U.S. big banks: Privatize the profits. Socialize the losses

[AlphaCentauri]

Bank of America writes its own bailout.

Privatize the profits. Socialize the losses. This has been the modus operandi of the big U.S. banks for decades. There hasn't been a domestic credit collapse of significance since the 1930s, but the U.S. banks have been getting into trouble regularly overseas. Remember the huge IMF loans of 1997-1998? The Asian governments had no debt problems. Thailand's total foreign debt was $4.8 billion, while it held foreign reserves of $37 billion. The problem was that the U.S. commercial banks had made loans to the private sector, which weren't being paid back in the environment of macroeconomic chaos. The IMF would lend money to the government of Thailand, and the government of Thailand would then pay off the private-sector loans to the U.S. bankers. This would bail out the U.S. bankers, and leave the Thai taxpayers to pick up the tab. I used this excerpt in my book. It is from an op-ed in the International Herald Tribune written by Hubert Neiss, the director of the IMF's Asia and Pacific department:

"The three crisis countries were also caught between a rock and a hard place because of the huge foreign currency debts of their domestic banks and corporations. Full debt service could not be maintained without some debt relief in the shape of loan rollovers and restructuring to allow more time for repayment.

“Defaulting on debt service would have forced foreign banks and other creditors to suffer immediate losses....

“Each of the three Asian countries receiving billions of dollars in international loans marshaled by the IMF decided to support continued debt servicing while seeking to negotiate debt relief with creditors. The IMF arranged additional official inflows of money to strengthen national reserve positions. It also facilitated debt negotiations with foreign commercial banks to provide the necessary balance of payments relief and some burden sharing by creditors."

"In Defense of the IMF's Emergency Role in East Asia," International Herald Tribune, October 9, 1998.

The IHT, by the way, is an international English-language paper owned by the New York Times.

The funds from the big IMF loans to the Asian governments in 1997-1998 spent no time in Bangkok, Seoul, Manila, or Jakarta. They were immediately sent back to New York to make the U.S. banks whole on their loans to the private sector.

My understanding is that much the same thing happened during the Latin American debt crisis of the 1980s – U.S. bank loans to private-sector, commercial entities in Latin America were replaced by sovereign debt, which evolved into the famous Brady bonds. In short, the U.S. banks were bailed out by the taxpayers of Mexico, Brazil, Peru, etc.

I haven't been able to find a proper description of the U.S. bank bailouts on their Latin America commercial debt of the 1980s, organized by the IMF, but these two sentences from a description of the crisis about sum it up:

"The 1980s crisis, while sparked by the official default of the Mexican government, was generally a crisis of the private sector. The majority of the debt was held in non-guaranteed private sector loans which were eventually nationalized to meet obligations."

In the latest Bank of America-authored (NYSE: BAC, Stock Forum) "homeowner bailout bill," we see that the Bank of America mortgage to a delinquent borrower is replaced by a mortgage from the U.S. government. BofA takes a small haircut, about 10%, which is much less than what they would face in foreclosure and liquidation, typically around 50% these days. Once again, we see the big U.S. banks' loans to the private sector paid off by the government. It's the same modus operandi. Here's a good description of the operating process, and Bank of America's involvement in it.

http://www.stockhouse.com/Columnists/2008/July/7/U-S--big-banks--Privatize-the-profits--Socialize-t

[The Backlash Cometh]

1. More reason why small time investors should stay away from

capitalist ventures.

[Hydra]

2. You know, since sovereign nations should be controlling their own currency

Let's just be honest and say that the Central banks and their various agents OWN EVERYTHING and have no problems siphoning off our labor.

System = Broken in their favor

[ooglymoogly]

3. KR nt

[HamdenRice]

4. That is one terribly confused article by a "gold bug"

The author of the article doesn't seem to have a firm grasp of what the IMF does. It does not have any direct connection to lending by US commercial banks to private borrowers in developing countries.

The IMF's main purpose is to lend currency (mainly dollars) to central banks of other countries in order to overcome balance of payments problems. The bank has been harshly and deservedly criticized for imposing "conditionality" on these loans -- that it, it won't make the loan unless the target country adopts certain policies, policies that generally have been proven to be ineffective or damaging in the target countries.

But it does not get involved in private sector lending.

The main connection is that if a private sector of a developing country is doing badly or importing too much, then that will create the international (dollar) currency shortage that causes the central bank of the developing country to have to ask for the IMF loan.

It's a particularly bad analogy to what Bank of America is doing -- an analogy that basically makes no sense.

[AlphaCentauri]

6. the Savings and Loan Crisis is a clear example of what the author try to explain

The U.S. Savings and Loan crisis of the 1980s and 1990s was the failure of several savings and loan associations in the United States. The ultimate cost of the crisis is estimated to have totaled around USD$160.1 billion, about $124.6 billion of which was directly paid for by the U.S. government -- that is, the U.S. taxpayer, either directly or through charges on their savings and loan accounts-- <1>, which contributed to the large budget deficits of the early 1990s. The resulting taxpayer bailout ended up being even larger than it would have been because moral hazard and adverse-selection incentives compounded the system’s losses. <2>

The concomitant slowdown in the finance industry and the real estate market may have been a contributing cause of the 1990-1991 economic recession. Between 1986 and 1991, the number of new homes constructed per year dropped from 1.8 million to 1 million, the lowest rate since World War II. <3>

http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

[truedelphi]

5. Try Making this story a headline in the M$M news!! n/t

[ThePowerofWill]

7. this is why i want to smack repukes when they bitch about welfare/aid to the needy.

It's fine to give banks, and corps a few billion, hell even trillion here and there. But we can't feed poor folks, or house the homeless, give out decent health care. It's a fuckin' shame.