Response to post re qualifications to bid for auction of "toxic assets."

[JDPriestly]

As we learned recently, financial institutions are being invited to bid on the opportunity to manage the auction of the so-called "toxic assets." The qualifications that must be met in order to bid are challenging and will narrow the field to the usual few "too big to fail" banks and institutions.

I posted this in a response to another post, but, hoping to get some reactions, positive and negative, wanted to use it to start my own thread:

This seems so crazy to me. I don't think I can possibly be right, but this is the way I understand what has happened. If you understand this better than I, please let me know where I am wrong.

So, basically,
1) These banks loaned money for mortgages to people who could not afford the mortgages.
2) The easy money caused the prices of housing to rise to levels not commensurate with rises in wages.
3) The banks took fees and other money when they gave the new mortgages.
4) The banks got investors to back up the mortgages with the investors' money.
5) The banks leveraged the investors' money into big profits through various insurance scams.
6) The bankers paid themselves huge salaries and bonuses out of the profits from the raging housing market.
7) The bankers raised interest rates pursuant to certain clauses in the homebuyers' mortgage contracts.
8) Many homeowners found themselves unable to pay the new, higher interest rates. (Surprise!)
9) The bankers declared the market a bust.
10) Housing prices went down.
11) The bankers insisted on charging the higher interest rates and foreclosing rather than rewriting the mortgages.
12) The bankers claimed a market bust.
13) The bankers turned to the government for help.
14) The bankers exchanged the now worthless houses to the government for the bail-outs and repaid their foreign investors and investing banks (each other) in full out of the government money,
15) And now -- those same banks which are the biggest megabanks in our system get to buy back the worthless properties that they sold to the government at inflated prices -- for market, post-foreclosure prices.

That is brilliant. What a scam. At each step, the banks made huge profits. And they stand to make even more now that they get to buy the "toxic assets" at low, low, going out of business sale prices.

And, maybe the best part is that, out of fear that the markets would crash, the Fed lowered its interest rates to next to nothing, while those same bankers that caused this collapse raised the interest rates on consumer debt, especially credit card debt and lowered interest paid to consumer depositors.

There is something wrong here. I don't think we are being told what is really going on. Is the real story that China is withdrawing or has threatened to withdraw its support for our economy? Why haven't we made the bankers disgorge the profits they took in compensation during the good years to cover the banks' debt?

Can someone please correct my analysis. Am I wrong here?

If I am right to any extent, these guys belong in jail, every single one of them. And Geithner (and Obama with regard to this bail-out business, sorry to say) and Bernanke are idiots and should be replaced.

Added support info: Citigroup profit in 2005 was $24.6 billion.
http://www.usatoday.com/money/companies/earnings/2006-0...

Goldman profits and executive bonuses soared in the 2006.

The figures were certainly good news to the scores of Goldman bankers and traders who will find out, starting today, what their bonuses will be. Chances are good they will be impressive: the bank is paying $16.5 billion in compensation this year, or roughly $623,418 for every employee.

Wealth on Wall Street is not distributed evenly, of course. Rainmakers in investment banking can expect to see $20 million to $25 million each while traders who booked big profits will take home a chunk of those profits, up to $50 million apiece, according to senior executives at leading Wall Street banks.

“Anyone at the bonus line at Goldman Sachs died and went to bonus heaven,” said Michael Holland, chairman of Holland & Company, a New York-based investment firm. “It doesn’t get any better than this.”

http://www.nytimes.com/2006/12/13/business/13place.html...

Wonder where Goldman plans to find all those private investors? They probably have to look no further than the corner and front offices in their own firm.

This chart compares the profits of the various banks and investment groups for 2006

http://money.cnn.com/magazines/fortune/fortune500/snaps...

Goldman Sachs shows revenues of $43,931 million 70 54.5% from the previous year
Profits are stated as $5,626 million (and they paid $16.5 million in bonuses?)
Assets are listed as $706,804 million.

This list shows that both Morgan Stanley and Merrill Lynch did even better than Goldman in 2006.

And we are bailing them out? These banks should have turned to their own executives and former executives for help before turning to the U.S. government. Who is getting rich here? This is a swindle of massive proportions. These banks are not in trouble. no way. The money is in Switzerland, the Cayman Islands or some other tax havens.

[Jim Sagle]

1. Whaddya moanin' about? Ed Henry got PWNED!!!! Life is good.

;)

[Oregone]

2. I think you got 14 + 15 wrong

The banks still own the assets. The original TARP plan was that the government bought the worthless paper, but it was altered to the government simply shoveling in money with no equity stake (what we've done so far). Hence, the banks still have the worthless (or worse, negative worth) "assets" on their sheets.

The new mechanism being introduce by the government is to help these banks finally get rid of these assets and sell em off to the private market. The government is helping this happen by financing 85% of the investor purchase (assuming, therefore, 85% of the liabilities) and relinquishing any significant owner stake in the assets. We are helping to make it attractive for private investors to clear out the banks balance sheets by absorbing almost all the risk and loss, and letting them absorb almost all the profit. We are "solving" this problem with easy credit to those that deserve it the least, and a practical subsidy for those buying (the government will probably lose a significant amount of money assuming this much liability, and investors are investors are at practically no-risk).

Through this action, we are hoping that the banks, who now are liquid, and the investors, who just got an additional government handout, will invest back into the American economy in the worst economic climate in decades--not because they see profit, but because they are our benevolent overlords who just got a happy handout despite their disastrous policies.

Can anyone say "Economic Stockholm Syndrome"?

[JDPriestly]

3. Thanks. You are probably right, but in terms of my analysis,

it's what we used to call "the same difference." In theory, the banks still have the assets on their books, but in reality, we have paid for them. They are, in reality, our liability. And the institutions that caused the mess in the first place are going to get first dibbs on grabbing the bargains. "We are helping to make it attractive for private investors." My point is that the only "private investors" who have the money to buy the bargains are the bank CEOS etc. who put us in this predicament. The guys who have that kind of money are the folks who took the profits during the years when the scheme was bloating the banks. This is simply a scheme to benefit the unscrupulous people who run our financial institutions.

We need to impose ethical standards in the financial industry, and those standards need to be enforced. In spite of the public disdain for lawyers, lawyers have to practice according to tough ethical standards. Lawyers face severe punishment if they misuse or appropriate the funds of their clients. These bankers appropriated their clients' money by taking overly generous salaries, perks and bonuses in the good years. They bled their companies dry with their greed. And now they turn to the public to make up the losses -- losses of money that they legally stole. No. No bonuses. Bail out the homeowners -- all of them, not the bankers. Require the bankers to disgorge the bonuses that they took from money their companies did not really earn. Google profits of Goldman Sachs 2006, and you will get a wealth of information from Forbes about the profits Goldman Sachs claimed in 2006.

[Oregone]

5. "but in reality, we have paid for them"

And in reality, we are going to pay even more to "sell" them off to private investors. This will be done when we absorb the losses of the bad assets.


"My point is that the only "private investors" who have the money to buy the bargains are the bank CEOS etc."

Ive mentioned this before, and some people don't "get it". We are sitting here pretending they are two different entities. We know how much wealth the top 1% control and own. Why do we assume then that the shareholders of the bank are not also among the wealth people (that are involved in the financial industry) looking to repurchase these assets.

And that creates a conflict of interest that is not going to be addressed any time soon. If people are buying their own assets (separated via liability structures) with essentially other people's money, aren't they going to want the highest price for them? Now, maybe the shareholders of BoA aren't going to be buying, literally, BoAs toxic assets from different firms they own, but they will be buying eachother's assets (their friends and peers). If the general attitude among these bankers is to drive up prices artificially due to that absolute absence of risk, in order to profit, its going to happen. Thereafter, mark my words, the good assets will have their profits realized (if there are any) and the bad ones will be traded to quarantine companies with their Chapter 11 paperwork filled out and ready to sign (leaving the government holding their dick with the bill). We are depending on a corrupt culture of businessmen to help us fix this. And you know what, some here believe they are the same damn people drafting these very policies (so much for oversight). Its all so ludicrous.


"Bail out the homeowners -- all of them, not the bankers."

The problem is we have a bunch of Friedman studying, Ayn Rand worshipping (the Democrats too) people in charge that see the bankers as the only true drivers of wealth and growth. This plan would of never come into existence if this wasn't true. We value the stock holders of these banks so much, the government will go to any lengths to ensure they aren't wiped out for owning a terribly ran bank. Because without their benevolence, the wheels would not only stop, but fall off the damn wagon. Somewhere along the line, maybe they will learn there is a price for letting these people run the show. In about a decade we will have a very finite pricetag on the whole operation.

[Leopolds Ghost]

4. Well, they ARE our overlords n/t

[girl gone mad]

6. You got it mostly right.

And anyone who's upset about the AIG bonuses should look into this guy:



He engaged in large scale fraudulent lending and walked away with $300 Million.

[truedelphi]

7. Don't remember being introduced to him at any of the

aAbulous soirees or spa visits I have taken lately... Can you possibly suggest his name so I do not appear too Gauche next time we meet?