If this is how the conversion goes, and the bank does pay off the remaining $11 billion over the next year or so, are they considered to have repayed TARP? How does a bank that's taken the conversion ever actually repay the TARP?
This is troubling, because it's now clear that the worry many of us had at the time of the bank bailouts has come true: the government is using its intervention in the banking system to pressure banks to give special deals to the government's special friends.
(The government is apparently still taking the line that they are only intervening because the automakers are splendid, robust companies that got caught in a "perfect storm". If so, Chrysler must be stuck in the Bermuda Triangle, because owners have been playing "hot potato" with its dying brands for most of the last decade.)
Countries that use their banking systems this way don't get good results. If you're a fairly uncorrupt developed country, you get slower growth and bloated "critical" sectors that are usually more critical in providing campaign support, lavishly remunerated make-work jobs, and photo ops, than any products the public actually wants. Then, if something like Japan happens, you have a twenty-year "lost decade" while everyone pretends as hard as hard can be that everything is all right, in the sincere but misguided believe that wishing hard enough will make it so.
If you are a badly managed country, you end up like much of Latin America or Africa, with a dysfunctional economy that booms only along with the price of some commodity you happen to produce.
We are hardly Zimbabwe, or even Venezuela. But if we keep using TARP to create a sort of "Most Favored Borrower" status, we'll erode the safeguards that keep election to office in America from being the kind of giant spoils system that's common in much of the world. What the bankruptcy judge did was entirely right and proper--it's his job to allocate losses among creditors. And it's always true that some of the credtiors won't like the deal they get. On the other hand, what the administration did really wasn't. It got its pet majority stakeholders to screw both their own shareholders, and the other creditors, in order to give a powerful union a sweetheart deal.
When the government gives money to favored constituencies--well, I don't like it, but as PJ O'Rourke says, that's basically what our government does. "It ought to be right there in the constitution: 'We the People, in order to form a more perfect union, establish justice, insure domestic tranquility, provide for the common defense, promote the general welfare, and give money to jerks . . . ' " But when it starts stepping in and trying to bypass the bankruptcy rules in order to make someone else give money to jerks, that's different in magnitude, and in kind.
What particularly worries me is that it seems so unnecessary. I heard repeatedly from progressives, in the run-up to the bankruptcy case, that the holdouts were unreasonably holding out for a trivial improvement--about 500 million dollars. But if it was so trivial, why didn't the government just put the extra money in, rather than jeopardizing confidence in the bankruptcy system--and the creditworthiness of a large swathe of unionized firms? $500 million is about the price of one cup of coffee per American, a trivial sum relative to the overall budget. This move has shown potential partners that government funds are dangerous, and potential lenders that union firms are risky bets; both have probably cost American citizens more than they saved. So why did the government risk so much for so little gain?
You know the answer, don't you? Because they're planning to do it again.
"They're planning to do it again."
Well of course they are!
Frankly, I hope this all turns out as well as Japan's lost decade. I fear it will be far, far worse.
After all, what happens when the leadership in the world's largest economy sets about destroying the basic rules and understandings underpinning that system?
Well, the last time we came close to having that kind of governmental action the Great Depression happened.
Probably unrelated, though. Obama seems so competent that I'm sure when he rewrites the fundamental workings of our capital markets and bankruptcy system on the fly, he'll get it just right and will usher in a new golden age rather than disaster.
On a separate note, can anyone actually plead surprise that a man who chose to establish his political career in Chicago ends up running an administration that strong arms people for the benefit of his electoral coalition? It is "the Chicago way" after all, no?
God bless you for quoting O'Rourke. "Parliament of Whores" pretty much formed my political outlook at age 17. A Nicaraguan friend in college asked me "Why are you a conservative?" -- this was 1992 or so, when the memory of the Sandinista/Contra civil war was very, very fresh -- and I gave him a copy of that book.
I feel like you've fallen off the deep end; I'm expecting Alex Jones to call book you on his radio show any day.
Maybe, just maybe, the government, as one of the lenders, stood up for a constituency that's been overlooked through all of this -- workers. Over the last ten years, finance took its profits despite workers instead of understanding its profits were because of workers. That's fundamentally flawed, though you might wish it were otherwise.
Hedgers had no plans to take a haircut, the knew they'd get their share of bailout money via AIG insurance in bankruptcy; workers would get nothing.
But having business afraid to take gov. money as a result of this sounds good to me. Maybe corporate America will behave instead of talking risks under the delusion they've solved the risk problem.
zic is absolutely right. Obama is just looking out for the workers.
Indeed, perhaps the best thing that could happen would be for the government to more conscientiously devote itself to workers' well-being. Perhaps we could have a "Workers Party" or, since the workers are just people, we could cement our concern for the workers by changing the name of the country to "The People's Republic of the United States of America".
This concern for the workers will doubtless redound to the benefit of the workers and all Americans. After all, in every other country in the world, in every era of history, the governments that were most self-consciously dedicated to helping the workers were always the best place for the common man and workers in general. They have all been veritable workers' paradises.
The only wonder is why we had to wait for Obama to finally steer us towards that glorious future.
I look forward to seeing a lot of this immortalized in socialist realist art posters. You know...a multitude of happy auto workers gazing adoringly at the great leader... that sort of thing.
"Maybe, just maybe, the government, as one of the lenders, stood up for a constituency that's been overlooked through all of this -- workers."
I would say that the gov't is standing up for the UAW, not "workers." If any workers deserve something extra, I would say it is the workers in car plants in TN, AL, and MS that have not helped drive their companies over a cliff.
And I'm not sure what the relevance of finance's profits is. To the extent that finance took profits that should have been distributed to somebody else, it was probably money that should have gone to investors, the same as overpaid CEOs, who took money that should have gone to shareholders.
When I hear comments like these, it makes me think the commenter is ready to go on a witch hunt. Something along the lines of "why should the secured creditors expect the protection of laws. Some of them are hedge funds." I just don't get it. I understand the frustration that people have over the way things have gone, I'm certainly frustrated.
But I don't understand the generalized animosity that has arisen toward certain people just b/c of their profession. Yes, there were lots of people in finance that made poor decisions that cost investors and tax payers lots of money, and to make things worse, some of them got rich doing it. But what exactly is it that the secured creditors of Chrysler did to justify dumping the load of giving a handout to the UAW to them. Are we wanting to punish them just in case some of their investors were involved in unseemly behavior?
It seems to me that if Obama wanted to give a handout to the UAW (which although I dislike it, is certainly consistent with the way we've been running our gov't for ??forever??), the burden should have fallen on the taxpaying public in general. The president shouldn't use populist rage to try to force one particular group to bear the whole burden.
Have you studied the supply chain for Chrysler, and how many jobs would be lost there?
As far as hedge funds -- they get theirs through insurance; and again, its taxpayer dollars (all those workers, for instance) -- just sluicing through AIG. They want the King's shillings without the strings.
When will someone explain how the jobs producing parts for automobiles no one wants to buy are themselves productive?
In case you're about to present the "last straw" argument -- i.e. that the suppliers also produce components for other brands but loss of Chrysler business will push them over the edge -- I am planning to immediately ask: "Why will it push everybody over the edge, and just the marginal supplier whose other business will become up for grabs?"
So the gov't takes gives a few bailouts, so now nobody has a right to anything? Rule of law is out the window?
I just don't remember any discussion about the bailouts resulting in the rule of law no longer applying to any deals. I would have thought that preserving the rule of law would have been one of our goals if we had known that there was a threat to it.
And how much gov't money has been taken by the secured creditors that were holding out? How much have they received from AIG? I'm guessing had they known that the bailout of AIG would mean the rule of law no longer applied to their other contracts, they might would have rather had AIG go through the bankruptcy process also.
If the hedge funds get their money back from AIG (paid by taxpayers) why would they care about the size of their slice of the bankruptcy pie?
Zic - I admire your sentiments - but you can't simply abrogate a contract because you want to give money to somebody that you like. Repeat after me - the secured lenders TOOK A HAIRCUT. They wanted 65 cents on the dollar and the govt thru the TARP bribe forced them to take 35 cents so that it could give more of the company away to the UAW, who had unsecured claims.
This is not going to work out for anyone, including the UAW. If lenders don't trust that contracts say what they mean, then they won't lend.
Let me try to give you an example. Let's say that you lent $100,000 to your brother in law to buy a house and you took back a mortgage. Then let's say he hired some contractors to do $20,000 of work on his house. After that he skips town, and you sell the house for only $80,000. How would you like it if the mayor came in and said that you only "deserve" $30,000. At the same time, he gives the contractor with an unsecured claim $50,000.
When you protest, the answer is -- well the contractor gave money to mayor for his election campaign, and, plus, he had a rough year. I choose to stand with the worker not the greedy lender. And, buddy, if you know what's good for you, you will keep your mouth shut if you like that family of yours.
To make this example even more accurate, what if this money you had lent was sent to you by investors, and you were investing it on their behalf? You are called greedy for expecting contracts to be honored and for looking after the interests of your investors. Is this the new world we live in?
And if they just decide not to lend to any company with a union, because God knows what the government will do to them if the company can't pay? What happens to your "overlooked constituency"?
The banks that have taken TARP funds will be browbeat into lending to them.
What's this post in reference to? What are the examples of the government forcing banks to give special deal to people?
Meet the new Amtrak, same as the old Amtrak.
I just can't wait to see the 2012 Obama- 0 to 60 in a week in a half for the low, low MSRP of $46,000- only $36,000 with the $10,000 refundable credit.
And I forgot- for just $20,000 more, you can get the two-seater version.
AC,
It is noteworthy that the secured lenders that accepted the government's plan for Chrysler were the ones taking TARP- the holdouts were not. Methinks this is not coincidental.
Yes. And they fully expected to get Treasury $ via AIG insurance, didn't they?
What's the difference, Yancey? It's still all government money.
The government has not even collected that money yet. It's scam money.
Zic: You seemed to be convinced that there is an AIG issued CDS for every dollar of Chrysler issued bonds. Are you sure that is the case? Just because some bonds are covered, does not mean all of them are.
This pretty much sums up my reasoning for not voting for Obama. Talk about any issue you want, but there's no issue more important than long run economic growth. And there's no better way to squander our chances for it than messing with the fundamental rule of law, right of ownership and fundamentally apolitical operation properties of markets.
As a libertarian, I wasn't a big fan of McCain, but I'm fairly confident he wouldn't be proposing a number of backdoor protectionist measures, operating without even token congressional resistence, subverting bankruptcy law, propping up dead industries, generally appearing to hold his hooks in the the industries that actually needed federal assistance forever, and spending at a pace that seems likely to erode our government's credit-worthiness... something as recently as a semester ago I joked to my students was something damn near impossible to fathom.
Meet the new Amtrak, same as the old Amtrak.
Yancey, that's completely ridiculous. Chrysler is NOT the new Amtrak.
The new Amtrak is building a "high-speed" rail network that everyone will be forced to ride because the Chrysler they got in lieu of a tax refund is in the shop drawing on our new universal coverage car-care plan ("Car care is a human right!"). The waiting lists for oil filters are going to be awful, don't you know, and you won't be able to get "life-extending" care after 50,000 miles.
Oh, Ok. I tend to get carried away at times.
"Car care is a human right!"
Rob, this was a brilliant post, front-to-back.
It would be hysterical if it didn't have a disturbingly high chance of seeming prescient in mere months...
And still waiting to go to bat: nationalized health care and EFCA.
Man we really dodged a bullet with McCain.
"the kind of giant spoils system that's common in much of the world" or in Chicago.
You'd think we'd elected a typical Chicago politician to the White House.
How's that vote feeling, Ms. McArdle?
Yourself, from the other day: ....when did it become the government's job to intervene in the bankruptcy process to move junior creditors who belong to favored political constituencies to the front of the line?
The answer is, when otherwise intelligent people like you voted for Obama. You got exactly what you voted for. You have no excuse for dismay.
Who in the world would ever again invest in a unionized company if any alternative exists? Oops! Maybe that's it...card check.
Or maybe no one will invest. That should be great for economic growth and high employment levels.
Derek
He is going to prove to be the third dud in a row, isn't he?
@Stubby: To be fair, Ms. McArdle didn't vote for Obama but she would have voted for Obama.
So...there's that.
As I read about these daily assaults on the rule of law by the Obama administration, a part of me really wishes for a mea culpa from, in particular, Libertarian Obama supporters. The "but, but, McCain would have been worse!" argument is starting to seem pretty unconvincing.
Yeah, you were real worried about the rule of law the proceeding eight years!!
And you pretended to care about it?
More importantly, you are confusing apples with oranges.
It is one thing, and entirely justifiable thing, to push the boundaries when fighting a war, and trying to prevent the murder of another 3,000 Americans. Esp. when you are pushing the boundaries against America's enemies.
It is an entirely different thing to completely ignore the law while merely seeking a political advantage for yourself and your political supporters. It's even worse when you are using teh power of the United States government, not to crush America's enemies, but merely to crush your political opponents.
Obama could have paid off the bondholders what they were legally and morally owed, and then given the rest to the UAW / Fiat. But doing that would have required him to be honest about what he was doing, and made the cost of teh payoff to the UAW clear to all.
So, instead, he decided to use threats in order to steal the money from the bondholders. If you really find that acceptable behavior, then you're clearly not someone who will ever be qualified to question anyone else's morality, ethics, honesty, or any other worthwhile personal characteristic.
Apostle: Think about what you are saying for a minute. Assuming, arguendo, that the right/libertarian/anyone but liberal really did not care about the rule of the law under the bush administration, your saying that it makes obama's abuses ok is the equivalent of saying
"Bush was a sh*thead. Obama is just as much of a sh*thead, but at least he's on my side"
Is that what you intended to say?
What the bankruptcy judge did was entirely right and proper--it's his job to allocate losses among creditors.
Excuse me? The Judge approved a plan that screws of secured creditors at the expense of unsecured creditors, and you think what he did was "right and proper"?
In what Third World Kleptocratic hellhole are you living? Bankruptcy Judge Arthur Gonzalez entirely ignored the law, and his oath of office, in order to suck up to President Obama, and help President Obama to steal from the secured creditors (and all their investors) to give to the political favored UAW.
If he'd been doing his job "right and proper", he would have told Obama and the UAW to get stuffed, and redrawn the plan so that the secured creditors were made whole before anyone else got a penny.
Megan,
You are quite right, again. I must say though, I am -still- mystified as to why you voted for Obama. Let me just ask it this way: knowing what you know now, would you vote for Obama again?
I just can not understand how you can be rightly critical on so many individual points and still have voted for this loser.
Megan,
Everything you said was quite interesting and insightful. In terms of BAC's repayment, here is how I understand it.
- They will have 7 months (6 months of execution plus 1 month of planning) to determine how to raise the $34 billion.
- They will likely include asset sales (Blackrock, CCB, Banco Itau, Columbia, First Republic, Etc...), slashing of dividend to nothing, and earnings.
- They took very conservative estimates for earnings, and if say BAC earns $8 billion (they earned $4 billion last quarter) then that number goes down to $26 billion.
- They can take part in the PPIP (this will both reduce the amount of assets on their books and potentially raise capital if done the sale is for a profit, helping both sides of the TCE calculation). I actually think this was a big part of the reason they failed everyone. Since banks were more inclined to hold onto their securities as a result of M2M reform, this pushes them to sell assets into the PPIP.
- The preferred does not automatically become Common. Instead they can swap it out for Mandatory Convertible Preferred. This will turn into common in 7 years if not repaid, or if the economy deteriorates and it is determined that their is an extra capital cushion needed.
So their is potentially $34 billion of dilution, if they can't get any asset sales done and the economy deteriorates. Most people figure that the odds of both events occuring are reasonably low (or they might do say $20 billion in asset sales, so you would only end up getting an additional $14 billion in dilution), so the stock rallied strongly today.
Of course this could all change tomorrow, as this process has been quite opaque.
As Simon Johnson's May article stated:
The Quiet Coup
"... the finance industry has effectively captured our government—a state of affairs that more typically describes emerging markets, and is at the center of many emerging-market crises."
And Foreign Policy makes essentially the same point:
How Big Finance Bought the Bailout Plan
"Another, more cynical explanation is that elected officials do not respond only to the will of the people, but also to political contributions...this cynical explanation finds support in a recent paper by three of our colleagues. They find that, controlling for ideology, the higher the amount of political contributions congresspeople receive from the financial industry, the more likely they are to vote for TARP."
"We are hardly Zimbabwe."
You don't know how right you are, Megan.
You see, in Zimbabwe, they don't have a Declaration of Independence. Our Declaration contains the following paragraph, written by Thomas Jefferson:
"But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security."
What Jefferson said is that it's our DUTY to eliminate a despotic government that might oppress us, even if it is our own.
Also, in Zimbabwe, there's no Second Amendment guaranteeing Zimbabweans the eternal right to keep and bear arms, so you can't buy a semi-automatic weapon and all the ammo you can stuff into a backpack should it become necessary to provide new guards for your future security.
Megan:
Well, against all reason (except for the tedious cultural ones) you voted for this POS.
How about a contrite column - that would truly add to your believablity.
Somerthing like "I voted for Obama to be accepted as a cool young person in midtown Manhattan, and now my entire generation's future is screwed."
LOL!! And yet you didn't complain when Bush spent like a drunken sailor for eight years.
So, your entire point, your entire logical wad as it were, repeatedly stated in various forms, is that anyone that chooses to not complain about something, forever loses their right to complain. Really? You're going with that? I choose not to report a stolen bike, and then some other guy steals my car, couch and dog; is it logical and rational for anyone (other than the thief) to complain about the differential attitude towards the crimes?
That, sir, is an insult to sailors.
And yet you didn't complain when Bush spent like a drunken sailor for eight years.
This does not strike me as an adequate defense of one who spends like a squadron of drunken sailors with trust funds.
Bush set the living room on fire. Obama poured gasoline on it and burned down the house.
Bush punched me in the mouth. Obama beat the crap out of me.
Bush was me, when I was 80K in credit card debt and making 35K a year. Obama is a friend of mine, who's making under 20K and owes around 100K.
There's a concept, Calvin, called "degree." Two things can be bad, but one of them is worse. The concept is difficult only if you've tied your ideological blinkers too tightly.
It reminds me of all the anti-war people who screamed that no one who's not willing to sign up for the military, right then and there, has the right to support going to war. I wonder if they feel the same way about calling the cops when their home is robbed or someone holds them up. If you're not willing to patrol the streets looking for bad guys, what gives you the right to call the cops when you're in trouble?
Some people are unteachably stupid. We'll find out who these people are when it's time to vote for President again.
How does a bank that's taken the conversion ever actually repay the TARP?
Through a stock buy-back. Am I missing something?
Usually buybacks are on the open market. A large block like this would generally entail lots of negotiations on price.
And what if the government doesn't want to sell?
TallDave:
Everything requires negotiations; ask the banks trying to give back TARP money now.
If the Govt does not wish to sell, that's just a variation on the current theme: the govt doesn't want the banks to payback TARP money with cash. It's not the question I was trying to answer.
Private purchases and sales of publicly traded securities occur all the time. Think PIPES for example.
I'm still scared by thinking about this question:
When does TARP end?
"When does TARP end?"
Where does the tooth fairy live?
What is in Street Meat?
Who was better Magic or Bird?
Some questions have no answer.
But will he be able to make the trains run on time ??
Just for fun, would anyone show me that part of the Constitution that allows the Federal government to own stock in a private corporation?
Let's assume Government Motors comes to pass, how would all the competitors be protected against being run out of the business by punitive regulations?
I hope all the Obama voters enjoy their Trabants.
Constitution? They don't need no stinking constitution, they're democrats. They think the constitution is a "living" document, and they've got the judges to prove it. "Just wait", they say, "give Obama time." All he needs is a little more time, a few trillion more dollars printed out of thin air, and a veto proof congress. Then, he'll get it all straightened out. Besides, everyone knows that the democrats have the best interest of the working man at heart. They're not like the evil republicans, after all. Those evil republicans just want to exploit the poor, keep all their money for themselves, and force their evil Judeo/Chrisian philosophy on the rest of us. Can you imagine? A philosophy based on the Ten Commandents, which says things like "thou shalt not steal", and advocates "doing unto others as you would have them do unto you". What rot!
Please, somebody wake me up. It's 1984 in 2009, plus Alice in Obamaland, and I'm waiting on Atlas to shrug.
"The tree of liberty must be refreshed from time to time with the blood of patriots and tyrants. It is it's natural manure." - Thomas Jeffeson