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Passing The Trash - Again
I participated in a slow motion disaster back in the early 80’s. I was working for the global powerhouse, Citibank. Walter Wriston was running the show at the time. He “famously” said “Countries don’t go bankrupt.” His thinking resulted in an enormous increase in the bank’s exposure to global sovereign lending.
All of the big global banks followed Citi’s direction. It was one big party. All the bankers were headed to Brazil, Mexico and Argentina. They all had checks ready to sign. Of course, the countries were more than willing to take on more debt.
It was in 1980 that the thinking was forced to change inside Citi. The sovereign loan portfolio was getting too big too fast. The bank had internal country limits and those limits were filling up fast. The worst thing that can happen to a banker is to reach a lending ceiling. The real return for lending to these countries was not the Libor+1 pricing, it was the front end fees from new loans that fed the bonus pools.
The solution was simple. Sell the loans that were already on the books to make room for the new ones (and the related origination fees). Who did we sell the loans to? Anyone we could, but we created demand from smaller, US regional banks.We sold them sub-participations in sovereign loans.
In August of 1982 the lights went out. All the big sovereign customers of Citi went bust in the course of a few months. The losses at Citi damn near shuttered the bank (many of the big banks were in the same condition). There were no more big fees coming in, and the losses were mounting. What was once a great place to work, became a terrible place, so I left and joined Drexel in 1985.
I spent the next five years buying back the loans that I had sold to the regional banks. At Citi, I had sold the loans at par to regional banks, at Drexel I bought them back from those same banks at 20 cents on the dollar.
Note: During this period I was not a “decider”. A “cog in a wheel”, is a better description of my role in this story. There were thousands of “cogs”, together we produced a crisis that cost hundreds of billions, wrecked a good number of banks and produced what is now called, “The Lost Decade”.
This story is important because it is happening again today. Money Center banks are reducing their holdings of risky loans. The regional banks are increasing exposure.
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It’s not just the big US money center banks that are selling. The EU banks are having a fire sale:
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Once again, the trash is headed downhill. It won't end any differently this time. I looked at my old Rolodex of banks that I both sold and bought bad loans from. Very few of them are alive today. Nothing has changed. Surprised?
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Bruce,
It is different this time. First, the Big Banks are all underwater and they have not been as successful at off loading their wares to the Regionals. They have unloaded a huge bag to the FED which now is buried and unable to move anywhere.
On the mountains craps rolls downhill in a rather orderly manner but in the Himalayas it rolls down in avalanches.
Magnitude matters.
What is really sad is that the same thing happen again and again ... until someday we find the whole banking system fall apart.
Again, if anyone is serious about circumventing these parasitic middle-men, I suggest trying to grow networks that trade or barter skills/goods, exchange precious metals for the same, uses bitcoin for portable storage of wealth and payment options.
Any one of these done on a large enough scale would end their reign upon us.
Everyone asks what can be done -- well, there it is.
I always like this clip that even a 2 year old could understand
Eliot Spitzer: "The FED is a Ponzi Scheme. Run by Banks". Won't say where $13.9 TRIL went
http://www.youtube.com/watch?v=UhfvE9bNls4
Banks = Cocksuckers.
Banks = cocksuckers.....
Huh...?
Wrong.
Cocksuckers= usefull
Bankers....
Well.not so much.
Unless it's a cock sucking banker.
right to the point and easy to follow
The incentivization of a-morality. Between you and your bonus there is only the situation at hand and it is your job to deal with that situation. Let God sort out the rest. And LET THERE BE BONUS!
Incentivizing bankers for short term gains corrupts even the incorruptible.
Today, even those working at the so called utilities, the largest Banks, are getting ready for a long July 4th weekend out in the Hamptons. Why not? Washington D.C. is a boom town. Why not let the bankers eat cake? The SYSTEM HAS BEEN SAVED!
Right?
The difference is the muppets are enlisting instead of being drafted.
Bruce, what's going on now has an obvious difference:
- when you were selling loans to US regional banks, you sold them at par.
- the loan sales going on in Europe now are described as "fire sales" - obviously not at par.
The regionals were dumb money getting shitty deals then. Now it seems they're buying at distressed prices.
Unknown if the prices are "distressed" enough, to be sure, but it seems like the situation is materially different from the one you are recalling from experience.
Not for lack of trying: "Axe sheets are typically circulated by major lenders to participant banks, mirroring primary syndications... But the offer is no fire-sale. The vast majority of loans for sale are high-quality assets, priced near par." Har har.
http://www.ifre.com/european-banks-dump-asian-loans/1618527.article
Wonder if anyone has bitten.
Interesting article - thanks.
Still, I'm wondering if it might be the case that the loans for sale are in fact good assets; when an entity is in distress, it sells what it can sell, not what it would like to get rid of - the market for good assets is likely to be better than the market for crap assets.
Yet the article indicates that the secondary buyers are holding out for better discounts. Not, perhaps, because they doubt the quality of the assets, but they sense the desperation of the sellers.
Just a thought.
City of Stockton to file bankruptcy, one problem , anyone working full time for 30days or longer guaranteed health care for life. Any long term problems with that ??? More cities to come. Cook County Chicago, property taxes in some suburbs up 200% as property tax revenues fall and houses worth in most cases 40 to 50 % less than 5 years ago. Pissed off citizens??? Maybe??
Actually it was 5 years but working for other towns previously could count towards the 5 years. Still, I wish I could get such a deal.
Got some bad ass news for some of my uber liberal CA gov't employee golf buds.
They used to say that their pensions were guaranteed by the CA constitution. A little misunderstanding based upon a CA supreme court ruling that basically said that a governmental entity cannot unilaterally abrogate a contract (Somebody will and can take action thereupon, the entity is not immune from recourse.)
Not a big or new idea, huh?
Well, Stockton gonna be, under Chapter 9, cutting pension and health care payments to current retirees (Currently being discussed and betting is likely to succeed.) so as to be able to provide basic necessary services.
And, the legal action is under Ch 9 of the Federal Code. And a federal bankruptcy judge can abrogate ANY contract.
So much for the protection under CA law.
Fucking idiots... their arrogance is unprecedented.
The entitlement generation. Same assholes who hated big gubamint in the 70's, now in gubamint and think they are owed superior financial security for making decisions that dictate how the rest of us (Less than 50% of the country who do not work for the gubamint or receive the dole) must live and behave. These people make better salaries, better health care and have real pensions. Unlike the rest of us!!!
Fuck 'em.
Seriously.
There is no one smarter than a goberment employee. They puff up and say how they sacrificed their life to public service when they could have been making 'much' more in the private sector. Who will get the last laugh?
Well said, Sir, well said.
Back in the day (before Wriston) sovereign debt used to be collateralized by real cash flows: port revenues, import duties, stuff like that. Maybe we can return to that setup: Greek bonds collateralized by tourist receipts at the Acropolis? Italian bonds backed by the VAT on Ferrari sales? Portuguese olive oil bonds. Irish bonds backed by...um...
Week old haggis borrowed from Scotland.
...whiskey
This is the insight into the System that us little guys do not have access to. ++++++++++++
Walter Wriston may have caused huge losses for Citibank and its shareholders, but I am sure he retired with a tidy fortune.
This illustrates a major problem with banks and most other publicly owned companies. The CEO's are typically in their 50's or 60's and are nearing retirement. So there is a strong incentive for them to 'goose' the company's earnings in the short term at the expense of the long term interests of the company. If a 60 year old CEO is planning to retire at 65, why would he be concerned if the company goes broke in 6 years?
It should also be noted that Walter Wriston (bless his little heart) was chairman of Ronald Reagan's Economic Policy Advisory Board from 1982-89. And in June 2004 he was awarded the Presidential Medal of Freedom by George W. Bush.
Just another banker scumbag.
Great story, Bruce....they need to sell the chicken before it gets chipper.
here's an apropos # for and from bruce:
http://www.youtube.com/watch?v=T4gra-OuONI&feature=related
bread lines strechin round the corner/
welcome to tha new world order,
janus
were do I sign up
Bruce ;
this time problem is much bigger in scale..
All of Brazil, Mexico and Argentina was $350B. That is about half of Greece's debt today.
The difference of 30 years is one "0". The $100B that went up in smoke in Mexico in 1982 is now $1,000B.
Billions, trillions. What comes after Trillions?
After trillions comes
"Look at the tits on that monster."
The difference of 30 years is one "0". The $100B that went up in smoke in Mexico in 1982 is now $1,000B.
10-fold in 30 years is 8% annual rate... pretty much in line with what I believe to be the true inflation rate for the US Dollar.
So no real difference.
after trilions comes.... derivatives
BK, I always look forward to stories in regards to your personal experience in the Matrix. Thanks for sharing yet another one.
"this is the big one." Only game on the Planet actually...and you want to be all in and not just in. The simultaneity of both the implosion of the eurozone and the explosion of the Middle East easily make this point in time the most important time since World War II. I find it fascinating that this site is the only media outlet that has "risen to the occasion" and actually covered it. Given the other story here about how bad the ratings is not just at CNBC but all the other news outlets...and amazingly the newspapers as well...only goes t show how pathetic the Publishers of today's media truly are. The IMPORT of all these events is PALPABLE. Obviously the focal point of interest is here at ZH for "the new media fix"...but i find it astounding there's barely even a lame attempt at ginning up the "dramatis personae" of this momentous and tumultuous point in time" in order to at a minimum move media product. I thought this was all these folks business? The irony is "the Big One really is The Big One"!
election year
We can just start making currencies in scientific notation. $1x10^n.
Great piece....people forget: a deposit in a bank is their liability; a loan (however construed) is their asset.
What was the real "trigger mechanism" to the Fall 2008 debacle? Answer: Russia invading Georgia; all the dry kindling was in place
So where's the next 'trigger mechanism'? (hint: it won't be financial)
IranWar. <60 days and counting.
you dream if you think they are really going to attack iran without Russia saying yes
Bruce
Jerry Doyle worked at Drexel at about that time. He currently hosts an excellent AM talk show here in Vegas syndicated across the country. Was he a classmate?
I don't know Jerry. There were 5000 people working at DBL before it went tapioca. I was there 1985-90.
Tell him I'm looking for some Vegas air time. I do a very good radio rant.....
bk
Then the bill will be passed - by a "united" and "bi-partisan" CONgress - to bail out the regional banks and insurers on the backs of the taxpayers - again.
And in 5-10 years when SS, Medicare, Medicaid, Pensions, and other taxed and fee'd yet unfunded liabilities are cut in half; Wall Street and the Bankers and the Politicians will still be getting theirs while most Boomers are too old to fight - if they are still alive.
Big banks just doing God's work in fucking the muppets!
Oh, is that where the term MF came from ... Can't get picture out of my mind
Let them eat paper?
Love your stuff but PLEASE don't start using "Decider", which always reminds me of "W". And I don't want to be reminded of "W". The President who started the trashing of the Constitution. I know you Americans are short of time and have already destroyed what is affectionaly called the "English" language, but is using "Decion maker" too difficult?
Hey, you limp-spined fag, why don't you bend over and blow yourself if you're in such need for a pacifier? Since you're not an American, kindly shut the fuck up about the Constitution, thanks. Tomorrow some of it actually gets restored.
Thanks for the highly sophisticated response. I do agree that SCOTUS might restore some constitutionality but it is already too late for the 1st, 4th, 5th and 14th amendements to YOUR constitution, which as a scholar of law, I happen to care about. Unlike, apparently, most Americans.
And, incidentally, I note that the repeal of Obamacare doesn't change the fact that the US spends 17% od GDP on healthcare, which covers only 70% of the population and the system has worse fundamental outcomes (Infant mortality etc.) than the average OECD country. In fact, should the other provisions of Obamacare survive, especially the requirement to insure "Pre-existing conditions", then the cost of Medical Insurance for everyone will go through the roof because the typical American grifter will recognise that there is no need to buy insurance until suffering from a costly condition. IMHO that is just another confirmation that the average American is being totally screwed by the system. That is, the 1%. Is this agreat country or what?
"...is using "Decion maker" too difficult?"
Tell me what a "Decion" is and I'll get back to you.
Decision maker. Edit function only survives for a few hours. But I think you either got, or completely missed, the point. Please stop destroying my language. Fortunately, in a few years, you will be destroying Spanish instead.
Give them more credit.
The big banks are willing to fuck ANYTHING they can ... muppets, regional banks, whoever.
"Fuck them all and let Bernanke sort it out!"
The motto they live by.
barliman
Bruce, your friend is right, countries don't go bankrupt. They do default though. Some countries often more than others.