A Summary of the Crisis

October 8th, 2014 by Rick Drain

Nobel Laureate Paul Krugman has written a review of fellow-economist Martin Wolf’s newest book. The review serves as a very readable summary of our latest financial crisis.

He covers where the crisis came from, what we’ve done, and what we haven’t done but should.

From the October 23, 2014 issue of The New York Review of Books, reviewing
The Shifts and the Shocks: What We’ve Learned—and Have Still to Learn—from the Financial Crisis. Click to follow the link:

Why Weren’t Alarm Bells Ringing?

 

Longsplice rope

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The September newsletter is out

October 1st, 2014 by Rick Drain

Hi,

I just posted and emailed the September 2014 Capital Drain newsletter. If you’re on the direct mailing list for that, you should be receiving it now.

If you’re not yet on the list, but would like to be, send me an email.
If you just want to read the letter, follow this link: September 2014 CapDrain.

I forgot to announce the August letter, so if you didn’t get that in the mail you can see it at: August 2014 CapDrain.
IMO the August letter is the more interesting of the two, even though it’s a bit behind current events.

I hope you’ll enjoy them. You can sample from the past several years of newsletters on this page.

-R


July 2014 newsletter is out

July 31st, 2014 by Rick Drain

Hi,

I just posted and emailed the July 2014 Capital Drain newsletter. If you’re on the direct mailing list for that, you should be receiving it now.

If you’re not yet on the list, but would like to be, send me an email.
If you just want to read the letter, follow this link: July 2014 CapDrain.

I hope you’ll enjoy it. You can sample from the past several years of newsletters on this page.

-R


Yes, a bailout. Not just a loan.

July 31st, 2014 by Rick Drain

One of the defenses you’ll often hear from the bosses and supporters of the (surviving) big banks is that they were not actually “bailed out.”

Their argument is that they took loans at premium rates, and paid back the loans and interest, generating a profit for the government. That specific snippet is tolerably accurate.

What they imply that isn’t true is that they paid market or above-market rates for those loans. That is totally false. In the few cases where banks got their rescue loans from private investors, which is by definition the market rate, the costs of the loans was much higher.

Long story short, the Fed/Treasury loans to banks in the heat of the crisis were at rates defined in terms of percent, just like when you buy a house. The percentage rate was higher than a mortgage rate (“See! Not a bailout!”, they cry) but actually lower than the roughly 18% that some people pay on their charge cards.

Quick quiz: do you think the big banks at the peak frenzy of the financial crisis were more or less creditworthy than a typical credit card holder? Keep in mind that some of those banks that didn’t get the loans failed. In my opinion, the banks were riskier, and the American public was not adequately rewarded for taking that risk.

We can compare the government rescue terms to the few examples of banks that got their rescue privately.
The private– market– rate for a rescue is described in terms of multiples, not percent.

That’s multiples, as in a return of 3.35X :

Bet on Failed Bank Creates Windfall
Investor Group’s Purchase of IndyMac in 2009 Provides Impressive Return as OneWest Is Sold to CIT

Just in case you can’t reach the article (WSJ has a paywall for some material) here’s a quote:

An investment group … stands to gain more than $3 billion from a bet made on a failed lender during the depths of the financial crisis.
The group’s 2009 purchase of OneWest Bank, formerly known as IndyMac Bank, will produce a return of 3.35 times its initial investment…
The investment group bought the bank in early 2009 for $1.55 billion. Including the dividends the group collected from OneWest’s earnings in the years since, the investors are due to rake in more than $5 billion.

That is the market rate for that type of loan.

There are other examples if you want to continue.
Buffett’s one-day win on Bank of America: $357 million

and extends beyond banks
Buffett’s Crisis-Lending Haul Reaches $10 Billion
Berkshire Hathaway Reaps Benefit From Tossing Lifeline to Handful of Firms

A quote for the WSJ article:

Billionaire Warren Buffett tossed lifelines to a handful of blue-chip companies during the financial crisis. Five years later the payoff on those deals is becoming clear: $10 billion and counting.
Mr. Buffett approached that figure after he collected another hefty payment last week, bringing to nearly 40% the pretax income on his crisis-era investments, according to a Wall Street Journal analysis.

It’s not these financiers who did something wrong. The shame lies on the officials at the Treasury and the New York Fed who gave away such a sweet deal.

Longsplice rope

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