No Banking Bailout, 2008

During the discussion of the banking bailout, I said the US should put a buttload of money in the FDIC and let the banks that screwed up fail. The FDIC would protect the depositors' assets but the companies that did the dumb things they did would die.

Faeelin and others did not agree, with the former suggesting that course of action would lead to a "Lost Decade" in the US similar to Japan (IIRC).

Now, several months later, we can discuss the subject with the benefit of hindsight.

In my case, I work for a small-town newspaper and there was one bank in a neighboring county that failed (due to lots of construction loans that could not be paid back because the houses weren't sold) and was taken over by a bank based in my county. The FDIC insured the deposits, so nobody lost money, "my" bank took over, and everything was back to normal the next day.

Could this have happened on a larger scale, with healthy banks like BOA taking over Goldman Sachs and other entities that in TTL would have been allowed to fail?
 
as much as i hate the idea of corperate hand outs and i def think things could have been done in the mortgage market to stem the tide... once the very large banks were tottering uncle sam had to get involved

a local county savings and loan isnt a big deal... citibank, bank of america, wachovia, and washington mutual are

its a twin fold... by having a major bank of that size fail its creates parallel runs on other banks. the other major problem is that the bonds and preferred stocks of those big banks are held in billions by money market funds, state and federal pension funds, insurance companies and mutual funds. by having the banks fail completely the bond holders would get wiped out which is devastating to those other financial products and institutions. literally its a spiral of death

basically if the government in regards to citi, bank of america, wachovia, and wamu were hands off it could devastate the entire economy... the great depression II becomes a serious possibility
 
as much as i hate the idea of corperate hand outs and i def think things could have been done in the mortgage market to stem the tide... once the very large banks were tottering uncle sam had to get involved

a local county savings and loan isnt a big deal... citibank, bank of america, wachovia, and washington mutual are

its a twin fold... by having a major bank of that size fail its creates parallel runs on other banks. the other major problem is that the bonds and preferred stocks of those big banks are held in billions by money market funds, state and federal pension funds, insurance companies and mutual funds. by having the banks fail completely the bond holders would get wiped out which is devastating to those other financial products and institutions. literally its a spiral of death

basically if the government in regards to citi, bank of america, wachovia, and wamu were hands off it could devastate the entire economy... the great depression II becomes a serious possibility
And, more important, it would lead people to question the system. We can't have that.
 
as much as i hate the idea of corperate hand outs and i def think things could have been done in the mortgage market to stem the tide... once the very large banks were tottering uncle sam had to get involved

a local county savings and loan isnt a big deal... citibank, bank of america, wachovia, and washington mutual are

its a twin fold... by having a major bank of that size fail its creates parallel runs on other banks. the other major problem is that the bonds and preferred stocks of those big banks are held in billions by money market funds, state and federal pension funds, insurance companies and mutual funds. by having the banks fail completely the bond holders would get wiped out which is devastating to those other financial products and institutions. literally its a spiral of death

basically if the government in regards to citi, bank of america, wachovia, and wamu were hands off it could devastate the entire economy... the great depression II becomes a serious possibility

So even the FDIC taking over the banks that would have otherwise failed would not have ensured the security of those other funds?

I was under the impression the point of the FDIC was to prevent runs on the banks, people losing their savings, etc. from occurring.
 
The problem is that banks have gotten so large that if they fail they can take down an entire countryu with them - hence the saying that they are "too big to fail". It doesn't mean that they can't fail due to their size, it means that they're so big that no government, democratic or not, socialist of capitalist can let them fail because the consequences would be so severe.

In 2008 only Lehrman Brothers was allowed to fail and that caused a global recession worse than any since at least the end of WW2. If no bank bailout had happened then the consequences would be, almost literally, unimaginable. A depression worse than that of the early 30's would have been an almost certainty. How much worse it would have been, well, luckily we'll never know

Of course, whether banks should have been allowed to get so large that it would be impossible to let them fail without such consequences is another issue
 
One thing we never seem to hear about is the number of people who got home loans for amounts they never should of have because government pressure (executive and legislative) to extend home ownership to more people (not a bad thing in itself if they can afford it) who by any rational analysis should never of gotten a loan in the first place.
 
The US government should have demanded payment for the guarantees and bailout money - de facto nationalising the faulting banks, taking over all obligations and loans the banks have. Sweden did that in the crisis 1991-92 and did not enter a lost decade, rather left the crisis within 18 months. And succeded to sell the only bank that was nationalized. Japan, on the other hand, did not let the banks fail and entered a (or rather two) decade of stagnation.

The big problem with "to big to fail"-reasoning is that the big banks has no, I repeat no, incentive to protect themselves the next time. Instead they maximises risk, since they keep the profit and let the taxpayers pay the losses. That is the biggest source to the current crisis.

If above had happened the total situation would probably be equal to now - but with a far better future. In OTL the crisis may repeat itself any year.


During the discussion of the banking bailout, I said the US should put a buttload of money in the FDIC and let the banks that screwed up fail. The FDIC would protect the depositors' assets but the companies that did the dumb things they did would die.

Faeelin and others did not agree, with the former suggesting that course of action would lead to a "Lost Decade" in the US similar to Japan (IIRC).

Now, several months later, we can discuss the subject with the benefit of hindsight.

In my case, I work for a small-town newspaper and there was one bank in a neighboring county that failed (due to lots of construction loans that could not be paid back because the houses weren't sold) and was taken over by a bank based in my county. The FDIC insured the deposits, so nobody lost money, "my" bank took over, and everything was back to normal the next day.

Could this have happened on a larger scale, with healthy banks like BOA taking over Goldman Sachs and other entities that in TTL would have been allowed to fail?
 
If healthy big banks took over unhealthy big banks, they would become unhealthy- BoA pushed itself to the verge of failure in the OTL bailout climate by taking over Merrill Lynch... (though it was also pushed to complete the merger by the feds, they probably would have been forced by the merger agreement anyway)

The first thing here is the likely failure of Bear Stearns without the federal backstop to sell it to JPMorganChase. Correct me if I'm wrong, but I thought Bear Stearns was larger than Lehman Brothers pre-collapse? So this could be worse, and earlier...
 
the fdic cannot possibly backstop banks that are that big... im not just talking about the deposits, those are only part of the problem, its the preferred high yield stock and the bonds.

with the mass losses those would inflict on pension funds, money market accounts, insurance reserve funds and mutual funds they would experiance a run on them as well.

the failure of lehman alone created 600 billion in failures on credit default swaps the shadow banking market at the time could not possibly be held together by the fdic

AIG had 1.6 TRILLION in credit default swaps outstanding TRILLION is an immense number... they could have never been wound down without the entire financial system falling apart.


what the government should have done with tarp money or the first stimulus money right away was to start buying up mortgages at auction to create some kind of floor on housing prices. with the funds allocated they could have easily bought 5 percent of the market via fanny mae and kept people from going so far underwater on their homes. a lot of the forclosure problems stem from this too think about it

my job is questionable... i bought a house 4 years ago for 400,000 now its worth 250,000 why not walk away especially if you have negative 30 percent equity
 

curious

Banned
During the discussion of the banking bailout, I said the US should put a buttload of money in the FDIC and let the banks that screwed up fail. The FDIC would protect the depositors' assets but the companies that did the dumb things they did would die.

Faeelin and others did not agree, with the former suggesting that course of action would lead to a "Lost Decade" in the US similar to Japan (IIRC).

Now, several months later, we can discuss the subject with the benefit of hindsight.

In my case, I work for a small-town newspaper and there was one bank in a neighboring county that failed (due to lots of construction loans that could not be paid back because the houses weren't sold) and was taken over by a bank based in my county. The FDIC insured the deposits, so nobody lost money, "my" bank took over, and everything was back to normal the next day.

Could this have happened on a larger scale, with healthy banks like BOA taking over Goldman Sachs and other entities that in TTL would have been allowed to fail?

The United States has a legal procedure in place to deal with institutions that are "too big to fail". It is called anti-trust legislation. AIG, Fannie Mae, Freddie Mac, Goldman Sachs and all the rest should have been taken over by either FDIC or another appropriate agency. This could and should have been done. The bailout money that was given to the crooks could have been used instead to create a workout agency similar to the agency created during the savings and loan crises and the toxic assets owned by the failed institutions moved into the workout agency. Then the institutions deemed "too big to fail" could be broken up into small pieces and their good assets sold off to regional banks.

Then, here is how you fix the mess they caused.
Subprime mess - a few hundred thousand mortgage auditors/counselors should have been hired to review every sub prime loan. Some borrowers qualified for prime loans but were given sub prime loans instead. These should have been rewritten as prime loans. Many borrowers were qualified on the teaser rates, not the eventual reset rate. These loans should have been rewritten based on the size mortgage that the borrower could qualify for given their current income. The money that was used to bail out the people who caused this mess should have been given to the homeowners instead so that they could refinance their homes at payments they could actually pay.

Derivitave mess - Many banks failed because they had assets on their books that cannot be valued. These assets have a value of course, the value is some function of whatever payments are actually made. The media called these derivitaves "toxic assets". The federal government should have taken these toxic assets from the failed institutions and created a workout agancy like they did during the savings and loan crises and had the workout agency hold the toxic assets to maturity. This actually would have yielded a large profit, the assets aren't worthless, it is just that banking regulations force banks to put a value on assets and it is not possible to put a value on these "toxic" assets.

Anti-trust actions. Any institution that was deemed too big to fail would be sliced up into small pieces and sold off to regional banks.

These actions would have protected the asset holders, saved the housing industry, and ended the careers of the people who caused this mess. All without one dime of taxpayer money going to the swindlers who caused the problem.

There would have been no bailout, instead federal money would have been used to take over troubled assets so that these could be worked out over a number of years and the good assets could be sold to regional banks.

This is exactly what was done to resolve the savings and loan crisis. The taxpayers made money on that one because the resolution trust made money on the troubled assets that it took over.
 
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