Citigroup Inc. (C) and Bank of America Corp. (BAC) were the reigning champions of finance in 2006 as home prices peaked, leading the 10 biggest U.S. banks and brokerage firms to their best year ever with $104 billion of profits. By 2008, the housing market’s collapse forced those companies to take more than six times as much, $669 billion, in emergency loans from the U.S. Federal Reserve. The loans dwarfed the $160 billion in public bailouts the top 10 got from the U.S. Treasury, yet until now the full amounts have remained secret. Fed Chairman Ben S. Bernanke’s unprecedented effort to keep the economy from plunging into depression included lending banks and other companies as much as $1.2 trillion of public money, about the same amount U.S. homeowners currently owe on 6.5 million delinquent and foreclosed mortgages. The largest borrower, Morgan Stanley (MS), got as much as $107.3 billion, while Citigroup took $99.5 billion and Bank of America $91.4 billion, according to a Bloomberg News compilation of data obtained through Freedom of Information Act requests, months of litigation and an act of Congress. “These are all whopping numbers,” said Robert Litan, a former Justice Department official who in the 1990s served on a commission probing the causes of the savings and loan crisis. “You’re talking about the aristocracy of American finance going down the tubes without the federal money.” Foreign Borrowers It wasn’t just American finance. Almost half of the Fed’s top 30 borrowers, measured by peak balances, were European firms. They included Edinburgh-based Royal Bank of Scotland Plc, which took $84.5 billion, the most of any non-U.S. lender, and Zurich-based UBS AG (UBSN), which got $77.2 billion. Germany’s Hypo Real Estate Holding AG borrowed $28.7 billion, an average of $21 million for each of its 1,366 employees. The largest borrowers also included Dexia SA (DEXB), Belgium’s biggest bank by assets, and Societe Generale SA, based in Paris, whose bond-insurance prices have surged in the past month as investors speculated that the spreading sovereign debt crisis in Europe might increase their chances of default. The $1.2 trillion peak on Dec. 5, 2008 -- the combined outstanding balance under the seven programs tallied by Bloomberg -- was almost three times the size of the U.S. federal budget deficit that year and more than the total earnings of all federally insured banks in the U.S. for the decade through 2010, according to data compiled by Bloomberg. http://www.bloomberg.com/news/2011-...y-got-1-2-trillion-in-fed-s-secret-loans.html
Why weren't the banks allowed to go down the tubes? We keep propping these inefficient enterprises up, of course we're going to failure after failure. Let those banks break up into tiny pieces and let the shareholders lose their money. It sounds counterintuitive, but to have a capitalist system work best, you must have failure. Creative destruction is a critical part of the process. Edit: re-reading my post, "failure" in the first paragraph and "failure" in the second paragraph refer to two different things. "Failure" in the first paragraph means public money flushed down the toilet while more nimble competitors eat market share. "Failure" in the second paragraph means the companies die, get chopped up and morph into those smaller, leaner, more nimble entities that eat the market share of the institutions that keep getting bailed out. No corporation should be allowed to socialize losses while privatizing gains. I apologize for the confusing post and hope my explanation clears it up.
You're getting too radical. Next thing you're going to say is that for capitalism to work, you need a bunch of people randomly assigned to the aristocracy, a bunch of people arbitrarily assigned to suffer at the bottom, and an arbitrary moral system to allow the top to feel superior to the bottom. Edit: I reacted to your last paragraph, but then you added 2 paragraphs, and your post lost its punch. So I inserted the quote to show what I was talking about.
The news in the OP is that the fed spent money on its own, far in excess of, and on top of, the approved TARP funds. Isn't it awesome to have a secret government within our government operating outside the rules and constitution? In other news... http://www.nytimes.com/2011/08/22/opinion/homeowners-need-help.html?_r=1&ref=opinion Neither Congress, nor federal regulators, nor state or federal prosecutors have yet to conduct a thorough investigation into the mortgage bubble and financial bust. We welcomed the news that the Justice Department is investigating allegations that Standard & Poor’s purposely overrated toxic mortgage securities in the years before the bust. We hope the investigative circle will widen. But a lot more needs to be done to address the continuing damage from the mortgage debacle. Tens of millions of Americans are being crushed by the overhang of mortgage debt. And Congress and the White House have yet to figure out that the economy will not recover until housing recovers — and that won’t happen without a robust effort to curb foreclosures by modifying troubled mortgage loans. Instead of pushing the banks to do what is needed, the Obama administration has basically urged them to do their best to help, mainly by reducing interest rates for troubled borrowers. The banks haven’t done nearly enough. In many instances, they can make more from fees and charges on defaulted loans than on modifications. ... The housing numbers are chilling. Sales of existing homes fell in July by 3.5 percent, while prices were down 4.4 percent in July from a year earlier. In all, prices have declined 33 percent since the peak of the market five years ago, for a total loss of home equity of $6.6 trillion. There’s no letup in sight. Currently, 14.6 million homeowners owe more on their mortgages than their homes are worth, and nearly half of them are underwater by more than 30 percent. At present, 3.5 million homes are in some stage of foreclosure. Nearly six million borrowers have already lost their homes in the bust. Reducing principal is a better solution than lowering interest rates, because it reduces payments and restores equity. Bankers resist, because it could force them to recognize losses they would prefer to delay. The administration has resisted, in part because principal reductions are seen as rewarding reckless borrowers. But many of today’s troubled borrowers were not reckless. Rather, they are collateral damage in a bust that has wiped out equity and hammered jobs, turning what were reasonable debt levels into unbearable burdens.
Denny, you make a great point about ratings agencies. I have posted time after time that they've largely escaped scrutiny. When I worked on Wall Street, for our CMBS product we would "shop" ratings agencies. As long as you got one of the big three--S&P, Fitch or Moody's--to give you the rating you wanted, you were golden. They competed for business not on price, but on rating. There was a real art to the language because you couldn't say what you needed explicitly. For the record, we did the same with appraisers. However, ripping the ratings agencies for their role in the MBS collapse and equating it with our national credit downgrade is a mistake. Rating the MBS product required a level of understanding that no one could possess--a block by block understanding of all the properties in the package and an eye for where people lied on their applications. Rating our debt is much simpler.
Lefty economists argue that common sense has no place in govt. policies. Yet common sense tells me if there were just one bank and the two of us, and the bank needed $400K or go bust, that the govt. could have bought down our mortgages by $200K each. The bank gets it's $400K either way, but we could have had our equity preserved at the same time. Instead, one of us loses our home, the bank is out $200K it loaned against the home, and maybe it can sell it to someone at a huge discount. That discount kills the value of the other home. Goldman Sachs mist be made whole!
Also, auditors try to be helpful to their client. Touche Ross auditors in the heart of Boeing accounting overlooked things I brought to their attention, showing sympathy in their voices to the company, making it clear they were trying to not upset the apple cart. At the small business level, a Republican county councilmember's business had lost big money for a long time, so the CPA simply had me, the bookkeeper, revalue all assets upward, which increased the business' equity. So simple. Then the owner could get more loans from his Republican banker friends and last an extra year before going under. By then he had canned me for telling him off one day. His reputation intact, he then won the primary for state legislature (and lost in the general election). He's still a big power in the county Republican party. I digress, but the point is, standards of auditors and CPAs are negotiable.
to big to fail... must be nice, run your company into the ground, and then just get a nice check for 100 billion dollars
If you're too big to fail, you're too big. IMO, if you fail, you fail. Shareholders lose their money and perhaps bondholders as well. If there's a demand for your product, some entrepreneur will fill the void. TARP didn't bother me except for the fact that with that money the problem wasn't fixed. They were good bets to pay that money back. The "too big to fail" banks got bigger, not smaller. We need to reenact the wall between commercial and investment banks dropped under the repeal of Glass-Steagall. Now the additional money lent is an outrage. You shouldn't be able to circumvent the Congress in that way.
Moral hazard ftw. It's like when I play a computer game and I save it right before I try a really tough battle or something... if I win? Fantastic. If I lose? I load my game. Some banks (and businesses) get to do that, and it's bullshit. Ed O.
