Europe’s Inevitable Plight

May 1, 2010 · Posted in Foreign Policy · Comment

Europe vs America

The failing and fundamentally flawed project called the European Union continues its slow, yet unstoppable, slide toward mad grandeur, imperialism, tyranny, collectivism, and fiscal chaos.

It is now coming to a minor clash between citizens within the individual European countries, and the governments who exploit them on behalf of the EU.

I do not believe that the European Union will get that same kind of free ride that the the growing central US government has enjoyed over the past two centuries. On the contrary, I expect opposition and healthy cynicism toward this ongoing centralization to grow incrementally. In particular the Eastern European nations have had their instructive lessons when it comes to becoming protectorates of an imperialistic and tyrannical force.

The US has had, over the centuries, the advantage of having a large part of public opinion behind the idea of a close union of American states (finding symbolic manifestation and direction in the War of Northern Aggression), an important factor when it came to enabling its central government to grow without major limitations in its way ever since.

This is not so much the case with Europe, at least not yet.

Many people in European countries are rather reluctantly moving along with the developments toward a more centralized union. I remember, growing up in Berlin, when politicians aspiring offices within the European government started the first campaigns for European parliament. People had no way of assigning any relevance to these efforts. What did we care for some guy asking us for his vote so he can pursue a career in Brussels? The detachment of European citizens from the European political process is completely justified.

So long as it didn’t affect Europeans fundamentally in their lives, they sort of acquiesced with this process. Now this is changing. People are beginning to notice that their own hard earned money is on the line to subsidize corruption in other member countries. This sentiment did flare up several times over the past decades, but never came to a culmination in the way that it is now. Populist right wing parties, whom I obviously have no sympathy for in general, have really been the only ones consistently pointing out these problems. So long as mainstream parties don’t pick up on this, I expect the popularity of such extremists to grow over the next 5-10 years.

Fiscal Discipline?

It is also noteworthy that in the US, individual states (except Vermont) are, by and large, required to balance their budgets:

All the states except Vermont have a legal requirement of a balanced budget. Some are constitutional, some are statutory, and some have been derived by judicial decision from constitutional provisions about state indebtedness that do not, on their face, call for a balanced budget. The General Accounting Office has commented that “some balanced budget requirements are based on interpretations of state constitutions and statutes rather than on an explicit statement that the state must have a balanced budget.”

I would be the last to claim that the US states are a beacon of fiscal responsibility. Many deficits are hidden in the form of substantial public sector pension plans. But as a tendency, existing restrictions provide for fewer frictions between member states.

Such provisions don’t exist in European countries. What does exist is a completely clawless tiger called the “Stability Treaty”. What it basically says is this: “It would be nice if you governments could try not to exceed a budget deficit of 3% of GDP. If you do, we’ll give you a big and instructive wag of the finger!”

This treaty is now, more than ever, null and void, but nobody likes to talk about it. The fact of the matter is that if you violate the treaty you won’t even get a wag of the finger, but you’ll be rewarded with more money! As I said over a year ago:

The 3% ceiling won’t matter anymore from hereon. Consider the European stability treaty dead. One member state after another will violate the requirements. The fact that a bailout of some Euro states by others is discussed, just shows how torn this European Union really is, how severe its imbalances are. With discrepancies like these, it is completely unfeasible to maintain a currency union. The Euro will keep taking its beating for it.

And it is precisely this which is currently stirring up the debate within Europe.

Why Do We Have to Pay?

The head of the ECB visited Berlin as Germans oppose the Greek bailout:

European Central Bank President Jean-Claude Trichet is on a diplomatic mission to Berlin as Germany’s reluctance to bail out Greece helps fan a fiscal crisis now burning around the euro region’s periphery.

Trichet and International Monetary Fund Managing Director Dominique Strauss-Kahn will brief German parliamentary leaders in Berlin around noon today about the $60 billion aid package for Greece, which has met with opposition in Europe’s biggest economy. The joint European Union-IMF package would require Germany to stump up the biggest individual loan to Greece.

“It’s a sales pitch in front of an audience that needs it,” said Jacques Cailloux, chief European economist at Royal Bank of Scotland Group Plc in London. “The lawmakers probably need it spelled out that this is not about financing luxury pensions in Greece. Not helping Greece will unfortunately have a direct impact on the euro-area economy and German jobs.”

Standard & Poor’s yesterday cut Greece’s credit rating to junk status and slashed Portugal’s two notches, intensifying a bond market sell-off across the southern euro region amid concern that debt-ridden countries will struggle to refinance their loans. The crisis has highlighted the absence of a common fiscal policy to cement Europe’s monetary union, frustrating Trichet’s efforts to promote a “common destiny” for its 16 members.

‘Why do we have to pay?’

“Why do we have to pay for Greece’s luxury pensions?” Germany’s biggest-selling tabloid newspaper, Bild Zeitung, asked on its front page yesterday. Almost 60 percent of Germans don’t want to help Greece, Die Welt newspaper reported, citing a survey of 1,009 people.

German Finance Minister Wolfgang Schaeuble asked Trichet and Strauss-Kahn to speak with lawmakers to “facilitate direct insight into the actions as they stand.”

Trichet, Strauss-Kahn and Schaeuble will brief reporters on the talks at 2:30 p.m. in Berlin, a finance ministry spokeswoman said. Trichet declined to comment on the S&P downgrades yesterday.

In Greece, Prime Minister George Papandreou will speak around 8 p.m. local time at a conference entitled “Shaping the Agenda: In the face of a crisis for Greece and the EU.”

Trichet, who once called himself “Mr. Euro,” has been powerless to stop the currency’s 12 percent slide against the dollar in the past five months as politicians haggle over aid for Greece. While he presides over interest rates for the region, he has no say over how taxpayers’ money is spent.

IMF Money

Trichet’s appearance with Strauss-Kahn to promote the joint package comes less than two months after he dismissed the IMF’s financial involvement in a rescue package as inappropriate. Trichet argued that money from the fund would show Europe is incapable of solving its own crises.

“Trichet can only give his opinion,” said David Milleker, chief economist at Union Investment in Frankfurt. “The ECB can’t do anything else. It’s up to the politicians now.”

German Chancellor Angela Merkel is facing a crucial state election on May 9, which could explain some of her reluctance to write a check for Athens, said Juergen Michels, chief euro-area economist at Citigroup Inc. in London.

“We’ve never been in a situation like this before so it’s not that unusual to have national interests supersede those of the euro area,” he said.

Merkel’s Audience

Merkel drew applause from an audience in North Rhine- Westphalia this week when she said that “Greece must do its homework” before getting any aid.

The problem is the crisis is now rapidly spreading, undermining confidence in the euro and even fueling speculation it could splinter.

“The most frustrating point in all of this is that those who followed the rules must now help out those who didn’t,” Cailloux said.

Portugal, Ireland and Spain are “conspicuously vulnerable” and may need funding, former IMF chief economist and Harvard Professor Kenneth Rogoff said in an interview this week.

Euro-region members are considering holding a summit to discuss releasing aid to Greece, an official from the Spanish EU presidency, who declined to be named in line with policy, said yesterday.

In the meantime, “it’s crucial for Trichet to regain his stature by reminding lawmakers that they are all in the one boat,” said Michels.

Trichet on April 12 said the ECB wants “the governments of the euro area to live up to their responsibility.”

“Their countries share a common destiny,” he said.

Brain bending and fuzzy conceptual nonsense such as the statement from Jacques Callioux is of course completely inevitable. He is doing his job, that’s all and that’s OK. But I hope he doesn’t expect rational individuals to listen to him for a second. There is absolutely no justification for bailouts whatsoever, be it a corporation or, worse yet, a gang of people controlling police, army, and prisons, a.k.a the government.

The German government also held a special session on Greece:

Chancellor Angela Merkel’s Cabinet met to debate help for Greece as Europe’s growing debt crisis tests her refusal to rush German approval of aid.

Key ministers stayed on after the weekly Cabinet session in Berlin today to discuss disbursing Germany’s 8.4 billion euro ($11 million) share of a European Union-International Monetary Fund bailout. A government spokesman declined to provide further details.

Merkel is insisting Greece commit to several years of deficit reduction as a cut in the nation’s debt rating to junk yesterday drove up borrowing costs from Italy to Portugal and Ireland and boosted indicators of corporate credit risk around the world.

Action “has to be done now, has to be done very fast,” Organization for Economic Cooperation and Development Secretary General Angel Gurria said in an interview today with Bloomberg television in Berlin before he was due to meet Merkel. “It’s not a question of the danger of contagion. Contagion has already happened. This is like Ebola. When you realize you have it you have to cut your leg off in order to survive.”

European stocks slid for a second day and the cost to insure against bond losses rose. Greek two-year note yields soared to 21.4 percent. The euro traded near a one-year low against the dollar.

To counter with yet another (German) limb-metaphor (since this seems to be the intellectual level of this debate): When you extend your small finger, people will want your whole arm. This is precisely what we’ll see. Once German taxpayers are on the hook for a Greek bailout, pension recipients in Spain, Portugal, and Italy are going to get in line and we will have the same debates. This is completely inevitable.

How much is needed for Greece?

The IMF says this:

International Monetary Fund Managing Director Dominique Strauss-Kahn told German lawmakers in Berlin today that Greece may need as much as 120 billion euros ($159 billion) in aid, Green Party parliamentary spokesman Michael Schroeren said by phone today.

Our dear friends the bankers are saying this:

European policy makers may need to stump up as much as 600 billion euros ($794 billion) in aid or buy government bonds if they are to stamp out the region’s spreading fiscal crisis, said economists at JPMorgan Chase & Co. and Royal Bank of Scotland Group Plc.

No contagion?

European policy makers continue to play down speculation of contagion, with ECB Executive Board member Juergen Stark saying yesterday that Greece should be seen as a “unique case.” Leaders will wait until around May 10 before meeting again to discuss Greece, EU President Herman Van Rompuy said yesterday in Tokyo. He also said there was “no question” of Greece restructuring its debt.

Some economists are optimistic that market turmoil will ultimately force politicians and central bankers to do what’s necessary to rescue the euro region.

Eric Kraus, a strategist at Otkritie Financial Co. in Moscow, said he’s buying Greek bonds on the bet policy makers will eventually strike back.

“Sooner or later those morons in Brussels and Berlin will realize that they are playing with fire, have already been burned, and will have to stop feeding the flames,” said Kraus, who works at a brokerage part-owned by Russia’s second-biggest bank. “Then we should see a very nice bounce.”

Of course the ECB will say there is no contagion. And of course they are as always 100% wrong. Contagion will spread rapidly.

Irony and hypocrisy will always we so rampant and staggering in disasters such as the one above. Thus Kraus is almost right when he makes a statement like the one above. Only that the morons he is referring to are not playing with fire by not bailing out Greece, but rather by considering that very option. Also, the morons don’t only sit in Brussles and Berlin, they also sit in offices in banks in Moscow and have signs on their desks saying “Eric Kraus”.

Merkel’s language already makes it obvious: Germany will go along with the package to bailout Greece, one way or another. She will sell it as a victory to have put strict requirements on the Greek bureaucrats to pursue fiscal discipline once they have been rewarded for their past indiscipline. This is of course how incentives work in the fantasy land of government officials. On the other hand, every sane individual sees it how it is: as sheer and utter madness.

All of this is completely inevitable until people reject the fantasies of interventionism and understand the blessings of voluntaryism.

Tags: bailouts, europe, greece

Bailout Watchdog: TARP Has Increased Risk of Another Crisis

January 31, 2010 · Posted in Government · 2 Comments

As we all know bailouts accomplish nothing but making matters worse, create false incentives, and make all of us poorer. Thus, as can be expected, the TARP watchdog reports:

The government’s response to the financial meltdown has made it more likely the United States will face a deeper crisis in the future, an independent watchdog at the Treasury Department warned.

The problems that led to the last crisis have not yet been addressed, and in some cases have grown worse, says Neil Barofsky, the special inspector general for the trouble asset relief program, or TARP. The quarterly report to Congress was released Sunday.

“Even if TARP saved our financial system from driving off a cliff back in 2008, absent meaningful reform, we are still driving on the same winding mountain road, but this time in a faster car,” Barofsky wrote.

Since Congress passed $700 billion financial bailout, the remaining institutions considered “too big to fail” have grown larger and failed to restrain the lavish pay for their executives, Barofsky wrote. He said the banks still have an incentive to take on risk because they know the government will save them rather than bring down the financial system.

Barofsky also said his office is investigating 77 cases of possible criminal and civil fraud, including crimes of tax evasion, insider trading, mortgage lending and payment collection, false statements and public corruption.

One case concerns apparent self-dealing by one of the private fund managers Treasury picked to buy bad assets from banks at discounted prices. A portfolio manager at the firm apparently sold a bond out of a private fund, then repurchased it at a higher price for a government-backed fund. A rating agency had just downgraded the bond, so it likely was worth less, not more, when the government fund bought it. The company is not being named pending the outcome of Barofsky’s investigation.

Barofsky renewed a call for Treasury to enact clearer walls so that such apparent conflicts are less likely.

Treasury said it welcomed Barofsky’s oversight but resisted the call to erect new barriers against conflicts of interest. The new rules “would be detrimental to the program,” Treasury spokeswoman Meg Reilly said in a statement. The existing compliance rules “are a rigorous and effective method of protecting taxpayers,” she said.

Much of Barofsky’s report focused on the government’s growing role in the housing market, which he said has increased the risk of another housing bubble.

Over the past year, the federal government has spent hundreds of billions propping up the housing market. About 90 percent of home loans are backed by government controlled entities, mainly Fannie Mae, Freddie Mac and the Federal Housing Administration.

The Federal Reserve is spending $1.25 trillion to hold down mortgage rates, and millions of homeowners have refinanced at lower rates.

“The government has stepped in where the private players have gone away,” Barofsky said in an interview. “If we take government resources and replace that market without addressing the serious (underlying) concerns, there really is a risk of” artificially pushing up home prices in the coming years.

The report warned that these supports mean the government “has done more than simply support the mortgage market, in many ways it has become the mortgage market, with the taxpayer shouldering the risk that had once been borne by the private investor.”

Barofsky’s report echoed concerns raised by housing experts in recent months, as home sales and prices rebounded. They warn that the primary reason for the turnaround last year has been billions of dollars in federal spending to lower mortgage rates and prop up demand.

Once that spigot of cash is turned off, they caution, the market will be vulnerable to a dramatic turn for the worse. Daniel Alpert, managing partner of investment bank Westwood Capital, wrote in a report that national home prices are bound to fall 8 to 10 percent below the lows of last spring.

“The lion’s share of the remaining decline will occur in markets that saw sizable bubbles but have not yet retrenched,” he wrote.

Officials from the Obama administration counter that massive federal intervention has helped the housing market stabilize and prevented more dire consequences.

Barofsky’s report also disclosed that, while the Obama administration has pledged to spend $75 billion to prevent foreclosures, only a tiny fraction — just over $15 million — has been spent so far. Under the Making Home Affordable program, only about 66,500 borrowers, or 7 percent of those who signed up, had completed the process as of December.

He said the key to preventing future crises is to reform Fannie Mae and Freddie Mac, create and improve loan underwriting and supervision of banks. He stopped short of endorsing specific proposals for overhauling financial regulation, but said many of the proposals would go far to improving the system.

Sorry, but that conclusion is just hilarious. This really is akin to a woman in an abusive relationship who continues to believe her boyfriend will change and continues to run back to him, no matter how many times she gets beaten up.

The entire article points out how incapable of solving any one problem the government is and concludes with the solutions of “reforming” nationalized banks, “creating” loan underwriting, and doing some more bank supervision. Who does all these things? Of course, that same government! That is supposed to solve the structural problems in the financial system?

No, what needs to happen is to bring down what has brought about the financial crisis in the first place.

Who has created all the excess fiat money that flowed into the system to blow up price bubbles? The Federal Reserve Bank – so just close it down already!

Who has created all the excess credit that blew up the bubble? The fractional reserve banks – so just end the system of fractional reserve banking already!

Who has granted oligopoly status to the rating agencies who one after another failed to assess credit risk appropriately? The SEC – so end the credit rating cartel already!

In fact who has taken away oversight from the stock exchange companies to try and oversee all stock exchanges in the country, missing one giant fraud after another? Which organization was close to Making Bernie Madoff their chairman?? The SEC – so get rid of it already!

Even after some of the worst excesses of subprime lending, who proudly remains the sole subprime lender in the country? The government owned banks! – So close them down already!

Who has been propping up financial markets in secret over decades with taxpayer money, creating malinvestments and false incentives left and right? The mighty President’s Working Group on Financial Markets! – So get rid of it already!!

What is it that made the common man put so much money into the stock market? It comes to a large degree from the incentive through tax savings for retirement accounts. If the taxes weren’t there in the first place, surely people would think twice about transferring their hard earned and saved money over to Wall St.

On top of that a policy manipulating and suppressing interest rates makes it completely unattractive to put money into savings accounts, and encourages people to be foolish. – So again, stop meddling with the credit markets, get rid of the central bank and with it would go all fractional reserve lending.

Why do you think it is so hard for honest small businesses to obtain funding in a flexible and straightforward manner? Why does it feel to most people like they are secluded from the majority of the action while Wall St. thrives? It is because every single government policy aiming at financial regulation has been designed to herd money into the stock market and lock it up in there for the kids to play with.

Which institution, out of all, is the least capable to be responsible about its finances, stay out of debt, live within its means? … it is of course the government itself.

Folks, wake up to reality, leave fantasy island. Come to your senses and work toward closing down that institution which is the root cause of all your problems: Close down the government and all the things I pointed out above and many more evils would automatically go with it.

Tags: anarchism, bailouts, corporate bailouts, tarp

AIG – A Ponzi Scheme, Endorsed and Bailed Out by Uncle Sam

July 31, 2009 · Posted in Interventionism · Comment

AIG, of which, since the “rescue”, 80% is now owned by the Federal Reserve Bank, is a bloated, confusing, procrastinating, monstrous, liabilities-shifting, allegations-denying, catchphrase-uttering apparatus whose cracks are leaking left and right:

The dozens of insurance companies that make up the American International Group show signs of considerable weakness even after their corporate parent got the biggest bailout in history, a review of state regulatory filings shows.

Over time, the weaknesses could mean trouble for A.I.G.’s policyholders, and they raise difficult questions for regulators, who normally step in when an insurer gets into trouble. State commissioners are supposed to keep insurers from writing new policies if there is any doubt that they can cover their claims. But in A.I.G.’s case, regulators are eager for the insurers to keep writing new business, because they see it as the best hope of paying back taxpayers.

In the months since A.I.G. received its $182 billion rescue from the Treasury and the Federal Reserve, state insurance regulators have said repeatedly that its core insurance operations were sound — that the financial disaster was caused primarily by a small unit that dealt in exotic derivatives.

My comment: This sounds a lot like the early assurances that “sub-prime” was a well contained issue that will have no spill over effects to other sectors, right Mr. Bernanke? It was obviously clear to everyone that these statements from the insurance regulators were complete and utter nonsense, right?

But state regulatory filings offer a different picture. They show that A.I.G.’s individual insurance companies have been doing an unusual volume of business with each other for many years — investing in each other’s stocks; borrowing from each other’s investment portfolios; and guaranteeing each other’s insurance policies, even when they have lacked the means to make good. Insurance examiners working for the states have occasionally flagged these activities, to little effect.

More ominously, many of A.I.G.’s insurance companies have reduced their own exposure by sending their risks to other companies, often under the same A.I.G. umbrella.

Echoing state regulators’ statements, the company said the interdependency of its businesses posed no problem and strongly disputed that any units had obligations they could not pay.

“There is absolutely no concern about the capital in these companies,” said Rob Schimek, the chief financial officer of A.I.G.’s property and casualty insurance business. The company authorized him to speak about these issues.

My comment: If there was absolutely no concern, then why does Mr. Schimek have to assure us so vehemently? What he really means is of course “There are serious, really serious, concerns about the capital in these companies but I am hoping we can hide it for as long as I am still in charge”.

Nothing is wrong with spreading risks to other companies, a practice known as reinsurance, when it is carried out with unrelated, solvent companies. It can also be acceptable in small amounts between related companies. But A.I.G.’s companies have reinsured each other to such a large extent, experts say, that now billions of dollars worth of risks may have ended up at related companies that lack the means to cover them.

“An organization like this one relies on constant, ever-growing premium volume, so it can cover and pay for the deficits,” said W. O. Myrick, a retired chief insurance examiner for Louisiana. If A.I.G.’s incoming premiums shrink, he warned, “the whole thing’s going to collapse in on itself.”

My comment: … also known as a “Ponzi scheme”.

Mr. Myrick has not fully examined all the A.I.G. subsidiaries but said his own recent review of many state filings raised serious concerns, particularly about the use of reinsurance to “bounce things around inside the holding company group.”

“That is a method used by holding companies to falsify the liabilities,” he said.

A.I.G.’s premiums have, in fact, been declining in important lines. Its ratings have fallen, and customers tend to steer clear of lower-rated insurers. To woo them back, A.I.G. has in some cases lowered its prices, competitors say. A.I.G. executives insist they would rather lose a customer than drive down prices dangerously.

A.I.G. has also pledged a share of its life insurance premiums to the Fed, to pay back about $8 billion. Details have not been provided, but consumer advocates say it is not clear how the life companies will pay future claims if their premiums are diverted.

“Eventually, there’s going to be a battle between the policyholders and the feds,” said Thomas D. Gober, a former insurance examiner who now has his own forensic accounting firm that specializes in insurance fraud. “The Fed is going to say, ‘We want our money back,’ but the law says, ‘Policyholders come first.’ It’s going to be ugly.”

Mr. Gober is a consultant for a lawsuit on behalf of A.I.G. policyholders, filed in California Superior Court in Los Angeles. The lawsuit seeks a court order requiring all A.I.G. subsidiaries doing business in California to put enough money to cover their obligations into a secure account controlled by the state treasurer.

The goal is to keep money from being moved out of California or used to finance A.I.G.’s other activities, said Maria C. Severson, a lawyer for the plaintiffs. The lawsuit also seeks to bar A.I.G. companies from soliciting new business without full disclosure of their financial condition.

The condition of A.I.G.’s individual companies is hard to see in the parent company’s filings with the Securities and Exchange Commission. Those filings simply tally all the individual subsidiaries’ financial information.

The companies’ weaknesses emerge in their filings with state insurance regulators — particularly when several are reviewed together. But that appears not to happen often, because there are so many. A.I.G. has more than 4,000 units in more than 100 countries.

Responsibility for A.I.G.’s 71 American insurance companies is spread among 19 state insurance commissions, which do not conduct examinations simultaneously.

As a result, Mr. Myrick said, a conglomerate like A.I.G. “can keep moving assets around to clean up one company” at a time, when examiners were looking. He said that it would take a coordinated, multistate examination of all the insurance companies to catch this.

Mr. Schimek, speaking for the insurance companies, said that in 2005, a team of examiners had at least considered A.I.G.’s property and casualty businesses as a group.

“It was a thorough examination,” he said. “I have absolutely no concern about the integrity of the financial information that’s been filed under my watch.”

My comment: Translation: “I am absolutely and 100% concerned about the integrity of the financial information filed under my watch.”

State regulators confirmed that they believed the A.I.G. subsidiaries under their authority were solvent. Mike Moriarty, deputy insurance superintendent for New York State, said that while A.I.G. subsidiaries did not report all their reinsured obligations on their balances sheets, state regulators could “follow the trail of liabilities” and make sure they did not get lost in the holding company.

Obligations “can’t be hidden from state insurance regulators,” Mr. Moriarty said.

One A.I.G. subsidiary, the National Union Fire Insurance Company of Pittsburgh, shows what can happen by heavily relying on affiliates. Its most recent regulatory filing in Pennsylvania said it had more than enough money to pay its obligations.

But at the end of 2008, more than a third of National Union’s portfolio was invested in the stock of other A.I.G. companies, which are not publicly traded. National Union might not be able to sell all of these shares, and it is not clear what it could get for them. Many states bar insurers from investing that heavily in related companies.

Meanwhile, National Union has $42.1 billion in obligations looming off its balance sheet. These have been transferred to 56 other A.I.G. companies, through reinsurance. National Union will have to pay any of these claims and then collect from its relatives.

But it is not clear that the affiliates could pay promptly. National Union’s biggest reinsurance partner is American Home Assurance, an A.I.G. subsidiary that has taken $23.1 billion of obligations off National Union’s hands. In a New York filing, American Home reports total assets of $26.3 billion, but part of that consists of assets that cannot be used to pay claims, like furniture. It too includes a number of investments in other A.I.G. companies.

My comment: This is, by and large, one of those cascading dependencies that I was talking about in Inflation & Deflation Revisited:

The US economy has been at the center of a worldwide network of such cascading credit relationships. Central banks loaned fiat money to fractional reserve banks, those would pass it on to financial institutions which would make it available as wholesale mortgages, individual mortgage banks would take those on and make loans to homebuyers. Insurance companies would insure one or the other loan in the chain and again consider the insurance policy as good as money, using it as collateral to obtain … more credit.

Everyone insures everyone and everyone thinks everything is fine. In the meantime the money has been squandered and it will come back to haunt everyone once everyone wants to see real cash.

In addition, American Home has “unconditionally” guaranteed the obligations of 16 other A.I.G. subsidiaries, bringing the total it might have to pay to $140.6 billion.

Normally, when an insurance company weakens, regulators in its home state will first measure its capital. They may demand a weak company rebuild its capital, and if it fails, eventually bar it from selling new policies.

Like New York regulators, Pennsylvania regulators say they do not see a problem. “The insurance companies remain strong and are probably the most valuable assets within the A.I.G. structure,” said Joel Ario, Pennsylvania’s insurance commissioner. “To the best we know it, we think the companies are sound.”

My comment: Haha, well put, commissioner! Such a statement requires no further comment.

But policyholder advocates said they feared state regulators were deferring to the wishes of the Fed and Treasury, to use the insurance operations to pay back the taxpayers.

“The insurance commissioners, for whatever reason, are letting them do this,” Mr. Myrick said. “I’d be jumping out of my shoes.”

Taxpayers won’t see their money back. Why would they?? The very purpose of corporate bailouts is to rip him off! It is what we already realized months ago: Sinking Money Down a Hole.

The government should have let AIG go bankrupt right then and there. Now the Fed is stuck with a huge non-performing asset that will be worth a tiny fraction of what they paid. Who knows, most likely the obligations to policy holders will be worth much more than what was acquired, in which case the value of assets held is less than zero. The oh so “independent” Fed just needs to assure us one thing: Don’t you dare come to the taxpayer and have the Treasury reimburse you for the losses you will suffer and probably have already suffered from this hideous acquisition of AIG!

Tags: aig, bailouts, federal reserve balance sheet, federal reserve bank

New Bank Bonus Releases – Heads: Bankers Win, Tails : Taxpayers Lose

July 31, 2009 · Posted in General Economics · Comment

And more unsurprising news on the TARP front. Cuomo releases ugly details on bank bonuses:

NY Attorney General Andrew Cuomo released his report on bonuses at the TARP Top 9. At these firms alone, over 800 people made north of $3 million in 2008. That’s a lot of scharole. See Appendix B for the bonus breakdown at each bank.

The key info is in one particular table, however:

(Click to enlarge in new window)

The columns to the right list the number of employees that received bonuses in excess of $3 mil/$2 mil/ $1 mil.

Banks that are still sitting on their TARP money (Citi, BofA, Wells among them) have no business paying out big bonuses before paying back the government. For that matter, neither do the others, who all continue to benefit from FDIC guarantees on debt and Fed lending facilities through which they’ve traded toxic loans in exchange for perfectly liquid Treasuries. They can use the Treasuries for repo collateral, get cash and then put that on deposit at the Fed where they now get paid interest on their excess reserves. It’s a great scam. One that feeds lots of cash into the 2009 bonus pool.

And GazetteOnline writes:

Citigroup Inc., one of the biggest recipients of government bailout money, gave employees $5.33 billion in bonuses for 2008, New York’s attorney general said Thursday in a report detailing the payouts by nine big banks.

The report from Attorney General Andrew Cuomo’s office focused on 2008 bonuses paid to the initial nine banks that received loans under the government’s Troubled Asset Relief Program last fall. Cuomo has joined other government officials in criticizing the banks for paying out big bonuses while accepting taxpayer money.

Comparisons to historical payouts weren’t available, as the banks are not required to disclose the information publicly. They provided 2008 details to Cuomo’s office under subpoena.

Cuomo’s office found that the companies, which also included Bank of America Corp., Merrill Lynch & Co., JPMorgan Chase & Co. and Goldman Sachs Group Inc., awarded nearly 4,800 million-dollar-plus bonuses, with much of the money going to Wall Street investment bankers.

Citigroup, which is now one-third owned by the government as a result of the bailout, gave 738 of its employees bonuses of at least $1 million, even after it lost $18.7 billion during the year, Cuomo’s office said. The bank’s top four recipients received a combined $43.7 million.

The New York-based bank received $45 billion in government money and guarantees to protect it against hundreds of billions of dollars on potential losses from risky investments.

“There is no clear rhyme or reason to the way banks compensate and reward their employees,” Cuomo said in the report, noting banks have not in recent years actually tied pay to performance as they claim when describing their compensation programs. Cuomo added that when banks’ performance deteriorated significantly, “they were bailed out by taxpayers and their employees were still paid well.”

Bank of America, which also received $45 billion in TARP money, paid $3.3 billion in bonuses, with 172 employees receiving at least $1 million and the top four recipients receiving a combined $64 million. Merrill Lynch, which Charlotte, N.C.-based Bank of America acquired during the credit crisis, paid out $3.6 billion, including a combined $121 million to four top employees.

Bank of America earned $2.56 billion in 2008, while Merrill lost $30.48 billion. Cuomo’s office said Merrill Lynch doled out 696 bonuses of at least $1 million for 2008.

Bank of America has been sharply criticized for its acquisition of Merrill Lynch because of mounting losses at the Wall Street bank and the size of bonuses Merrill paid its employees. Of the $45 billion in bailout funds Bank of America received, $20 billion was to support the acquisition of Merrill. Neither Bank of America nor Citigroup have repaid their TARP loans.

A Bank of America spokesman declined to comment on the report. A spokesman for Citigroup did not return repeated calls for comment.

The truth is: The public has no business discussing and quarreling about how much banks decide to pay their employees in bonuses. Legislators had the choice to unconditionally reject the TARP bailout ripoff. Many tried to talks sense into people. They didn’t listen. They rewarded companies whose financial irresponsibility led them to collapse, so they could continue their adventures in screw-up land. What did they expect to see happen? Now these clowns are running around, trying to find scapegoats for their own incompetence and cluelessness. What a circus!

Paola Sapienza and Luigi Zingales appropriately call for the government to Stop Subsidizing the Street:

The word for “crisis” in Chinese, weiji, is written with two characters: one (wei) means danger; the other, ji, means opportunity. That’s because every crisis challenges the status quo and in so doing creates the opportunity for something new to emerge. “This process of Creative Destruction,” wrote economist Joseph Schumpeter, “is the essential fact about capitalism. It is what capitalism consists in and what every capitalist concern has got to live in.”

We have experienced the destruction wrought by the financial crisis. Now it’s time to focus on the opportunities it brings. The first place to look is the site of the greatest destruction: the banking sector. While finance will remain a pillar of a well-functioning economy, it’s unlikely that banking will survive for long in its current form. The current banking model is broken. Citigroup has been on the verge of failing in three of the last four downturns: This is hardly a viable business model.

Even more important is that Americans are rapidly losing trust in their banks. A survey we conducted at the end of March showed that only 29% of Americans trusted banks, down from 34% three months earlier and 42% a year ago. Twenty percent of respondents felt that a bank had cheated or misled them in the previous 12 months, while 10% had withdrawn their FDIC-insured deposits and squirreled away the cash. The word “credit,” speaking of telling etymologies, comes from the Latin credere, which means “to trust.” Trust is essential in banking, and it’s unlikely that banks can restore it. It’s always difficult to regain trust; it’s easier to start anew.

Luckily, starting anew is exactly what’s happening in the banking sector, with the launch of several start-ups with innovative ideas. They range from new ways to insure mortgages to new models of lending to reliable consumers by bypassing the current banking system. Many others, such as Lending Club and Prosper, are popping up on the Internet, letting investors, rather than credit officers, decide who is creditworthy. It’s too early to tell if these attempts will succeed, but it’s vital that they occur. Through trial and error, a new world of banking will rise from the ashes of the old one.

Should the government subsidize these efforts? In a New York Times column this spring, Tom Friedman said yes, suggesting that it should dedicate a fraction of the Troubled Asset Relief Program (TARP) money to promote innovation. Fortunately, several venture capitalists have rejected the idea online, and with good reason: The government’s record as a venture capitalist is rather poor.

Nevertheless, the government can foster the new and innovative in a crucial way: by ceasing to subsidize the banking dinosaurs. The evidence shows that subsidies to failing companies not only waste resources in keeping obsolete and inefficient firms alive, but also delay the entry of new and more efficient organizational models.

TARP was sold as a way to keep credit flowing, but it could wind up delaying the success of new ventures that could help revive credit in the economy. For finance to begin allocating resources efficiently again, the government must stop propping up Wall Street.

Tags: bailouts, bank bonuses, banks, Citigroup, tarp

CIT – No Bailout for You

July 15, 2009 · Posted in Interventionism · Comment

Reuters reports CIT talks fall apart, bankruptcy looms:

CIT Group Inc, a lender to hundreds of thousands of small and mid-sized U.S. businesses, said on Wednesday that bailout talks with the government had ended, a development that could ultimately drive the company into bankruptcy.

The announcement followed last-ditch talks in which Treasury officials had expressed concern about a worsening liquidity crunch at the 101-year old lender and indications that government aid would not put it on a path to recovery.

It also showed the possible limits of Washington’s ability and willingness to rescue companies, after multiple bailouts engineered by Treasury, the Federal Reserve and the Federal Deposit Insurance Corp for larger companies such as American International Group Inc and Citigroup Inc.

Lesson learned: If you don’t screw up royally, then no bailout for you from Uncle Sam.

Tags: bailouts, cit

CIT Group – Trading Halted

July 15, 2009 · Posted in Interventionism · 3 Comments

The AP reports Trading halted in CIT shares:

Trading in the shares of crippled commercial lender CIT Group Inc. was halted on the New York Stock Exchange late Wednesday afternoon.

A trading halt often occurs when news about a company is about to be released.

Regulators have been poring over the books at New York-based CIT trying to determine which of its assets remain strong enough to secure emergency financing.

The company has been teetering on the brink of a bankruptcy filing as its assets decline in value and a large debt payment looms.

Industry and government officials say representatives from the Treasury Department, Federal Reserve and Federal Deposit Insurance Corp. have been meeting to discuss plans for a possible rescue of CIT.

Time for more corporate bailouts. Yipeee!

On a side note: Just as an example, please consider the phoney argument of an “independent” Federal Reserve Bank raised against auditing it in light of what I highlighted above.

Tags: bailouts, cit, corporate bailouts, government bailouts

Tim Geithner Refuses to Answer Simple Question on Derivatives

July 14, 2009 · Posted in Politics · Comment

The simple answer Tim Geithner trying to avoid here: “Yes, taxpayer money will be used to bailout worthless derivatives issued today.”

Tags: bailouts, derivatives, government bailouts, tim geithner

Saving the X Industry

April 24, 2009 · Posted in Interventionism · Comments Off

Henry Hazlitts Economics in One Lesson is timeless, clear, and simple. When it was written in 1946 its lessons were as true as they are today. Unfortunately most journalists, economists, and politicians have not learned from it and still resort to the same tired arguments that have been refuted long ago. Please consider Chapter 14, “Saving the X Industry”. Feel free to substitute “Auto” or “Banking” for the “X”:

The lobbies of Congress are crowded with representatives of the X industry. The X industry is sick. The X industry is dying. It must be saved. It can be saved only by a tariff, by higher prices, or by a subsidy. If it is allowed to die, workers will be thrown on the streets. Their landlords, grocers, butchers, clothing stores and local motion picture theaters will lose business, and depression will spread in ever-widening circles. But if the X industry, by prompt action of Congress, is saved—ah then! it will buy equipment from other industries; more men will be employed; they will give more business to the butchers, bakers and neon-light makers, and then it is prosperity that will spread in ever-widening circles.

It is obvious that this is merely a generalized form of the case we have just been considering. There the X industry was agriculture. But there are an endless number of X industries. Two of the most notable examples in recent years have been the coal and silver industries. To “save silver” Congress did immense harm. One of the arguments for the rescue plan was that it would help “the East.” One of its actual results was to cause deflation in China, which had been on a silver basis, and to force China off that basis. The United States Treasury was compelled to acquire, at ridiculous prices far above the market level, hoards of unnecessary silver, and to store it in vaults. The essential political aims of the “silver Senators” could have been as well achieved, at a fraction of the harm and cost, by the payment of a frank subsidy to the mine owners or to their workers; but Congress and the country would never have approved a naked steal of this sort unaccompanied by the ideological flimflam regarding “silver’s essential role in the national currency.”

To save the coal industry Congress passed the Guffey Act, under which the owners of coal mines were not only permitted, but compelled, to conspire together not to sell below certain minimum prices fixed by the government. Though Congress had started out to fix the price of coal, the government soon found itself (because of different sizes, thousands of mines, and shipments to thousands of different destinations by rail, truck, ship and barge) fixing 350,000 separate prices for coal! One effect of this attempt to keep coal prices above the competitive market level was to accelerate the tendency toward the substitution by consumers of other sources of power or heat—such as oil, natural gas and hydroelectric energy.

But our aim here is not to trace all the results that followed historically from efforts to save particular industries, but to trace a few of the chief results that must necessarily follow from efforts to save an industry.

It may be argued that a given industry must be created or preserved for military reasons. It may be argued that a given industry is being ruined by taxes or wage rates disproportionate to those of other industries; or that, if a public utility, it is being forced to operate at rates or charges to the public that do not permit an adequate profit margin. Such arguments may or may not be justified in a particular case. We are not concerned with them here. We are concerned only with a single argument for saving the X industry—that if it is allowed to shrink in size or perish through the forces of free competition (always, by spokesmen for the industry, designated in such cases as a laissez-faire, anarchic, cutthroat, dog-eat-dog, law-of-the-jungle competition) it will pull down the general economy with it, and that if it is artificially kept alive it will help everybody else.

What we are talking about here is nothing else but a generalized case of the argument put forward for “parity” prices for farm products or for tariff protection for any number of X industries. The argument against artificially higher prices applies, of course, not only to farm products but to any other product, just as the reasons we have found for opposing tariff protection for one industry apply to any other.

But there are always any number of schemes for saving X industries. There are two main types of such proposals in addition to those we have already considered, and we shall take a brief glance at them. One is to contend that the X industry is already “overcrowded,” and to try to prevent other firms or workers from getting into it. The other is to argue that the X industry needs to be supported by a direct subsidy from the government.

Now if the X industry is really overcrowded as compared with other industries it will not need any coercive legislation to keep out new capital or new workers. New capital does not rush into industries that are obviously dying. Investors do not eagerly seek the industries that present the highest risks of loss combined with the lowest returns. Nor do workers, when they have any better alternative, go into industries where the wages are lowest and the prospects for steady employment least promising.

If new capital and new labor are forcibly kept out of the X industry, however, either by monopolies, cartels, union policy or legislation, it deprives this capital and labor of liberty of choice. It forces investors to place their money where the returns seem less promising to them than in the X industry. It forces workers into industries with even lower wages and prospects than they could find in the allegedly sick X industry. It means, in short, that both capital and labor are less efficiently employed than they would be if they were permitted to make their own free choices. It means, therefore, a lowering of production which must reflect itself in a lower average living standard.

That lower living standard will be brought about either by lower average money wages than would otherwise prevail or by higher average living costs, or by a combination of both. (The exact result would depend upon the accompanying monetary policy.) By these restrictive policies wages and capital returns might indeed be kept higher than otherwise within the X industry itself; but wages and capital returns in other industries would be forced down lower than otherwise. The X industry would benefit only at the expense of the A, B and C industries.

Similar results would follow any attempt to save the X industry by a direct subsidy out of the public till. This would be nothing more than a transfer of wealth or income to the X industry. The taxpayers would lose precisely as much as the people in the X industry gained. The great advantage of a subsidy, indeed, from the standpoint of the public, is that it makes this fact so clear. There is far less opportunity for the intellectual obfuscation that accompanies arguments for tariffs, minimum-price fixing or monopolistic exclusion.

It is obvious in the case of a subsidy that the taxpayers must lose precisely as much as the X industry gains. It should be equally clear that, as a consequence, other industries must lose what the X industry gains. They must pay part of the taxes that are used to support the X industry. And consumers, because they are taxed to support the X industry, will have that much less income left with which to buy other things. The result must be that other industries on the average must be smaller than otherwise in order that the X industry may be larger.

But the result of this subsidy is not merely that there has been a transfer of wealth or income, or that other industries have shrunk in the aggregate as much as the X industry has expanded. The result is also (and this is where the net loss comes in to the nation considered as a unit) that capital and labor are driven out of industries in which they are more efficiently employed to be diverted to an industry in which they are less efficiently employed. Less wealth is created. The average standard of living is lowered compared with what it would have been.

These results are virtually inherent, in fact, in the very arguments put forward to subsidize the X industry. The X industry is shrinking or dying by the contention of its friends. Why, it may be asked, should it be kept alive by artificial respiration? The idea that an expanding economy implies that all industries must be simultaneously expanding is a profound error. In order that new industries may grow fast enough it is necessary that some old industries should be allowed to shrink or die. They must do this in order to release the necessary capital and labor for the new industries. If we had tried to keep the horse-and-buggy trade artificially alive we should have slowed down the growth of the automobile industry and all the trades dependent on it. We should have lowered the production of wealth and retarded economic and scientific progress.

We do the same thing, however, when we try to prevent any industry from dying in order to protect the labor already trained or the capital already invested in it. Paradoxical as it may seem to some, it is just as necessary to the health of a dynamic economy that dying industries be allowed to die as that growing industries be allowed to grow. The first process is essential to the second. It is as foolish to try to preserve obsolescent industries as to try to preserve obsolescent methods of production: this is often in fact, merely two ways of describing the same thing. Improved methods of production must constantly supplant obsolete methods, if both, old needs and new wants are to be filled by better commodities and better means.

Tags: bailouts, corporate bailouts, economics in one lesson, henry hazlitt

AIG – Sinking Money in a Hole

March 17, 2009 · Posted in General Economics · 1 Comment

It’s time for our dear politicians to act surprised again. It’s time for Congress again to complain about the results of false policies that they themselves recklessly approved, against all warnings. It’s time again for Ben Bernanke to fire off mindless blather, platitudes and predictions that will, as always and without exception, turn out to be abysmally false.

The AP has a shocking surprise for us, Taxpayers unlikely to be fully repaid in AIG mess:

As the cost of the rescue swells, experts says it’s becoming harder to envision a scenario in which the government could recoup its full investment. Even though the AIG payouts to major banks have angered critics of the bailout, it might be legally impossible to claw back any of the billions already doled out.

Of course the taxpayer won’t get any of this money back. Is there a living creature with more than one brain cell that seriously expected the taxpayer would ever see this money come back? Of course it will be legally impossible to get the billions handed out back in any way. Congress and the Fed shouldn’t have been so stupid to throw it at them in the first place.

The government agreed to uphold those contracts when it seized control of American International Group in September. It argued that failing to repay the debts of the globally interconnected company could cause catastrophic losses at big international banks, potentially toppling the financial system.

…and the problem with that is what exactly? Toppling the financial systen? Does that mean the people who were instrumental to the credit expansion and the ensuing credit crisis would have gone out of business and we wouldn’t have to deal with their incompetence, greed, irresponsibility, and arrogance? Great! Anyone who has a problem with that should speak out and explain precisely why that would be such a terrible thing to happen. Especially he should explain why it is, on the flip side, good when instead the taxpayer who earned money with honest and productive work is milked to the Nth degree and driven into bankruptcy.

Scrutiny of AIG’s dealings with its trading partners comes after revelations over the weekend that the insurer planned to pay out tens of millions in executive bonuses. President Barack Obama on Monday accused AIG of “recklessness and greed.” He pledged to try to block the bonuses, which AIG insisted it’s contractually obligated to pay.

Mr. Obama, how about we pursue a policy of change? How about we no longer announce that we will react when the damage is already done. How about we proactively prevent disasters from happening? How about we listen to the people who advised us not to put the taxpayer on the hook for $170 billion for an organization whose market value is $2 billion? How about we realize that there is a reason why these organizations are not performing, why they are on the brink of bankruptcy? It is because they pursue the profession of wasting money. When we subsidize this behavior, we will get more of it. How much longer do we want to subsidize this bahavior?

Later, White House spokesman Robert Gibbs said the administration would modify the terms of a pending $30 billion bailout installment for AIG to at least recoup the $165 million the bonuses represent. That wouldn’t rescind the bonuses, just require AIG to account for them differently.

How retarded is this government? We hear from our President how outraged he is and at the same time his press secretary calmly announces that $165 million need to be accounted for in a slightly different manner, and then we’ll give them another $30 billion. Disgusting.

Asked if he’d favor trying to see if those AIG contracts could be broken so the government could recover some of those payouts, Rep. Barney Frank, chairman of the House Financial Services Committee, stopped short of endorsing the idea. But he said “that’s something that has to be examined.”

“I would want to know the consequences of not paying those debts,” Frank, D-Mass., told The Associated Press.

There is definitely something that needs to be examined. And that is Rep. Barney Frank’s head. This guy has been wrong on every single thing he said. He has been the strongest supporter of all bailouts and spending boondoggles that were brought before Congress. His dishonesty and hippocrisy are astounding.

Federal Reserve Chairman Ben Bernanke, defending the $30 billion lifeline the government provided to AIG, said earlier this month that the government may eventually be able to “recover most or all” of the taxpayers’ investments.

*Yawn* *Sigh* No, Mr. Bernanke. The government will not be able to recover any of the taxpayers’ investments. You know that or you are the biggest idiot to ever head the Federal Reserve. Your statement is wrong, just as all your previous statements have been. Please, do us all a favor and shut the hell up.

Some words of wisdom in closing:

But Mark Williams, a former Fed examiner and finance professor at Boston University, said the AIG wind-down inevitably will cost taxpayers money. And he thinks it will take much more money — perhaps an additional $200 billion — to finish winding down AIG’s financial dealings so its core businesses can be sold off.

“No longer can we call it an investment,” he said. “We just have to call it what it is — and that’s sinking money in a hole.”

Tags: aig, bailout, bailouts, tarp

Hudson City Bancorp Posts Record Profits

March 4, 2009 · Posted in Business · 3 Comments

My good friend Goran “G.” Djenadic pointed me to this interesting article. Thus my shout out to Chicago: “Thanks G. !”

While the major national banks are teetering on the brink of collapse, this New Jersey thrift seems to be doing alright:

Decade of record profits for Hudson City Bancorp:

Hudson City Bancorp, the largest New Jersey-based thrift, continues to stand out as a pillar of profitability in a battered industry.

The parent of Hudson City Savings Bank on Wednesday reported a fourth-quarter profit of $124.3 million, up 60 percent from the previous year as both loans and deposits grew by nearly 22 percent year-over-year. Per-share profit rose to 25 cents a share from 16 cents.

For the year, profits rose more than 50 percent to $445.6 million.

“This was the 10th straight year of record profits, and we think ‘09 will continue that trend,” said Chief Executive Officer Ronald E. Hermance Jr. in an interview.

Hudson City is thriving while many banks, including such titans as Citigroup and Bank of America Corp., flounder. Citi lost $8.29 billion and BOA $1.79 billion in the fourth quarter. Both banks slashed their dividends to a penny a share.

The New Jersey lender, on the other hand, increased its quarterly dividend to 14 cents from 13 cents.

“We think it’s a good sign to put out there, and we would not be doing it if we didn’t see future earnings growth,” Hermance said.

The bank is enjoying the fruit of its relatively low overhead costs and long-adhered-to policy of avoiding subprime and other risky loans, lending only to those with verifiably good credit and collateral, said Theodore Kovaleff, president of banking consultant Informed Sources Service Group.

“I look at them as an area of serenity amidst a major maelstrom,” said Kovaleff, who owns Hudson City shares.

Hudson City is a jumbo mortgage specialist with 127 branches in the northern New Jersey, Long Island and Western Connecticut suburbs. Although the real estate market remains poor, the bank has benefited from the demise of competitors such as Long Island-based American Home Mortgage and the scant availability of wholesale funding for loan brokers.

Hudson City, which raised $3.9 billion in a 2005 stock offering, remains very well capitalized compared to its peers, said analyst Matthew Kelley of Sterne Agee & Leach Inc.

And the bank’s above-average rates on certificates of deposit have allowed it to rake in high-end consumer deposits, Kovaleff said.

Lending was boosted in recent months by lower interest rates, bringing a surge in refinancings of loans that were made by competitors.

The bank has also benefited from a flight of consumer deposits — a comparatively low-cost source of funding for loans — from equity markets and from banks with besmirched reputations.

Meanwhile, Hudson City’s national, Internet-based deposit-gathering program has brought in more than $50 million since being quietly launched in November.

Hudson City has not been immune from the housing market woes.

It added $9 million to its reserve against future possible loan losses in the fourth quarter, up from a $2 million provision in the year-earlier period. Loans with payments 90 days or more past due increased to $217.6 million from $79.4 million, year-over-year.

“When [Hudson City] is forced to foreclose the losses are quite modest,” Kelley said, adding that the bank’s portfolio of securities investments “is the cleanest of the banks we cover in the Northeast.”

The coming year is going to be more challenging, he said.

“They are not going to grow loans quite as fast and the [profit] spread has compressed over the last couple of weeks,” he said.

“But I continue to believe Hudson City will outperform on earnings and on stock performance.”

Now, it remains to be seen if Hudson City will be able to weather the storm. They are, like most banks, also highly leveraged and we have no idea what assets they really have on their balance sheet. But at least they haven’t been begging for taxpayer money over the past year. Depositors are rewarding them with their trust and their deposit money.

Performance ultimately prevails in a free market. It can’t, however, stand out so long as the government subsidizes one failure after another.

Tags: bailouts, hudson city bancorp