Sheila Bair Answers The $6.4 Trillion Question

Why was everyone so afraid in the Fall of 2008?

Posted by Cheyenne.

The story, as Maude would say, is ludicrous: we bailed out the mega banks to prevent an even bigger depression than the one that ensued; we bailed out the mega banks so companies could make payroll; we bailed them out so our ATM machines would keep working; to stave off attacks by giant lizards.

No one has ever produced a shred of evidence to support any of these assertions.

Moreover, the evidence that has emerged since the TARP bailout passed has uniformly undercut the factual claims made in support of the bailout.  Credit markets tightened up?

The Federal Reserve itself debunked this claim with contemporaneous data years ago.

And yet the myth that the bailouts saved us from peril persists to this day.  The main force behind the myth’s staying power is the passion of its promoters: they seem genuinely scared that something earth-shattering was about to happen in early October 2008.

But what?

Ignoring the clichéd and inherently speculative doomsday scenarios, we had never even seen a high-ranking official from the government address this narrowly factual question: exactly what set of financial conditions spooked officials into agreeing to a $700 billion bailout?

That changed yesterday, when Sheila Bair, who headed the FDIC from 2006-11, showed up for an online Q&A about her first-hand insider’s account of the crisis, Bull by the Horns, held at firedoglake.

Any number of luminaries participated in the discussion, which ran some 175 entries, but the question most pertinent here—no. 39 in the thread—was lodged by someone calling herself MauiMom. Referencing an earlier discussion in which her question went unanswered, MauiMom asked Ms. Bair as follows:

"I'd like to revisit a question I ask every time this topic comes up, but for which I never get an answer.  Could you [and/or Bill Black] talk some about what ‘great crisis’ was ‘averted’ in 2008-09 by plying the banks with all of that taxpayer money?  Paulson is running down the hall with his 3 page memo about how HE should be given billions to distribute to the banks, and the financial end of the world is predicted, but really, what did they fear?   And what other paths could they have taken when confronted with the massive fraud and mismanagement?"

After asking this question numerous times, of numerous accomplished folks, I still don’t feel like I have an answer: what WAS this big, scary, "meltdown of the financial system" or whatever that herded Congress and the Administration to rush through TARP and shower money on the banks?

To Sheila Bair’s credit, and befitting her book’s title, she addressed--in thread entry no. 50--MauiMom's question head-on.  Here is what Ms. Bair said:

You are right to ask this question.  All the trillions we threw at these banks – if you include all the Fed loans– the public deserves better analysis and explanation.  In late 2008, we were dealing with a liquidity crunch.  Too many large institutions borrowed from each other to fund themselves with short term loans – what is called the “wholesale” market.  Ironically, even as Main Street depositors were leaving their money in the banks, the banks themselves got scared and didn’t want to lend to each other.

Another source of bank funding – money market funds – were also cutting off the spigot.  So that while most were solvent – they had enough capital to bumble through- the short term funding they used to maintain operations was being disrupted.  That was the main problem that needed to be fixed in late 2008, and in retrospect, it could have been fixed with a lot less money.  The bigger problem for the economy was the huge number of troubled mortgages, but we never really fixed those.

Kudos to Ms. Bair for answering the question.  We’ll leave a discussion of the answer’s ramifications and merits for another day.

Go read the whole Q&A.  Bill Black answers reader questions as well.

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Blood in the streets if the bailout is not passed...

"Bow your heads before Henry Paulson..."

The famous 'Paulson threatened martial law' speech from Brad Sherman.

Sherman exposes the Kanjorski-Paulson martial law, blood-in-the-streets fear mongering, which as we've demonstrated on multiple occasions was nothing more than highly granulated hyperbole meant to frighten a financially illiterate Congress and media corps into gentle acquiescence to the demands of their Sith Lords.

TARP was one giant lie designed to fleece taxpayers and benefit bankers.  And despite overwhelming public opposition, it worked.

The reason why is even more distasteful to contemplate:

Congress is populated by members with extremely low financial IQs.  Eyes glaze over, knees get weak, and the checkbook opens automatically.  Talk about ATMs failing and you'll get whatever bailout you need, Sir Paulson.

Comments

[DailyBail]

Cheyenne

This was your question:

Exactly what set of financial conditions spooked officials into agreeing to a $700 billion bailout?

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It was a combination of Paulson fear-mongering behind closed doors, threatening martial law, blood in the streets, and the fact that the stock market had tanked when TARP was voted down the first time in the House.

Those 2 factors are what spooked officials into voting yes.

I wasn't actually very impressed with Sheila's answer to the question. She explained that inter-bank lending had dried up. She calls it a liquidity crisis. But why was it a liquidity crisis?

Because everyone was insolvent, and didn't have funds, was leveraged above 30-1, etc. This crap about a liquidity crisis is bullshit and needs to stop. Bair is protecting her turf here, she can't admit everyone was insolvent since she was the FDIC chair at the time. But they all were. Every damn one. And most of them still are. Make them mark assets to market and the tally will come up negative.

Here are a couple links

[DailyBail]

http://dailybail.com/home/adam-levitin-tells-congress-citigroup-bank-of-america-jpmorg.html

http://dailybail.com/home/wikileaks-cable-systemic-insolvency-is-now-the-problem-globa.html

http://dailybail.com/home/santelli-battles-kashkari-liesman-ditch-the-band-aids-and-du.html

http://dailybail.com/home/less-than-a-3-percent-drop-in-asset-values-could-wipe-out-wa.html

[DailyBail]

CNBC's Becky Quick Is A Bailout Apologist And Believer In Paulson's Myth Of Societal Breakdown If TARP Hadn't Passed (Run For Your Lives!)

http://dailybail.com/home/cnbcs-becky-quick-is-a-bailout-apologist-and-believer-in-pau.html

[DailyBail]

A new academic paper by economists from MIT and the NY Fed proves that creditmarkets were NOT "frozen" during the crisis.

http://dailybail.com/home/the-unbearable-lightness-of-tarp-reporting.html

[Pitchfork]

Three cheers to MauiMom for trying. Great post and discussion on this. Steve is right about Bair's CYA exercise -- although at first I thought "solvent" was just a typo. Natch.

[DailyBail]

The FDL discussion is great. Just finished reading it all.

http://fdlbooksalon.com/2012/11/18/fdl-book-salon-welcomes-sheila-bair

[Cheyenne]

DB--

What I found interesting about Bair's answer--aside from the novelty of seeing a public official acknowledge the question--was her reference to tightening in the "wholesale" credit market. That alone is an eye-opener, because never before has an official publicly rejected the myth inevitably trotted out by mainstream media commentators, namely, that TARP saved us from a collapse in retail (i.e., Main Street) credit.

Bair's answer buttresses David Stockman's account of REAL causes for the panic (as opposed to Paulson's bedtime stories), which amplifies what is meant by "wholesale credit:"

"So the run on money was not at the retail teller window; it was in the canyons of Wall Street. The run was on wholesale money—that is, on repo and on unsecured commercial paper that had been issued in the hundreds of billions by financial institutions loaded down with securitized toxic garbage, including a lot of in-process inventory, on the asset side of their balance sheets."

http://www.fedupusa.org/2012/05/the-emperor-is-naked-david-stockman

So wholesale = mortgage-backed securities, basically. And to the extent credit tightened, it was only in this market, "not in the Main Street banks and savings and loans; these institutions owned mostly prime quality whole loans," according to Stockman.

What it all boils down to, in my view, is this: only one public official who saw the crisis first-hand, Sheila Bair, has taken a position on specifically what set off the panic in Fall 2008, and that position is squarely at odds with the Official Myth that's been "reported" in the popular press for four years.

[DailyBail]

I think Sheila further answered the question in other interviews when she said that most of TARP was for Citigroup. I was trading during this time and remember it well. Markets were in freefall. Paulson felt he had to do something big. $700 billion was just an arbitrary number that he hoped would sound big enough to calm markets. That's why the bill was just 3 pages with no specific and no oversight. There was no real plan in the first few days. Just a big announcement with a big number.

Paulson could see Goldman heading to below $50 per share. Morgan Stanley below $15 at the time. Citi tanking. Lehman gone. AIG toast. Money funds were having trouble. They were making it up as they went along.

Paulson On Paulson: "We Had No Choice But To Fly By The Seat Of Our Pants, Making It Up As We Went Along"

http://dailybail.com/home/paulson-on-paulson-we-had-no-choice-but-to-fly-by-the-seat-o.html

[DailyBail]

Here's a bailout that I had forgotten about completely.

http://dailybail.com/home/brand-new-35-billion-bailout-for-criminally-irresponsible-wh.html

[DailyBail]

The reasonable conclusion to draw is one we have been making here at The Daily Bail since the crisis first started: TARP and the other bailout measures were always about saving the banks, and had almost nothing to do with saving the real economy.

http://dailybail.com/home/more-evidence-that-tarp-and-the-bank-bailouts-failed.html

Good stuff from Dr. P.

[DailyBail]

TARP was one giant lie designed to fleece taxpayers and benefit bankers. And despite overwhelming public opposition, it worked. The reason why is even more distasteful to contemplate:

Congress is populated by members with extremely low financial IQs. Eyes glaze over, knees get weak, and the checkbook opens automatically. Talk about ATMs failing and you'll get whatever bailout you need, Sir Paulson.

http://dailybail.com/home/exposed-the-lies-of-hank-paulson-watch.html

[Cheyenne]

Oh, yeah. TARP was undoubtedly passed to due to Wall Street panic over its own portfolios and had ZERO to do with Main Street. Again, David Stockman sums up the situation quite bluntly in an interview:


Q. Why was TARP a bad idea? I mean, we had President Bush, we have President Obama, we have Tim Geithner, we have a bunch of Nobel Prize-winning economists telling us—we have Warren Buffett telling us, “TARP is the only reason you and I are still talking. It’s the only reason why there are still lights on.”

A. Well, first of all, that’s urban mythology. I don’t think there was panic on Main Street in America. What was happening was that the big pyramids of debt on Wall Street were coming crashing down, and had we allowed nature to take its course, maybe Goldman Sachs’ stock would have gone down to $10. But that’s their problem and that’s the problem of speculators who owned the stock, not a systematic problem for the economy.

http://www.youtube.com/watch?v=Lq9NwyQSzhk (3:20 mark)

But public officials like Bair don't talk like that. Their trash-talk is of a more elliptical nature, using terms like "wholesale credit." Make no mistake, though, she threw the Wall Street party line under the bus here.

[Pitchfork]

"What it all boils down to, in my view, is this: only one public official who saw the crisis first-hand, Sheila Bair, has taken a position on specifically what set off the panic in Fall 2008, and that position is squarely at odds with the Official Myth that's been "reported" in the popular press for four years."

That's a good point. I think I related it here a couple of weeks ago, but my wife spoke to friends recently who really, truly thought that the ATM's would quit working, people's savings would be gone and the whole economy would stop if we didn't bail out the banks. And nice recall, Cheyenne, on the David Stockman speech.

[Pitchfork]

"I don’t think there was panic on Main Street in America. What was happening was that the big pyramids of debt on Wall Street were coming crashing down."

Exactly. This is the choir preaching unto one another (or something like that), but that's something we had been saying all along -- that Main St. didn't effin' know enough to panic over Lehman Bros. I don't know anybody, myself included, who really thought he needed to take his money out of Local Co-operative Bank, Inc. because some assholes in New York were losing their shirts. Nobody.

Unfortunately, this kind of bull shit happens all the time wherever you have elites running things for their benefit. At every single level, whenever you have insiders and outsiders, the insiders lie their asses off and expect to get away with it. And they usually do get away with it. I'm seeing it among TPTB in my local area right now. Stuff I KNOW isn't true, but is being put out by PR guys and taken down dutifully by local reporters as gospel truth.

I don't have a fully developed theory of why, but that ^ is the reason we need a vigilant, pissed-off middle class. One of my favorite social theorists (Max Keiser ;-) ) discusses it here:

http://www.youtube.com/watch?v=ciXw-4K-Gls

[DailyBail]

Cheyenne

I thought it was a great story. And I like Sheila Bair. I just got put off by her line about liquidity crisis, etc.

Pitchfork

Great clip from Keiser. Had never seen it before.

[Big M]

OK, as to Bair's answer, she makes two false statements in the first paragraph, possibly unintentionally. First, there was no liquidity crisis. The banks had printed up literally trillions of dollars. They could have easily used the money to "loan" to people, had they cared to. By the way, bank "loans" are ALL phony, which brings me to her second false statement about Fed "loans."

What you have here is blatantly false labeling. Those were not "loans" at all. The Fed somehow managed to have everybody call them loans, when in fact, all of that money they handed to all those foreign banks weren't loans; the Fed used the money to buy back all of the phony Credit Default Swaps, bundled mortgages, etc., that they had sold to those banks, because the banks told them that if they didn't buy it all back, they would be exposed globally. They made them look like next to zero-interest loans for PR purposes. You won't see any of those foreign banks paying one cent to the Fed. Keep an eye out, and see if you see any payments from those banks on any of the Fed's balance sheets.

[Big M]

Sorry, I made a mistake. I meant to say that the FED had printed up trillions of dollars.

[Cheyenne]

"You won't see any of those foreign banks paying one cent to the Fed."

It is most curious that the biggest users of the Fed's commercial paper funding facility were foreign banks, and that the biggest domestic user was the leader in credit default swap issuance ($3 tril, if memory serves):

http://online.wsj.com/article/SB10001424052748703865004575648942102949502.html

Is that what you're referring to, Big M?

[DailyBail]

What you have here is blatantly false labeling. Those were not "loans" at all. The Fed somehow managed to have everybody call them loans, when in fact, all of that money they handed to all those foreign banks weren't loans; the Fed used the money to buy back all of the phony Credit Default Swaps, bundled mortgages, etc., that they had sold to those banks, because the banks told them that if they didn't buy it all back, they would be exposed globally. They made them look like next to zero-interest loans for PR purposes. You won't see any of those foreign banks paying one cent to the Fed. Keep an eye out, and see if you see any payments from those banks on any of the Fed's balance sheets.

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Sorry Big M.

Those were dollar swaps between the Fed and foreign central banks. And they have been accounted for by the Fed.

The Fed make almost $90 billion in profit last year, all of which was given to the Treasury at the end of the year, as is done every year by law. I'm not a fan of the Fed, but I'm also not a fan of false information. And there was BOTH a liquidity and solvency crisis. The Fed was flooding the system with liquidity but banks were still NOT lending to each other, because everyone was insolvent.

[DailyBail]

Here is the exchange I was referring regarding the dollar swaps.

http://dailybail.com/home/alan-grayson-which-foreign-banks-got-the-feds-500-billion-be.html

[DailyBail]

Cheyenne

What 'Big M' is referring to is a rumor/meme that's out there that basically states that the emergency Fed Loans to US and foreign banks were NOT paid back. That the Fed lied about this and has covered it up, etc. Part of this meme states that the Fed was blackmailed by European banks, otherwise they threatened they would go public with tales of fraud committed by US banks.

Pardon me while I laugh.

Think for a second about this theory. It's based on the idea that the Fed might actually care about fraud by US banks. The problem has never been finding examples of fraud, the problem is and will remain finding DOJ prosecutors who actually give a shit.