Financial crisis update

by on April 16, 2009 at 5:20 am in Current Affairs | Permalink

The TARP money seems to be for bank bondholders (not bank lending), banks are gaming the system like crazy and winning the public relations earnings announcement battle, and step-by-step the Obama team has ended up painted into a corner and now needs to publicly announce the results of the bank "stress tests."  No one wins when the government pronounces a bank "weak" (and thus destroys it) and no one wins when the government pronounces a bank "good" (and thus to some extent owns it).

That's the latest.

1 rhhardin April 16, 2009 at 5:44 am

Stabilizing the financial system is the point. Stimulating the economy is mission creep.

If provoking an economic upturn ever takes precedence, the Fed won’t be able to soak up all the money it’s flooded the economy with when the time comes, and things will be pretty bad.

2 mgunn April 16, 2009 at 6:41 am

On the topic of gaming the system, one concern I have is the degree to which Treasury and the Fed leak. Given the massive and unpredictable government interventions (or lack of intervention), there are potentially large opportunities to profit by front running Treasury or Fed announcements.

For example, imagine that FDIC or Treasury is somewhat concerned about bank X. This leaks out to Greenwich Connecticut where hedge funds rush to short bank X and send quotes for bank X CDS through the stratosphere. Regulators see the rush of market activity predicting a bankruptcy and shoot bank X dead, making it a self fulfilling prophecy. This is just a concern of mine… I have no special inside information to justify it.

3 Travis April 16, 2009 at 9:25 am

Part of the problem is that many of these banks do not traditionally lend in the manner that Congress is demanding they lend. The investment banks make highly stylized financings for special purposes (bridge financings, hedge funds, etc). Hearing Maxine Waters demand that these firms lend to her constituency shows that she either doesn’t understand their business model or wants them to change it.

4 On vacation April 16, 2009 at 9:39 am

I don’t know many people will be going for MBA’s in the coming decade, but there will sure be a lot of interesting case studies for them to learn.

5 mk April 16, 2009 at 9:58 am

Can someone clarify why the government has to say a bank is “good” or “bad?” What if they just relate information in a value-neutral way? Of course this could be a positive or negative shock relative to investor expectations but in the end this is just a matter of transparency, right?

Why isn’t sunlight the best disinfectant here, as everywhere else?

Is the risk that banks are worse than investors think they are (thus transparency = negative shock)? After 6 months of crisis, is it really possible that banks are massively worse off than investors think?

And isn’t it true that the government has shown willingness to massively subsidize investment in banks, and thus a bank in crappy shape needn’t be a bank worth pulling your equity out of?

6 babar April 16, 2009 at 11:17 am

the administration and fed have decided to fight fire with fire (fire as “finance and real estate”). the reason for this is probably that they fear a deflationary depression otherwise.

if you start there, these sorts of conundrums are inevitable.

how do you get tough on intermediaries, or make them delever, while you need them to increase the money supply and make credit available?

how do you get tough on them when you need what they have to offer?

7 Norman Pfyster April 16, 2009 at 11:38 am

It has stabilized the financial sector; the question is whether it was necessary to intervene to do so.

8 Ann April 16, 2009 at 12:42 pm

“Very troubling. So what’s the Administration’s best move from here?”

Ritual suicide.

9 Phil April 16, 2009 at 10:55 pm

Can we please admit Obama is incompetent already.

He can’t speak withoput a teleprompter, he’s misstepped all over the international stage, his affection for gandiose projects is unprecedented, we can forget the claims of post-partisanship. The guy is nothing but a tool for Soros and other big money contributors, nothing more, nothing less.

10 Steve April 17, 2009 at 1:07 am

We hope that TARP funds will surely be helpful for easing the economy at least!

11 Betclic July 25, 2009 at 7:55 am

I don’t know many people will be going for MBA’s in the coming decade, but there will sure be a lot of interesting case studies for them to learn !

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I don’t know many people will be going for MBA’s in the coming decade, but there will sure be a lot of interesting case studies for them to learn.

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Douglas Mallette
Author: Turning Point

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