Tuesday, October 21, 2008

Winners and Losers

I review the first part of How Will Paulson Pick Bank Winners and Losers? by Jane Sasseen, Tuesday, October 21, 2008:

U.S. Treasury Secretary Henry Paulson and other regulators went a bit further toward spelling out how troubled banks will go about securing a capital infusion from the Treasury's $250 billion rescue fund. However, at a press conference held on Monday, Oct. 20, Paulson continued to be mum on a core question: How exactly will regulators decide who does, or does not, get the money?

In other words, will it be a fair, impartial, objective bureaucratic process?

Or, will this be subjective, with Mr. Paulson (or someone else) just making the decision? Based, of course, on that person's best judgment as to what is in the best interests of the American people.

Banking industry sources say the government has little choice but to pick winners and losers among the struggling banks, now that the Treasury has spread half of its first batch of money -- $125 billion -- among nine large institutions. While those that are currently solvent but lack liquidity will likely get funding, others that are essentially insolvent will not, at least not if they remain on their own. "The key is the bank has to be viable," says Bob Litan, a senior fellow and specialist on financial issues at the Brookings Institution. "Regulators have got to make sure that if they put money in, the bank will survive."

As to how they'll do that, exactly, regulators refuse to be specific. Nor will they release the names of any banks that apply and either get turned down by Treasury or withdraw their application -- information that, if it were to become public, would surely lead investors to flee a bank's stock. "Not releasing the criteria or the names of institutions who don't receive funds makes sense, to prevent investors and depositors from drawing negative inferences and acting on incomplete information," says Scott Talbott, a senior vice-president of the Financial Services Roundtable.

Taxpayer Losses Not Expected

Officials made clear Monday that not every bank that applies will necessarily get funding. In a brief speech, Paulson also stressed that the money spent will not lead to taxpayer losses. "This is an investment, not an expenditure, and there is no reason to expect this program will cost taxpayers anything," he said.

And, I trust Mr. Paulson and the Bush Administration. I believe everything they say, and I have no concerns at all about their honesty or integrity.

Paulson said the Treasury has already received "indications of interest from a broad group of banks of all sizes." And he made clear that the money won't be doled out on a first-come, first-serve basis. "Sufficient capital has been allocated so that all qualifying banks can participate," he added.

How do we know that the money is adequate "so that all qualifying banks can participate" -- unless there was a list drawn up before the money was allocated?

And, if a list was drawn up before the money was allocated, why can't we now see the criteria used to draw up that list?

This was preplanned.

They saw this coming, and did nothing to stop it.

I already pointed this out in a previous post, Economic 9-11?

It is the job of the Federal Reserve Board of Governors to monitor the loans being made by banks, identify areas of concern, anticipate the problems that might come up from those concerns, and act to minimize the impact of such problems on the broader financial community.

And, they did not do that.

All of the current members of the Board of Governors of the Federal Reserve were appointed by our current President, George W. Bush.

There needs to be a criminal investigation of this.

And, I don't care how late in Bush's term it is, impeachment must not be off the table. For Speaker of the House Pelosi to take impeachment off the table is dereliction of her duty. It makes me wonder what "Democrat" Pelosi is getting out of all the shady dealings going on in this "Republican" administration.

Instead, the Treasury has worked with the primary regulators of the banking industry -- the Federal Deposit Insurance Corp., the Federal Reserve, the Office of Thrift Supervision, and the Office of the Comptroller of the Currency -- to come up with a uniform application and a standardized evaluation process for all the institutions who want access to new funds. The banks and other institutions will be required to apply by Nov. 14; various regulators will then make a recommendation based on standardized criteria. The final decision, however, will lie with Treasury.

But if that's the case, how do they know that "[s]ufficient capital has been allocated so that all qualifying banks can participate"?

Mergers or Sales Possible

Banking regulators insist they have plenty of insight into the institutions' financial state. "Obviously we're very familiar" with the health of the institutions we oversee, says one senior regulator. He argues that the decisions will be based on our "knowledge of management and the strength of individual business plans, as well as the known strengths and weaknesses" of each institution.

Then how come they didn't see this crisis coming, and take the action they were supposed to take to mitigate this early on?

Other things may factor into their decisions as well. If a troubled institution may no longer be able to last on its own, banking regulators are more likely to push it toward a merger or a sale, as they've done with Bear Stearns and Wachovia (NYSE:WB - News). And in such cases -- or where an institution is able to find a merger partner on its own -- the new joint enterprise could get Treasury funds. Weak firms that can nevertheless do "a concurrent capital rise" will also have a better shot at getting funding, adds another official.

In other words, these regulators decide who sinks, who swims, who gets bought, who gets sold; they have full authority -- and capital -- to compel any reorganization of the financial sector that they deem fit.

Yes, indeed, with that kind of authority, there will be winners and losers.

Does this quote from the Sibel Edmonds case come to mind here? From The Highjacking of a Nation, Part 2: The Auctioning of Former Statesmen & Dime a Dozen Generals by Sibel Edmonds, November 29, 2006:

The foreign influence, the lobbyists, the current highly positioned civil servants who are determined future 'wanna be' lobbyists [snip] operate successfully under the radar, with unlimited reach and power, with no scrutiny, while selling your interests, benefiting from your tax money, and serving the highest bidders regardless of what or who they may be. This deep state seems to operate at all levels of our government; from the President's office to Congress, from the military quarters to the civil servants' offices.

I leave you to read the rest of How Will Paulson Pick Bank Winners and Losers?; I've made my point.

On the horizon
The landscape's burning red
Smoke in your eyes
Smoke in your eyes
If you feel something
That makes you warm all over
If you got a fire and you can't put it out
Got a bushfire


anticant said...

The first question everyone here is asking - and I guess in USA too - is "how did the banks come to be in this mess?" The only answer I've seen is "because they lent irresponsibly, and encouraged their customers to borrow irresponsibly".

The second question is "If that is the case, why do the banks deserve to be bailed out by the taxpayer?" The only answer I've seen to that one is "because if they weren't, the economy would collapse".

So this means that bankers are people who can behave totally irresponsibly, and then get bailed out by the taxpayer. Reminds me of the old highway robbery: "Stand and deliver - your money or your life". In the old days those guys were strung up when caught red-handed. Now, they are handed out a huge government subsidy. Crazy!

Yankee Doodle said...

The banks were directed to offer loans to people who could otherwise not qualify for them.

This was caused by too much government interference, not by any lack thereof.

A financial meltdown can be very profitable, if you control the people who are monitoring it and whose job it is to prevent it.