Wednesday, November 12, 2008

AND THE BEAT (AS IN BEAT-DOWN OF THE AMERICAN CITIZEN) GOES ON

Seems that American Express, a credit card lender, is now a "bank holding company."

What does this mean, you may ask? It's simple really. The Federal Reserve (a "quasi-governmental" entity with private components, headed by non-elected governors and non-elected chairman) declared that AmEx is a bank holding company.

Just as it declared that investment banks like Goldman Sachs are bank holding companies.

And what does it mean to such a company when the Federal Reserve unilaterally declares it to be a bank holding company? That's simple too: access to cheaper credit, loosened rules for issuing stock, tax-free treatment of certain debt, etc.

I guess AmEx is "too big to fail." Incidentally, AmEx happens to be an unsecured creditor to lots of consumer debtors in a time when consumers are reducing their debt financing and finding it harder to pay off existing debt.

Funny thing is, even though we're paying to keep AmEx and Goldman Sachs and AIG afloat, through debt now, taxes soon, and inflation later, I can't seem to remember when I got to vote on which companies qualify as "too big to fail."

Taxation. Representation. You know the rest.

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16 Comments:

Blogger Toast said...

I was unaware that AmEx was struggling at all. Is this really about them getting in line for bailout dollars, or are they seeking to re-categorize themselves to take advantage of opportunities in the market?

7:00 AM  
Blogger Mike said...

They've been struggling bigtime:

4 straight bad quarters, lost half its market value, tons of defaults by its debtors, layoffs. I haven't seen this written anywhere, but the fact that AmEx, unlike Visa & MC, requires full payment, and not perma-debtors who can pay the minimum, probably hurts its ability to collect.

Anyhow, they're not part of the TARP, or a "bailout" as we think of it ala AIG. Nor are they re-categorizing to take advantage of "the market." The market is too busy taking advantage of AmEx right now.

They're very simply taking advantage of the willingness of the Fed and Treasury (the Fed in this case) to throw our money, via debt, taxes, and inflation, at whatever company they deem worthy. A choice the American citizens have no say in. Our money . . . but not our vote.

AIG, Goldman Sachs, AmEx worthy. Lehman Bros., Wachovia not worthy. The American citizen? Never worthy.

This is also bad economics: this cheap credit (read close to a zero percent rate) that AmEx is now in line for goes nowhere useful: it's not a bank, so it doesn't lend to institutions. All it can do is ostensibly allow consumers to spend money they've lately shown they don't want to spend. And it allows AmEx to stay in business to collect the credit card debt it's already owed.

Meanwhile, because the Fed is creating new money to make these loans, that means a larger debt, one way or the other. And this debt is paid for via more debt, taxes, or inflation which devalues the dollar in the future.

In other words, WE ARE PAYING to keep AmEx in business.

7:17 AM  
Anonymous Applesaucer said...

Hey Now, Mike! This is all for a good cause -- things like this:

http://abcnews.go.com/Blotter/WallStreet/story?id=6223972&page=1

applesaucer

7:41 AM  
Blogger Mike said...

Jeez. This is the second time they've been caught "junketing" since we bailed them out, right?

7:43 AM  
Blogger Edwardo said...

How does this all end? Very very badly.

9:16 AM  
Blogger Weaseldog said...

I wonder how far we can go, to keep these businesses operating, even as their customer base goes broke and blows away?

Will they become permanent corporate welfare recipients, rolled into government functions? Will they go decades employing people, but producing nothing and serving no cause?

It seems that's where this is leading.

9:54 AM  
Blogger DED said...

More poisoning of the American well. Is it too much of a stretch to say that Obama is being set up to fail so that the GOP can point fingers and (erroneously) lay blame for 2010 and 2012?

4:35 PM  
Blogger Bob said...

So how do GM, Ford and Chrysler set themselves up as banks?

5:27 PM  
Blogger Mike said...

Is it too much of a stretch to say that Obama is being set up to fail so that the GOP can point fingers and (erroneously) lay blame for 2010 and 2012?

I think this is both bigger and smaller than simple party politics. At a very simple level, this is straight-out looting as the last days of the Bush administration roll on. Bigger picture, this is about a permanemt shift of power (and money) to the financial sector.

Also, let's see if Obama does much differently when he takes over. Will his Treasury head change things much from Paulsen?

So how do GM, Ford and Chrysler set themselves up as banks?

GMAC probably could.

6:05 AM  
Blogger Mike said...

I was semi-joking, but I shouldn't have been joking at all:

http://www.reuters.com/article/companyNewsAndPR/idUSN1247675620081112

The FDIC is guaranteeing GMAC's loans.

6:24 AM  
Blogger Rickey Henderson said...

Screw masquerading as banks, if only these ailing companies could organize themselves as religious groups to evade taxes, they'd be golden! Who wouldn't prostrate themselves before the first congregation of GMAC?

8:10 AM  
Blogger Mike said...

The altar is a 1974 Chevy pickup.

8:27 AM  
Anonymous wfta said...

I can’t strictly stick to the thread here, but I am afraid this financial crisis is much worse than the press, even the financial press if you can still call the WSJ financial press, is able to learn and publish.

I know you will scoff, but what if Paulson is a public hero? Suppose he said to the banks and brokers, ”Make me a price for these soiled doves that Treasury can sit on for a couple of years and then sell back to the market to break even or maybe make a little for our hard working, tax paying, somewhat reluctant investors.” And the banks and the brokers trotted out 10 or 20 trillion “worth” of counter party agreement “assets” which in any financial climate other than a 10-year wealth downpour are going to be worthless at best. Maybe he’s trying to save us the other $350 billions or at least get us some stock certificates we can kindle the fire with this winter.

4:11 PM  
Blogger Mike said...

WFTA, I'm not sure I see it, for a couple reasons.

First of all, I don't see the "save us" part, at all. These bad assets are not "ours." "We" don't own them, the financial institutions do.

And, at the core of the problem, if entities and individuals are deleveraging, cleaning up their books, hoarding cash, then all the liquidity in the world won't solve the problem of banks that refuse to lend to each other.

All we accomplish is massive inflation which will lead to price rises in the future.

And then we can turn to the moral & political questions of whether the government should engage in this sort of thing, whether it's right to make these decisions without a public debate, etc.

6:51 AM  
Anonymous wfta said...

In principle I am with you 100%. Moral hazard: Managers made bad business decisions. Boards of directors enabled it by not taking their fiduciary responsibilities seriously. Investors allowed it by not knowing what they were investing in or, like me, by expecting Fidelity or Putnam or New England Financial to be at least as knowledgeable about the financial business as I am the fertilizer business or you are the law. Business fucks up. Business deserves to fail. And every bailout teaches managers, boards and investors to expect the next bailout.

My only reason for favoring federal intervention is that many legitimate and necessary businesses depend on credit availability both for “over night” purposes and for consumers to be able to access medium and long term financing. I don’t know that new financial institutions can spring up sufficiently capitalized to fill the void if the existing institutions are simply allowed to go under at their own pace. If Wall Street sneezes is it absolutely necessary for Main Street to die of pneumonia? I read The Grapes of Wrath when I was a teenager and could not stop asking myself, “Why did they let it get this bad?” In practice, I don’t want to see the pain and suffering that a collapse will cause for many people who did nothing to deserve it.

I am speculating that Paulson made the shift away from acquiring “toxic” assets because the brokers and bankers wanted to sell the assets they knew were worth exactly nothing (or less,) keep all the bonuses they had “earned” before the house of cards blew apart, and go back to the unregulated good life (this was essentially what the House Republicans wanted to give them behind the fig leaf of an “insurance” program.) And maybe Paulson would have been happy to oblige if he had $10 or $20 or $30 trillions to spend, but I think even a congress as vainglorious as our own would balk at that. But as I say, I’m speculating and that is a major rub. This crisis didn’t start yesterday, but we (the public) still don’t have any solid numbers, and probably they (Treasury, FED and Congress) don’t either.

I think the old WSJ would have gotten the facts as well as some of the top tier dailies (the Post broke Watergate, eventually.) Now (see Doonesbury) the dailies don’t do investigative and until the next election cycle starts and the WSJ gets back to full-time shilling for the RNC, I expect to see page 2 articles about having sex with cosmic aliens.

I don’t know the answers, but I'll meet you this far: don’t approve any more money for TARP until we know the scale of the problem and have some sort of real plan. That said, Mrs. wfta and I are off for the weekend to celebrate our 27th anniversary and I leave it to you to monitor the scoundrels until Monday.

3:14 PM  
Blogger Mike said...

Mrs. wfta and I are off for the weekend to celebrate our 27th anniversary

Congratulations, sir. Here's to at least 27 more.

9:34 AM  

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