1 Boring Old Man

Bankrupt
By Josh Marshall

On Friday we interviewed Nobel prize-winning economist Joe Stiglitz for an upcoming episode of TPMtv. It was very clarifying on a numbers of topics. And it confirmed for me everything I’d thought to this point about the first and now second bank bailouts. It now seems like we’re going to go the ‘bad bank’ route. Only instead of buying the crappy assets at inflated values [to absorb the bank’s loses for them], we’re going insure the assets so we can absorb the losses dribbled out over time.

Many, perhaps most, of these big banks are insolvent. But they refuse to recognize it. They insist that these ‘toxic assets’ are worth much more than anyone is willing to pay for them. Stiglitz’s argument is that this is really a zero sum game over who picks up this tab – the banks, their shareholders and bondholders or the taxpayers. A far better approach is take these banks through some sort of structured reorganization, something like bankruptcy, though probably it would need to be customized in some ways given the scale of the institutions and the larger issues involved. Feds take over the bank [just like they routinely do when little banks fail], run it until things stabilize, then sell it to new investors.

That’s ‘nationalization’, I guess. But it’s really not any different from what we did with IndyMac. And that worked out okay. We even found some people to sell it to. Taxpayers are already providing these banks with far more dollars than the markets say they’re worth. So there’s really no way to get a good deal for the taxpayers without owning the institutions more or less outright. The math just doesn’t work. So we get more and more convoluted ways of structuring bad deals for the taxpayer to avoid temporary public ownership. As Krugman put it a few days ago, "the Obama administration appears to be tying itself in knots to avoid this outcome."

What’s as troubling as the big rip-off of taxpayer money is that what Obama’s attempting on the side of rebuilding the real economy could founder on the public backlash against what looks like a very misguided way to get a handle on the banking crisis. We’ll be bringing you the Stiglitz interview soon…

That said, the reason I posted Josh’s comments above is this point, "Many, perhaps most, of these big banks are insolvent. But they refuse to recognize it. They insist that these ‘toxic assets’ are worth much more than anyone is willing to pay for them." There’s a similar, almost humorous, version of the same point in the Madoff story. Bernie Madoff estimated his Ponzi Scheme at fifty billion dollars. That number is what people think their Madoff Investments are worth. What they actually put in was more like 15-20 billion. The Banks, the Fund Managers, the Investors have lived in a fantasyland of their worth. The whole frigging point here is that it was an illusion! Even scam-man Madoff overestimates his worth as a criminal. All those investment Banks have all kind of paper that they propose has worth. It doesn’t. What Stiglitz is saying is that the taxpayers are going to have to eat the Financiers mistakes, but we don’t have to eat their fantasies. They even scammed themselves into believing that their paper money traded in the unregulated over-the-counter derivitive markets still has worth. Not so.