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This actually goes very well with your Matt Bai post up above. Bank balance sheets are in trouble because assets (loans made to people who are supposed to be paying the banks back, and collateral for those loans) are yielding less money than they were - i.e., those assets have fallen in value dramatically, and rewriting the prices of those assets to those real values (i.e. marking them to market) would leave the banks without enough assets to meet their liabilities (what they owe depositors, bondholders, etc). If a bank didn't accept deposits (i.e. didn't incur debts) it wouldn't be a bank. If a bank can't cover its debts, it's an insolvent bank; but the borrowing (taking deposits) isn't really the problem, it's the fact that they made loans that can't or won't be repaid.

This is an example of Matt Yglesias not knowing what he's talking about, because he is not an expert. For a really simple explanation of how this works, listen to the "Bad Bank" episode of This American Life. For more complex explanations, read Simon Johnson, Yves Smith, etc.

An editorial on saving the banks dismissed nationalization because it would involve the government in running the banks. Then it discusses the idea of buying bad assets and warns, "but there is a huge risk that the government would badly overpay in the first place."

Actually, this is not a risk, this is the point. If the government paid the market price for these assets the banks would be bankrupt and we would be back to step 1, nationalization. The point of buying the bad assets is to pay too much, so that the banks can get enough money to stay solvent. (In is worth noting that deciding how much the government will overpay, and to whom, also involves the government in running the banks in a really big way.)

It would be nice if the Post and the rest of the media would report honestly...

It would be nice to have a small population, plenty of fertile soil, healthy oceans and lots of snow at the top of Mt. Kilimanjaro, but that's not the world as we find it. We, the intelligentsia, are forced to find ways to disseminate information despite the overwhelming power of the corporate news hawkers. That is our most important challenge now, and is far more difficult than electing a President. It's more akin to a genuine political revolution. Our rules of government now come not from some puny constitution but from the existing media structure and control apparatus, which, as we saw during the B*sh administration, can effortlessly override any law, convention or agreement, simply by accepting the new behavior with the pasted-on smile of a news anchor.

The Foulness: "The assets are still backed by real estate, which while not worth 100% of their original value, are certainly worth more than the 5% you could probably get for them on the market now."

This is a common misconception. Many of the "assets" in question are NOT "backed by real estate" in anything but the loosest sense of the term. Many mortgage-backed securities are bundled together from junior tranches, which only get paid off if ALL the senior tranches have been paid off first. In other words, if the property loses 20% of its value, the junior tranches don't just lose 20% - they are completely worthless, since the senior tranches got paid first and there's nothing left over.

Many of these securities were rated AAA on the basis that, even if some borrowers might default, they wouldn't all default at once. But that assumption was flawed - it assumed first of all that borrowers circa 2006-7 were similar to borrowers from previous years (they weren't) and secondly that housing prices would never go down (they did). If these assumptions fall apart, the securities are worthless.

And that's without even getting into the trillions in "credit default swaps," which have absolutely nothing at all backing them up.

The Foulness: "And of course, eventually real estate prices will rise again, foreclosed house will be bought and regain some value."

Why would you think that? Housing is still way overpriced in some parts of the country, and we have a massive glut. It's not going back up for decades, and probably not until most of the people who remember this bust are senile or dead.

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.

Boris Fyodorov, the late Russian Minister of Finance who struggled for many years against corruption and the abuse of authority, could be blunt.  Confusion helps the powerful, he argued.  When there are complicated government bailout schemes, multiple exchange rates, or high inflation, it is very hard to keep track of market prices and to protect the value of firms.  The result, if taken to an extreme, is looting: the collapse of banks, industrial firms, and other entities because the insiders take the money (or other valuables) and run.

This is the prospect now faced by the United States.

The revolution will be powered by data, which should be unshackled from the pages of regulatory filings and made more flexible and useful. We must require public companies and all financial firms to report more granular data online—and in real time, not just quarterly—uniformly tagged and exportable into any spreadsheet, database, widget, or Web page. The era of sunlight has to give way to the era of pixelization; only when we give everyone the tools to see each point of data will the picture become clear. Just as epidemiologists crunch massive data sets to predict disease outbreaks, so will investors parse the trove of publicly available financial information to foresee the next economic disasters and opportunities.

The time to act is now. An exhaustive study by the Transparency Policy Project at Harvard University's John F. Kennedy School of Government—analyzing disclosure rules for everything from restaurant cleanliness to SUV rollover risk—found that there's a very brief window after any calamity for government to institute changes. (Wait too long and the special interests start regaining their confidence and pushing back.) In the financial world, the old order is still trying to find its new shape. So the window is, briefly, cracked. Caveat vendor

Can we stop pretending this money is anything but looting? At this point, every sane employee of AIG, Citibank, and other "troubled" institutions is doing the nearest legal equivalent to going down to the safe in the basement and stuffing their pants full of cash.

Why? Because we're letting them. There's absolutely no reason not to--they've driven their companies into the ground while lining their pockets. Why would they stop now just because their companies are dead? There's still assets to move from the company's accounts into their own. The rational economic move here is to do it. More and faster!

And this nonsense that AIG created a bomb only it can defuse, so we have to pay these guys whatever they demand? Is this a joke?

There are plenty of people who understand what they did better than the AIG traders do--for the simple reason that they understand that it was failure prone from the very beginning.

I absolutely agree. Furthermore, the idea of ponying up and then hoping they won't blow up the bomb suggests they should twiddle their thumbs for 6 months, demand another $160 million, twiddle some more, repeat until people wise up and stop paying them off. At which point who knows how much more screwed up they will have managed to make everything.

So how do you get the message across?  Obviously, we need the comprehensive stress test immediately and it has to be transparent and very tough.  And this is where David Axelrod and Rahm Emanuel have apparently been exactly right in the past 10 days.  According to press reports (NYT yesterday and WSJ last week), both have pushed for tougher symbolic and substantive actions that would hurt bankers’ pocketbooks and weaken the largest banks.

Remember, weakening the big banks and their bosses should not be seen as an unfortunate side effect of beneficial medicine.  It is exactly what we need to do under these circumstances.  Unless and until these banks’ economic and political influence declines, we are stuck with too many people who know exactly what they can get away with because their organizations are “too big to fail.”

And weakening these banks (or actually having some of them go out of business and be broken up) as part of a comprehensive system reboot - with asset revaluations at market prices and a complete recapitalization program - will help return the credit system to normal. 

Host Ira Glass plays clips from TV in a recent senate hearing and talks about how
confusing the current banking crisis is.  But fortunately today, we have the
team that brought us our show that explained the mortgage crisis a year ago,
back to explain entire the banking system in 40 minutes. (3 minutes)

Act One. The Collapse of the US Banking System Explained in Just 39 Minutes.

Alex Blumberg and Adam Davidson tackle a very tough subject: trying to
explain exactly what a bank is and does. They talk to a number of experts
about what has gone wrong in banking, but not before bringing us all up to
speed on some banking basics, like understanding a bank balance sheet, and a
bank’s assets and liabilities, and the squishy business of what banks say
about their balance sheets compared to what they are.



Alex and Adam walk us step by step through the complications of the US
government buying up bad assets from banks, and explain why, when it comes
to footing the bill, the government might just prefer to not be in charge of
the very banks it is having taxpayers bailout.  From a dollhouse, to a
hypothetical bank worth tens of dollars, to the trillions of dollars being
spent to keep banks afloat, Alex and Adam talk economy, and where we might
be headed. (39 minutes)

Act Two. Clean Up Crew.

Not everyone hates the idea of “toxic assets.”  Reporter Lisa Chow goes to New Jersey
to follow two guys on their quest to clean up some of America’s bad
mortgages—by buying them, and going straight to the homes themselves to
have a look at how dire the situation really is. (13 minutes)

The government is handing even more money to Citigroup and the NYT is doing its best to cover up. The NYT reports on the fact that the government's preferred shares in Citigroup are being converted to common shares at a price of $5 per share, more than twice the market price.

The article describes this move as, "giving taxpayers more risk, but more potential for profit if the company recovers." This is extremely misleading. At the point of the transaction, the government is effectively losing half of its money, which had already been invested at a return that was far below market rates.

the government is getting 5%. Warren Buffett got 10% from Goldman Sachs (a far safer bet than Citi). So the government's interest rate is less than half of the market rate.

Not satisfied with that sweetheart deal, the gov't agreed to accept nearly worthless common shares instead of at least trying to get our money back. To add insult to injury, the only reason the common stock isn't completely worthless is because of anticipated future gov't bailouts.