Posts tagged zombie banks

Did you know that Iceland is actually a failed hedge fund where they believe in elves?

By admin on April 9, 2009
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Michael Lewis writing for Vanity Fair: “Wall Street on the Tundra”

Iceland’s de facto bankruptcy—its currency (the krona) is kaput, its debt is 850 percent of G.D.P., its people are hoarding food and cash and blowing up their new Range Rovers for the insurance—resulted from a stunning collective madness.

What led a tiny fishing nation, population 300,000, to decide, around 2003, to re-invent itself as a global financial power?

Michael Lewis explains:

Iceland was entirely new to his experience: a nation of extremely well-to-do (No. 1 in the United Nations’ 2008 Human Development Index), well-educated, historically rational human beings who had organized themselves to commit one of the single greatest acts of madness in financial history.

The fundamental transformation came in 2003:

Iceland’s three biggest banks had assets of only a few billion dollars, about 100 percent of its gross domestic product. Over the next three and a half years they grew to over $140 billion and were so much greater than Iceland’s G.D.P. that it made no sense to calculate the percentage of it they accounted for.

Riot in Reykjavik - Jan 20, 2009

Riot in Reykjavik - Jan 20, 2009

I understood the basics of the story of Iceland’s collapse from reading the news reports of riots as the global financial system melted down, but I learned of this amazing Vanity Fair article when I listened to CBC’s “The Current” podcast on the way home from work last week. The March 27th show dug deeper on a point raised in the ”Wall Street on the Tundra“ piece.  Many of these “well-educated, historically rational human beings” we’re susceptible to believing myths even more ridiculous than the one that there was little risk inherent in leveraging their country’s entire 2003 economy 47 times by 2007…

The majority of Iceland will not deny the existence of elves:

According to Lewis, when the American aluminum giant ALCOA decided that it wanted to build a smelter in Iceland, the company had to first verify that it wouldn’t be trespassing on land occupied by “hidden people” or as most of you would know them… elves.

Now, as far as we know, most ALCOA officials don’t believe in elves. But ALCOA does acknowledge that it paid hard cash to make sure the future site of its smelter was elf-free.

In the CBC interview, we learn that there are consultants that hire themselves out to companies to ensure potential worksites are elf-free and that sites have even been moved because of their interference with the “hidden people.”

Slate.com elaborates:

According to a poll conducted in 2007, 54 percent of Icelanders don’t deny the existence of elves and 8 percent believe in them outright, although only 3 percent claim to have encountered one personally.

All this begs the question: is it really a surprising coincidence that Iceland, whose former Prime Minister David Oddsson – “the architect of Iceland’s rise and fall” – was “under the spell of Milton Friedman,” AND that it also has a burgeoning elf detection industry?

Great myths require fertile soil.

Zombie Banks Devour Tim Geithner’s Brain

By admin on March 22, 2009
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I just read Krugman’s lament. The Obama Administration, and specifically Treasury Secretary Tim Geithner have, at long last, put forward a plan. But it’s a terrible plan that doesn’t address the fundamental rot at the heart of the global economic crisis. Or as Krugman put it, “The zombie ideas have won.”

From the Times article Krugman references, it is clear that his frustration is justified, in that the US Treasury Dept. just handed over a trillion dollar blank cheque to the zombie banks. Furthermore, even with another trillion dollars thrown into this bottomless pit, the people saddled with the responsibility of fixing the banking sector (and, more importantly, the credit markets) are still underestimating the scope of the crisis and are longing for the good old days of inflating bubbles.  

The proposal’s fundamental assertion is that the nuclear waste from the securitized sub-prime morgage market is being undervalued and that the best way to fix this problem is for the US government hand private investors “generous subsidies, in the form of low-interest loans, to coax investors to form partnerships with the government to buy toxic assets from banks.”  The moral hazard inherent in this proposal is lost on Tim Geithner. As Krugman put it: “this is an open invitation to play heads I win, tails the taxpayers lose.”

The biggest problem is that these zombie banks are dead. They are under-water in a sea of red ink, but some of them have reached the magical level of systemic risk that’s made them “too big to fail.” And in reaching this disgusting size, the zombies managed to completely envelop the entire American political system in their grip. 

As political unpopular as it may to seem, the only sensible proposal is temporarily nationalizing the banks (and de facto banks, like A.I.G.), while freezing all foreclosures.  This is the only way to amputate the zombie appendages currently strangling the global economy.

What American cable news thinks about AIG bonuses.  

By Stream of Consciousness on March 16, 2009
This entry is filed under Media, Politics, TUMBLD and tagged , , .View Comments

What American cable news thinks about AIG bonuses.  

The Zombie Problem

By admin on March 6, 2009
This entry is filed under General and tagged , .View Comments

March 6, 2009

Any keen observer of the deepening financial morass we’re faced with, and there’s many armchair pundits – myself included,  recognizes that the problem began with sub-prime mortgages and the securities they were packaged in to. The investment banks  that bought and sold these highly speculative “investments,” their insurers who underwrote them *ahem* A.I.G. *ahem* and the credit rating agencies that provided the toxic waste with AAA ratings can all take their healthy share of the blame for how we got to where we are.

The financial media also deserve a lion’s  share of the blame, and Jon Stewart’s evisceration of CNBC (US link / Canadian link) this week was truly “Must See T.V.”  As an aside, there’s also been some excellent commentary on what journalists can learn from this comedian, who many seem to think is doing a better job reporting than most reporters. [link via Jay Rosen]

But there’s a bigger problem: how US political leaders are structuring the bailout.

To contextualize how the bailouts began, the philosophies guiding the decisions and the characters and personalities behind the scenes that presided over the both the largest financial meltdown in history and, at that time, the largest (failed) financial bailout I highly recommend PBS Fronline‘s indispensable look Inside the Meldown, an hour long documentary that aired several weeks ago.

So where does this all leave us?

Tim Geithner, Obama’s Treasury Secretary and Federal Reserve Chairman Ben Bernanke are pursuing a strategy of throwing good money after bad buying these “troubled assets” and propping up the “zombie” financial institutions one bailout failure at a time.

NYT Columnist, and 2008 Nobel Prize winning economist, Paul Krugman points out today:

Earlier this week, Ben Bernanke, the Federal Reserve chairman, was asked about the problem of “zombies” — financial institutions that are effectively bankrupt but are being kept alive by government aid. “I don’t know of any large zombie institutions in the U.S. financial system,” he declared, and went on to specifically deny that A.I.G. — A.I.G.! — is a zombie.

This is the same A.I.G. that, unable to honor its promises to pay off other financial institutions when bonds default, has already received $150 billion in aid and just got a commitment for $30 billion more.

The truth is that the Bernanke-Geithner plan — the plan the administration keeps floating, in slightly different versions — isn’t going to fly.

In other words, US political leaders, including Obama himself, better remove their heads from their asses immediately lest we all fall victim to Obama’s own dire worst case scenario: “an economy that sputters along for not months or years, but perhaps a decade.”

-@andrewmcintyre