" Dems played a key role in introducing the horribly irresponsible notion of a debt ceiling standoff. Meanwhile, driftglass takes Chait to task for his "magical thinking" in a related post. I find Chait to be a mixed bag (and perhaps that's fodder for another post) but it's certainly possible for someone to write well on some subjects but not on others, or to make both good and poor points in the same piece. Hey, give credit where and when it's due, critique with what's sincerely offered but inaccurate, and challenge the outright bullshit.

And if you were wondering where the jobs really are now (rich PR also helps this type movement):

Young Americans flock to Israel to join army
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2 comments:

TONY said...

I like the look of that Polenta with lemony asparagus on the left of the blog, Suzan. Can you make some and send it over.In return for your trouble I'll give you a mark out of ten.

Suzan said...

It's on the way, Tony.

I love it too!

S