Obama Pushes New Bank Regulations

[DGuller]

Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders?

The problem to me seems to be that once you write off those debts, another set of balance sheets is suddenly in grave danger.  This can go on until everyone is crushed in a deleveraging spiral.

[Ed Anger]

I have decided to accelerate the construction of the Money Bin. Until it is ready, I have increased burials of cash in coffee cans.

[Admiral Yi]

I get that; I don't get the logic of the premise.  The only way in which non-banks benefitted from TARP is that the horrible mistakes made in the financial sector were blocked from sinking the entire economy.

If the tax is supposed to be levied on those who benefitted from TARP, that's all of us.

If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.

If the tax is supposed to reflect populist anger at "the financial sector" then it's perfectly designed.

[The Minsky Moment]

If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.

Disagree.

[Admiral Yi]

If the tax is supposed to be levied on those who caused the crisis, that's largely firms no longer in business.

Disagree.

Sun Trust, gone.  Washington Mutual, gone.  Lehman, gone.  Bear Stearns, gone.  Meryll Lynch, gone.  AIG, in de facto receivership.  Mr. Gaussian Cupola, hiding in China.

[The Minsky Moment]

Those institutions combined are a pretty small % of the financial sector.

[Admiral Yi]

Those institutions combined are a pretty small % of the financial sector.

Not everyone in the financial sector was long on subprimes.

[The Minsky Moment]

Not everyone in the financial sector was long on subprimes.

1) Suprime was only part of the problem.
2)  What about Citibank, BOA, JPM, etc - why in your view are they completely innocent?

[DGuller]

Those institutions combined are a pretty small % of the financial sector.

Not everyone in the financial sector was long on subprimes.

Subprimes are a red herring.  The crisis was about way more than just subprime mortgages.  It was about the reckless use of financial instruments in general.  Subprimes were just the first domino to fall.

[Admiral Yi]

1) Suprime was only part of the problem.
2)  What about Citibank, BOA, JPM, etc - why in your view are they completely innocent?

1) Subprime + associated deriviates were the problem.  If you were long in CDO, you were long in subprime.

2) I don't know much about Citi except that they're fucked.  Tax the shit out of them for all I care.  Course we own 80% of it so we're taxing ourselves. 

My understanding is that JPM's subprime portfolio was high quality and survived the crash in pretty good shape.  BOA I *think* acquired most of their exposure through purchases of Sun Trust and Merryll.  Correct me if I'm wrong.

[Admiral Yi]

Subprimes are a red herring.  The crisis was about way more than just subprime mortgages.  It was about the reckless use of financial instruments in general.  Subprimes were just the first domino to fall.

The reckless use of financial instruments who's value derived from subprime mortgages.  I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.

[Neil]

Why not empower regulators to nationalize banks that are "too big to fail", which would wipe out equity holders but still allow the company to function and not ruin counterparties, and then allocate any government loss to debt holders?

The problem to me seems to be that once you write off those debts, another set of balance sheets is suddenly in grave danger.  This can go on until everyone is crushed in a deleveraging spiral.

Not only that, but that wouldn't even eliminate the temptation to meddle, since the retirements of so many voters are riding on those companies via mutual funds and the like.

[Admiral Yi]

Add Freddie and Fannie to the list.  We own them too.

[Neil]

Subprimes are a red herring.  The crisis was about way more than just subprime mortgages.  It was about the reckless use of financial instruments in general.  Subprimes were just the first domino to fall.

The reckless use of financial instruments who's value derived from subprime mortgages.  I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.

Subprimes were the trigger, but it wouldn't have been what it was if everybody wasn't as highly leveraged as they were.

[The Minsky Moment]

The reckless use of financial instruments who's value derived from subprime mortgages.  I have yet to read about any firm losing a trillion dollars on credit swaps, options, or futures.

AIG's losses were primarily due to its massive CDS exposure.

Subprime was really just the canary in the coal mine.  If you recall, about a year ago I posted some of the OECD analyses of credit losses - subprime accounted only for a fraction of the estimated credit losses (unrealized).  The significance of subprime was that b/c it had the weakest collateral, it was the first to be affected by the panic.  The only reason the rest didn't follow was b/c of a massive, unprecdented stabilization by Treasury and Fed + a certain degree of forbearance in strict application of mark-to-market principles while the federal intervention could be felt.