An unknown Wall Streeter says that Treasury Secretary Geithner and the Obama economic team are the Emperor with no clothes… if this guy is saying it… everyone is saying it…
From Bloomberg… Doug Dachille, chief executive officer of First Principles Capital Management LLC, talks with Pimm Fox about the U.S. government’s decision to provide additional aid to GMAC Inc., Fannie Mae and Freddie Mac. Dachille also discusses the Build America Bonds program.
Mr. Dachille says…
“We’ve stuffed all the problems in the closet… we haven’t solved the problems… we’ve papered them over at this point…
The Treasury Secretary said this about the challenges to our national economic and finanical system… in an interview from Slate…
“GROSS: There have been, and continue to be, calls for you to go. How do you deal with those?
GEITHNER: I spent most of my professional life in this building. Watching the politics of the things we did in the past financial crises in Mexico and Asia had a powerful effect on me. The surveys were 9-to-1 against almost everything that helped contain the damage. And I watched exceptionally capable people just get killed in the court of public opinion as they defended those policies on the Hill. This is a necessary part of the office, certainly in financial crises. I think this really says something important about the president, not about me. The test is whether you have people willing to do the things that are deeply unpopular, deeply hard to understand, knowing that they’re necessary to do and better than the alternatives. We’ll be judged on how we dealt with the things that were broken in the country. We broke the back of the worst financial panic in three generations, more effectively and at a much lower cost than I think anybody thought was possible.
I guess history will decide which of these two gentlemen called it right… but I imagine that history will judge that the Mexican and Asian crisis established the principle of “global moral hazard”… it was these bailouts engineered by Robert Rubin and others that convinced global hot money that no sovereign default would create too severe a haircut… that some consortium of nations would guarantee bondholders…
Well… who will bail out US Treasury holders when the time comes?
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Lessons of the Mexican financial crisis from the Cato Institute…
Regulatory Failures, Credit Growth, and the Onset of the Crisis
The financial sector also underwent a substantial liberalization, which, when combined with other factors, encouraged an increase in the supply of credit of such magnitude and speed that it overwhelmed weak supervisors, the scant capital of some banks, and even borrowers.
Several factors contributed to facilitate the abundance of credit: (1) improved economic expectations; (2) a substantial reduction in the public debt; (3) a phenomenal international availability of securitized debt (see Hale 1995);(4) a boom in real estate and in the stock market; and (5) a strong private-investment response.
Poor borrower screening, credit-volume excesses, and the slowdown of economic growth in 1993 turned the debt of many into an excessive burden. Nonperforming loans started to increase rapidly. A process of adjustment of the balance-sheet position of the private sector, underway by the second half of 1993, and the late adoption by some commercial banks of prudent policies were signs that nonperforming loans had exceeded reasonable dimensions before 1994.
The substantive causes of the debt increase were:
1. The financial sector was liberalized: lending and borrowing rates were freed, the forced channeling of credit was abolished, and bank reserve requirements were eliminated.
2. Banks were hastily privatized, in some instances with no due respect to “fit and proper” criteria, either in the selection of new shareholders or top officers (see Honohan 1997: 13, and Ort z 1997). It must be noted, however, that on average the banks remained in government hands for half of the expansionary period.
3. Several banks were purchased without their owners proceeding to their proper capitalization. Shareholders often leveraged their stock acquisitions, sometimes with loans provided by the very banks bought out or from other reciprocally collaborating institutions.
4. The expropriation of the commercial banks in 1982 contributed to their loss of a substantial amount of human capital during the years in which they were under the government. With these officials institutional memory migrated as well.
5. Moral hazard was increased by the unlimited backing of bank liabilities.
6. There were no capitalization rules based on market risk. This encouraged asset-liability mismatches that in turn led to a highly liquid liability structure.
7. Banking supervision capacity was weak to begin with, and it became overwhelmed by the great increase in the portfolios of banks. Part of this weakness originated in the political stature of government-appointed CEOs when banks were still government owned.
8. There was a substantial expansion of credit from the development banks.
9. From December 1990 on, foreigners were allowed to purchase “domestic” (short-term) government debt. Since domestic public debt decreased during this period, the purchases of Cetes by foreigners enhanced the purchasing power of their domestic sellers.
10. Short-term, dollar-indexed, peso-denominated Mexican government securities, Tesobonos, were issued at the end of 1991, although not in large amounts except during certain periods.
These experiences are not unique to Mexico. As Lindgren et al. (1996: 100) point out, “Formerly regulated banks may lack the necessary credit evaluation skills to use newly available resources effectively.” And they concluded: ``Unless properly overseen, liberalization can result in too rapid growth of bank assets, over-indebtedness and price-asset bubbles” (p. 107).