Government & Banks Idiosyncrasies
Hey guys,
I am almost done reading 'Too Big to Fail' and there are a couple of things that I just can't get my head around, specifically when the book mentions government backed merger deals between banks.
On page 477 the book talks about the time when Goldman was considering buying Wachovia for $18.75 but "to complete the deal Goldman would need the government to guarantee, or ring fence, Wachovia's entire portfolio of ARM option mortgages - all $120 billion worth." Is there an increasing dependency on government aid during most mergers now a days or was this specific to this moment during the crisis? How exactly does this work? Does the government 'lend' the money to the bank (in this case $120b) and the bank slowly pays it back or does the government just buy the toxic assets and considers it a personal loss?
When Goldman contacts the government, the government suggests that if "Goldman would take a first loss on the deal - in the same way that JP Morgan had agreed to accept the first $1b of losses at Bear Sterns before the Federal Reserve would step in and guarantee the next $29b - the government might well consider acting as a backdrop." This again seems ridiculous given that the government is covering for most of the losses. How is this different from TARP? Am I missing something about how government backed mergers or acquisitions occur?
Is government the de facto toilet where banks go to to throw their shit?
It also seems that foreign investors also look for government guarantees when making a deal. On page 473 Paulson contacts China's Vice Premier Qishan to vouch for Morgan Stanley so China would invest in the company. Wang asked "for commitment that the US government would guarantee any investment." Again, how does this work? Does the government pay for any loses but China, in this case, reaps all the benefits were the investment to be fruitful? Or does the government pay a percentage of the losses? Or does the government also receive a percentage of the winnings for taking the risk alongside the foreign investor?
It just seems like the government always takes the short end of the stick (except in the AIG bailout I believe) and I don't understand how it continues to do that unless there is something I am missing.
Anyway, apologies if the answer to these questions are common knowledge. I just recently got interested in finance so I'm still getting my feet with how things work.
Not a popular viewpoint, but here goes:
This is the definition of the 'pro-business' platform: privatize the gains and socialize the losses. This is nothing new at all, it's just so blatant that no amount of GOP bullshit can disguise it....and considering that the Democrats are in on this too just demonstrates how much power big business has.
The time has come to do accept one of two things, or possibly a combination of the two: 1. Accept the fact that political parties and individual politicians do basically the same things across party lines, regardless of what they say. The 'differences' are largely just cosmetic. Both political parties are worthless.
OR
We could also collectively decide to continue shitting ourselves, and pretend that the 'socialist' or 'libertarian' or some other such unworkable causes are worth fighting for. My guess is that we will do so, probably for a very long time.
^^^ Great point; have accepted #1 looonnngg time ago :)
And everyone wonders why banks ended up in such an enormous mess and did so many self destructive things. Government involvement in the banking industry is beyond merely excessive. You didn't even mention all the stuff it does in the housing market and housing related securities.
In response to your musing about how it is able to continue, the answer is it isn't; thus the 2008 financial crisis.
The backstops were put in place, not so much because anyone really believed that the entire portfolio would go sour but more because no one wanted to buy something that is bleeding money faster then it can be found. Also it was governments way of saying, yes we fucked up and this is us making up for it. Instead of actually coming out and saying this publicly the government provided these backstops under the condition that the banks would take some of the risk in the begining and congress would get to have their dog and pony show on the hill to make it look like they are going to change something.
OP- to your initial question, yes, these were 'extenuating circumstances'. gov't typically tries not to bend over in order to make these deals happened. it was backed into a corner during this time period and to heisters point, the gov't fucked up and needed to do something to keep these banks from failing and taking the economy down with it.
on another note, UFOinsider, Bravo to number 1. sad but true
dammit
Kudos on #1
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