If you think capital matters to an entity under administration, you do not live in the real world. Once the US gvt appoints an insolvency custodian, the entity is US gvt responsibility, unless it announces (immediately) that the entity will be liquidated. That is not the case here. F&F are obligations backed by yours truly now..

But looks like the deal fell apart. But BA just bought Merrill. So now the market won’t know whether to go up or down tomorrow.

I do not believe that there is an unprecedented lack of liquidity in the system – anyone who was around during LTCM and 9/11 saw similar disruptions. The problem is that the present holders of assets do not like their market price.

To me, there was always a significant chance that the house of cards that the Fed allowed to build up would collapse, based on a simple “what goes up must come (most of the way) down” assessment of risk. The problem was that talk of such disasters was seen as curmudgeonly.

I am tired of hearing each time that the sky is falling. My solution is to proceed with liquidating any firm that fails as normal, and windfall-tax those individuals who benefitted from the boom to pay for the clean up.

http://www.globalresearch.ca/index.php?context=va&aid=10173

China is utilizing political and diplomatic ties, weapons sales and training agreements, and low-interest loans to advance its interests. It is ideologically positioning itself in parts of the Third World by criticizing U.S. domination and some of the U.S. policies that squeeze Third World countries. And it is taking advantage of the fact that the U.S. is focused and tied down in the Middle East, where its wars for greater empire are now being waged.

U.S. imperialism has been increasingly targeting China as a strategic competitor. Since 2006, the U.S. Defense Department in its annual survey of China has put competition with China over resources on par with conflict over Taiwan as a potential spark for a U.S. war with China.[19]

It is in the context of China’s rise in the world economy and rivalry with China that we can begin to see U.S. demonization and scapegoating of China: for exporting unsafe foods and medicines, for intellectual property-rights infringements, for human rights violations, and for increasing its military spending.

“Especially if F&F are properly handled after nationalization (i.e. incentivised to facilitate a slow but steady return to rising house prices in the US)”

I don’t think it can be done.

We now have a nationalized entity, F&F, which is for all intents and purposes the US Treasury, and its “assets” nearly equal the size of the US debt.

That makes the Treasury a bank with NO CAPITALIZATION, and the traditional problem of commercial banking…borrow short and lend long.

Banks hate it when interest rates go up. So now the Fed is severely restricted in using interest rate policy to fight inflation.

At the long end of the yield curve this is a problem too, especially if inflation expectations become “unanchored”.

So not only does the Treasury have to come up with new money to make loans to support new residential real estate transactions, it is quite likely they will be a very bad bank from a cash flow standpoint.

Then there is the “mark to market” value of the portfolio. Not all the loans were made at the top of the boom, but median prices have dropped 20% so far, have another 20% to go per Case-Schiller, foreclosures and late payments add up to 9% of the mortgage market, incomes are not rising, and loan standards are thankfully increasing.

We now live in old Brazil. It could take 30 years to become a BRICUS.

I guess you would have to leave some ownership of the bad bank on Lehman’s books, then let the sale effort proceed next week?

Good point about including the sale of the “good” Lehman in the deal. Otherwise its stock would skyrocket after jettisoning the bad parts, making them too expensive to buy. And it would be “unfair” to the rest of the IBs if they found out in a few months that Lehman is making a stock swap hostile takeover for their shares.

This way a buyer of Lehman would be forced to buy a diluted chunk of the bad parts, which may make the deal more palatable than it is now.

I hope Mr. Geithner is a harda$$.

Problem in this case is: does an investment bank deserve to be rescued? What exactly are the public interest issues here? Commercial banks are much more special than broker-dealers. Let’s not forget that the normal bank assistance model provides only for the FDIC to protect depositors up to a point, and that bailing out the FDIC itself may be a reasonable instance of public interest outweighing the taxpayers’ immediate interests. There is protection for some clients of investment banks and all unprotected creditors of investment banks knew quite well what they were doing and were hardly unsophisticated. No one should have expected IB creditors to be assisted, or an investment banking systemic crisis to be resolved other than through the elimination of the weakest.

Apparently there is now a more “dynamic” view of the balance of public interests (investment bank creditors, parties likely to suffer from an investment banking meltdown etc against taxpayers only remotely likely to benefit in the forseable future), i.e. that preventing a systemic crisis does two things: the gvt “buys” an investment banking franchise at rock bottom hence may recover a portion of its expenditure and the reduction of market failure conditions reduces the bid-offer spread of many classes of illiquid assets, thus pushing many leveraged investors away from insolvency on a mark to market (bid) basis. That might be a justifiable form of gvt intervention but I have several problems with it:
- it is inherently intransparent, hence likely to foster corrupt behaviour, especially given the amounts involved
- After Bear and especially if Lehman equity and stakeholders were treated better than Bear’s, there is no reason why investment banks would behave prudently next time once their capital has suffered a large hit. The well known “gambling for resurrection” would then become part of the investment banking scene as well as commercial banking. I do not believe that a curse on the banking system (and the banking system is a necessary evil as long as we allow a private payment system) should be allowed to spread. Investment banks are not as necessary as banks.

Let all the investment banks and investment managers and their clients and counterparties pay the price, nationalize the banking system and let everything else fail. Someone will want to pay scrap value and build a few good businesses out of this mess. Also, it is utterly unfair towards firms that avoided the trouble and may now not be able to benefit from their discipline and patience.

Especially if F&F are properly handled after nationalization (i.e. incentivised to facilitate a slow but steady return to rising house prices in the US), there may be plenty of operators who would be prepared to, using existing mortgage technology, simply continue the fundamentally healthy business of sourcing and distributing reasonably robust financial instruments, based on n existing IB platform or a de novo one. Why let a bunch of (in hindsight) reckless and incompetent managers, shareholders and creditors that should have been taken out of the game, benefit from that? This is worse than socialism…