Zero Hedge: Meet the 35 Foreign Banks That Were Bailed Out by the Fed

[Fergasun]

On the difference between AIG and Lehman the Fed always said "AIG wasn't insolvent, they had a liquidity issue". I think that was a BS answer. However, let's transform myself into their worldview. The banks have been having liquidity issues for 3 years. At what point *does* it become an insolvency issue? The fact that they are going to the Fed to continue to get liquidity indicates they are still having some issues. Is there going to be another 5 years or so of problems with the banks? At what point is there no credibility left that it's not liquidity but is actually solvency? The assets really are value-less, everyone really does need to take a 30% haircut.

Maybe its late here... an idea I got from another article.

Liquidity means you have enough value in your assets to cover your liabilities, just the assets are not liquid. They have value, one can't transform the value into cash that fast.

Insolvency means you don't have enough value in your assets to cover your liabilities. You're essentially underwater and screwed. Even if you sold all your assets you couldn't cover your liabilities.

[SnyderShrugged]

Keynesians fail.

[techboy]

Because those are all designed by the same people who said the crash wouldn't happen, then said they didn't know why it was happening, then said that they don't know why we haven't had a real recovery yet.

Even if you're right (and this is a pretty broad brush), this doesn't really address the question, you know. My wife is terrible at math, but if I ask her what 8+7 is, and she says 15, it doesn't mean she's wrong. You're going to have to move beyond the genetic fallacy to make your case.

But you know what I did learn fairly recently? The various CPI measures are off. It turns out that when economists study the issue, they do find there's a bias built in. Multiple studies have shown the same thing.

The CPI over-reports inflation. Here is one such paper, by Robert Gordon from Northwestern. The abstract:

This paper provides a retrospective on the 1996 Boskin Commission Report, Toward a More Accurate Measure of the Cost of Living, and its famous estimate that the CPI in 1995-96 was upward biased by 1.1 percent per year. The paper summarizes the report's methods, findings, and recommendations, and then reviews the criticisms that appeared soon after the Report was issued. Post-Boskin changes in the CPI are summarized and assessed, as is recent research on related issues. The paper sharply distinguishes two questions. First, with what we know now, what should the Commission have concluded about CPI bias in 1995-96? Second, what is the bias now after the many improvements introduced into the CPI since the Commission's Report? About the first question, my own recent research on apparel and rental housing indicates a substantial downward bias in the CPI over much of the twentieth century, diminishing in size after 1985. Incorporating these findings into the Boskin matrix would reduce its 0.6 percent annual upward bias due to quality change and new products to a smaller 0.4 percent bias. However, this is more than offset by the stunning discrepancy over 2000-06 in the chain-weighted C-CPI-U compared to the traditional CPI-U, indicating that the Commission greatly understated the magnitude of upper-level substitution bias. This retrospective evaluation suggests that the Boskin bias estimate for 1995-96 should have been 1.2 to 1.3 percent, not 1.1 percent. Current upward bias in the CPI is estimated to have declined from the revised 1.2-1.3 percent in the Boskin era to about 0.8 percent today. Yet the Boskin report, like most contemporary studies of quality change, failed to place sufficient value on the value of new products and on increased longevity. Allowing for these, today's bias is at least 1.0 percent per year or perhaps even higher.

I find it interesting that you think there's hidden inflation anyway. Don't you follow Austrian economics? In Austrian terms, inflation is caused by an increase of money plus credit. The Fed's been printing money, but there is much less credit. It doesn't surprise me that inflation seems to be low.

This is confirmed by considering the bond market's future inflation expectations. As of Dec 2, the 5 year Treasury is yielding 1.64%. The 5 year TIPS is yielding .04%. This indicates that the bond market more or less expects inflation to be around 1.6% over the next 5 years (give or take inflation insurance and liquidity premiums).

Keynesians fail.

Care to elaborate?

[Hubbs]

Even if you're right (and this is a pretty broad brush), this doesn't really address the question, you know. My wife is terrible at math, but if I ask her what 8+7 is, and she says 15, it doesn't mean she's wrong. You're going to have to move beyond the genetic fallacy to make your case.

If by "genetic fallacy" you literally mean that I think this has to do with the natural makeup of BLS economists, I don't.

But you know what I did learn fairly recently? The various CPI measures are off. It turns out that when economists study the issue, they do find there's a bias built in. Multiple studies have shown the same thing.

Funny, I learned the exact opposite. Take a guess - really, guess, no looking up numbers - and tell me how much the BLS said the cost of housing dipped between May 2008 and May 2009. By the way, ever heard of something called hedonics?

I find it interesting that you think there's hidden inflation anyway.

I find it interesting that you don't.

Don't you follow Austrian economics? In Austrian terms, inflation is caused by an increase of money plus credit.

There are other factors. In this case, the problem is where the inflation is occurring. You don't want it happening to the extent that it has in commodities, especially basic commodities like food. Then, of course, there's health care, education, gas prices, and stocks, just to name a few things that have inflated since the printing began.

The Fed's been printing money, but there is much less credit. It doesn't surprise me that inflation seems to be low.

No, there isn't. According to the credit market data published by the Fed itself, credit within the US economy has been stuck at $52 trillion since the crisis began. Where that credit is going is another matter entirely.

This is confirmed by considering the bond market's future inflation expectations. As of Dec 2, the 5 year Treasury is yielding 1.64%. The 5 year TIPS is yielding .04%. This indicates that the bond market more or less expects inflation to be around 1.6% over the next 5 years (give or take inflation insurance and liquidity premiums).

The bond market's biggest influence is the CPI. If there's something wrong with the CPI, the bond market has problems.

[PeterMP]

I

There are other factors. In this case, the problem is where the inflation is occurring. You don't want it happening to the extent that it has in commodities, especially basic commodities like food. Then, of course, there's health care, education, gas prices, and stocks, just to name a few things that have inflated since the printing began.

I'm sorry, but this comment is halirious in the context of other arguments you've made in other threads with respect to it not mattering how people spend their money.

When are you counting as started printing. The relatively recent printing in response to the economic crisis or when we came off the gold standard (or some other point in time)?

http://www.inflationdata.com/inflation/images/charts/Oil/Gasoline_inflation_chart.htm

[techboy]

If by "genetic fallacy" you literally mean that I think this has to do with the natural makeup of BLS economists, I don't.

No, I mean the informal logical fallacy committed when one attempts to discredit an idea because of its source. The Genetic Fallacy.

Funny, I learned the exact opposite.

Well, you apparently learned wrong. Try reviewing the academic literature on the issue. You can just type "cpi upward bias" into google scholar, and you get this list of articles.

You seem concerned about food, so perhaps you'd be interested in CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?, by Jerry Hausman at MIT and Ephraim Leibtag at the USDA. An excerpt from the abstract, found here (the first link is to a free version so you can read it)

Hausman (2003) discusses four sources of bias in the present calculation of the CPI. A pure price' index based approach of surveying prices as done by the BLS cannot succeed in solving the problems of bias. We discuss economic and econometric approaches to measuring the first order bias effects from outlet substitution bias. We demonstrate the use of scanner data that permits implementation of techniques that allow the problem to be solved. In contrast, the current BLS procedure does not treat correctly outlet substitution bias and acts as if Wal-Mart does not exist. Yet, Wal-Mart offers identical food items at an average price about 15%-25% lower than traditional supermarkets. The BLS links out' Wal-Mart's lower prices. We find that a more appropriate approach to the analysis is to let the choice to shop at Wal-Mart be considered as a new good' to consumers when Wal-Mart enters a geographic market. This approach leads to a continuously updated expenditure weighted average price calculation. We find a significant difference between our approach and the BLS approach. Our estimates are that the BLS CPI-U food at home inflation is too high by about 0.32 to 0.42 percentage points, which leads to an upward bias in the estimated inflation rate of about 15% per year.

Or maybe just check an Econ Textbook.

I have to admit, I was surprised when I looked into it recently. I'd never heard about the upward bias, and it's not new... there are articles I've found from the 1960s discussing the phenomenon.

[Hubbs]

I'm sorry, but this comment is halirious in the context of other arguments you've made in other threads with respect to it not mattering how people spend their money.

When are you counting as started printing. The relatively recent printing in response to the economic crisis or when we came off the gold standard (or some other point in time)?

http://www.inflationdata.com/inflation/images/charts/Oil/Gasoline_inflation_chart.htm

Erm... I'm talking about the printing called "quantitative easing." The kind of spending generated by QE is much, much different than your run-of-the-mill spending done by, well, just about anyone. And I'm not surprised that you find it hilarious. What would surprise me would be an honest attempt - a truly honest attempt - to understand why I'm not surprised. You probably think you've made one. That wouldn't surprise me, either.

No, I mean the informal logical fallacy committed when one attempts to discredit an idea because of its source. The Genetic Fallacy.

And if I were actually doing that, rather than trying to illustrate some specific problems with their formulas by asking you about things like housing and hedonics, you'd at least have one good argument in favor of the BLS.

I notice you didn't answer either question.

Well, you apparently learned wrong. Try reviewing the academic literature on the issue. You can just type "cpi upward bias" into google scholar, and you get this list of articles.

Seriously? This is what you're coming at me with? The notion that economists disagree about things? Of course I know that some believe there's an upward bias. Want me to show you the paper authored by the guy who ran both the OMB and CBO that said the odds of Fannie and Freddie going bankrupt were 250,000 to 1?

You seem concerned about food, so perhaps you'd be interested in CPI Bias from Supercenters: Does the BLS Know that Wal-Mart Exists?, by Jerry Hausman at MIT and Ephraim Leibtag at the USDA. An excerpt from the abstract, found here (the first link is to a free version so you can read it)

Again, nothing I haven't heard before. I like to bring up food as an example because everyone needs food, so I find it to be something that everyone can relate to when it comes to their own wallets.

Or maybe just check an Econ Textbook.

I have to admit, I was surprised when I looked into it recently. I'd never heard about the upward bias, and it's not new... there are articles I've found from the 1960s discussing the phenomenon.

Yes, I of all people have never read an econ textbook.

I can show you things written in the 1930's that say current Fed policy is idiotic. Does that automatically make them right? I'm continually surprised by the fact that your ability to find the opinions of some economists allows you to believe that those are the only opinions that exist. You of all people know very well that there are multiple schools of macro thought that have all sorts of disagreements.

[SnyderShrugged]

Hubbs for the win (yet again, I may add)

[sportjunkie07]

Horizon Bank deserved to fail, and it did.

Citibank deserved to fail, but we couldn't afford to let that happen because it would have risked causing pretty much every other business in the world to fail - including Horizon Bank.

If local businessmen in SW Florida can't understand that (or don't want to), then screw them.

Im not attacking you, because you are much more knowledgeable than myself on this topic. However, dont you see the problem with this.. a large bank can pretty much do whatever it wants whenever it wants, because, frankly, we cant do anything about it.

Maybe I need to study politics/economics more, but this way of doing business sounds completely horrible. So what can be done to change it? Or am I just way out of line here.

[DjTj]

Im not attacking you, because you are much more knowledgeable than myself on this topic. However, dont you see the problem with this.. a large bank can pretty much do whatever it wants whenever it wants, because, frankly, we cant do anything about it.

Maybe I need to study politics/economics more, but this way of doing business sounds completely horrible. So what can be done to change it? Or am I just way out of line here.

We could reinstate Glass-Steagall so that the banks vital to our financial system are properly regulated while those engaging in more risky behaviors are separate and can be allowed to fail.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQfRyxBZs5uc

[Predicto]

Im not attacking you, because you are much more knowledgeable than myself on this topic. However, dont you see the problem with this.. a large bank can pretty much do whatever it wants whenever it wants, because, frankly, we cant do anything about it.

Maybe I need to study politics/economics more, but this way of doing business sounds completely horrible. So what can be done to change it? Or am I just way out of line here.

Of course I see that, and absolutely we need to change it. 2008, in the middle of the liquidity crisis - that was not the time to abruptly change it. We would have completely screwed ourselves over.

The first thing to do is to reinstate Glass Steagal, and whatever else we can do to reduce the size of individual financial institutions.

[sportjunkie07]

Of course I see that, and absolutely we need to change it. 2008, in the middle of the liquidity crisis - that was not the time to abruptly change it. We would have completely screwed ourselves over.

The first thing to do is to reinstate Glass Steagal, and whatever else we can do to reduce the size of individual financial institutions.

I see, well i guess if i hang around here long enough i won't need to take those economics classes..

[techboy]

And if I were actually doing that, rather than trying to illustrate some specific problems with their formulas by asking you about things like housing and hedonics, you'd at least have one good argument in favor of the BLS.

No, sir. Your leading questions were part of a response that came after you committed the genetic fallacy. In that particular post, you offered no argument save that of "the CPI is operated by a bunch of idiot beaurocrats". The fact that you responded to my criticism by actually attempting to flesh things out a bit doesn't change that, and is, in fact, the response I was hoping for. Sort of.

I notice you didn't answer either question.

You're right, because I didn't feel like playing your guessing game. I figure that if you have a point, you'll make it sooner or later.

Or maybe you'll just allude to your amazing wealth of knowledge and expertise with a combination of sarcasm and ennui.

Whichever.

I provided research backing my position, which answered your objections. Sorry if I didn't do it the way you wanted.

Seriously? This is what you're coming at me with? The notion that economists disagree about things? Of course I know that some believe there's an upward bias.

It's a little more than "some economists disagree about things". It is the mainstream position adopted by the vast majority of economists, to the point where it's in every modern textbook I've checked as accepted fact.

That doesn't mean that the consensus is right, of course, but you're going to have to present a pretty strong case to counter that.

You could start by substantively addressing the papers I've already linked to.

Want me to show you the paper authored by the guy who ran both the OMB and CBO that said the odds of Fannie and Freddie going bankrupt were 250,000 to 1?

"This one expert was wrong once. Therefore, we shouldn't trust experts."

P.S. Genetic fallacy again.

Again, nothing I haven't heard before. I like to bring up food as an example because everyone needs food, so I find it to be something that everyone can relate to when it comes to their own wallets.

That's nice. The current CPI does use food, you know, and yet that's a part of the upward bias.

[Fergasun]

Of course I see that, and absolutely we need to change it. 2008, in the middle of the liquidity crisis - that was not the time to abruptly change it. We would have completely screwed ourselves over.

The first thing to do is to reinstate Glass Steagal, and whatever else we can do to reduce the size of individual financial institutions.

Wait, that's what Frank-Dodd did, correct? Oh wait, it didn't! No, no, no, since the crisis the big banks have only grown bigger!

[Predicto]

Wait, that's what Frank-Dodd did, correct? Oh wait, it didn't! No, no, no, since the crisis the big banks have only grown bigger!

Umm, your point? You won't find me defending the good-hearted nature of the big banks or underestimating the power of their lobbyists. Obama has pushed through some banking reform

http://www.marke****ch.com/story/obama-signs-sweeping-bank-reform-bill-into-law-2010-07-21-12200

but nowhere near enough. :whoknows:

[Fergasun]

Two years ago it was recognized by Bernanke that we had a "too big to fail problem". He said this in front of Congress, in front of everyone. Yet I have no doubt when the next crisis comes the American taxpayer will again be asked to bail out the financial system and be held hostage lest "we enter another depression".

Dodd-Frank of 2010 was the time to repeal Glass-Steagal. Every time there was a crises there is a reform act. We're averaging about 1 crises every decade. However this reform is very similar to the last one, in fact it fails in its over-reliance on regulators. I have no doubt we are repeating the cycle here again. The "Volcker Rule" is just "Prompt Corrective Action" respun. I'd rather have the protection and regulation written more into the law than on the reliance of regulators. Of course the banks have successfully lobbied against this claiming that America will lose banking power due to the fact that other countries won't implement the same safe-guards.

Good! Why do we need to have large banks which threaten our economic safety? Because its "free market"? I don't remember there being a banking crisis in the 1980s... I was too young... but I don't think anyone ever taught me or did any post-mortem or even brought up that crisis in the run-up of the housing market, even though it was clear that things were going out of whack...

[PeterMP]

Hubbs for the win (yet again, I may add)

I figure that if you have a point, you'll make it sooner or later.

Or maybe you'll just allude to your amazing wealth of knowledge and expertise with a combination of sarcasm and ennui.

Whichever.

I provided research backing my position, which answered your objections. Sorry if I didn't do it the way you wanted.

[Ignatius J.]

We could reinstate Glass-Steagall so that the banks vital to our financial system are properly regulated while those engaging in more risky behaviors are separate and can be allowed to fail.

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=aQfRyxBZs5uc

But doesn't that just make future failures more likely? After all, Lehman was practically GS compliant and still proved to be a threat to the system. The quintessential mega-bank violator of GS was JP Morgan, who was in the best shape through the crisis because it had commercial deposits. Bank of America saved Merrill Lynch. Why isn't the opposite of what you are suggesting true? If anything is to be learned both are vital to our financial system.

I am tempted to believe that the Dodd legislation's idea of designating certain institutions as systemically significant is a good idea, especially if the rules for determining systemic importance are clear. Although, I wonder if the Fed will have any ability to see the next Long Term Capital Management coming. Systemically important can be hard to classify.

On a side note, Alex Tabarok of Marginal Revolution Fame has an interesting article on the origin of glass steagal arguing that it was a power grab by rockefeller to keep JP morgan's power in check. http://www.springerlink.com/content/c0724600625r0572/

[Seabee1973]

I can only go by your posts. I'm not accusing you of being a racist, but I am suggesting that black people have a legitimate concern that Obama has not been given a fair shake, and they also have a historical basis to suggest that the likely reasons for unfairness are not good ones.

There is legitimate opposition to Obama. There is also open racial opposition to Obama in some quarters, as well as subconscious race-tinged opposition by people who are sure that they are not racists (we saw some of that at the Tea Parties).

I'm not asking you to agree that Obama is a good president. I'm asking you to understand why black people honestly might think he is getting a raw deal.

Most of the racism at the tea parties were planted