If we need to inject capital into the banks, then we should do it the same way Warren Buffett would; not just by gifting it to them via buying worthless paper and “hoping” that we get some of our money back.
Instead he overpaid for stock? He gave 125 billion for 62 billion in bank stock. Why the $62 billion gift? The whole reason for the exercise was to unfreeze the credit markets and get banks to lend again which was in a way a misrepresentation of the problem.
Treasury Secretary Hank Paulson agreed to invest $125 billion in the nine largest banks, including $10 billion for Goldman Sachs, his old firm. But, if you look more closely at Paulson’s transaction, the taxpayers were taken for a ride–a very expensive ride. They paid $125 billion for bank stock that a private investor could purchase for $62.5 billion. That means half of the public’s money was a straight-out gift to Wall Street, for which taxpayers got nothing in return.
The Fed already lent out 2 trillion and took the worthless paper as collateral for cash and treasuries. What incentive do these banks have to payback the money? That was our money they lent out and I don’t see that getting paid back.
According to Bloomberg:
The Fed lent cash and government bonds to banks, which gave the Fed collateral in the form of equities and debt, including subprime and structured securities such as collateralized debt obligations, according to the Fed Web site. The borrowers have included the now-bankrupt Lehman Brothers Holdings Inc., Citigroup Inc. and JPMorgan Chase & Co.
Banks oppose any release of information because it might signal weakness and spur short-selling or a run by depositors, said Scott Talbott, senior vice president of government affairs for the Financial Services Roundtable, a Washington trade group
.
Signal weakness? I don’t think we need a signal for that, we need transparency.
The main problem is the whole model of securitization is dead. There is zero confidence with investors because Paulson and his ilk poisoned the market with subprime and Alt-a. This was all encouraged by the Fed, the supposed stewards of the US’s monetary policy. The only thing that could help is transparency which is what we don’t have probably because it would bring the whole thing to a screeching halt.
According to the Wall Street Journal:
Banks and other finance companies making loans for autos, credit cards and college tuition are having virtually no success in selling those loans to other investors, a potent sign of just how tight credit markets remain. The market for selling such loans — by packaging, or securitizing, them into bonds — had just one $500 million deal for all of October, according to Barclays Capital. That compares with $50.7 billion worth of deals made one year earlier. The overall market for so-called asset-backed securitization is estimated at $2.5 trillion.”
2.5 Trillion, the entire GDP for the US is like 14 trillion!
So let me get this straight. Wall Street’s entire model of selling debt is dead, which it their bread and butter, because no investors have confidence. The banks balance sheet is overloaded with this crap so the Fed gives out good cash for the garbage. Then the Treasury injects money into the banks by overpaying for stock? This is supposed to do what?
What is the endgame for this? Confidence is the only thing that will get investors to buy this crap and the only thing to gain confidence again is transparency. Eventually the Fed will not be able to take this garbage off their books, and then what?
The TARP is most expensive boondoggle in history. No one even knows what the banks are doing with the money. There’s neither accountability nor transparency. As a result, investor confidence has deteriorated and the credit markets remain frozen. No one trusts Paulson to do the right thing anymore; it’s that simple.
The taxpayer is taking on an unprecedented amount of debt just to keep a broken business model running for a few more months while the grifters make billions off of taxpayer money.
The present financial crisis is a self-inflicted wound. It started at the Federal Reserve and any solution that does not involve the dismantling of the Fed, is unacceptable.
