Our relationship was so stormy and intense. In 2004, you begged your buddies at the SEC to let you and the Goldman boys manage your own risk. Four years later, you begged an incompetent Congress to cover the risky bets you and your buds made. One week you claimed that the economy was sound. The next week you declared our financial system was on the verge of collapse. You held the key to the Treasury just the way you held the key to our economically challenged hearts. We believed in you. Then wham bam thank you nation, you were gone. It has been less than three months since you vanished into carbon thick air. We are feeling used and abused Hank. We trusted you to do the right thing.
It serves us right for always choosing the bad boys. The ones we know who will take the money and leave us when they get what they need. Someday we will figure out the dull predictable ones without the fancy jets, Ivy League MBAs and Paul Smith suits are the ones that will stand by us. I guess we will continue to pay a high price for our indulgences until we comprehend we have to cut the cord once and for all to those bad boy bankers who are destined to harm us.
No more destructive self-serving bankers for us. That is our new resolution going forward. It will be hard and painful to let the old system go. But we must remember how severely the old system let us down. Creating a new one in its place can’t be more painful than trying to keep the old one intact.
What surprises us most Hank, is that we really don’t miss you or your reckless overleveraged underhedged style. It gives us hope to hear inklings of a new mindset that includes the concerns of ordinary underleveraged Americans. While we know you believed in your “it takes a lot of borrowed money to make money” and “investment bankers make the best risk managers” philosophies, we hope your conscience catches up with you someday and you recognize just how tragic your bad banking behavior has been for the rest of us.
Remember when sinking $700 billion dollars into the bad boy banks meant something? Remember when it meant we would avoid an economic collapse? The $700bn isn’t enough to prop up the banks folks. We need trillions more in the form of unlimited guarantees for the same bad assets the first infusions of taxpayer cash were intended to resolve. In other words, the long-awaited government TALF plan is a miserable failure. Why? The banks want to have their bad asset cake and eat it too.
What is the TALF (Term Asset-Backed Securities Loan Facility) program?
Imagine you are a bank and wrote millions of crappy loans hardly worth the paper they were written on to people who never in a million years could pay them back. Then you, the Bank, pooled those quasi-loans into a big bundle and sold them in “Triple A” (top quality) bonds. You threw in a few less shaky loans to make the bunch look legit and tried to con other con men into buying these. But nobody wanted them. They figured out the scam after getting burned by you and your cronies a few times.
These are the underlying securities aka “Bad Assets” that form the foundation of the Treasury’s TALF plan. Just like our bad TARP plan, TALF won’t do much good. Here’s why: Good assets in bond world are loans that have premiums being consistently paid- say auto loan, mortgage or credit card interest and principle payments. You the consumer pay your monthly bills. These payments go directly to the bank who services them. If the servicing bank sells these as a bond to an investor, ultimately your big payouts of interest support the bond holder. A mortgage-backed or asset-backed bond is called a bad asset when the underlying mortgages, car loans, or credit cards are in default. In other words, the consumer loans behind that bond are not being paid back. Those are the “bad assets” the Treasury boys are financing in hopes that investors will buy them. But if a bond has no yield (no repayment value) what’s it worth? Yup you got it. Nada, nichts, nyet. How much would you pay for nothing?
The distressed “investors” (hedge funds, private equity) are like bottom feeders or decomposers in an ecosystem. They break down dead materials and recycle these back into the system. Only this time the banks are holding out for more. Without government interference, these assets would have been sold to the highest bidder for pennies on the dollar- much the way they did with The Resolution Trust plan following the Savings and Loan debacle of the 1980s. Distressed investors swooped up bad debt, dissected the good parts and gave them new life.
In 2009, TARP recipients holding bad assets have so much government capital propping them up they don’t want to sell the worthless paper for less than what they bought it for. So we have a bad asset bad plan standoff. Banks are resisting slashing prices and bond buyers are resisting paying over value.
All of this is supposedly an effort to get the markets liquid again—meaning—to get these rotten self-serving banks to lend to small business, big business and consumers again. Only it ain’t happening anytime soon. Banks are hoarding and holding as they have been for six long months, choking off the money supply that the Feds are pouring into their coffers. It’s like dumping trillions of taxpayer dollars into a giant black hole.
When are we going to learn Hank that to throw good money after bad can’t be good?