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Just how much is $350 billion?

by Brad Setser
January 30, 2009

My colleagues at the Council’s Center for Geoeconomic Studies calculated that it was enough to buy most of the common equity of the US financial system – at least on January 21.

That isn’t the best use of the TARP’s funds, but it does illustrate just how little common equity is now left to help support the financial sector’s large aggregate balance sheet.

Update: The book value of bank equity is of course higher. And the banks have other sources of regulatory capital.

28 Comments

  • Posted by Twofish

    bsetser: That isn’t the best use of the TARP’s funds, but it does illustrate just how little common equity is now supporting the financial sector’s large aggregate balance sheet.

    Right now whether it is the best use of TARP funds is being debated, but the small amount of equity supporting the financial system means that a government takeover of the entire thing is an option, and likely to be an option that is being seriously considered.

    The problem with nationalizing the banks is not so much the nationalization itself, but what happens after the nationalization. If the US government does a full nationalization, than the Department of Treasury will be able to determine who gets a car and business loan and who doesn’t and what people’s monthly credit card limits are. I think people are still uncomfortable with this much potential state controlover people’s personal lives (as well they should be), and even if we decide that it’s the best thing to do, we still need to decide how the government decides these things.

    The other thing to note is that it’s also quite possible that there are more than $350 billion in losses that haven’t been reflected in the current balance sheets, in which case it’s quite possible that the US banking system is insolvent right now.

  • Posted by modgen

    Is there any doubt in anyone’s mind that the banking system is utterly, completely insolvent at this point? There certainly isn’t in mine.

  • Posted by Albion

    ECB estimates are for around 1TR euros recapitalisation in the banking sector (amazingly the ECB governor is making contradictory comments ). It is obvious that the real scarcities are the financial resources and savings.Political efforts are deployed in channelling those resources.
    Anyway there is an overcapacity in the banking universe and their leverage attrition is overdue
    Trichet warns on capital hoarding
    By Chris Giles and Peter Thal Larsen in Davos
    Published: January 29 2009 19:15 | Last updated: January 29 2009 19:15
    Jean-Claude Trichet gave a stark warning to financial markets on Thursday to stop putting pressure on banks to hold more capital, insisting that such views were exacerbating the global recession.
    The president of the European Central Bank criticised the prevailing view among investors that banks should hoard funds, insisting that the view was contrary to those of the European authorities. Such ideas did nothing to contain the deepening recession, he said, and also provided non-financial companies with incentives to postpone investment
    Difficult to understand how 10 Pct money supply growth drove to a scarcity of resources.Blame Schumpeter!

  • Posted by M.G. in Progress

    It’s enough to set up brand new and good banks. It’s the only solution. A kind of euthanasia of the present bank system.

  • Posted by Daniel

    Do not expect any REAL money at these comedy-central “dis-interest” rates ?

    Real money is not cheap. It has been for too long. Has been – because of its cheapness – disastrously mis-allocated.

    Those useless condos in your countries, overcapacity-generating horrendously costly steel, automotive factories have a price: “When mis-allocated for a long period, money starts missing”.

    Why could anything else happen?

    Well, that public start to restore “capital” fast, i-e printing it.

    We can even hear Nobel prize asking for it? I can wait to see US massively defaulting via inflation.

    An indebted economy has no neutral position. Only serious deflation or massive inflation.

    I’d prefer see politicians, both US and Chinese one at first, trying to deal with their issues. Set up a working welfare state rather than trying to fix what they contributed to break.

    I fear they will try to fix the economy and even worse the finance. Money will ultimately be missing the hard way. The inflationary one.

  • Posted by Indian Investor

    The Austrian School of Midas Economists and their political adherents will arguably not support further bailouts. There’s going to be a further Congressional debate over the issue of banking bailout, and Congress will approve a huge sum, much bigger than $ 350 billion for a new round of banking bailouts. This is both good and neccessary. Soon there will be at least 4 large banks that have a very safe balance sheet, a very strong capital account supporting their balance sheet. Common people in America will once again be able to borrow for normal business transactions, not the old over-consumption ones.
    I noted the persistent rumors that purple haze blog reports on deployment of troops within the US in the contingency of widespread civil unrest. These rumors were rife during the previous Congressional debate on banking bailouts as well.

  • Posted by locococo

    if so then obama s support will dive of a cliff. he does not seem to like that. so geithner takes another hit. he s measures are being taken by the hour. that s whay he looks like on the verge of a breakdown.

    if thigs turn into partian nationalization – don t forget to nationalize the fed.
    if they turn to full nationalization – well then, don t forget to nationalize the fed.

  • Posted by anon

    clarification: this is the market value of common equity; the equity that’s actually supporting the system is the book value.

  • Posted by DJC

    Wall Street Banksters destroy 40% of world’s entire wealth. Just how much is that?

    WEF 2009: Global crisis ‘has destroyed 40pc of world wealth’

    The past five quarters have seen 40pc of the world’s wealth destroyed and business leaders expect the global economic crisis can only get worse.

    http://www.telegraph.co.uk/finance/financetopics/davos/4374492/WEF-2009-Global-crisis-has-destroyed-40pc-of-world-wealth.html

  • Posted by babar

    so why doesn’t china just buy half for $175B?

  • Posted by Vlad

    I would say that the Fed should close all their lending faciliities. This would cause all institutions to fail imediately. Then it buys the equity with US$ 1 dollar, creates a Bad Bank and privatize the Good Banks a few years from now.

  • Posted by Rien Huizer

    350 bn is about one third of the (book) equity capital of all FDIC insured depository institutions as of 9/30/08. Against 12 tr in assets, about 60% of which loans and securities (not to menion derivatives). So the 700 bn difference between book and market value of bank capital (ignoring privately held banks) may reflect an impairment of 10% of (book) assets etc. Not a lot, if you read the papers. Oh, of course, after tax. Well,.. nd then , not to mention the shadow banking system. Humpty dumpty needs a lot of glue.

  • Posted by Indian Investor

    If somebody can also tell me something about the related question “How much is $ 386.5 billion?” I would be extremely happy. Here’s the sequence: I read a number of press reports where huge falls in Russia’s forex reserves were highlighted and the ruble’s decline was being watched from the perspective of a currency crisis. So, I went to the Bank of Russia web site.

    When you follow Dr. Brad Setser’s blog site for some time, it encourages you to visit Central Bank web sites of Much Richer Foreign Countries before you do stupid things in the local stock market :-)

    Now I look at an approaching currency crisis in my own way. Dr. Krugman and Dr. Rogoff spent many years writing profound mathematical papers describing the whole process and model as to how a currency crisis comes up, and their views are different. Similarly I have my own view, as well.

    What I look at is the level of external debt, the forex reserve, the imports and exports. My reasoning is that the external debt can drain out, so you have to subtract it from the forex reserve. Here the short term maturity portion, denominated in foreign currency is important.

    Next, you have to divide the imports by the result of the above step to get a “time measure”. How long will the forex reserves alone pay for the country’s imports, as the short term maturity external debt gets out of the economy?

    Exports are important, but they can fall or get embargoed due to politics. So, now I’ve given you the real secret of determining a country’s survivability without having to plead for external financing.

    It looks to me that I have made a tremendous saving of time, effort, etc to read the life work of Dr. Krugman and Dr. Rogoff, what with having to start off perhaps by re-learning how to solve partial differential equations and the like, so now I have a question as to whether I’m right on this.

    What I saw on the Bank of Russia web site, what looks like hardly a couple of weeks back was quite reassuring. Russia had forex reserves of $ 427 billion as of Jan 02 2009.

    Current data:
    ” The External and Public Relations Department of the Bank of Russia informs that the volume of the international reserves of the Russian Federation amounted to $386.5 billion as of January 23, 2009 against $396.2 billion as of January 16, 2009.”

    Source: Bank of Russia

    How much is $ 386.5 billion? And how fast is it going to fall? And why is it falling?

  • Posted by Albion

    @How much is $ 386.5 billion? And how fast is it going to fall? And why is it falling?

    One may apply reserves as a multiple of imports one may as well introduce a dynamic model including the currency depreciation and its impact on imports.
    Russia had reserves corresponding to 6 months import in 2008.Most of the depleted currency reserves has been used to assist the crawling foreign exchange depreciation against a basket of currencies where the dollar is still a major weight.

  • Posted by Indian Investor

    @ Albion: Thanks a lot. So in your opinion is Russia close to a currency crisis or relatively far away. If Russia had 6 months’ worth forex reserves in 2008, and if they can hold out in 2009 as well, it looks like a stable external financing situation.
    I would have expected an independent negative impact on the Rouble, and a separate fall in forex reserves, due to the non supply of Gazprom Petroleum Gas to the Whole of Europe. As this item of exports falls, you have lower demand for roubles, and lower addition to reserves on that count, ceteris paribus.
    Also, I noted earlier that Bank of Russia web site shows increasing exports and imports through 2008. Any news of employment levels in Russia? If both exports and imports are increasing, then some sectoral shift might be driving higher unemployment, or , the business picture may not correspond with what you infer from higher nominal exports and imports.

  • Posted by DJC.

    Quote of the Day from Mish Shedlock’s Global Economics Blog on what is driving Geithner’s bailout strategy:

    “There is only one reason Treasury Secretary Geithner doesn’t want to nationalize the banks. It would destroy all the stock wealth of his bankster cronies now running these banks, and would force them out of their financial engineering jobs and personal fiefdoms. Geithner will do everything possible to not force banking’s elite insiders to have to go out in the working world amongst the commoners.”

    http://globaleconomicanalysis.blogspot.com/

  • Posted by DJC.

    Does anyone remember when the cost of the bailout was supposed to be $500 billion? Then $1 trillion? Then $2 trillion, then a whopping leap to $3.6 trillion. It’s time top up the taxpayer ante once again. Fortune Magazine is reporting Bank bailout could cost $4 or maybe $5 trillion. Citigroup, Bank of America, and Wells Fargo are gigantic black holes that will suck in every taxpayer dollar available. All taxpayers will get, if anything, are a few quarks that escape.

    http://money.cnn.com/2009/01/27/news/bigger.bailout.fortune/index.htm?postversion=2009012704

  • Posted by Albion

    @ Albion: Thanks a lot. So in your opinion is Russia close to a currency crisis or relatively far away. If Russia had 6 months’ worth forex reserves in 2008, and if they can hold out in 2009 as well, it looks like a stable external financing situation.

    I did not look at the BOT figures since long; I assume that 30 Pct currency depreciation is going to translate in very substantial decrease of imports (consumable and durable) at a time when unemployment is rising. The major issue a budget at 40USD/ barrel to be downsized accordingly.
    As a whole Russia macroeconomics are much solid than in 98 with the banking system financial requirements unknown.

  • Posted by Cedric Regula

    Roubini just calculated that on aggregate, when projecting likely write offs to come yet,the US financial system is bankrupt.

    So that means $350B for equity is $350B too much.

    But I have my worries too about how a nationalized banking system would run in the US. Congress already decided to “fix” interest rates for F&F loans at 4.5%. If they want to re-flate their Georgetown homes and Virginia McMansions, they can vote up the conforming F&F loan limit to a couple million and “fix” interest rates at,say, 1%. That should do it. They could do similar things for their constituencies.

    In Sweden they have to worry about government balance sheets and CA deficits. This never seems to be a concern in the US, which would give the Federal Bank of USA far too much operating latitude.

    However I do like the idea of clerical pay for clerical work. I just don’t know why private stock holders can never enforce that.

  • Posted by DJC.

    Robert Rubin’s crony Timothy Geithner is on record bashing the China PBoC for currency controls to stabilize the yuan. Be careful of what you wish for. The yuan will depreciate sharply if the Chinese government were to remove capital controls……

    http://www.financialpost.com/money/story.html?id=1230717

    China’s yuan could depreciate sharply if the government were to remove capital controls and the managed exchange rate, resulting in quite the opposite effect to what U. S. lawmakers have advocated, an economist said yesterday.

    Charles Dumas, a director at Lombard Street Research in London said China’s capital flows have turned negative as a result of a collapse in its foreign trade in autumn and a removal of capital controls amid current economic conditions would exacerbate the situation by encouraging a large outflow of money from the country. He said this would devalue the Chinese yuan, which is also known as the renminbi.

    The comments follow criticism of China’s currency controls by the new U. S. Treasury Secretary, Timothy Geithner, who was sworn in on Monday.

    “China also has comprehensive capital controls that confine its huge savings within its domestic financial markets. Full abandonment of manipulation would mean scrapping these controls, at which point the cumulative savings of 1.3 billion excess savers would become potential capital exports.”

  • Posted by DJC.

    Axel Merk, manager of the Merk Hard and Asian Currency Funds, said the United States should be careful in its rhetoric regarding currency manipulation, especially because it could be viewed that the United States, too, has acted to manipulate the greenback.

    “Pulling interest rates to near zero is also a form of currency manipulation, trying to make the currency less attractive,” Mr. Merk said. “Beyond lowering interest rates, the Fed is trying to weaken the dollar with its purchases of agency securities and government bonds.”

    http://www.financialpost.com/money/story.html?id=1230717

  • Posted by Antiochian

    The government doesn’t need to take over the whole system.. Its quite clear that the vast bulk of banks (in pure number terms) are not toxic-loaded. Otherwise there would have been a lot more banks shut down by the FDIC. A systemic banking crisis should be made of sterner stuff with hundreds failing. The big culprits are trying to project their own travails onto a broader sector.

    Pour encourager les autres…lets put Citi, Chase (no-one in the financial sector was fooled that Bear and WaMu weren’t reverse rescues of Dimon’s empire) and BofA out of their misery. A whole new generation of banks will rise in their place to replace them. Selling off Citi’s assets overseas (Banamex for example) would be a start in recouping funds. The root problem is these three banks.. Remove them from the game and the shrubs in the understory of the financial forest would grow to fill their places.

    The self-same thing is happening in the i-banking/securities industry at the current time. It is being blasted back to before May 1975, when a score of mid-tier firms ruled the market. Darwin rules and the brontosauri have had their day..

  • Posted by gillies

    “Remove them from the game and the shrubs in the understory of the financial forest would grow to fill their places.”

    antiochian – that is a telling image. surely this is a great time to start a bank, or to identify a small bank that has stood aside from the property madness and condo flipping and mortgage salami scams – and support it.

    surely there is an opportunity for some small bank to write into its own constitution basic safety rules about lending ratios and transparency, and attract customers who fear to deal with the big banks that have possible concealed risks ?

    when vladimir putin of russia, formerly of the soviet union, stands up at davos to lecture the west on too much state interference – it is surely time to take stock ?

  • Posted by pwm76

    What is the thinking behind counting only these firms as “the US financial system”?

  • Posted by bsetser

    banking system seemed to narrow as several are (former) broker dealers — but other than that there was no deep thinking. the goal was primarily to produce an interesting graph …

  • Posted by Rien Huizer

    Brad,

    The somewhat populist comment by Antiochian makes sense: the trouble sems to be concentrated in the big banks.

    Nationalize those or at least put them under an administrator, swap the existing equity for some form of residual value certificates without voting rights, offer the marketable parts of their business to healthy banks (but take your time and meanwhile feed them well) ), and retain only a bad bank, with staff incentivized to work out or sell, not market to clients. Private customer information and private information about CDOs (yes, there is systematic knowledge within the investment banks, and it should be highly marketable) should be put in a separate entity which could provide contract services for work out groups and involuntary holders of CDOs etc.

    The idea would be to (1) indeed give space to the undergrowth, the NY crowd have made too many messes (and regulate them heavily at the same time) (2) wipe out the managers and equity holders of most of the NY giants (3) break up their businesses and sell the parts that can be sold for more than book value (4) put the remaining assets (not businesses) in bad banks with contract management and (5) each bank’s customer and risk management information (incl CDO analytics) in a separate entity, with people maintaining it (as the customers are all in the bad bank, they must continue to inform the bank) and providing it on a contract basis to private and public agents running the bad banks’ workout programs.
    Ultimately those consultancy teams and asset management teams could become the core of a few dedicated investment banks and privatized.

    Finally, the gvt should design an offer for the most toxic CDOs, MBS and whole loans still stuck in the pipeline and held by healthy banks, that is both not too generous and whose refusal would lead to severely close, continuous inspection by the regulators. Those loans should go to a national central bad bank under policy guidance (i.e. th gvt could decide to offer relief to the debtors involved, prosecute frauds (aggressively) with the evidence contained in those records, etc) and have access to all the information and consultancy services available under (5) above.

    Just a pity that this is imposible, due to political and legal reasons.

  • Posted by Erich Riesenberg

    The bank I use reported increased profits in 2008. Perhaps the best thing is to let the free market work, with one limitation being maximum bank size.

    It would be great to see my bank competing with other banks, rather than with banks getting tax money.

  • Posted by don

    I suspect $350 billion overstates the value of financial sector equities, as they are now bloated by prospects of taxpayer assistance. The ‘book values’ are nonsense and don’t take proper account of unrecognized losses.