The Federal Reserve is living up to its purpose, which is to enrich bankers at the expense of everyone else. Ben Bernanke, who chairs the Federal Reserve Board, is to be congratulated for his open call for the banks under his tutelage to receive billions more of our tribute.
Let us understand the matter clearly. We have exited a significant boom period. During the boom, the bankers made large and very large profits. The managements took home very large pay and bonuses. The stockholders (including officers and managers of the banks) had, for a time, very large wealth in the stocks they held. The bondholders of the banks had, for a time, very secure debts.
But the bankers over-reached for business in several ways. They extended a slew of bad loans during the lately departed boom. The stocks and bonds fell in price, reflecting the lower worth of the bank assets, these bad loans.
And now that the boom is over, the bankers, led by Mr. Bernanke, want us to eat their losses.
Bernanke urges Congress to absorb the bad loans. The details of his three alternative plans are secondary to the fact that they all ask that others pay for the losses that the bankers caused, or else they involve the government in a variety of complicated maneuvers by which the government ends up shoring up these banks and bankers while taking on various risks of owning portfolios of bad loans. The idea is for the bankers to offload their mistakes onto taxpayers.
One plan has the government buy the bad loans. Why? Why don’t the bankers reveal what these loans are and sell them in the market? Such sales will reveal that their assets are worth even less than what the market now thinks. The insolvency of the banks will not only be revealed but it will trigger legal ramifications. The banks will have to be re-organized. This will mean breaking them up. It will mean that the holders of the securities of the banks will face large losses, even larger than are now being reflected in the current market prices.
A government bailout does the following. It preserves the bank organization. It preserves the current bank management. It transfers taxpayer wealth to the security holders of the bank (bondholders, preferred stockholders, and stockholders). It transfers wealth to counterparties to other contracts that the bankers entered into. Why is any of this necessary? What is so precious about these banks? Haven’t they demonstrated a level of high incompetence? Shouldn’t that spell their doom?
Heads I win, tails I win. That is the deal that Bernanke wants for the banks and these associated parties. Tails – they should be losing. No one else should be footing the bills.
Citibank or Citigroup is emblematic of the whole tawdry affair. Why in the world should we be saving Citibank? I have been wondering about this for some time before Bernanke’s latest salvo. The government already made a complex deal involving over $300 billion of this company’s loans. What is so special about this bank, other than it has attempted to become a world-girdling enterprise and is failing badly in this endeavor? It even has an office two miles from where I write that usually looks barren. Why should we support the ambitions of a bank like this that is competing with a myriad of other banks in this area alone? The reasons given by Bernanke are absurd ("to promote a lasting recovery unless they are accompanied by strong measures to further stabilize and strengthen the financial system,..."). Promoting overcapacity and singling out inefficient banks for the grace of taxpayer dollars does not promote a lasting recovery and it surely does not strengthen the financial system. Shifting the assets of Citibank, such as they are, to higher-valued uses through re-organization is a sound way to promote recovery and strengthen the economy. But this path would require that a lot of Bernanke’s favorites would bear losses. It would mean a rather different banking system might emerge that influential members of the Fed, who apparently shape its recommendations and bailouts, do not want.
What cheek! What effrontery! What brazen thievery! How disgusting!
The losses of the banks are already to a large extent reflected in the lower security prices of the stocks and bonds of the banks. However, investors do not yet know fully what these losses are because the bankers have not yet recognized and reported on them fully in their accounting or in any other way. If the government were not available as a possible trash bin, the banks would be forced into re-organization, and that is as it should be.
Banks, in Bernanke’s world, are not only to have insured deposits that lead them to make risky loans, investments, mergers, and expansions into all sorts of lines of business, which are overlooked by regulators such as the Fed and even encouraged by them, but they are also to be bailed out by government financing when these investments turn sour!
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