Thursday, March 05, 2009

Change we will be fucked by 

Have you, like me, been constantly checking the web for signs that O'Bannion will finally figure out that he is sabotaging himself and ruining everything by flushing money down the bank/insurance toilet? Have you been reading the tea leaves for some hint that eventually O'Burt will push for nationalization, the opening of the bank books, and the wiping out of false assets so that lending can finally resume and the stimulus has some possiblity of catching hold of the economy?

If you have, then I think you can stop. I think it's done. We should stop hoping and wasting time looking for good signs and start preparing for new mountains of shit to fall onto O'Bill's Treasury fan. Hunker down.

Here is Simon Johnson, formerly of the IMF:

Emerging market crises are marked by an increase in tunneling - i.e., borderline legal/illegal smuggling of value out of businesses. As time horizons become shorter, employees have less incentive to protect shareholder value and are more inclined to help out friends or prepare a soft exit for themselves....

This is the prospect now faced by the United States. Treasury has made it clear that they will proceed with a "mix-and-match" strategy, as advertized. And people close to the Administration tell me things along the lines of "it will be messy" and "there is no alternative." The people involved are convinced - and hold this almost as an unshakeable ideology - that this is the only way to bring private capital into banks.

This attempt to protect shareholders and insiders in large banks is misguided. Not only have these shareholders already been almost completely wiped out by the actions and inactions of the executives and boards in these banks (why haven't these boards resigned?), but the government's policy is creating toxic financial institutions that no one wants to touch either with equity investments or - increasingly - further credit.

Policy confusion is rampant. Did the government effectively sort-of nationalize Citigroup last Thursday when it said Vikram Pandit will stay on as CEO?... Will debtholders be forced to take losses and, if so, how much and for whom?...

Drip-drip injections of government money are not a proper clean-up; there has been no complete recognition of losses and, almost six months later, that company still cannot move on. Time horizons presumably remain short or are getting shorter for all involved. This points to a bleak future more generally....

The course of policy is set. For at least the next 18 months, we know what to expect on the banking front. Now Treasury is committed, the leadership in this area will not deviate from a pro-insider policy for large banks; they are not interested in alternative approaches (I've asked). The result will be further destruction of the private credit system and more recourse to relatively nontransparent actions by the Federal Reserve, with all the risks that entails....

Sweet fucking cut.


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