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So, after two years of crisis, we still don't know how big the Big Shitpile is

William Grieder:

Here is the ugly, unofficial truth that neither Wall Street nor the government will acknowledge: the pinnacle of the US financial system is broke -- with perhaps $2 trillion in rotten financial assets on the books. Nobody knows, exactly. The bankers won't say, and regulators won't ask, or at least don't dare tell the public. Official silence naturally feeds the conviction that banking's problems are far worse than we've been told. ...

The scale of this disaster explains why the Treasury secretary had to abandon his original plan to buy up failed mortgages and other bad assets from the banks. If government paid the true value for these nearly worthless assets, the banks would have to write down huge losses or, as Levy economists put it, "announce to the world that they are insolvent." On the other hand, if Paulson pumps the purchase price high enough to protect the banks from losses, $700 billion "will buy only a tiny fraction of the 'troubled' assets."

Paulson was trapped by these circumstances (and his own mendacity). Each time he tried to change the script, market insiders became even more alarmed. Congress is trapped too. So is President-elect Obama. From the outset of the crisis, the essential fallacy shared by governing influentials has been a wishful assumption that quick interventions with tons of public money would somehow restore the system to "normal" without disturbing free-market principles. Replenished banks would start lending again and lead us to recovery. "Normal" is not going to happen. ...

... Facing facts will be painful, but it's better than continuing a costly charade. Paulson's approach, endorsed by many Democrats, was designed to preserve oversized Wall Street titans. ...

A genuine solution means closing down the hopeless institutions and creating a more democratic system based on small to medium-sized banks, financial intermediaries that are less imperious and closer to the real economy of producers and consumers. The Levy institute suggests that some banks are "too big to save." If the president-elect seeks an opinion quite different from his circle of orthodox advisers, he could start with the institute's tartly incisive analysis "Time to Bail Out: Alternatives to the Bush-Paulson Plan," by Dimitri Papadimitriou and Randall Wray [PDF]. Their perspective is Keynesian, not market worship. They argue (as The Nation and others have) that the bailout is proceeding backward. Instead of saving Wall Street first, government should devote its heavy firepower to reviving jobs, incomes and business enterprises. The banks will not get well or begin normal lending until there is overall economic recovery.

NOTE Hat tip on "The Big Shitpile" to Atrios, who called his shot on Bubbles Greenspan back in 2004. Atrios for Fed chair!

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Submitted by jawbone on

system, as far as they can determine.

I did have to double check on the T for trillion. Article with lots of info, lots of opinions.

The U.S. government is prepared to provide more than $7.76 trillion on behalf of American taxpayers after guaranteeing $306 billion of Citigroup Inc. debt yesterday. The pledges, amounting to half the value of everything produced in the nation last year, are intended to rescue the financial system after the credit markets seized up 15 months ago.

The unprecedented pledge of funds includes $3.18 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s, according to data compiled by Bloomberg. The commitment dwarfs the plan approved by lawmakers, the Treasury Department’s $700 billion Troubled Asset Relief Program. Federal Reserve lending last week was 1,900 times the weekly average for the three years before the crisis.

When Congress approved the TARP on Oct. 3, Fed Chairman Ben S. Bernanke and Treasury Secretary Henry Paulson acknowledged the need for transparency and oversight. Now, as regulators commit far more money while refusing to disclose loan recipients or reveal the collateral they are taking in return, some Congress members are calling for the Fed to be reined in.

Congress can't get transparency; Bloomberg is suing to get info.

herb the verb's picture
Submitted by herb the verb on

Because it isn't lizard-brained enough for me. I'm going to see if I can work through it:

Each of us needs the following to survive: food, water, shelter. To thrive we need education, community, reproduction. If the global investors collapse, that hurts human beings, how? Basically, what has happened is they lent us all the money, to buy stuff (which they can't use, and can't resell, since no one will buy) and then sold to each other the rights to collect the payments on the things which they couldn't afford to take and resell, even if they were allowed to, even if they wanted to. So this is really a failure of the concept of global capitalism, not humanity. What is staring us in the face is this is exactly like the failure of communist socialism. We've just been too brain-washed to notice.

Let me put this differently: if possession really were 9/10ths of the law, then everybody who borrowed to the max is in a better position than the banks who bought the loans on those properties 2nd, 3rd, 10th hand.

If every bank went belly up, and all of the peoples of this world were freed from their debt obligations, the resulting explosion in productive activity would likely dwarf anything seen in human history.

Um, but I'm not a libertarian, I'm just speculating....

herb the verb's picture
Submitted by herb the verb on

I have a problem with this:

The scale of this disaster explains why the Treasury secretary had to abandon his original plan to buy up failed mortgages and other bad assets from the banks. If government paid the true value for these nearly worthless assets, the banks would have to write down huge losses or, as Levy economists put it, "announce to the world that they are insolvent."

This (in bold) is not fact, it is at best conjecture. I'm not sure what the percent here is between "failed mortgages" and "other bad assets", nor am I sure what exactly IS a "other bad asset". A mortgage is typically backed by capital equipment or property. Those things have at least some intrinsic value, and often a value that closely approaches the principal (if not the principal and interest). But even if it doesn't closely approach the principal value, there is a PUBLIC value had in maintaining that tangible property (as long as it remains in the US, since it can still potentially generate taxable income to the state), and the intrinsic value is never zero (or less than zero, except if you have to store it or maintain it).

Still following?

My point is that Geiger's article seeks to describe Paulson's motives without being critical (enough) of the premise. Those reasons are and were based on providing a frogger-style path of rocks across the crocodile river for his very good friends.

bringiton's picture
Submitted by bringiton on

The "value" of the successive tranches of these derivatives falls with distance from the actual capital asset and depends on continuing cash flow as mortages are paid down. They are speculative instruments, bets if you will, made on the likelyhood that all will continue in the future as it has in the past, with an ever-increasing valuation of housing price and an ever-expanding pool of credit to drive those prices.

When the bubble burst the "value" of the most distant tranches went to pennies on the dollar. Not a problem except that the banks and hedge funds and retirement funds and whole governments had invested in those speculative instruments and established the worth of their holdings on commonly agreed upon future values that have now all but disappeared.

By demanding, as Pelosi and others in congress did, that the Trillion Dollar Bailout first establish real value for the instruments before buying them, they made it impossible for Treasury to make the purchases. Establishing actual value will show that some huge percentage of banks are in fact insolvent and down will come crashing the whole of the banking industry along with Western Civilization. Not to mention destroying Paulson's own portfolio, which he isn't about to risk, so the decision was made to not buy those derivatives after all and just leave them in place along with their fanciful valuations.

The size of the Big Shitpile is indeed uncertain but we do know approximately. The total assigned book value to all of the derivatives floating around is somewhere between $1.0 and $1.5 Quadrillion, an amount that gives good use to the term "astronomical" - a quadrillion miles is 200 light-years.

The net value at current real pricing appears to be, give or take, around negative $65 Trillion. That is, if all the holdings - which have two sides, those who owe and those who are owed - are reconciled the residual value is a huge deficit. This deficit exceeds the total 2007 worldwide GDP, around $55 Trillion, and so cannot be absorbed all at one time. The sorting will take a couple of years, after which it is hoped that a rebounding economy will return some value to the marginalized tranches and the total negative balance will be ameliorated to the point that it can be dealt with through accounting adjustments and not destroy the entire system in the process.

The good news, if there is any, is that the people who made the mess will no longer be in charge of cleaning it up. The econ team Obama has assembled are very much Keynsians and very well informed about the Great Depression and what worked and what did not back then. These are different times but a balance sheet is still pluses and minuses and the new crowd has at least some basic common sense and unlike the BushCo/Reaganite crowd is not so concerned with political ideology as they are with sound principles. That this meltdown did not happen a couple of years ago is something for which we should be at least - ahem - marginally thankful.