How democracies perish.
May 2, 2008 9:47 am UncategorizedThe current troubles in the financial markets around the world has necessitated bank bailouts in several countries. Some conservatives, including some on this august site, have eagerly extolled this. The lack of responsibility displayed by the shareholders of the banks is appalling, who at the very least should have been completely stripped of their ownership instead of being rewarded.
It was obviously a bailout for the rich and now these details will be kept under wrap in UK.
The Bank of England has imposed a permanent news blackout on its £50bn-plus plan to ease the credit crunch.
Ferocious and unprecedented secrecy means taxpayers will never know the names of the banks that have been supported through the special liquidity scheme, which was unveiled by Bank Governor Mervyn King last week.
Given the level of secrecy one would think we were dealing with the Keeler client list.
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Arran Gold
Swift :
Date: May 2, 2008 @ 3:57 PM
Your solution has been tried previously, in 1929. For the results read up on “The Great Depression.” Then and now the problem was caused by the US politicians getting the banks to make money loosing loans. The Democrats during the Clinton years decided every American should be able to own their own home and setup “innovative” mortgage programs to accomplish this. Thus the subprime mortgage market boom was born. The US bankers, not being as dumb as the Democrats, got rid of as many of these ticking time bombs as they could. Due to the falling interest rates and rising house prices, the early experience with these loans showed a low default rate, which resulted in the true high risk of these loans being hidden. So these mortgages looked to be a good investment in a stable country with low political risk (ironic that last bit.) They spread around the world.
Rising interest rates brought a flood of houses onto the market, as their owners could not afford the higher mortgage payments. Defaults skyrocketed. The question then became do the banks around the world that held these mortgages when the music stopped, get bailed out, or do we have a repeat of the dirty thirties. I would rather condemn the politicians for causing the mess than cleaning it up.
Arran Gold :
Date: May 2, 2008 @ 8:53 PM
Wrong comparison Swift. A better comparison is the Nordic bailout in 1990s.
http://www.telegraph.co.uk/money/main.jhtml?xml=/money/2008/03/31/cnfed131.xml
(snip)
Norway ensured that shareholders of insolvent lenders received nothing and the senior management was entirely purged. Two of the country’s top four banks – Christiania Bank and Fokus – were seized by force majeure.
(snip)
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In the current case the audacity of the Bear Stearns shareholders was unbelievable. Here was an entity that was on the verge of filing for Chapter 11 and the shareholders were offered $2/share. They rejected that and settled for five-fold increase of $10/share. They should have received $0.00.
Swift :
Date: May 3, 2008 @ 5:55 PM
Why bother to pass legislation that forces banks to go bankrupt? Just nationalize them and give the shareholders nothing to begin with. I can’t comment on the reason the Scandinavian banks went bankrupt because I don’t know the details. But if all banks were in trouble, it certainly sounds like the governments passed legislation that made it impossible to remain solvent.
If you think that owning a stock that was worth over forty dollars on Friday afternoon at the close of trading(and over $70 in January) and getting ten dollars for it is making money, you will never get rich buying stocks. If it hadn’t been caused by the US government, a bank might have gone bankrupt, but the whole sector would not have been in trouble.
Arran Gold :
Date: May 4, 2008 @ 11:38 AM
My original post contained two major points:
- lack of transparency in UK, and
- we shouldn’t bail out the rich.
You seem to be troubled by the latter point. Before we discuss our political differences let us examine some historical issues.
Wall Street is a club and one of the requirements of the belonging to the club is that they will bail out each other when going gets tough. When LTCM (http://en.wikipedia.org/wiki/Long-Term_Capital_Management) went bankrupt, investment banks were asked by the Federal Reserve Bank of New York to fund the bailout. This was the price of belonging to the club. Bear Stearns walked out and did not contribute. Wall Street has a long memory and when Bear Stearns got into trouble nobody wanted to help them out. Same thing happened when Drexel Burnham Lambert (http://en.wikipedia.org/wiki/Drexel_Burnham_Lambert) went bust. They only needed $30m to but nobody on the Street was willing to help them because of previous differences.
Bear Stearns decided early on that they wanted to go it alone. Well that is fine but then they shouldn’t have gone out with cap in hand. That firm was owned primarily by the employees so it was time to reap what they sowed.
Now as for socializing the losses. I simply cannot relate to why I should share in the losses now when I never shared in the profits earlier. Joe Lewis, who is 71-years old, was worth about $4bn and bought substantial number of Bear Stearns shares. The price decline led losses of close to $1bn on that position. While I take my hat off to guy for placing a $1bn bet, one-quarter of his net worth, at the age of 71, I don’t understand why I should share in his loss. If he had done well with that trade I certainly wouldn’t have shared in any of the profit.
Yes, it was necessary to keep the Bear Stearns trading book private to stop the trouble from propagating but let us stop it at that. We don’t need to ensure that investment bankers who failed can continue to be subsidized.