I now spend too much time reading blogs written by investment bankers and economists. I just finished this disappointing book (interesting as a journalistic account of the history of Bear Stearns, which surprisingly is kind of interesting, but really pretty lame in providing the larger context of the meltdown). I'm about to read this book which I have higher hopes for. What's most alarming to me is that the folks who actually understand all this shit (and much of it is indeed shit, and it isn't inherently complex it's just that much of it was designed that way: purposeful obfuscation) are clear on one point: nothing has changed. In fact, it may be worse. This is in contrast to much of the media noise we hear about the economy rebounding.
Why? I mean didn't Goldman Sachs and the rest of them pay back all that bailout money? Aren't they raking in record setting profits? Can't we trust Jamie Dimon and Lucas Van Praag? Well, the recent successes of the mega banks seems to be the result of one thing: free money. Yes, the bailouts saved these institutions from insolvency and yes, technically, they paid that money back.
So how did they manage that? Well, they repaid all that free government money with more free government money. We're not calling it a bailout anymore. Nope, that's toxic terminology. Gets folks on Main Street all upset. And instead of just being handed the money it's now a two step process.
First, they "borrow" money from the Fed discount window. What the fuck is the fed discount window? Note the rate table here. What wikipedia does not mention is that the discount window had been closed to investment banks. But when Paulson and Geithner lowered the rates and extended the length of the loans, they also opened up the discount window to the mega banks. So now the likes of Citi, J.P. Morgan and Goldman Sachs can all borrow money for virtually, or literally, nothing. The second step: they take all that free government money and they turn around and buy U.S. Treasury bonds or bills or whatnot that even with their tiny interest rates add up to huge profits when you're buying them by the billion with free money.
Apparently, the Federal Reserve’s free money is paying off. Citigroup’s trading desks kicked ass by capturing $8 billion. Most of these gains came from the bond traders who were borrowing free money from the Fed Discount Window and parking them in higher yielding Treasuries. I refer to this as the “Bailout Carry Trade”.The Fed has tried hard to keep this borrowing secret, even refusing Freedom of Information Act requests. Thankfully their secrecy appears endangered.
My emphasis there. Note that last little bit. What a piece of work.In separate rulings Friday, the U.S. Second Circuit Court of Appeals upheld a lower court's decision granting a request by Bloomberg LP's Bloomberg News for documents related to use of the Fed's discount window and other programs and vacated a separate ruling denying a request for documents by Fox News Network LLC's Fox Business.
Both news organizations had sought Fed documents under the Freedom of Information Act and ultimately brought lawsuits after the Fed denied their requests.
Matthew M. Collette, a lawyer for the Fed's board of governors, argued in January that banks would be less likely to use the discount window and other lending-of-last-resort programs if they know their use would be made public. He said at the time that accessing the window carries a negative connotation if use was made public, even when a healthy bank suffering a short-term liquidity issue does it.
Call it the Fed/Treasury Two-step. Borrow from the Fed Discount Window, turn around and buy from the Treasury. Almost instant money. They may as well give them the keys to their own mint. And who pays for it? You and me.
The confusing part of this for many is that it doesn't fit into the simple-minded liberal/conservative dichotomy that has turned our country into one big Miller Lite commercial. Both sides have been bought off by the mega banks. They hedge their bets. Blame for the crisis is shared by both parties. Obama, like W, has left the foxes in charge of the Hen House. His recent rhetoric is mostly just that. We'll see what this reform bill actually looks like. I fear it will be toothless.
I will wait and see what comes of the SEC's case against Goldman Sachs. Handmaidens of the mega banks are trying to cast aspersions on the SEC by drawing attention to the porn some SEC employees have watched while at work. Really. Is this a good precedent? Can only prosecutors and police who've never seen pornography enforce the law? Good luck with that.
I fear for our country's well being. I say that without sarcasm or drama. I don't want to be reading all this shit. I don't want to think about Timothy Geithner or Hank Paulson or Jimmy Cayne or Lloyd Blankfein. I really don't. But I felt like this was serious enough that anyone with a vestige of old-fashioned citizenship left in them ought to at least try to understand what's going on. And what I learned was sobering. I believe the banks should have been allowed to fail. That was the free market verdict. Their malfeasance got the better of them and they were fucked. Was it going to hurt the rest of us? You bet. But we Americans don't like our medicine. So here we are.
