I have (had?) a lot of respect for Warren Buffet. He once said famously that only when the tide goes out do you find out who has been swimming naked. Sad to say that the Financial Crisis and the Great Recession has revealed that Buffet and Munger -- the great investors of Berkshire Hathaway, beneficiaries of TARP and other bank bailouts, and Goldman defenders among other things -- have been found wanting appropriate beach wear.
Barry captures my emotions about departure of Larry Summers from the WH, and failure of Obama on economic front perfectly.
Perhaps it is unfair to place the blame on Mr. Obama, but I continue to believe that Obama administration should be held responsible for the economic problems facing the country and their continued lack to address the fundamental causes behind the current economic crisis.
I think to understand the crisis of 2007, 2008, 2009, you have to understand that it had many, many sources, many, many factors that contributed to it. The underlying recklessness of the banks, their perverse incentive structures, the fact that they were too big to fail encouraged them to engage in excessive risk taking; meant that if you had tied their hand in one direction, it's likely that they would have moved in another direction.But it's absolutely clear to me that if we had restricted the derivatives, some of the major problems would have been avoided. Some of what it has cost American taxpayers -- a great deal would have been avoided. I think there is a very high probability, for instance, that we would not have had to pay out the hundreds of billions of dollars that have gone to AIG, that much of the other financial turmoil we would have avoided. But we still would have had the problems of the mortgages; we still would have had the problems at rating agencies.So I think it's too simplistic to say that if we had done this one thing, we would have avoided the crisis. ... I view her experience as a dramatic illustration of what was wrong with the system and the power of the financial markets to resist doing what should have been done. But they did it with predatory lending; they did it with mortgages; they did it in area after area. And it would have needed a comprehensive attack to stop that. ...
And, that's what makes the overall financial regulatory reform so critical.Watch the Frontline Episode here:
We will know it on May 4th, or somewhere around that time, whether Obama/Geithner/Summers have decided to stoop to their lowest level yet, when they announce how they want the banks to recapitalize. The latest news is that several major banks including BoA, Citi, and Wells Fargo may need to raise a lot of capital (not that we did not know it already).There is only one way out of this if Obama and company have the interest of the country in mind: Make the bondholders take the hit, and use that debt to convert in to equity. It's not that difficult to understand (even I can understand it. Read this if you need more: Parts I and II).Not that converting debt to equity will solve our economic problems, but the current Obama/Geithner/Summers approach is despicable. Obama was not in charge when this problem started, but he owns it now, and except for the stimulus package, there is very little that his administration can say that they have done to address this problem.IF Obama decides that he wants to stick the taxpayers with the burden, and proceed with the zombie bank option, he will own the 11-12% unemployment rates that will follow. No amount of work on other fronts will save his presidency.Another excellent discussion of these issues was on Charlie Rose show with Bill Ackman, Kate Kelly, Joseph Stiglitz, Andrew Ross Sorkin.Barron's as well as his appearance last week on Bill Moyes Journal serves as a great book end to Simon Johnson's Atlantic article.
Choice quotes from the Barron's interviews:
"His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.
We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to."
"With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.
These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation."
"The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership."
Make no mistake, Obama is not doing so badly on rest of the issues, but when it comes to dealing with the financial sector, the performance so far has been deeply disappointing and disturbing.
Now if only the Obama administration will listen!Over the past few weeks, I have been slowly and steadily becoming convinced that "nationalization" i.e. FDIC taking receivership of the big bad insolvent banks, is perhaps the only right way forward. It is not that the plans presented by Geithner et. al will not produce anything positive, but they are unlikely to solve the problem of insolvency!For more on why banks need to undergo an FDIC intervention, where current stockholders are wiped out, many if not all bondholders take a haircut, and then the banks are recapitalized and sold back to the private sector, read:When it comes to Obama, one of the following is true:* Obama and Geithner do not understand the problem.* Obama and Geithner understand how to deal with this problem, but do not have the guts to do what is right.I suspect that the latter is correct.
- Al Jazeera has the best coverage...
- Brother, can you spare a dime?
- Ben Bernanke Blows my mind....
- Hatzius, Krugman and Feldstein at the Newseum
- Only when the tide goes out....
- Summers to go at the end of 2010, when will Geithner go?
- Obama officially out of ideas...
- Mr. Obama's ironically titled legislation "Financial Stability Improvement Act" is likely disastrous
- What will happen to Obama Financial Regulatory Reform initiative?
- Obama better not stick the taxpayers with this one...