Too Big to Fail is a MYTH.

[achilles28]

In Jan 2008, the total asset value (pre-crash) of all US banks was ~12 Trillion USD.
http://www2.fdic.gov/idasp/main.asp

Current losses suffered by US banks are estimated at ~2 Trillion USD.
http://www.reuters.com/article/idCNL554155620091105?rpc=44

To date, the total cost of Government intervention to stabilize the economy is estimated at ~3.5 Trillion USD.
http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

Total Losses (Public and Private) = ~6 Trillion.

If the bailout never happened, half of US Banks would have survived. The prudently managed Regional Banks would quickly grow to fill the vacuum left by irresponsible National Banks. These would become the new Citi's, BoA's and Goldmans. This is how Capitalism is supposed to work.

 

[achilles28]

Another perspective:

The total value of the US mortgage market is ~14 Trillion (commercial and residential).

The total residential mortgage delinquency rate is 10% (and commercial, less).
http://www.bloomberg.com/apps/news?pid=20601068&sid=apgWNuCmIQ4I

The bailout only allocated 850$ billion to prop the consumer economy.
http://money.cnn.com/news/storysupplement/economy/bailouttracker/index.html

Even if 15% of all mortgages defaulted and went to zero tomorrow, the total economic cost (850$ Billion included) would be ~3 Trillion USD.

Total Losses (Public and Private) = ~3 Trillion.


Why did the "Too Big to Fail" route cost America an extra 3 Trillion Dollars?

- Derivatives. Credit Default Swaps on MBS paper and Corporate Debt underwritten on insolvent Companies (Bear/Lehman/WaMu) compounds outstanding debt obligations. The AIG Bailout and the FED backstopped all this derivative crap instead of letting the sellers of it (BoA, Goldman, JPM) go bankrupt. Nobody knows the total cost to hedge outstanding short derivative exposure during the crash on all these defunct (and would-have-been defunct Companies - Goldman, Merril, JPM etc). But it's multiples of the MBS/CDO or Debt loss (1.5 Trillion in MBS losses alone plus the big Corporate Bankruptcies (Bear, Lehman, WaMu) plus hundreds of smaller Banks)

- Most of the taxpayer bailout (Trillions) went to purchase stocks on bankrupt companies (pump-and-dump), purchase toxic paper at full market value (to save large banks that need not have been saved), and guarantee Fannie and Freddie mortgages to keep a bid under *subprime* real estate prices. Subprime buyers (bottom 20%) having little-to-no effect on the economic recovery. In essence, a taxpayer-funded bailout for the Chinese/Japanese and Pension fund holders of GSE debt that should have gotten a big haircut

Equals?

3 Trillion in net Graft to Americas Largest Banks and Foreign Bankers (Chinese & Japanese) courtesy of the US Taxpayer

 

[nutmeg]

In essence, a taxpayer-funded bailout for the Chinese/Japanese and Pension fund holders of GSE debt that should have gotten a big haircut. More graft.
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Just as an example, ya think if you plunk down $100 million for triple A paper, the buyer would make an attempt to know what he is buying rather than just accepting the rating at face value.

Take this Prozac, it's FDA approved, don't worry about the side effects. Who does that?

Imo, when they don't manage money carefully or waste it, ironically the conclusion is they have too much money.

 

[achilles28]

Quote from nutmeg:



Just as an example, ya think if you plunk down $100 million for triple A paper, the buyer would make an attempt to know what he is buying rather than just accepting the rating at face value.


Imo, when they don't manage money carefully or waste it, ironically the conclusion is they have too much money.

Yep. I think the quid pro quo here was, once burned, twice shy.

Imo, the Fed wanted continued foreign participation in Treasuries to keep rates from taking off - not necessarily to bailout China/Japan - but to save US real estate, and by proxy, Wallstreet from plummeting even further.

But that argument is really a load of crap. US national debt was under 9 Trillion at that point (2008) and manageable. The decision to bail Wallstreet and GSE bondholders pushed us over the cliff, financially. Now we're the next Greece, after Italy, Spain and the UK. Kleptocracy.

 

[peilthetraveler]

Quote from achilles28:

Now we're the next Greece, after Italy, Spain and the UK.

Funny...in those countries they say they are the next U.S.A.

 

[Martinghoul]

I disagree with many of your conclusions, achilles, but what else is new... It's boring to go into detail again, so I won't do it.

At any rate, your calculations take place in a counterfactual universe, so it's all sorta moot.

 

[Lethn]

There is nothing wrong with his conclusions as far as I can see, too big to fail is a myth perpetuated by the government, the only reason anyone thinks these banks are too big to fail is because they are being told to.

 

[achilles28]

Quote from Martinghoul:

I disagree with many of your conclusions, achilles, but what else is new... It's boring to go into detail again, so I won't do it.

At any rate, your calculations take place in a counterfactual universe, so it's all sorta moot.

I'd like to hear your argument, Martin. The numbers are good. So not sure what you mean by "counterfactual".

 

[Martinghoul]

Quote from achilles28:

I'd like to hear your argument, Martin. The numbers are good. So not sure what you mean by "counterfactual".

I am not suggesting your numbers are bad, achilles... By "counterfactual" I mean that your numbers are based on losses encountered by the system with the various govt backstops, programs etc. You don't have a good way of knowing what these losses would have been without govt intervention.

 

[jagadish]

Merrill Lynch has failed.