The Great Bailout Bank Heist—and a Review of 2008 Frustrations

We know it’s happening, we can’t do anything to stop it, and it’s perfectly legal! What is it? The largest bank heist in history. No, don’t worry, the bank’s money is secure, they’re now stealing from us!

As 2008 winds to a close, it’s time to reflect on this year’s self-inflicted maladies that confound our country. I’ll start with the “Great Bank Heist” and you’ll see how it’s connected to a variety of other concerns, right up to, and including, the real estate collapse and the auto industry bailout; and how the auto problem can actually be turned into an opportunity to reclaim our automotive leadership.

Ever wonder where the $700B Bailout money went? It would be tempting to ask Barney Frank, the head of the House Financial Services Committee. Problem is, he looks like someone who might have trouble balancing his checkbook, much less tracking the whereabouts of our billions! Fortunately, there’s a forensic trail that led us into this crime scene, now it’s a job for CSI Washington!

The Great Bank Heist plot began in November of 2007 when the SEC decided to institute a new accounting rule known as “Mark to Market” (M2M), formally known as FAS-157 that changed the way banks were allowed to value mortgage-backed securities (MBSs) causing them to spiral downward. These are the same people who allowed Bernard Makoff to “make off” with $50B in a pyramid scheme he ran right under the nose of Chris Cox, the head of this vaunted organization. Fortunately, Mr. Cox will be looking for a new job come January 20th.

To solve this problem, Henry Paulson and the treasury pushed through the $700B bailout TARP (Troubled Assets Relief Program) only to find out their TARP had a large hole in it: banks, holding MBSs that were paying 98% of their interest were unwilling to sell them at fire sale prices and be labeled “in trouble,” a scarlet letter that would blacklist them from future loans from other banks.

So instead of purchasing assets, Mr. Paulson and his treasury decided to buy the banks instead—at least a large percentage of those chosen—by purchasing equity investments, presumably so these banks could begin making loans to individuals, companies, and other banks. At least $350B has been spent this way, but unlike you buying stock in these banks from other stock holders, this was new equity on which new stock would be issued. Normally, when one invests in a company in this fashion, the investor negotiates a “term sheet” detailing the transaction including the amount invested, and the percentage of ownership purchased. Somehow, Mr. Paulson neglected to get (or at least publish) these term sheets; there should be one for each bank.

So now the banks have heisted $350B of our money without any documentation of where it went or how it will be used. And why would they tell us how the money will be used (just because they insist on YOU answering that question when you borrow money from them!) since nothing in the Bailout Bill stipulated they should! But that’s just the beginning; not happy with just $350B, they want ten times that much!

So what are they doing with the money? Wisely, they are using it to acquire smaller banks not so “gifted” with TARP largess. The reason? It goes back to those pesky MBSs and the Mark-to-Market mistake. Remember, the MBSs held by the banks they are acquiring have been knocked down to 10% of their original value by the new M2M valuation rules. The large banks receiving TARP funds are smart enough to know that ultimately, the dichotomy of MBSs that are paying 98% of their interest (only 2% of mortgages are in foreclosure) yet are valued at 10-cents on the dollar must be rectified. And when this paradox is removed by the SEC in 2009 after their “study,” these MBSs will magically be restored to 98% of their original value, resulting in a 10-fold increase in the value of their investments. That’s how they can take the $350B they’ve stolen and turn it into $3.5 TRILLION! Talk about a full Christmas stocking…

So, as I said in my opening statement: we know what’s going to happen, we can’t stop it, and it’s perfectly legal. And if that’s not ironic enough for you, let me now add that this theft is ultimately in our best interest!

What did he say????!!!!

M2M has created a situation where a Fair Value accounting theory intended for liquid assets does not agree with the reality of illiquid MBSs that in the eyes of the holder are worth 98% of their original value. In other disciplines in which I am familiar, e.g., physics and engineering, when theory doesn’t agree with reality, the theory must be changed, reality can’t. But that’s physics, not finance. Ironically, in this case, if we don’t change the M2M theory, reality COULD change since M2M will ultimately bring down all real estate values and thus their mortgages, be they part of an MBS or not. I believe we are seeing the beginnings of this already.

Auto Bailout

So what does all this have to do with the auto industry bailout? The vast majority of new car purchases are financed through bank loans, or through the lending arms of the automakers themselves (e.g., GM has GMAC). The banks aren’t making loans, and the lending arms, like GMAC, that used to securitize (bundle) their loans into Asset-Backed Securities find few takers given that they are forced to be written down like MBSs. With no one to take on the debt, GMAC is running out of money to loan. No loans, no new car sales. This leads to a fundamental problem that seems to have escaped the auto industry bailout discussion: in recent years, the US market for new vehicles was about 20M units per year. For 2009, estimates are between 10 and 12M vehicles (I actually believe this is optimistic). It doesn’t take an accounting major to understand that if your revenue is cut in half (or more given the desperation sales that are going on), to remain profitable means you need to cut your costs in half—quickly.

So why did we loan the big three $17B when we know they will burn through that by March of next year and come back looking for more? They have to cut their costs in half, and the only way to do that quickly, while staying afloat, is through a Chapter 11 reorganization that would allow them to restructure debt with their creditors, close excess capacity (GM’s 18 US factories vs Toyota’s 4), shed their onerous legacy benefits and move to non-union labor. Only then should we have invested. We should have insisted on such a plan, but, as demonstrated in our earlier investments in the banks, our leaders(?) seem prone to a ready-fire-aim strategy when it comes to throwing our money around.

We should look at the US auto industry problem as an opportunity to reinvigorate an aging industry into one that produces the highest technology electric vehicles that would leapfrog the rest of the world, allow our environment to heal itself, and put us in the lead in the race toward building a carbonless energy economy, one that every industrialized nation in the world will need—and pay for. Unfortunately, with our premature bailout we have just continued to feed the problem—and delay the solution—for another three months.


2008 is the culmination of almost six years of self-inflicted disasters that started with our invasion of Iraq for completely unsubstantiated reasons. We then turned the whip on ourselves and in a fit of domestic self-flagellation introduced a misapplied esoteric accounting rule that has had the effect of nearly destroying our economy and those of the industrialized world. M2M is a financial cancer that must be removed. Until that is accomplished, anything else that we do, like purchasing banks or bailing out auto makers, amounts to just “rearranging the deck chairs on the Titanic.”

We can’t blame the bankers for our real estate/financial crisis, that honor goes to the Mr. Paulson, the SEC and Mr. Cox. However, the bankers have done a great job of taking advantage of the situation for their own advantage at the expense of ours.

Clearly, assets cannot have two different values at the same time, one dictated by the misapplication of an accounting rule and the other based on the real value of 98% of mortgages that are paying interest. And therein lies a way out of this paradox. Every MBS has an average interest rate and the total principle balance of mortgages within an MBS that are paying interest to the holder(s) can be computed based on the interest received, which becomes the value of the MBS. This would be a good starting point and immediately restore these securities to 98% of their original value and restore sanity to the credit markets. And when we do finally restore sanity to the credit markets, the banks that took $350B of our money will turn that into $3.5 Trillion…and we will all be better off for it! Of course the bankers who took advantage of this irony will be smiling all the way to the…bank. It’s traditional this time of year to talk of New Year’s resolutions, perhaps we need a national one; mine would go something like, “As a great nation, we need to stop making dumb mistakes—and correct those already made.” To quote Pogo, a long-defunct cartoon character, “We have met the enemy and he is us!”

If this message is as disturbing to you as it is to me, then I apologize for disturbing you. But if you are disturbed enough, you may want to disturb ten of your closest friends by sending them the link to this message:, which could ultimately disturb enough people in Washington—or soon to be in Washington—to do something about it; in which case I can stop writing these. Until then, when you see these things happening, remember that “Dave-Told-You-So.”

Happy(er) New Year,

Dave Spicer


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