It's All About Privatizing Gains and Socializing Losses

We are stupid! We've been punked! Punked by the financial oligarchy. Punked by financial conglomerates. And yes, punked by the Obama Administration.

Currently, there is a story on EP about private equity firms feeding at the trough. It talks about FDIC's loss share agreements. These are very generous sweetheart agreements whereby the FDIC, and more directly taxpayers, assume losses of assets sold to private equity firms and other acquirers of failed bank assets. Here is a little taste of these loss share agreements:

"The FDIC, assuming its traditional role, brokered a sale of the bank's deposits to BB&T Corp., ensuring that customers wouldn't see any interruption. It also agreed to help BB&T buy a $15 billion portfolio of Colonial's loans and other assets by agreeing to absorb more than 80% of future losses. Under the deal, the most BB&T can lose is $500 million, the bank says, and that is only in the unlikely event that the entire portfolio becomes worthless. The FDIC is on the hook to cover the rest."

That's right, BB&T can only lose $500 million on a $15 billion investment.

Or how about this one as it relates to private equity firms' purchase of IndyMac:

As part of the deal, the FDIC entered into a loss-sharing agreement with IMB HoldCo. IndyMac will assume the first 20 percent of losses on a portfolio of "qualifying loans," after which the FDIC will assume 80 percent on the next 10 percent of losses, and 95 percent on losses thereafter.

Nice deal.

Private equity firms are salivating at these types of deals. Who can blame them - the rules allow it and after all, this is American Capitalism at its finest - socialize the losses.

But wait. Hedge funds are getting in on this action. These funds see a great deal:

At least 20 top hedge funds boosted their positions in financial institutions in the latest quarter in a sign that Wall Street is ready to bet on more risky sectors in the hope of longer-term rewards.

This is "smart money". They see it. Private equity funds and hedge funds know that our government has guaranteed that "TOO BIG TO FAIL" Institutions will be supported at any cost particularly any cost to the tax payer. These investors know that their downside is protected by the government and the taxpayers while their upside is unhindered. That is "smart money".

Look at this money quote:

"It's a fundamental bet that they won't go to zero, and that liquidity will come into the system" over time, said McGlynn, whose fund owns shares in Bank of America(BAC.N) and JPMorgan (JPM.N). Big banks have "breathing room," he said.

Big banks won't go to zero because there is value to a government/taxpayer guarantee (bailout).

Oh, but it is not just private equity firms and hedge funds that love these socialized losses. The executives at these financial conglomerates love it as well:

As shares of bailed-out banks bottomed out earlier this year, stock options were awarded to their top executives, setting them up for millions of dollars in profit as prices rebounded, according to a report released on Wednesday.

The top five executives at 10 financial institutions that took some of the biggest taxpayer bailouts have seen a combined increase in the value of their stock options of nearly $90 million, the report by the Washington-based Institute for Policy Studies said.

Who is to blame? The blame falls squarely on the Obama Administration. It has done nothing to stop this feeding frenzy. Its proposals for financial regulatory reform are weak at best.

Lord Adair Turner, chairman of UK's Financial Services Authority, had the courage to say what everyone already knew but were to scared to say it: That the financial sector is too big and much of what it does is "socially useless". But this is what he said to Prospect Magazine (UK):

"If you want to stop excessive pay in a swollen financial sector you have to reduce the size of that sector or apply special taxes to its pre-remuneration profit. Higher capital requirements against trading activities will be our most powerful tool to eliminate excessive activity and profits.

"And if increased capital requirements are insufficient I am happy to consider taxes on financial transactions – Tobin taxes

While I appreciate his courage in telling the truth and proposing a Tobin-like tax. What he proposes overall doesn't go far enough. It still embraces "too big to fail".

The Obama Administration and the Fed are talking about macro-prudential policies. I say bullshit. Any new capital requirements will have loopholes and financial conglomerates who can afford to hire the best and the brightest will find a way around any new capital requirements.

The answer is something that the financial oligarchy and the Obama Administration don't want to hear: BREAK THEM UP! I absolutely agree with Lord Turner assessment that much of what financial conglomerates do is "socially useless". Their size only helps their shareholders, debt holders and executives not society as a whole. BREAK THEM UP!

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Comments

Casting aspersions, are we?

How could you possibly blame anyone in the Obama Administration?

Certainly you're not blaming Rahm Emanuel (Wasserstein Perella)? Nor could you possibly blame Diana Farrell (McKinsey Global Institute, Goldman Sachs)? Not even Laura Tyson (Morgan Stanley)?

I can't fathom how you could possibly blame Richard Holbrooke (Perseus LLC) and certainly not Robert Hormats (Goldman Sachs)? Tell me you're not blaming Roger Altman (Blackstone Group)? And God forbid you should blame Larry Summers or Timothy Geithner (every stinking slime on Wall $treet)?

Just because President Obama met with the director of UBS, and got their official seal of approval prior to the election, don't tell me you think a Swiss banker could possibly have anything to do with it?

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Ethics and religion

Who are you to say that their religion of socializing costs and privatizing gains is wrong? Isn't it just their exercise of free will?

But oddly enough, GK Chesterton had the answer to this a long time ago: The one thing capitalism most suffers from is a lack of capitalists. You're absolutely right- break them up. Keep the banks small. Same with every other industry- small factories mean more jobs for more people- due to the loss of economy of scale.
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Maximum jobs, not maximum profits.

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Maximum jobs, not maximum profits.

Private equity and hedge funds are exercising free will

they are performing their function of finding the best deal possible for their investors so I would expect to be punked by them. The problem is that the gov't, in my opinion, has an obligation to not allow or limit the punking not facilitate it.

RebelCapitalist.com - Financial Information for the Rest of Us.

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government not supposed to punk their people

I agree with that one and they seem to be the government by and for the financial oligarchy. It's pretty clear from U.S. history, with strong regulation, one can make massive profits just fine and dandy and it actually can help keep economic Armageddon away....uh, Lehman Brothers...AIG?

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That's only if

The government is of, by, and for the people.

This current adminstration appears to be of, by, and for the banks.
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breaking them up

Breaking them up seems like a very difficult thing to do to such powerful institutions. Seems like the best bite at that apple that we had was to simply let them go under in the first place. Can anyone explain to me why we bailed out those assholes in the first place? Couldn't we have done better just lowering interest rates to zero and spending half of what we spent on the bailout on a much bigger stimulus package instead?

miasmo.com

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Explanation

Why we bailed them out? The Revolving Door. How much has Hank Paulsen made since leaving Treasury?
Frank T.

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Frank T.

I agree w/ Frank T.

I would add that it is a philosophy or school of thought that the financial sector and financial oligarchy must be strong. Fu*k that, the financial sector is an intermediary service that allocates resources/capital. I agree we need a healthy financial sector but that doesn't mean that it needs to strong and the source of illusory economic growth.

RebelCapitalist.com - Financial Information for the Rest of Us.

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I say let 'em fail.

Yes this will cause instability but at least we would have finally had our medicine. There is too much bad investment here to really secure anything. The FDIC should reassure the deposits and just assign a bank the deposits of this failed business. Otherwise what we got here is a slow moving car accident, where it is adding more and more cars to the pile on. Banks are businesses, nothing more, businesses succeed and fail. Let them fail if they are improperly run, shareholders should know the risks and if they get wiped out so be it. Depositors are guaranteed, and really that should be the ONLY thing the government should be guaranteeing.

Like I said, this will cause instability, and possibly choke up the credit markets. But better to accept the pain now and amputate a few fingers than lose the whole arm or worse later on. Honestly, is it too hard to put in the right regulation here? There should only be two types of banks, as there was in Glass-Stegall, investment banking and retail. In fact, I dare say we reclassify and create new types of banking, with a risk scale. Retail savings banking should operate like a public utility, there is no need for a local bank to get into derivatives trading. If you wish to take on risk, then you cannot take on depositors. And if you decided to be in investment banking with an orientation towards speculating in the markets then you should be classified as such and not recieve FDIC protection.

Investment banking should really be two types, Market Banking and Public Finance Banking, "Investment Banking" is too nebulous of a meaning. The former would fund hedge funds and private equity or speculate itself in the markets, and the latter deal in M&A activity and helping companies with their IPOs. Now the only time I could see Market Banking receive FDIC treatment is if they are facilitators to credit market operations. Here again, perhaps we need a new classified bank.

Do you see what I'm doing here? We need to break down the 'Investment Banking' field. Risk Market/Hedge Banking with zero FDIC protection, let them come up with their own pool. Credit Market Banking for dealings in the capital markets and private or government debt securities. Finance Banking to help businesses in their IPOs or if their client wishes to buy or merge with another firm. Finance Banking and Credit Market Banking could work together under a new set of regulations that still keeps a "Chinese wall." Lastly, you have retail banking, which would be FDIC insured, and run like a public utility. They could interact with the Credit Market Banking, but I see no reason for them to deal with Hedge Banking or Finance Banking.

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That might work

Especially if you used *coin*, not just paper money but real coins, to transfer between the banks.

In other words, no accepting a counter check from an Investment Bank for deposit into a retail bank; one needs to get it converted to *real money* to transfer through the firewalls.

Put your money into a MB or a PFB that doesn't have enough coin to back up it's trades? Sorry, you've just lost the value of your shares.

And credit cards- should be under retail banks, and limited to coin-on-hand; if the bank comes even close to being leveraged more than 1:1, credit limits should be cut.

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The horse may have left the barn on this one, JV!

What you propose makes all the sense in the world to me. In fact, I would love for you to have been on Obama's economic team or the FED Board of Governors or any other policy making agency that could have enacted your plan. Unfortunately, I believe (and I think you also do) that the damage has already been done, and long before Obama took office.

In order to re-regulate and rearrange the financial industry here, means that you have to first find a way to unravel the "shadow banking industry", which is global. Now, I have heard many evaluations of the derivatives markets ranging from around 500/600 trillion all the way into the quadrillion + range. Whatever it is, it's like pondering the big bang. A lot of analysts I have read over the past months are willing to discount this "notional" amount because the vast majority of it is in currency and interest rate swaps. These have been considered "predictable" or "stable" by the same analysts and therefore should be considered as "a wash", and should not be considered in future analysis.

After reading this news item from Reuters, I'm not so sure anything in the global financial system is predictable. Everyone is worrying about China discontinuing its purchases of Treasuries, which is certainly a cause for some concern on a macroeconomic scale. But what would happen to the global financial system if China defaulted on her CDS contracts? Think of the counterparty clusterfuck that would ensue!!

No matter how I look at our predicament, and I mean globally, all that I see is a bad moon rising. I am just hoping that we don't reach the scenario presented by Michael Hudson, in his interview on Guns and Butter radio August 26th, in which he discussed A Dress Rehearsal for Debt Peonage"

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Unpredictability the norm

Given this is a unique point in history, one should agree nothing is predictable, although Prof. Hudson is a brilliant macro economist with a consistent record in predictions.

The last time I checked at the DTCC sight, they claimed that 1.33 quadrillion in derivatives had been cleared through them. (Perhaps that was $1 trillion cleared many times over???)

We should discuss this subject around 30 years from now, but I seriously believe we are witnessing the end of capitalism, one way or the other (Japan, with their new prime minister, appears to now be ahead of the curve, along with Venezuela.)

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Hrmm

I don't think capitalism is "ending", it will survive this mess. If it can survive the Great Depression, it can this. Though, saying all this, I think it will change. Everyone assumes that it is the market that will disappear, but what about the state? Last time I checked, the banks offloaded to the government their liabilities in what I think is the largest con in history. Government's books aren't exactly financially healthy. Everyone thinks that some big disaster is going to hit and the market goes "poof" everyone suffers and then someone says "well, time to have a socialist government!"

Not going to play out that way, folks. History isn't that clean. If I were to make a wager, I would say that the US government as we know it disappears before Goldman Sachs does. These people have "gamed" this from the beginning, government is baught and paid for (Democrat, Republican, it doesn't matter), where people are used for supposed political motives to hide financial ones. If old man JP Morgan could help engineer a crash in the early part of the last century, there is no reason to believe that history isn't repeating itself with new actors.

Unless they all explode at once or in a short term, then the concern is valid but not exactly DEFCON 1. Derivatives of similar values are traded every day on regulated exchanges. Look, I know it sounds like I'm short changing this credit derivatives mess, but from what I've read (especially here on EP!) it isn't exactly a universal condition. A lot of this can be salvaged. To say they can't link a buyer with the seller of these derivatives is hogwash; trust me if they want their money they'll make themselves known. This reminds me of a piece in the FT that came out today or yesterday, where the op-Ed writer says just have contracts linked to the original underlying instrument. If there is a package of MBS with 10 derivatives tied to it, then first come first serve, baby. The remainders get screwed, bottom line. That would prove interesting, given who sold what to whom, testing "relationships." Let the piggies fight in the tough test their legitamacy. Wasn't it someone on here who said it was a prisoner's dillema or something? In the end, like I said, it's all a friggin game you and I are being forced to play. People more powerful than us, many part of the "lucky sperm club" who are in positions that many are not qualified for, running around doing what aristocrats from the Ancien Regime to the aparachiks in the former USSR did.

You think Soros ventures in democracy promotion is legit? His "concerns" about American democracy are as altruistic as his bottom line on his currency positions against the US Dollar. We're all players and pawns, free trade's wage arb'ing pitting the blue collar in Ohio against one in Shenzen. This is a very old game, factions fighting factions. Lehman represented one or was part of one that lost, and it paid the ultimate price.

As for Japan, Yukio Hayotama (the perspective Prime Minister, whose nickname is "the Alien") and Ichiro Ozawa are no where near that thug Hugo Chavez. When the Japanese government nationalizes Sony and Toyoda and take all the company's funds for reinvestment and plows it into public funds to bribe partisans, then I'll believe it.

The fact is Ozawa lost a pissing match within the LDP years ago and had been planning his revenge for a long time. He was a big wig in the Liberal Democrats and almost became leader to be PM until he lost an internal struggle. Ozawa will be the real power behind Japan, as President of the Democratic Party of Japan, and Hayotama will be his puppet. Yes the DPJ are made up of socialists and social Democrats, but these are "paper leftists". Just imagine if over here, after losing the primaries, Hillary became a Republican and they picked her to run because she was like the master at Parliamentary elections (if we had a Parliamentary system). The real leftists are still the Communist Party, which has a decent following there.

Japan's economy has been sucking wind for sometime. The average voter picked the DJP not because they liked them but because they were tired of the LDP. Deflation is returning and recent real estate gains are evaporating. They have a debt that I believe is twice their GDP and growing. JGB rates have been rising along with the Yen. The country has lost its dominance in semiconductors and soon other electronics as China's own firms (not to mention Korea) expand. They are still an export-oriented economy with a graying population, both major liabilities in this economic climate.

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Numerous corrections

"Last time I checked, the banks offloaded to the government their liabilities in what I think is the largest con in history."

While I agree with the "con" part, they didn't actually unload so much as get a new infusion of greenbacks and other instruments from the Fed through it's various funds. The amount of notional derivatives exposure by the top five has continued to increase, especially at Goldman Sachs, BofA and Morgan Stanley. (Check the latest OCC report from that Bloomberg news article blog previously mentioned at this site.)

The increase in securitized products in the insurance industry is most likely what has encouraged this backdoor bailout for the insurance industry - fraudulently referred to as "healthcare reform" (I'll believe it when I see single payer). I recently read that AIG is paying back some of loans to the government utilizing securitized notes, or "death bonds" based upon a pool of life insurance policies. Good luck on that -- junk bonds out, junk bonds in.

We are going through a super-deleveraging from the previous securitization/derivatives superleveraging, while they are still superleveraging, a mix that can only lead to further meltdown, if not a continuous one as this administration is continuing the Bush Administration's policies and has taken no radical action to nullify or address this situation.

The BIS recently mentioned an economic malaise period for the US over the next 25 years (and I think this is a very whimsical and optimistic prediction).

This superleveraging is the basis for the dramatic increase in billionaires and multi-millionaires over the preceding decade -- there just ain't enough real wealth creation to justify such a fiction -- simply fraud, tontines and Ponzi schemes to the max!

The derivatives-based extremely high volume trading going on the stock exchange (or probably I should say world's stock exchanges) is destroying any possible real exchange values, and should only lead to further destablizing of the economy (check out all that HFT going on).

As for Hugo Chavez being a thug, where did you come by such neocon nonsense? The only thuggery are those who attempted to assassinate President Chavez and put the head of the Venezuelan Chamber of Commerce in his place (that's not the normal political secession, even for a South American country, bud!). And still the US government finances the Honduran coup --- will this clown econ-run poli-culture never learn?

President Chavez, had you any familiarity with history, is simply continuing on the exact same program once put forth by President John F. Kennedy, his Alliance for Progress.

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pull in some quotes

In the two years since the crisis began, neither the Fed nor policymakers at the Treasury have taken steps to remove toxic assets from banks balance sheets. The main arteries for credit still remain clogged despite the fact that the Bernanke has added nearly $900 billion in excess reserves to the banking system. Consumers continue to reduce their borrowing despite historically low interest rates and the banks are still hoarding capital to pay off losses from non performing loans and bad assets. Changes in the Financial Accounting Standards Board (FASB) rules for mark-to-market accounting of assets have made it easier for underwater banks to hide their red ink, but, eventually, the losses have to be reported. The wave of banks failures is just now beginning to accelerate. It should persist into 2011. The system is gravely under-capitalized and at risk.

It's really true and why I keep posting what is going on with regulation and Congress.

The minute that spotlight is off, well, they are counting on the American people having a 10 minute attention span, which frankly, they do and the MSM doesn't help anything but continually reporting on "polls" and "political maneuvering" instead of what is specifically in each bill before Congress, each proposal and what that implies
(and is a very good reason for us to exist!)

There is nothing more that pisses me off than to watch the financial oligarchy use this situation to keep on doing what they were doing, even making it worse, getting stronger, now on the taxpayer dime, and use taxpayer funds to block regulation and reform.

@*)$@!

Also, when you see a great, in depth article, with recent analysis, etc. (vs. just kind of fluff opinion), you can put it in an Instapopulist with a few critical or teaser quotes too to get our attention to it.

There is a major war going on for any regulatory reform and we do have some good warriors in Congress...although the Senate...God, does the Senate need a good flush! They block EVERYTHING substantive it seems!

Anyway, a spot light on the specifics and why those specifics are important, opening it up to discussion on the ramifications of proposals, including negatives....
helps refocus that spotlight on reforms...

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