Tuesday, August 23, 2011

Geithner Rules

Oh dear.  Of course I haven't any idea whether this is true but it Sounds like Tim Geithner hasn't learned a thing:
There is a rumor circulated on Wall St. that JP Morgan (NYSE: JPM) will take over Bank of America (NYSE: BAC) within the week. The government will support the deal with a $100 billion investment in preferred shares issued by the combined entity. Alternatively, the government may guarantee the value of a large pool of Bank of America assets. The word is that Treasury Secretary Geithner has discussed the transaction with JP Morgan CEO Jamie Dimon.The “merger” would completely destroy the value of BAC’s common shares.
Translated: okay, so equity gets hosed, which is just as it should be in insolvency. But it sounds like we will be paying $100 bill for something. And that would be? Why, the bondholders, I suppose--who else could it be, with numbers like this and on terms like this. It's been the one abiding principle throughout the Geithner--no matter how parlous the state of whatever, no bondholder gets left behind.  Apparently we need to say it again, guys: capitalism means the risk of failure, and real failure when things go bad.  Bank bailouts that protect bondholders are ring-fencing for which the rest of us pay.  Sheesh, is that so hard to understand?


Ken Houghton said...

Not necessarily. There are claims superior to the bondholders right now, and Jamie Dimon is many things but he would never have been as stupid as Ken Lewis is/was.

$100B will barely cover Countrywide losses and ML write-offs.

And it would explain the pressure on the NY/DE/NV/IL/etc. ad nauseam AGs. As with S&P leadership changes, these things don't happen overnight.

Buce said...

Don't follow. We're adding money to the asset side of the balance sheet, right? So every dollar that goes, e.g., to pay off Countrywide losses-means a dollar freed up for the bondholder, right?

A good test will be the political response. If no Republican complains, then we know the fix is in.

OldSouth said...

If no Republican complains, they should be tarred and feathered.

At every removal of risk, there is the injection of moral hazard, and the bolstering of the impunity and recklessness of the remaining banks.