Play by the rules, close failing banks

By J Saft
February 3, 2009

James Saft Great Debate – James Saft is a Reuters columnist. The opinions expressed are his own –

Why not just play by the existing rules and rescue the economy, rather than the banks and their foolish shareholders and counterparties?

The choice for the Obama administration comes down to this: pay a subsidy to weak banks and reward failure and self-dealing or shut them down and start over again.

Because it doesn’t want to run the banks, and who can blame it, my bet is that the U.S. government will go the subsidy route, but it would be wrong.

A better idea is nationalization of the banks that can’t function combined with fresh capital for lending, perhaps in new institutions or newly managed ones built from the wreckage of the failed.
As Nobel prize winning economist Joseph Stiglitz points out, the United States has an existing process to deal with failed banks.

“You have to have a certain amount of capital and if you don’t have enough capital you are going to be shut down. We have a legal framework and we should use that legal framework,” he said in an interview on Saturday at the World Economic Forum in Davos.

“What you need to do is carve out the narrowest thing that you need to carve out to preserve the payment mechanism. We are engaged in re-writing the rules and the question is: ‘For whose benefit?’”

Both bondholders and derivative counterparties — people who entered into a contract with a bank for payment if certain external things happened, such as the default of a third party — look to be the big winners in preserving the existing banks.

I would also be very interested to see where the cash from bailouts of banks and their complex international obligations flows. It seems to me pretty possible that in rescuing banks, you are bailing out their derivative counterparties, channeling cash to many people and institutions who were speculating, who took risks on the strength of the bank counterparties they were using but who had no contract with the U.S. government for these risks to be insured.

Many of them inevitably will be abroad and some may be unsavory. The political fallout could be huge.

The argument in favor of this particular bailout is that, as we saw in the aftermath of the Lehman failure, the knock on effect will magnify the impact of the crisis. But really, this is about how you want to take your pain, and who will bear it rather than how much.

NOT BAD BANKS BUT DEAD BANKS

And it’s not just that wiping out failed institutions would be fairer, it would also be more successful. So long as house prices are falling, efforts to prop up banks through insurance will very likely be swamped by future losses.

Let the FDIC or Federal Reserve take over the weak and even, as Stiglitz has proposed, take a big chunk of the money you would otherwise spend and use it to capitalize a new bank or several new banks with clean balance sheets. Those banks could take $150 billion or so and leverage it very easily but conservatively, thus allowing for more than a trillion of new credit. Keep management at arm’s length from government and sell it back to the private sector in three years or so. They won’t be best banks the world has ever known, but they will beat the ones we have now hollow.

In the meantime the bad assets of failed banks could be managed separately, in much the same way the Resolution Trust did with assets of failed savings and loans.

There is also an elegance in the barbell proposal of Nassim Nicholas Taleb, the author of “The Black Swan: The Impact of the Highly Improbable,” to nationalize the banks, limiting them to utility functions like payments and simple deposits, but twin them with an utterly unregulated sector with no recourse to government insurance or support of any kind.

“They rigged the game. We pay them for their profits, there is no clawback so their incentive is to hide the risk they are taking,” he said in an interview in Davos.

“Which is why eventually, (speaking) as someone who loves free markets, a total nationalization of the part of the business that requires insurance and does clearing and payments needs to happen.
“I am angry with U.S. policy. What we had is exactly the opposite of socialism, they got TARP to pay their bonuses and to take more risk.”

It is true that if you let large banks go down and don’t bail out their counterparties many other banks may fail, including banks outside the United States. Mitigating that –  and that’s the best we can hope for — will take coordination, but those failures don’t change the basic issue.

Who has a call on the resources of the state and whose claims should take priority? I don’t think it ought to be derivative speculators, shareholders or bondholders. Get in line.

– At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund. For previous columns by James Saft, click here.  –

81 comments

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Only 3 places where incompetence rules;
Our Bank/Wall St. relationships.
Politicians.
Our Colleges and Universities.

Nice article…Let them go bankrupt and end this once and for all!
Buy gold and silver to protect yourself from the coming fallout.

Posted by Kirk | Report as abusive

I agree with your analysis.

I would add that the fundamental problem with any solution that seeks to determine a current value for bank assets is that most holdings on bank balance sheets were designed to pay off over time. Thus, any valuation based on an immediate sale would present two problems. For assets that eventually will perform, uncertainty about the future dictates that they will be sold too cheaply. For those assets that eventually will default, our inability to predict that event will lead to overpayment for them (for in reality they are worthless). The solution is some form of run-off or liquidation of bank assets over time.

If taxpayers are involved in financing this transition period, then shareholders and bondholders should be forced to wait for their dividends, interest payments, and redemption proceeds until after the taxpayers have been repaid.

Posted by j marston | Report as abusive

I agree with the solution proposed by Stiglitz having arrived at the same conclusion that 350 billion in the remaining TARP funds could be used to capitalise a handful of new banks which could be leveraged up to 4 trillion in a relatively short span of time. 4 trillion is just about the amount which some reports suggest is required to save the US banking system, a sum the US surely cannot afford.

The banks could later be sold 5 years later at a profit for the taxpayer – sufficient to pay for the stimulus package.

When I posted my thoughts on Pension Pulse, I was told politely that the idea would not work, because there are too many interests (political, financial and otherwise) at work to allow that to happen. Sad, because some reports say that the incidence of suicides, contemplated suicides and crime have risen in the US because of the financial crisis.

I urge Mr Obama (as I am sure he does) and all others involved to consider how their decisions would impact the lives of the ordinary people in the US and around the globe.

Posted by Vincent | Report as abusive

A well written article. William Seidman, of the RT program has another good idea, that he used in the savings and loan crisis. Let the mismanaged banks fail, then the Government should seize the insolvent banks. Fire the exhisting managers, who created the problem ,and then sell the banks to the private sector.

Finally someone is telling it like it is. Economics is a zero sum game. If there are losers, then there have to be winners. Identifying the winners in this financial meltdown is the first step to a rational response.

In the final analysis, we need to ask who do we want to bail out – ourselves or a relatively small group of invisible speculators?

James Saft has it right, we should not be bailing out the unsavory characters behind this meltdown. We should not be bailing out any entity that has no statutory guarantees from the government. Let the credit default swaps and the rest of the speculative derivatives without government guarantees meltdown. Bail out the real victims – the middle class mortgage holders, the pensioners, the small businesses. Within those groups is the core of the economic system.

Posted by Jonathan Cole | Report as abusive

Saft is a little short on logic and reality. We, the “foolish shareholders”, had nothing to do with the banks’ bad decisions. We just invested in the American financial sector. And the only reason some banks “don’t have enough capital”, even though they continue to meet regulatory requirements, is because those, like you, who panic and sell withdrew it all! So now you – the government – are going to kill off what’s left of the economy and shut them down! For spite! You need to stop and think.

Don Weller

Posted by Don Weller | Report as abusive

It is plain foolish to capitalize the banks from the top- down — it is giving good money to the incompetent which will end up doing nothing for the economy. IMF rated as the most secure banking system in the world, Canada is taking a recapitalization strategy from the bottom- up. Every citizen as of January 1 can shelter $5,000 per year, and the profits, from taxes in a special tax free account. The banks can then compete for the money, from people which have it, instead of bankrupting our society with taxes to pay off the staggering increase in national debt.

Posted by Craig | Report as abusive

Question: Aren’t the Board of Directors are supposed to be exercising fiduciary care on behalf of the shareholders? Aren’t they supposed to oversee the executive? If so, the Board members are the ones who should go to jail.

Posted by Craig | Report as abusive

Well, if that were to happen, what would happen to those thousands who work in the banks??? Wouldn’t that boost unemployment as well???? I mean people have mouths to feed don’t you think?

The Board of Directors are supposed to be exercising fiduciary care on behalf of the shareholders, and monitoring the executive. Where were they in each case??? The Board members are the ones who should be prosecuted. How can they approve executive bonuses for such gross failure and incompetence? Let the mismanaged banks fail, prosecute the executive and Directors, then sell the bank assets.

Posted by craig | Report as abusive

I agree with you.

The bondholders, shareholders, and counterparties should take their place in line. I would advocate careful and coordinated bankruptcy proceedings for the big three banks. Japan’s real estate crisis in the past taught the world that you can’t return to growth till you get the bad debts off the balance sheet and start fresh. Those are sunk costs. Let them sink into history, replace the boards of directors, and move on. I’m sure some group of investors or hedge funds could easily take over bank operations, and do a better job of it.

Regarding the social unrest that this could cause in other countries, I would just say that you can’t be a charitable person until your own house is in order.

Very, very good. Rule of law should prevail. Bankruptcy and fraud statues are on on the books. The USA should stop paying for casino banks and insurance. Follow the money.

End the US Federal Reserve. End Fractional Reserve. They failed too! Because the Fed, using fractional reserve creates money from nothing, they will always be able to create more “Federal Reserve Notes” out of thin air (or even polluted backroom mystery air).

Don’t ask the President. Ending control of our USA money creation monopoly is serious and dangerous. Our US Government ceded control of printing money to the US Fed in 1917 by President Wilson, under great pressure and regret. Read what he said (very scary).

Presidential assassinations occurred after advocating a return of monetary control to the US public: Andrew Jackson (national debt nearly paid off, advocated creating a National Bank; sudden reversal after an assassin’s knife wound); President Lincoln (Created US money without ceding to a private bank to finance part of the Civil War; assassinated by a shot to the head); President Garfield (advocated a public bank; assassinated by a shot to the head); John Kennedy started printing “United States” money as apposed to “Federal Reserve Notes”; assassinated with a shot to the head).; Ronald Reagan (advocated a public bank; assassin missed head and Reagan survived).

Our USA Constitution requires citizens to have control of our money creation. Ceding control to the US Fed or any other private organization is unconstitutional!

William Seidman (from the USA Resolution Trust that held insolvent Savings and Loans)also has excellent, clear ideas about how to take over an insolvent bank, wipe out bad debt and accounts, remove bad management; then, recapitalize and sell.

Rule of law. No bailouts. End the Federal Reserve and Fractional Reserve (mystery thin air accounting). Work with reasonable, sound, and prudent judgment to rebuild.

Posted by skinner | Report as abusive

Banks should be allowed to fail assuming depositors are covered. As the article indicates, by supporting banks tax payers also support their derivative and other counter positions. The concern that institutions might be unable to back up their bets is secondary to the undisputable truth that tax payers should not be the underwriters. Why are we not hearing about jail time for at least some of these bankers? At least freeze their assets and stop them from earning income. Put some teeth in the oversight process. Banking is supposed to be one of our most highly regulated industries. Some of those affiliated accountants, lawyers and securities regulators should be thrown in jail. We do not progress from this point until we take out the trash.

Posted by Don | Report as abusive

Sometimes I get so angry at the stupidity involved with banks that I think we should sell the US to China for no down payment.We owe them 600 Billion dollars. Why aren’t some of these people being prosecuted? The Feds should take a very firm hand and say start lending or we pull your business permits. Failing banks should be closed, and deposits moved to an institution that is still alive.In certain areas of the country debit cards with $1000. limits should be handed out to struggling families for food and other necessities. And everybody should get Reuters as a home page.

Posted by Andrew Franks | Report as abusive

Agreed. Your first paragraph say’s it all very well. It is not the banks, but rather the middle class in this country that is too big to be allowed to fail. Let the FDIC take over the banks that need to be. Focus on efforts that will help stabilize housing prices and many areas of this downward spiraling economy will start to self correct.

Posted by Phillip Cornacchia | Report as abusive

Let the bad banks fail. Arrest and imprison the criminals including criminally complicit politicians like Chris Dodd and Barney Frank.

And revamp business school curricula…
Punishment for thieves and corruption must be part of any solution.

The USG MUST prosecute and jail all of the criminals whether they are white collar thieves or politicians like Dodd and Frank. Anything less is just a coverup and protection of the perpetrators. The USA cannot afford the corrosive social and economic effects of allowing these people to remain free.

Posted by RFL | Report as abusive

Finally! A solution based on principle, precedent and law rather than the insanity that has been prevailing. But do any lawmakers have the courage and forward-thinking to do the right thing?

Posted by Adele Gabriel | Report as abusive

AMEN!!

Capitalism is all about the fit survive and the weak fall by the wayside. If this was any other market section, would the government be so eager to assist? Do you think they would bail out IBM, Intel, Microsoft, etc. if that sector was falling? Heck no!

Recession is the father of innovation. When businesses that didn’t have enough common sense to keep track of their books and keep up with the times are failing, there will be a rise of new ideas and companies that will learn from their mistakes and rise up above.

Let the fools fall!

Posted by Name (required) | Report as abusive

How much more would it cost to pay the FDIC settlements than it would to bail the banks out? Have they performed this analysis?

Posted by Name (required) | Report as abusive

The whole idea of credit and currency in the US needs to be completely overhauled. That includes getting rid of the Federal Reserve, currency based on real assets, and encouraging private saving and investment. Mr. Obama may be a wonderful man, but he clearly does not understand what he is dealing with. If he did, bail outs for banks would be the farthest thing from his mind; dismantling the entire banking industry would be more the call of the day, and reinventing the US dollar would be the top priority.

Posted by Anna von Reitz | Report as abusive

Some excellent posts here. Absolutely let them fail on their own and let the investigations begin.

Posted by jason | Report as abusive

Great article and comments.

Regarding: “Let the investigations begin.”

Wow! And let building on a sound monetary system begin!

End the US Federal Reserve and Fractional Reserve Banking! (did you know that is is illegal to audit the private corporation known as the US Federal Reserve?; they show us meeting minutes/summaries, not external audits)

USA does not benefit from creating mystery thin air “Federal Reserve Notes”. The gig is up!

Posted by Skinner | Report as abusive

j marston: There is no fundamental problem with valuing assets. We do not have a time machine or way to predict the future. Only the value of assets *now* matters, not what you *hope* they will be worth.

Take over the banks based on their actual value, which is zero.

The value of the dollar is irrelevant. The *ratio* of ownership is what is important, and we will see that the rich have vastly increased their wealth in relation to everyone else, all the time pointing to the dollar figures that “prove” they have lost so much. Sickening. Sickening that the majority are buying it.

As far as I’m concerned, Bernanke, Obama, etc need to be charged under RICO. This is a well executed conspiracy to defraud the majority of Americans.

Posted by James | Report as abusive

Absolutely, Mr Saft. But will they heed. It’s all been stitched up, beforehand. Scratch my back and I’ll scratch yours.

Posted by Justin Deco | Report as abusive

I like the words: play by the rules. When any corporation/company fails there are holders of bonds and preferred stock that should be paid if the company is liquidated… Those are the basic rules of the stock market, as those who bought those bonds/shares have lended the company money. Look what’s happening with Washington Mutual – dead silence regarding the fate of preferred shares… Violation of the principal rules of stock market will lead to more chaos…

Posted by Svetlana Mironenko | Report as abusive

I think we should either nationalise the banks or we should just go ahead and let them fail; the shareholders took on that risk and are fully aware of the risk of failure. You never heard them whining while they were on the receiving end and making high returns, but you can guarantee they will be the first in line to complain or stand against nationalisation when they start to crumble, which they already have. One way or another it is going to happen, I think we should have the say of how it is going to happen instead of letting the banks decide that. The money we are injecting into the failed banks is not being spent where it needs to be spent, and if it is being handed out to the folks that got us into this mess in the first place, then there is no legitimate reason for allowing that bank to keep operating the way it is. Let it go bankrupt and restructure. If your bank is running within the limits and rules that are in place now, then you shouldn’t have any worries. Starting a new bank or two with clean balance sheets in place sounds like a pretty good idea too, one that will abide by the rules and run in a manner that a bank is supposed to function; with enough capital in place to lend to the people that need it the most and to the small business sector to keep job losses at a minimum and to stimulate job growth.

Posted by Damian Palmares | Report as abusive

No doubt the big heavyweight shareholders, debt holders, and speculative counterparties have and are driving these decisions in Washington. Take AIG. Exactly who are the counterparties to all of their credit default swaps and other toxic derivatives which have been given massive support by the Federal Reserve? Follow the money – if you can.

Posted by Dave | Report as abusive

What needs to be considered here are the lending practices and probably the most controversial word in that topic is “conservative”. If you are you an up & coming bank with few shareholders you are constantly looking at why outside investment isn’t buying into your portfolio. You look at your competition and these banks are claiming 15-25% returns. You are showing your 6% steady growth based on your conservative lending practices but in order for you to get up to the level these other banks are you take HUGE amounts of risk. Your loan underwriting guidelines become flexible as rates are increased for riskier borrowers and the end result is a higher yield. Well there comes a point where your risky book of business out weighs your conservative portfolio and now you’re praying every night your risky borrowers keep paying. Banks are FORCED into this model else no one will invest in them, i mean if you had money to invest in a bank would you go with the one claiming 15% returns or 6%? Most people aren’t diving into what these banks portfolios encompass and what we’ve found out over the last year is that their books of business are incredibly unbalanced.

Posted by Anthony | Report as abusive

the end of my comment got cut off:

Banks are FORCED into this model because the big guys know going under isn’t going to happen, they’ve been bailed out in the past and continue to do so. If that’s the case they have nothing to lose and if all banks are forced into this high risk lending then at the end of the day we’ve created a system whereby “loss” is just a slap on the wrist not a 6ft grave. If banks aren’t going under then the need for “conservative” lending practices doesn’t exist. I’ll expect to see an article like this in another 5yrs.

Posted by Anthony | Report as abusive

“Followed the money.” Read extensively. JP Morgan tops the list:
! Number 1 in “Credit Default Swaps. > 10 Trillion. Big banks are all high, as they wanted to sell CDO, SIV, and other junk at AAA bond value. Foolish lie.
! Number 1 in receiving Bailout and other government money. Too big to fail got way bigger with Bears’ Investment Bank and Wa Mu.
! Big and bad. JP Morgan is likely biggest and possibly the baddest. They were on the losing side of Bears – so they tricked most of the US government (though Hank Paulson certainly knew) by pretending to “save” that casino style Investment bank. Bought Wa Mu for a song to strenthen the “too big to fail” nonsense.

Posted by skinner | Report as abusive

PS: AIG loses related to Credit Default Swaps are almost certainly being paid by our $150 B to none other than, JP Morgan, et al. Follow the money. Heck, we own 80% of AIG. How about us taxpayers take a peek at a surprise audit by a trusted outside auditor!

Audit AIG by a new, trusted auditor. Heck, to protect our loses, audit by 3 independent audits.

Posted by skinner | Report as abusive

This is a new, deadly twist on the savings and loan debacle from the 80s. Back then the federally regulated, conservative savings and loan industry was “deregulated” in order to allow it to try to earn it’s way out of insolvency – while the government continued to provide insurance on all of the deposits. Coupled with Reagan’s “Accelerated Cost Recovery System” tax code change, a huge speculative commercial property bubble was ignited based on totally unsound and corrupt lending practices, and radical tax sheltering. It all fell apart when Ronnie reversed the tax code in 1986 and there was no longer any tax sheltering benefits to the property scheme. This resulted in massive loan defaults, massive failure of the savings and loans, a national property market crash, national recession, banking crisis, and the government creating the RTC to manage and liquidate the assets of the failed thrifts. All of the depositors were made whole by the US taxpayers at a net cost of approximately 175 billion dollars.

Today, going into this calamity, part of the financial system had government guarantees of their deposits, and was poorly regulated, but the engine which drove the biggest amount of the bad credit creation did not have guarantees or any/much regulation. That is the Wall Street shadow banking system which securitized and resecuritized, and supported ludicrous debt values with more debt at capital ratios of 20, 30 40 to 1. The people running those casino house of cards were confident that ultimately, if it all came apart, the US taxpayer would have to pay the bill. Because the result would be – too big to fail. And now – the government is providing the massive guarantees, after the failure.

Privatize the profits, socialize the risks. That is American Capitalism.

Posted by Dave | Report as abusive

Yeah you should hear Jamie Dimon talk about how his company is doing fine and to quit blaming bankers for the mistakes that were made. Let me do some research on CDO’s and CDS.

Posted by Damian Palmares | Report as abusive

Let them fail…no more bailouts…period.

Posted by Damian Palmares | Report as abusive

It’s funny how Dimon wants to shift the blame to the public by moving their money out of riskier funds. JP will get what they deserve in the end and so will Dimon.

Posted by Damian Palmares | Report as abusive

Just because you offer it to the public who is at a disadvantage doesn’t mean that it’s their fault….it’s your fault for pushing these risky investments and then after they fail you want to shift the blame off of yourself and Wall Street for it, saying the investor should have known. Don’t worry we are onto you. And you will pay.

Posted by Damian Palmares | Report as abusive

Let them fall…here’s more proof of the hoarding going on…. http://www.forbes.com/2009/02/03/banking -federal-reserve-business-wall-street-02 03_loans.html

What do you expect from that industry? It’s time to let them fail and move on.

Posted by Damian Palmares | Report as abusive

What is unknown is if the bond holders and counter parties are foreign sovereigns, or their proxies. In that case we are collectively dealing with a problem that could start a world war. If there are no concerns in that regard then clearly insolvent is insolvent and no amount of tailoring will salvage the emperor’s new clothes.

Posted by Bradford C. Riendeau | Report as abusive

Bankers don’t understand their responsibility to society. And we do not require them to. This should change. We require doctors, lawyers and teachers to be certified/licensed to practice. We have employees in these banks with 50+ staff under them, or making $5mm decisions, and nothing other than a privacy or AML on-line test as a qualification. I suspect Dimon has a lot of managers in JPMC that don’t understand they have a role in society that goes beyond personal wealth-building. The easiest way for the ‘good’ bankers to show their support for the nation, and divert attention from those huge “knowledge worker” salaries, is to opt into a real professionalization program. Dimon gets higher morale and better employees, the bankers get an understanding of their role in society, and America gains a mechanism to dis-BAR bad apples from service in financial institutions.

Posted by bill | Report as abusive

Thank you Mr. Saft. Also, thank you for the comment section.
I completely agree with most comments on this article by Saft.

I was really surprised by the wealth of historical knowledge brought to the debate.

JP Morgan has a long and sorted history of power grabs. One bank too far.

The Resolution Trust bailout of the Savings and Loans is very good. Yes, indeed, much of that was caused by the favorable accelerated cost recovery system (ACRS depreciation of building over only 15 years). Then, ouch! The Tax Simplification Act of 1986 (Including the Alt Min Tax “ATM”; the only thing simple was in its name). Another reason to eliminate the IRS and the Fed. Those private corporations should be audited and eliminated.

Posted by Skinner | Report as abusive

Just a few thoughts.

Policy makers don’t want to create a bank that lends conservatively, banks are already loaning conservatively, they want to create a bank that lends to risk to return to former consumption levels.

One thing that must be considered is that if we commit to letting banks fail we aren’t only talking about small banks. Citi goes under? BOA goes under? The dollar crashes, you cant approach this argument without considering the effects on the currency.

And if we let the banks fail do we also let the automakers fail? I am not saying this is good or bad here, but if we let the markets take care of the mess be prepared for a wave of foriegn takeovers. All those dollars held by other countries will return in a viscious way.

What kills me is that in the tortuous debate over this some very simple math gets missed. O.k. now we will have spent a trillion dollars just on stimulus alone, never mind bank bailouts. Consider this, for 200 billion dollars you could pay 5 million people $40,000.00. So we’ve spent a trillion plus, you could pay that five million that for five years! Or you could do any number of alternatives, spend 400 billion for two years and 600 billion on the tools of whatever you want them to do. Or cover 10 million people for half the time, whatever…

Socialism? Another failed New Deal? Well people are fond of saying that the New Deal didn’t pull us out of the depression, spending on WWII did. Here’s the thing though, WWII WAS public spending. It’s not whether or not to spend public money to put people to work, it’s having the will to do so in way that means something.

What we’re witnessing is the culmination of 34 consecutive years of trade deficits that total $9.2 trillion, all of which was financed by a sell-off of American assets to the foreign “bondholders and derivatives counterparties” mentioned in this article. With ownership comes control and the U.S. and all of its institutions are now owned and controlled lock, stock and barrel by foreign entities. Anyone who thinks their interests won’t come first is delusional.

Time to follow the money.

Posted by Damian Palmares | Report as abusive

They are owned by foreign interests…so how do you stop that? I guess my point about letting them fail is that we have nothing else to fall back on since we outsource everything now to foreign countries….we have no manufacturing base, Detroit and the Big Three can’t keep up with what the public wants, our IT is being outsourced like crazy to India, China owns our domestic consumer electronics base, clothing base and mostly everything else we buy is not made here in the U.S…..they move the factories overseas because they will work for pennies on the dollar so our greedy corporations wont keep business here because they know they can get a factory worker in Vietnam to work for $3 a day versus $18 an hour; I’m not saying this is not a bad move for corporations but they are only out for profit so of course they are going to outsource and move factories to China, Vietnam, Indonesia, Brazil…they are third world countries…But how does that help the U.S.?….How does it help the people? It doesn’t. I am all for countries advancing besides the U.S. but at some point we have to say what is this going to do our economy and our country in the long run? It is not doing anything good….look at the numbers…with as much wealth that was taken from us in this financial meltdown, and I speak as the individual public, where do we go now as a country? What do we do?

Posted by Damian Palmares | Report as abusive

It is greedy corporations and individuals out for themselves and don’t care what happens to our country as long as they pull in their millions…they don’t care, they are set for life after that and their family.

Posted by d | Report as abusive

While this analysis seems appealing at first blush, it still 1) leaves the government in the position of deciding which banks live and which die and 2) does nothing to address the underlying flaw which triggered this problem, bad mortgages. If we agree with the sentiment that equity and bondholders of the banks should pay for failures of judgment by the firms, then a better approach might be to offer through FDIC or another agency to buy mortgages in arrears in packages at 50% of sold value. These would then be packaged and sold to Fannie/ Freddie to provide a ~4% rate at 60 – 80% of sold value depending on the market the house is in. This would 1) force pain onto the banks equity and bond holders, 2) provide a way for homeowners to stay in their houses and hit the recent button with a minor penalty for getting in over their heads (e.g. set the value to wipe out any equity above the 20% down payment they may have accrued), and 3) provide a market price for these assets which could then be used to unwind and reprice all derivatives. Private equity will come in and offer the lenders better terms for some of these mortgages. The government should in any case float this at bond market rates transparently on the exchanges in weekly or monthly auctions until the prices stabilize. Regulatory reform will be needed to help the surviving lenders avoid this mistake in the future.

And now we are going to pay the price….unless we figure out a way to combat this…you can say buy American only but we don’t have the manufacturing base to support that, we could in 5-10 years if we buckled down and the government supported that but I don’t know that they want to do that. No one buys our exports because of the unfair trade agreements in place…it’s too expensive…everyone wants a piece of our money in the U.S. but they don’t want a reciprocal balance of trade, because we actually care about our people and how we go about manufacturing products unlike our third world countries and their factories that produce inferior products. We are stuck unless we seriously do something about this situation. We need to come together and figure this out though before we have no legs to support us. Maybe we should just become a self-sustaining country and rely on no one else and stop helping others and the world like we have in the past, because they are taking advantage of us now…here’s a good quote that applies to the U.S….”Don’t mistake our kindness for weakness”.

Posted by Damian Palmares | Report as abusive

It is the mortgage industry that got us into this in the first place, or lack or underwriting skills…the underlying root of the problem, which the Government wont fully recognize or address to the point that it should…but the failure of our mortgage industry, consumers and banks the like, pushing people to buy what they really can’t afford now instead of earning it the hard way; saving a 10% or more down payment, instead we caved in and said sure you have a 720 credit score…we don’t care about what you have in reserves or whether or not you can prove you make enough income to own this house, go ahead…you’ll make 10% on house value increase next year….no one wanted to see the collapse of the bubble. Now it has opened up and shown us and led us to the weakness of our financial industry on a much broader scale; not only the financial industry but our entire economic model.

Posted by Damian Palmares | Report as abusive

These are one of the toxic loans(besides derivatives) most wont touch now in the secondary market and can’t be priced but are still on our banks balance sheet because they were mixed with good loans by our banks and lenders who were just greedy when it comes down to it. The due diligence on these portfolio of loans was despicable…either they just kept hedging on the fact that these people that made $50,000 household income could keep up with a $200,000 mortgage payment because they thought the value would keep going up or they didn’t know that it was that bad. One or the other…either we need to write them off and start over or we need to address the public and assist them by converting these loans to a fixed rate if we want to keep our banking sector alive, assisting the banks is doing nothing. We have $300 billion in a project called hope for homeowners but it is so strictly laced with guidelines it helps no one. They have helped 485 people, I think, since I last read about them…what about the millions who really could use that help? If we help the people that are upside down in their mortgages and can’t afford what they are paying now don’t you think that might spur them to buy other products instead of worrying if they are going to be out on the street or where they are going to live ? It makes no sense to keep injecting the banks with money…they aren’t lending it to the people who need it, but instead giving it to their own people and our Government is allowing them to do so.

Posted by Damian Palmares | Report as abusive

How FASB 157 is destroying our financial system

I have always been taught that when a problem occurs go back to the time or source that caused the problem in the first place. In the fall of 2007 the Federal Accounting Standards Board implemented mark to market accounting (FASB157). Although a great idea for transparency, flawed in it use with illiquid securities.
Prior to this rule the FASB had a rule called mark to maturity accounting, in which a bank or other financial institution would mark a security it owns to its maturity on its balance sheet. For example, A bank might own a pool of mortgages in which only 10% are failing. So, to make things simple, the bank might mark those securities to 90 cents on the dollar. However, in analyzing this under FASB 157 now a bank or financial institution must mark those securities to market. What does this mean? Well if a financial institution like Lehman who was leveraged like most banks and financial institutions are and is having financial difficulties and needs to sell their mortgage securities at distressed prices for liquidity. For example, the mortgage pool I listed above might have sold for fifty cents on the dollar. You as a well capitalized bank now must mark down your similar mortgages to that price too. Which will destroy the next banks financial balance sheet. This has been going on now for the last year and will only get worse and cause more foreclosures and banks to fail. When everyone wants to sell at once it will just feed on itself till all these mortgages are written to 0. Which we all know, 100% are not failing to pay their mortgages. In fact, On December 8th 2008, the Mortgage Bankers Association reported that the percentage of foreclosed houses across the country stands at 2.97%.
When looking at this problem, I tried to compare it to another industry. I looked at the insurance industry. Insurance companies collect premiums and issue insurance policy’s, similarly a bank takes deposits and issues mortgages. If all the people an insurance company issues policies to dies, basically, the insurance company will be insolvent. Similarly, if the mortgage assets a bank holds are considered “toxic” and no one wants to own them and are forced to mark them down to basically nothing, a bank will have less capital and less to lend. If the bank is leveraged, like most are , it can cause more failures and more failures mean more write downs.
The reality is that since this problem started things in the financial markets have deteriorated. The stock and real estate market are down, so an individuals wealth has been all but wiped out. Which, will cause this recession to last for many years. The only solution is to either start a market to purchase these securities or repeal or modify FASB 157.

Posted by Glen | Report as abusive

Not only allowing it but funding it, and we are paying for this? No that’s not what I pay taxes for, I’m sorry.

Posted by Damian Palmares | Report as abusive

Come on, the common American should not fret about this complicated stuff. They should just go back to watching their televisions and let the tough issues be tackled by more reasoned people. Where else in the world besides America can you fleece millions of people from their hard earned money and yet have no civil unrest? Just tell them that all will be well and they will forget about it in a couple of months. The government that they so love will take care of them…

Posted by Anthony Afterwit | Report as abusive

President Obama, please nationalize the banks. Please stop giving tax payers’ money to those criminals.

Posted by ron_paulite | Report as abusive

I absolutely hate the idea of bailing out stupidity. Unfortunately, that stupidity doesn’t end with the banks. Some would look upon this financial fiasco and make claim that its proof that capitalism is a failure. I disagree. What has failed isn’t capitalism because we don’t have capitalism. We have a capitalist/socialist mix that has failed us, and its really the socialist part of the equation that is at the foundation of the failure. What we did was embed moral hazard into our home mortgage market. It started back in the 1990′s when Clinton HUD secretary Andrew Cuomo opened the door to both Fannie Mae and Freddie Mac to increase their exposure to sub-prime and Alt-A mortgages exponentially. Then into the next decade, Congress totally blocked oversight of the cancer growing at the GSEs. The CEOs didn’t care what they bought because the incrementally higher cash flow in the short run produced outsized bonuses in while sleazebags like Franklin Raines were in charge. Besides, Congress had their back. Congress would cover for them as long as they still had a team of lobbyists greasing the hands of corrupt Congressmen and Congresswomen. This is the embedded moral hazard.
Now add to the mix credit default swaps to be used as insurance, a large dose of stupid, greedy bankers,bad decisions at the SEC to allow leverage to increase from their typical 14-1 to as much as 40-1, an overly lenient credit policy from the Fed, mortgage companies that know moral hazard when they see it like a shark knows blood in the water, a raging real estate market, a Congress and executive branch cheering on the highest percentage of home ownership ever, ratings companies that admittedly would rate anything AAA including a cow, and a greedy and stupid public that thought real estate only goes up in value……..and you have one explosive cocktail.
So, should we now act like capitalists with the banking sector even while we still bail out homeowners, the auto industry, and every other stupid special interest group even though not doing so will likely create such a domino effect in bringing down many banks that today are thought to be strong? A good example is J.P. Morgan who has more invested in credit default swaps than any other bank but because of their wealth of deposits is strong as long as the domino effect is kept at bay.
Will we save money with this approach? HELL NO! Nationalizing this mess won’t get us off the hook at all and the extra collateral damage will put the dollar along side the Zimbabwean currency for resiliency.

Posted by SDDuude | Report as abusive

Dear Sirs, The mirror tells in the simplest form of all.
If through carelessness(or whatever causes) you fell and hurt yourself and the injury is not serious you get up, go home, nurse yourself and be well in a few days and live again. If the injury is serious and if so happens some good samaritan comes along, brings you to the doctor which happens to be very good and also that you are able to raise the money to pay him you can be well and live again.
If through carelessness, recklessness(and or other reasons)
you sail the high seas and you hit the stormy choppy waters and very fast you are drowning. Nobody knows how and have the courage to rescue you. Also nobody has the expertise and resources to rescue you without risking their lifes. But you have to be rescued so they say or your death will bring suffering to many. The US Administration would pilot the helicopter to pull you out of the water. It does not matter where the resources and helicopter will come from. It does not matter if the rescue drill works. It does not matter if the helicopter is up to the task. It does not matter if the pilot is up to the task. It does not matter how long it will takes.
Do it as they said the consequence of not doing is unacceptable. The mirror says it is just a repetition of what brought us here after all. No technicalities is needed to explain to your common readers

Posted by Tang Kin Meng | Report as abusive

I agree with all you have said, but more should be done.

In addition to helping out the weak banks the stronger banks should also have capital put into them OR new well capitalised banks formed. This will allow businesses and individuals more chance of getting loans. Now the established banks have a choice they have start lending or they may go out of business. The free market will do its magic of cleaning out the weak leaving the stronger banks to get the economy going again.

There will be many who will lose as a result, but what is the purpose of all this money being being spent? To keep insolvent banks and bankers alive or to kickstart the economy?

Posted by VDharmarajah | Report as abusive

That losses of Private Banks are being Socialised in a country that preaches the World the virtues of Capitalism,is not just obnoxious but a moral hazard. America will have to live with the stigma of this indefensible act for decades.

We hear the specious arguments that if Banks are allowed to fail, poor will suffer hardships and unemployment. While this may be true, the poor are not living in luxury so a little hardship or a lot more will not make a significant difference. It is the Wealthy who will suffer with Bank failures as their Assets will become virtually worthless. This is daylight robbery in a full Democracy. Everywhere it is the Rich who make the policies to keep themselves rich and the poor can keep working harder to remain poor. While the World changes some things never change.

Capitalism is probably dead and gone forever now. Please invite the Congressmen to preside over the last rites.

Posted by F.Daruwala | Report as abusive

All commentors seem to be taking issue based upon emotion and the talking points foisted to them by the media. The problem the west is facing has been faced by Russia in the 1980′s – 1990′s and by Western Europe in the 1920′s and it is the on-going problem of centralized wealth and closed-ended control of capital.

The “bailouts” are another example of supposedly competent, responsible folks being scammed for trillions of dollars by a long-term plan to dominate the world’s capital markets completely and preside over the wealth of the entire world totally.

Stop thinking in financial terms! The financial houses and any institutions who even touched CDO-based aquisitions of capital MUST FAIL. This is more along the lines of GAMBLING than banking and finance. The bettor takes ALL the risk; if the number doesn’t ‘hit’ he loses. PERIOD. No one walks into the Nugget and pays the bettors anything to get them back on their feet. Lucky are those who get a free breakfast. PERIOD.

Posted by crashcrisis | Report as abusive

As I stated before, the declared economic emergency is going to allow governmental actions to focus on symptoms to the detriment of causitive factors, and we badly need to address the question of debt securitization and debt insurance such as CDS. As long as we continue to seperate the originator of loans from the ultimate lender there will be irrational lending, but solving the problem will wrest economic control out of federal hands and doom Fannie, Freddie and GNMA (not that the first two aren’t deep enough in doom).
There are probably rational arguments on both sides of the FASB 157 question. The truth is that world economies are going to have to face the fact that most real estate prices and many industrial loans to leveraged companies will probably not stabilize in value short of 50% of 2007/2008 prices. Do we accept and plan for reality, or do we let Mr. Market have his way on his schedule?

Posted by Gary Leeper | Report as abusive

Can someone here recommend how I can become more educated regarding the economy (ie stations, programs, etcs). I have been reading reuter’s lately and I would like to learn more about. There is so much debate now about bailing vs not bailing, the unemployment rate etc. Can someone direct me a path to follow so I can be more “educated ” regarding this, (sorry did not get my degree in business: in sciences ;) So, besides reading the NY Times and Wall Street Journal, what else do you recommend for a clearer understanding

Posted by Kasia | Report as abusive

You have got to be kidding me. Nationalize the banks? what idiocy. Russia went bankrupt and so will we if we follow their example and become more and more socialist. We haven’t had real free market capitalsim for years thats why we’re in trouble. The real problem is the FEDERAL RESERVE. They are the root problem and they cause the recessions and depression. Do some fact checking even Bernanke said the the Federal Reserve CAUSED THE GREAT DEPRESSION in an interview in 2002

Posted by doug | Report as abusive

Doug, yes it END THE US FEDERAL RESERVE. END FRACTIONAL RESERVE.

End the casino banks.

Create sound money and prudent banks.

I recommend listening to US Rep. Ron Paul, NH. dailypaul.org

Posted by skinner | Report as abusive

Here is a suggestion:

Instead of giving money directly to the large banks (citigroup, morgan stanley, lehman, etc ad nauseum) we, as taxpayers operating under a CAPITALIST system, should simply buy up all existing available shares of all failing banks with federal bailout money. When the taxpayers own > 51% of a bank, it is considered “nationalized” and can be audited to pieces by the IRS, SEC, etc. All accounting “irregularities” can be exposed. The lending can be done in a controlled, regulated way by a bureaucracy without greed as its primary motive.

Posted by Bob Johnson | Report as abusive

The recommendation in this column mirrors George Soros, and others in the press. The questions that need to be answered before anyone should consider the path proposed of a U.S. Government lead cram down financing of the financial system are as follows:

1) Do the big investment players like Soros who propose this direction actually have any evidence that this is the best direction for a world financial system crisis, or is it just a speculative short trading position on the banks that they currently hold?

2) No one seems to question that it is a Government lead policies of increasing home ownership in the U.S., started in the 1990s that got us into this financial mess, which all the banks supported – some more than others. Why is it not the responsibility of the government(s) now to clean up the mess?

3) We know the government took action during the 2006 – 2007 timeframe to stop the increase in home inflation – see Greenspan testimonies during this time frame which lead to a major pullback in underlying capital to support mortgage financing. Again, the instigator of the current crisis can be linked to government actions, so why is it not the government responsibility to fix the problem?

4) Does anyone believe that wiping out the creditors and shareholders of the existing banks in the U.S. is actually going to fix the problem? The owners and creditors of the existing banks are pensions, 401K and IRA investors, etc., a very large minority shareholder base. They were not investors becasue they were looking for a quick buck. However, the same may not be said for the money sitting on the sidelines waiting for a cram down.

5) Is there a better way out of this mess? Of course there is. A FDIC like model for insuring deposits needs to be created for insuring assets such as non-recourse mortgage loans which our federal government has determined in “its infinite wisdom” an area in which government meddling is required in order to promote economic growth. Since this is the case, we cannot expect sound private institutions to take the blame for government policies run aground. The only insurer of last resort for these actions is the government (i.e. taxpayer), and the government can easily set-up an insurance fund which all banks pay into going forward which will begin to properly reflect the price / risk of the policy. The foreclosure / work-out agency (“bad bank”) would be the caretaker. The insurance rates if too high, will act to brake risk when needed, rather than stop the system entirely. All of this can be done today, with the existing institutions in place, without the proposed cram downs run the very high risk of just being disguised trading positions of very large investors around the world at the expense of minority investors which are primarily U.S. based.

Posted by Dan | Report as abusive

I agree with your observation. Let the market forces work.

We are going about trying to fix the economy and banks the wrong way. Trying to get a population that is over extended alraedy to borrow and spend more just by lowering interest rates while the fear for there jobs is not going to work. What is needed is not a bailout of banks but a bailout of taxpayers. I think the government should refinance all outstanding mortgages. It should reduce the principal for each one anywhere from $50,000.00
to $100,000.00 by doing this you would free up money for comsumer spending, stop a majority of foreclosures, and improve the quality and prices of these assets on the banks books. we could also eliminate mortgage interest deduction to help pay for it. Part of the problem is nobody knows what these things are worth but with the knowledge that the majority of mortgage principal would be paid back prices for mortgage backedd securities would improve. As mortgages are paid off, the only thing left would be
the really baad assets giving a much clearer picture of what the real amount of the losses are. Short term would be expensive but as people continue paying there mortgages, income would exceed what is going out and principal and interest earned would pay for amount mortgage was reduced over life of loan. This would free up cash for consumers to spend, provide jobs, and help other depressed assets as economy stablizes. As the government and the Fed helped create this problem by deregulation and encourging people to borrow and spend they should be willing to bailout the the people hurt most by their actions not the ones who profited the most.
We should also do something to encourge people to save more maybe a credit for interest earned and not tax it.
We can no longer live off borrowing other peoples money.

Posted by Andrew McGowan | Report as abusive

Thank you! I came to exactly the same conclusion a while ago but this is the first time I’ve seen it in print. I was beginning to think I must not understand banking.

Let the speculators take their hits rather than the taxpayer, the “lost” money from the bubble is not coming back, let real estate deflate to where it belongs and pick up from there.

Add one thing: I would use this mechanism to solve the other major problem that is destroying the economy, the freeze in the credit market. Make the “new” banks loan money rather than hoard it as the TARP-ified banks have. Banks that should be allowed to fail and be seized. You would un-freeze the credit markets tomorrow to save all of the otherwise healthy businesses needing to borrow operating capital and enable qualified consumers to borrow to make purchases.

For that matter you could require all banks to loan from directly from TARP to consumers and businesses, paying the banks by commission to administer the loans.

The loans must be based on prudent standards however, not just to get money out there, idiot lending standards is what got us into this mess in the first place, anyone with half a brain could see the real estate bubble forming as far back as 2001. When granting mortgages don’t base them on a market value that is a bubble value, base it on genuine market fundamentals value. Duh.

Posted by Add one thing | Report as abusive

Don’t nationalize, THAT’S WHAT ICELAND DID.
>>We don’t want to assume their debts!<<

Force ‘em into chapter 11 or the FDIC seizure equivalent. Segregate the debt, sell off the seized banks when the economy is better and give the shareholders the proceeds and the debts to take their lumps .

Posted by STOP | Report as abusive

Thank you Mr. Saft and Mr. Stiglitz. Finally, people who are willing to stand up and advocate ideas grounded in common sense. Will the exercise hurt and be painful, yes. However, if the feds had stayed out of the fray last year and not intervened the bad banks would be gone, the marginal banks would be working to manage their way out of the mess, we would have already reached a bottom, and the US taxpayers wouldn’t be on the hook for the next bejillion years.

Posted by bubbadude | Report as abusive

All this effort to resurrect what has failed and died will lead the US to a truly grim setting in the near future. How very un-American America has become.

Posted by Morozov | Report as abusive

James I wished the American policy makers had half the common sense, Integrity or Ethics you have. There is a moral hazard to baling out Banks that were highly leveraged, took unacceptable Risks and speculated with Derivative products – all for the sake of higher Profits and Bonuses. In the absence of disgorgement clauses to claim back the Money from the wayward Bankers, better means of invigorating the Economy should have been explored.

Even with a change in Government it seems that the same cabal of discredited Financial experts continues to dictate and pursue a failed Policy. A highly indebted Country can least afford to throw good Money after bad. The Price of these decisions will be borne by the American citizen already reeling under severe Financial stress. A Policy that is expedient is not the best one, especially one which can create multiple problems tomorrow. Cant understand how America has not only produced such terrible Economists but so many of them have reached the TOP.
Greed has conquered common sense !

Posted by F.Daruwala | Report as abusive

The problem seems to be that we are treating most of these institutions like they a teenagers who dipped into his mother’s purse for money, instead of prosecuting them for the fraudulent waste they have incurred. After hearing that the CEOs were going to Vegas to have a “conference” using taxpayer’s money, I can only think that my struggles to balance my checkbook every month is a futile endeavor if the system is so broken it can’t recognize outright theft when it sees it. Send the idiots to jail, clean out the banks and start over. And I like the idea of capping CEO compensation to $500K, as I can live on $50K without denting anything. Make them learn to live with what they’ve got.

Posted by T. Moore | Report as abusive

well . . . . everyone has good ideas and they make sense concerning the existing banking and FDIC regulations to deal with under capitalized banks.

However I think that there is a bigger problem and no amount of spending will solve it as the total value of the credit default swaps exceeds that of the planetary GDP. The value of all the credit default swaps exceeds the GDP of every nation on the planet combined.

They can spend and finagle economic theories but at the end you can’t get blood out of a stone. When the chickens come home to roost we will all be trying to dig out of this and not just in America but the whole world.

The problem is not an American economic crisis the problem is a world economic crisis, quickly heading to disaster!

Posted by peter m | Report as abusive

Thats why this is a heist, and not a ‘crisis’.

Real solutions are not even being discussed in the halls of power – only money to be falling from the sky upon they who created their own ‘crisis’.

It isn’t the first time either – nor will it be the last.

Posted by BaronvvonvLufthoven | Report as abusive

AMEN! Should have been done in the first place — it would have likely prevented the world-wide financial tailspin we now face. Now it may be too late. Set up a Special temporary agency to start extricating the bad apples one at a time, but re-structure them possibly in groups, beginning with the largest. Use the existing apparatus to re-open the shut-down operations under a local community oversight. Forever ban the former management(s) from re-infiltrating such activities. Force them to be re-trained through Job Corps, WPA, CCC, or something similar. Ask China for advice as they regularly operate this way. We’ve come full circle anyway if we are going to have to now nationalize what otherwise should be private enterprise. The jail system is not large enough to handle all those responsible for this mess. They maybe could be sent to national disasters around the globe to help clean up nature’s mess.

Forget the banks for a second,they are only utilities:
The biggest decisions of this financial crisis have just been made. Did you miss it? GM, Ford, Toyota, and others have just begun the biggest event since the space race between the USA & Russia, the biggest change since the Model T Ford.
They have all embarked on the challenge of dumping gas guzzlers,and electrifying the transport industry. The Government & BIG business has finally plugged-in, and the auto-makers have switched on. The question is who will win??? The Chinese, the Japanese, the Russians, the Middle East, or will the US prevail??
Mark my words.
This will be the biggest decision made in this Century. I can’t wait. LET THE RACE BEGIN!!!!!!

Posted by Brad | Report as abusive

Sorry forgot to mention Nissan before,
Yet another auto maker in the race for the EV. This is truly the start of this milleniums revolution. It’s a revolution that has at its core renewable technolgy, energy. Renewable technology, fuel, energy, is the answer to renew our economies. It has to be because the earth isn’t. It is the only way forward, and thank God it is happening. All those who say it’s too expensive, or it can’t be done will be proven wrong. They are just scared because they will have to change. The fact is it will get smaller, cheaper, and easier once we take it and run with it. Look at the first cars, the first space rockets, aeroplanes, phones, computers. The first computer took up an office block, now it fits in the palm of your hand, and continues to astound us every day. The first planes were nothing more than a glider strapped to a man. Now we can break the sound barrier, and send people on holidays to the moon.
A world full of renewables will hapen, it is happening, and not a moment too soon. Get on board before the intergalactic train leaves. Don’t get left behind. Lead the way.
Brad

Posted by Brad | Report as abusive

The only justifiable reason for pumping trillions of dollars into these virtually dead banks seem to be Credit Default Swaps. It looks to me that the government is afraid that letting fail one of the big banks would trigger a chain reaction of payments from CDS’s that would cause bankruptcy of all major financial institutions in the world.
My question is why can’t congress legislatively restrict CDS payments only to those who hold underling debt and invalidate (or deffer in time – e.g. 10%/year for 10 years or 5%/year for 20 years) all others that were after all nothing but gambling. It would require establishing of a central clearing house for these instruments as there are many who don’t directly hold the debt instruments but they are liable to those who are holders therefore there would have to be facilitated process of transferring the debt instruments from ones to the others. This should limit the magnitude of any shock caused by the collapse of any major institution. If that is not enough to avoid the systemic risk we should consider spreading CDS payments for those who hold underlying debt overtime as well.
It might be unfair to some of the market participants but it would be more fair than financing this mess by taxpayer.

Posted by PwlM | Report as abusive

Here is a simple questions: Would you ask the person who started the problem to try and fix it even if they don’t have the stones to admit they screwed up? Most logical people would say no, but that is exactly the government is trying to do.

They (gov. Frank) created the market for bad debt by forcing bad loans (Banks got greedy and took it) and low and behold people didn’t pay it back, not to mention many companies just move money around, there is no value created.

Now to the banks, the gov. is good at creating problems not solving them, unfortunately these banks need to fail. It sucks that people will be fired, but I would hope the banks would have enough leadership to not run to washington with their tale between their legs to suck on our teets! Cowards!!! Detroit too!!! Life ain’t fare and consequences are real. Nationalization of the banks will destroy any interest potential investors have as gov. entities are poorly run and inefficient at best, why would I want my money there if I have other options? It is ridiculous.

There are a ton of scare tactics going on to distract people from the truth. The gov. started this and needs to get out of the way. And private firm (no matter how big) need to know they can fail and that leadership gets fired if they do, without a parachute.

And to someone who commented on electric cars, rubbish!! I don’t want to drive an RC car, I want a clean diesel. The rest of the world has them with 40 mpg averages, why not us????

Posted by No-Bailout Too Late | Report as abusive

The banks are too big (and important to fail). Well, that is according to the bankers. I, on the other hand, am ready to test that statement at this stage.

Let Babylon burn.

Posted by Quintin | Report as abusive

Nationalization IS a dirty word and I will tell you why: Naionalization wipes out the shareholders. That means all the pee-ons that worked for these companies all their life lose their entire 401(k). Here’s my story: my husband worked for 25 years for Merrill. They took away the pension and offered us a 401(k) and very generously offered to buy stock for us in the company, in exchange for a pension. If we were given choices, we surely would have kept the pension. But this was not the case. So, my husband worked faithfully and loyally, while the ceo’s were stealing our money like roaches in the dark, making a mockery of our system. My husband and I did nothing wrong, why should we lose our retirement while theses rats get to keep theirs for a lousy job done no less? The only thing that I can see that we did wrong was not consult our crystal ball regarding the future. How can anyone think that we deserve to lose it all since we are shareholders???? My husband earned that money, it is ours and we should be allowed to keep it. This is just one more dirty thing to screw honest people. Granted, the stocks arent worth much now, but we should be allowed to keep those shares in hope of better days. People have to keep in mind that these so-called shareholders are people who worked for that money!!!!! There is a an entire sector of people out there that will be unfairly penalized for the mistakes of others. Also, people should start giving thought as to the next crises that will be caused when we seniors can no longer work and camp out on beaches??? That is my plan B….you need to give some thought to this side of the issue

Posted by Babs | Report as abusive