For over a year now, I have been advocating a Swedish rather than Japanese approach to crisis. The Swedes decided to protect their banking system at all costs; the Japanese protected their banks at all costs.
That subtle distinction is the difference between a rapid recovery and a slow, agonizing one.
Some people think this is an academic debate — a distinction without a difference. However, when you see who bears where the actual costs of this fall, it is apparent that the it is an enormous difference.
Unfortunately, the US (mostly) went the Japanese route. Exceptions are the automakers and a handful of FDIC closed banks. Instead of waxing philosophical, let’s look at who pays the costs of this – and who does not.
Shareholders: In the Swedish approach, the Shareholders get wiped out. In the US/Japanese model, they take a big hit — a loss of 90%+ of their value — but they got to keep there stock shares. Hope springs eternal for an eventual recovery.
On Wall Street, other than Lehman Brothers (LEH), all other shareholders were saved. Bear Stearns (BSC), Citigroup (C), Fannie Mae (FNM), AIG, BofA, (BAC) Goldie (GS), Morgan Stanley (MS) — all were kept afloat.
Ironically, the insolvent firms that were forced into a reorganization – GM & Chrysler, Washingon Mutual, etc. — actually are the ones following (at least partially) the Swedish style model: Restructure, Wipe Out Debt, Recapitalize, Relaunch as a new, clean firm.
Bondholders: There are 3 parties that undeservedly were bailed out, and the head of the class are the bondholders.
Except for Lehman and FDIC closures, most bondholders were rescued: Bear Stearns Bondholders received 100 cents on the dollar — that was their reward for exercising terrible judgment when lending money to a reckless irresponsible insolvent investment house (so much for Moral Hazard). Same for Citi, Fannie Mae, Bank of America. We still don’t know what the final impact will be for AIG Bondholders, but expectations are for the full monty.
When future historians discuss the bailouts of 2008-09, and discuss who were the greatest financial recipients of taxpayer largesse, they will be referring to the bondholders.
Counter-parties: For reasons not yet explained, Paulson, Bernake and Geithner essentially gifted to speculators and hedge fund traders a guarantee that all their back alley bets would be made good. This is truly perplexing, as they are probably the least deserving group receiving taxpayer money.
Management: Several senior execs have lost their jobs, but they have been the exception. A recent study found that 92% of TARP firm senior execs, boards of directors, and C-level management were still running the firms they had been. It is perplexing to those of us are trying to figure out the penalties for driving your firm over a cliff . . .
Taxpayers: So far, the US taxpayer has laid out all of the costs of the bailouts. TARP appears to be mostly repaid, and the new TBTF tax should recover the rest. But the question the FCIC should be asking is why are taxpayers a backstop fro traders and speculators?
Borrowers: Banks are lending dramatically less, as they slowly recapitalize their balance sheets, borrowing from the Fed at 0% and lending back to the Treasury at 3%. Best guesses are that this year and last will see a $1 trillion less dollars than normally would be loaned to credit worthy borrowers. This is directly due to the Japanese approach that allows bad balance sheets and enormous bank under-capitalization to continue.
Workers: Are going to suffer for a long period of slow job recovery due to the above. If banks were forced into the normal FDIC insolvency process, the economy and employment would likely recover must faster.
Savers: Zero % interest rate. Estimates are this costs depositors $250Billion per year. ’nuff said
Bank Customers: All banks customers are now buying services from frims in a sector with much less competition.
First Time Home Buyers: Although they get a minor tax credit, various government policies are maintaining home prices at levels far in excess of where the market would take them. Outside of the big foreclosure zones, they are feeling the impact of the subsidies and bad policies.
The bottom line: Bailouts have specific winners and losers . . .
Attack of the Zombies ! February 26th, 2009
92% of TARP Firm Sr Management is Unchanged (January 4th, 2010)
What we can learn from Japan’s decades of trouble
FT, January 12 2010