Finally Going to Get Tough On The Banks?

For those, like Brad DeLong, who argue that the Geithner Plan is merely the first phase of the Obama Administration's plan on the financial crisis, this story should be encouraging:

As the Obama administration completes its examinations of the nation’s largest banks, industry executives are bracing for fights with the government over repayment of bailout money and forced sales of bad mortgages.


Some of the healthier banks want to pay back their bailout loans to avoid executive pay and other restrictions that come with the money. But the banks are balking at the hefty premium they agreed to pay when they took the money. . . “This is a source of considerable consternation,” said Camden R. Fine, who attended the White House meeting as president of the Independent Community Bankers, a trade group of 5,000 mostly smaller institutions, many of which are complaining about the repayment requirements. Meanwhile, the Obama administration wants weaker banks to move more quickly to relieve their balance sheets of the toxic assets, the home loans and mortgage bonds that nobody wants to buy right now. But the banks are resisting because they would have to book big losses.

The pressure and criticism that the Geithner Plan has faced no doubt contributed to this statement from the President:

“You will be seeing additional actions by the administration,” Mr. Obama said after the meeting Friday, when the officials discussed the bank stress tests and the new $500 billion to $1 trillion plan that will use public subsidies to encourage private investors to buy mortgage assets.

What that "additional action" will be is critical:

The tension between the industry and the administration is rising as the government’s bailout fund is dwindling, putting the administration in a bind. It is all but certain to need to seek more money from Congress, which wants to see results from existing programs first.

The debate seems to be moving in a positive direction.

Speaking for me only

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    Story Seems About... (5.00 / 2) (#4)
    by santarita on Sat Apr 11, 2009 at 10:13:04 AM EST
    what I expected to be occurring at this point.

    The government is getting its ducks in order to take an increasingly more aggressive approach with the problem banks.    The stress testing is fact finding mission so that when the government comes in with the heavy hammers, it has a strong case.  And the PPIP is designed to convince the banks that their prices are not realistic.  The government is trying to avoid protracted litigation.  The next few months should prove interesting.  

    Thsi supports your ongoing theory (none / 0) (#5)
    by Big Tent Democrat on Sat Apr 11, 2009 at 10:17:53 AM EST
    Let's see if it holds up.

    There Was A Companion... (5.00 / 1) (#7)
    by santarita on Sat Apr 11, 2009 at 10:35:51 AM EST
    article in the NYTimes in the Dealbook section about getting rid of the OTS (Office of Thrift Supervision) because it is possibly the most incompetent of the federal regulators.  It is interesting to read because it reviews a little of the recent history of bank regulators and banks shopping for the easiest regulator.  The OTS was the regulator for IndyMac, Downey Savings & Loan, Countrywide and Wamu. "Nuff said.

    One of the points, I think, of the stress tests was to have a unified regulatory agency approach so that the banks couldn't play the OCC against the FDIC or treasury.  

    The Geithner Plan might not work.  I hope that the Obama Administration has a Plan B.


    Heart of the matter (5.00 / 1) (#13)
    by ricosuave on Sat Apr 11, 2009 at 12:42:30 PM EST
    I think this is the heart of the matter right here:

    But the banks are resisting because they would have to book big losses.

    The banks want to get rid of these assets, but they want to stay solvent.  I don't think they will be able to do both.

    Just have (none / 0) (#1)
    by Ga6thDem on Sat Apr 11, 2009 at 09:36:02 AM EST
    to wait and see what happens. We all know words and promises are pretty worthless.

    What words? (none / 0) (#6)
    by ChiTownMike on Sat Apr 11, 2009 at 10:21:42 AM EST
    I don't read anything new here by Obama. And I don't read anything new here in general. There have been banks wanting to repay for weeks now but understand that there are restrictions on when they can pay back the money and there is interest to pay. That's old news.

    The forced sales of assets is not a new contention either. There are a lot of banks who want to hold on to all or some of the assets they have. I assume they want to do that for two reasons one being they think in the long run they are worth more that the market will currently pay. And if not that then they want to hold them to keep from having to book write downs now and instead wait until they book more business profits to do so  - if they end up having to do so. The assets are probably worth more than current market, or not. Why sell them now if you don't need the money? Best case is hold them because they are worth more. Worst case is to defer your loss until later.

    Of course the above does not apply to all banks and it appears the article is talking about smaller community banks which in the grand scheme of things are probably not as important to the economy.


    Okay. (none / 0) (#9)
    by Ga6thDem on Sat Apr 11, 2009 at 11:13:09 AM EST
    Obviously you've paid better attention to the words of Obama than I have.

    I doubt it (none / 0) (#10)
    by ChiTownMike on Sat Apr 11, 2009 at 11:20:29 AM EST
    you seem on top of things on a daily basis.

    Two more (none / 0) (#2)
    by CoralGables on Sat Apr 11, 2009 at 09:45:52 AM EST
    were taken over by the FDIC yesterday:

    New Frontier Bank, Greeley, CO
    Cape Fear Bank, Wilmington, NC

    That still leaves in the neighborhood of approximately 150 banks with a zero rating from Bauer Financial and susceptible to closure. It's a small percentage of the over 8000 banks in the country but it does make 23 bank failures for the year with 25 all of last year.

    The small banks.... (none / 0) (#3)
    by Inspector Gadget on Sat Apr 11, 2009 at 09:48:38 AM EST
    do they end up being bought by a giant bank or do they just disappear?

    Their assets get sold... (5.00 / 1) (#8)
    by santarita on Sat Apr 11, 2009 at 10:38:24 AM EST
    to another bank, usually a bigger bank.  The liabilities are paid through the sale and the bank disappears.  That's the usual way these things work.  

    Interesting Change in Usual ... (none / 0) (#11)
    by santarita on Sat Apr 11, 2009 at 11:37:38 AM EST
    FDIC procedure for the Greeley Bank takeover.  The FDIC formed a temporary bank and gave the depositors at Greeley Bank 90 days to find a new bank.  The bank the FDIC created will then terminate.

    Maybe this is a trial run?  


    This sounds like an outcome that would (none / 0) (#12)
    by Inspector Gadget on Sat Apr 11, 2009 at 12:19:44 PM EST
    encourage banks in trouble to get busy and take a serious approach to turning things around.

    IN the past few months, there have been (none / 0) (#15)
    by andgarden on Sat Apr 11, 2009 at 01:17:16 PM EST
    a few banks that they had to seize but for whom they could not find a buyer. Sometimes the FDIC will run the bank, and other times the FDIC will close it down and mail checks to the insured depositors. The latter option is inconvenient, because it requires turing off the ATM network, etc. This seems like a new, interim, option.

    Here's a story worth reading... (none / 0) (#14)
    by inclusiveheart on Sat Apr 11, 2009 at 12:58:48 PM EST
    Wall Street Reform Digs In

    And while it clearly wants to install serious supervision, the Obama administration--along with other key authorities like the New York Fed--appears willing to stand back while Wall Street resurrects much of the ultracomplex global trading system that helped lead to the worst financial collapse since the Depression.

    I have a theory about why Geithner is going this route which is that the only way that Geithner thinks he can offset the catastrophic burst of the previous grossly over inflated bubble is to encourage another equally large one to form.  

    I'm More Concerned About... (none / 0) (#16)
    by santarita on Sat Apr 11, 2009 at 02:42:47 PM EST
    Congress than Geithner.  If Congress is vigilant they won't go for recreating the same system even if Geithner and Bernanke were to propose it.  Elizabeth Warren is providing a good service for Congress.  I only hope that Congress doesn't drop the ball.

    Geithner and Bernanke certainly address too big to fail issues.  Whether they propose an approach that works is another story.  One thing that they are considering is proposing high capital requirements for exotic financial instrument activity.  Regulators should be able to require higher capitalization for any kind of activity that is so complex that they don't understand it.  Financial innovation is ok and not evil in itself but if regulators and boards don't understand it, then provide high capital requirements.  This isn't a panacea but it is a way of mitigating risk.


    Risk mitigation is good, but in (none / 0) (#17)
    by inclusiveheart on Sat Apr 11, 2009 at 03:02:28 PM EST
    order to create an epic bubble the captilization requirements need to stay low.  And if my theory about Geithner hoping that the banks can work their way out of trouble has any validity, he'll do his level best to prevent Congress passing any sweeping changes because he needs the old rules (or lack thereof) in order for his recovery plan to work.

    But He Himself Has... (none / 0) (#18)
    by santarita on Sat Apr 11, 2009 at 04:04:38 PM EST
    proposed increased capitalization requirements for derivatives and other types of instruments with unknowable risks.  And he has proposed other steps that could rein in risk.  Maybe his proposals won't go far enough.  But Congress has a lot to say in all of this.

    I didn't totally agree with the Newsweek article.  I don't think a ban on complex financial instruments makes sense.  But they should be well-regulated and the risk well-capitalized.  

    I don't think Geithner and Bernanke are trying to restore the status quo.  They are trying to restore a functioning financial system that has better protections built into it.  Banking should be boring.  But there are other needs of a functioning financial system - facilitation of trade (letters of credit, guaranties, etc)  and raising capital for existing and new companies.  If banks don't perform those functions, some other type of entity will.