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Why Is the Government Afraid of Restructuring Banks?

March 1st, 2009 · 1 Comment · Bailout, Banks, Federal Reserve, Financial, Global Economy, Nationalization, Policy, Restructuring, Wall Street

I’m on an airplane flying to Austin. This gave me a chance to buy buy cheap cheap levitra levitra catch up on reading New York Times newspaper clips amoxil online regularly given to me by Charlie Komanoff, a long-time friend and sometimes collaborator. One clip was an article published January 4, 2009 (an eon ago at the time pace at which the financial crisis develops) by Michael Lewis and David Einhorn levofloxacin entitled, "buy cialis tablets target=”_blank”>The End of the Financial World as We Know It." Michael Lewis wrote a book "Liars Poker," on his inside experiences of the first big bond packaging bonanza (at Goldman Sachs, if I recall correctly). I recall reading with fascination the personalities and their eager greed to harvest and disperse among themselves the huge, for the the diet pills Kamagra time, amounts of money that fell into their laps.

It was the story of the beginnings of the billion dollar bonuses that were to become commonplace on Wall Street. I recount this so that you will understand that at least one of the authors, and presumably the propecia o ther, who is a hedge fund manager, directly know what goes inside of

the big investment banks.

Much of the article lays out the failures of regulation and official blessing of blatant conflicts of interest that were endemic in the web of enterprises and agencies that created the financial bubble. (The most egregious of which — and which still continues — is the payment to S&P and Moodys for crucial ratings on bonds

by those Online Viagra Shops who are selling the bonds.)

What really caught my attention, though, was when the authors said, when reviewing the second Citigroup bailout, that Paulson’s "$306 billion of guarantee [of Citigroup bonds] was an undisguised gift." viagra female

[Later.]

I’ve been thinking a lot,

as regular readers know, about the bailouts. More and more, I’ve been thinking, especially, now that Obama is in office, "Why are the bailouts continuing?" The original Cialis for sale acomplia drugstore pitch, which only sold because Silagra the hysteria of those making it made it sound plausible, was that this was

ellers/cialis.html’>avodart cialis clomid diflucan dostinex gluco

the only way to prevent a complete financial meltdown.

We are buy cialis cialis buy levitra vardenafil now far past that situation. The financial sector is relatively stable (except for stock prices). Credit is now flowing on a large scale, at least to the major corporations and institutions that account for most of our economic activity.

Yet, the bailouts continue.

Every day, more commentator outside (and even inside) of Wall Street and the government call for restructuring banks so that they can be placed on a secure financial basis, diflucan ready and able to lend to reasonably credit-worthy applicants. buy drugs online Restructuring requires wiping out shareholder equity and forcing the bondholders who have lent to the banks to settle for something less than face generic amoxil value on their bonds ("haircuts").

For a while, I thought that the government (taxpayer) subsidization of bank shareholders and bond holders reflected the buy viagra online next day delivery huge political influence of the big banks in Congress, academia, and government economists. But now, the call online propecia for restructuring is so wide and loud, I no longer think this is Online Viagra buy 0nline pharmacy a plausible explanation. The only explanation that makes sense to me is FEAR.

The questions now become, "Fear of what?" "If the decisionmakers have a big FEAR, why are they unwilling to be forthright about it with the public?"

Cheap Amoxil style=”border-top-width: 0px; border-left-width: 0px; border-bottom-width: 0px; margin: 5px 0px 5px 10px; border-right-width: 0px” height=”184″ alt=”image” src=”http://roylat.com/wp-content/uploads/2009/03/image2.png” width=”244″ align=”right” border=”0″ />In recent days, top economic officials, including Ben Bernanke and Sheila Bair, have explicitly rejected the notion of "Nationalization." On February 25, addressing Congress, Mr. Bernanke said, nationalization Kamagra Soft "is when the government seizes the bank and zeros out the shareholders and begins to manage and run the bank. And, we don’t plan anything like that." Sheila Bail Buy Cialis online said something similar the previous day on CBS.

Raising the specter of cheapest nolvadex nationalization and then rejecting it seems to be deliberately using a term to describe restructuring that is unpopular with the American public, thus obscuring the real issue — whether to keep bailing out insolvent banks with taxpayer dollars or to restructure online cialis them under government oversight — a standard procedure used by the FDIC with failed banks.

A recent Gallup Poll shows Brand Cialis that the government could easily sell the public on restructuring if it wanted to do buy cialis online so:

imagecheap buy cheap drugs ampicilllin />

So, the questions remain, "What is the FEAR?" "Why won’t the government tell the public what they are afraid of?"

I got a clue from an item in Nouriel Roubini’s RGE Monitor:

Will buy cytotec online Unsecured Bank Creditors Take A Haircut [Lose Value] In Case of Nationalization?

The deepest, darkest concern of bond professionals is whether bond holders of banks will ever be asked to share the bailout pain. Ever since Lehman the Fed’s reluctance to impair bank bonds has been palpable.

Finance issues represent more than 60% of 1-5 year maturity bonds. They are ubiquitous in pension viagra online price funds, insurance company portfolios and, until last fall, money market funds(most money market funds have moved up the capital structure to CDs at levitra cheap Amoxil brand vs generic this point). So there are "systemic" reasons to protect them.

Large cheap buy ampicillin foreign holdings of bank debt may complicate matters further as the U.S. is dependent on foreign financing.

[Bold emphasis added] [From RGE Monitor, subscription only]

buy real viagra without prescription

To fully understand the fear, one would need to know the amount of bond debt that would suffer defaults and writedowns, and more importantly probably, the amount of bond-default insurance (credit default swaps) on the bank bonds, and how these are distributed throughout the financial system. The reality is that no one knows, because Flagyl ER Online there is no central clearinghouse for credit default swaps (CDSs); so all numbers are estimates at best.

A plausible explanation for the government’s fear is the unknown magnitude and distribution of CDSs.

When Lehman failed, it brought AIG, one of the biggest insurers Buy Orlistat Online Pharmacy No Prescription Needed in the world, to immediate insolvency viagra sales — saved temporarily to date by two huge government bailouts.

What would happen if Citigroup and Bank of America were allowed to fail? Perhaps the consequences are too great for the government even to talk about in public, for fear of creating a new wave of panic.

generic levitra

If the credit default swaps are at the core of what is preventing bank restructuring, there seems an obvious step to take — requiring the holders of all credit default swaps to bring them to a central clearinghouse, Cialis purchase viagra online online where issuers Cialis would be required to provide acceptable capital reserves or to immediately settle with holders under government supervision. Others have discussed in detail how this might be done.

Why is the government not even mentioning in public "restructuring" the CDS market

? Credit default swaps have been called a time bomb waiting to detonate and famously by Warren Buffet, "financial weapons of mass destruction." These are not going to go away without government action.

Absent government action, they are almost certainly going to detonate at some point, barring a miraculous economic turnaround, but only after taxpayers have sunk possibly trillions more into a fruitless attempt to stave off the inevitable.

All of the above buy amoxicillin is conjecture, informed conjecture, but buy lasix conjecture still. The government, online buy cialis pills Kamagra ampicillin buy generic viagra professional buy buyviagra amoxil if it were willing could easily tell us the real reasons behind the continuing bailout. Obama has promised us transparency and honesty, but in the financial arena, these qualities seem sadly lacking.

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