From the Naked Capitalist…

The Federal government has said that it is willing to lend or backstop up to $7.4 trillion to get the credit markets moving again. This figure comes from Bloomberg as a tally of all the commitment ALREADY made. Note that many of these have not been drawn down, hence the Fed’s and Treasury’s balance sheet have not (yet) expanded correspondingly. And some of these are in the form of guarantees, such as $1.4 trillion by the FDIC. Note the Bloomberg article fails to provide a tidy table showing how it came up with this figure. Critics will argue that the mixing of guarantees and borrowing facilities is an apples and oranges comparison, but the flip side is that the guarantees are treated by the authorities as a cost-free exercise, which is also incorrect.

From later on in the same post….

US debt to GDP stood at 350%. as of March 31, 2008. There are some items that are arguably overstated (lines of credit are included at their full amount, but second and third mortgages not included, and perhaps most important, contingent exposures like AIG’s credit default swap guarantees). It isn’t unreasonable to assume they net out.

The Fed’s proposed intervention is a bit more than half of GDP. However, note it (and the Treasury) has already made, and will continue to make, considerable commitments to non-US parties. AIG., for instance, has over $300 billion in CDS exposures in guarantees that permit European banks to evade minimum capital requirements (and AIG also has other, substantial non-US exposures). Similarly, the most likely cause of a Citi meltdown would be withdrawals of uninsured deposits, which were primarily overseas. Moreover, the Fed has also provided considerable indirect support to non-US entities via providing unlimited dollar swap lines to other central banks.

That is a long winded way of saying that not all of that $7.4 trillion applies to exposures that fall in the 350% debt to GDP figure cited above. Just to pick a number, say $6 trillion of the total goes to US debt. The US debt was $49 trillion. The Fed can commit less than 1/8 of the outstanding debt to solve the problem

As a nation we owe more then we can ever afford to pay. This comes from growing debt faster then GDP for many years. There are only to ways out of this mess. We can inflate our way out or we can allow many people to default. There is no third choice.

As for me, I prefer the default option to the massive inflation. At least under the default option there is a chance that the people who caused this mess will suffer more then those who played it straight. By contrast, massive inflation will benefit those with heavy debt and wipe out those who tried to save.

Given that the US is a democracy and a net debtor nation, I have no doubt about which solution this nation will chose in the end.

I been watching this Citi over the weekend. It seemed like things were merrily heading towards the government giving them a ton of money to solve all their problems. Then all the sudden everything went haywire.

Read this article from CNBC and you can get an idea of how fast things changed. Two updates on one article is hardly normal.

Naked Capitalism has more. Though I must say I take strong exception to this…

But the real problem is more basic. Why does the Administration need to be fair? This is a one-off, emergency measure. The fact that it is worrying about other banks demanding the same deal suggests the terms are not sufficiently punitive to Citi management (note the stress on the impact on the key actors). But even if it is not as nasty as it ought to be to Citi, people in power have the right to be capricious. Citi is unique on so many dimensions that it is easy to argue that a deal for Citi need not apply to anyone else.

I think that the idea that people in power have the right to be capricious is more harmful then Citi’s collapse could ever be.

Edit: Forgot to put the link in. Fixed now.

The airline industry goes bankrupt all the time. But we still have air travel. Why should we assume that bankruptcy means the end of the car industry?

My solution would be for the shareholders to be wiped out. All the secured debt holders to be given equity in proportion to how much money they were owed and all the unsecured to take a hike. After all that is done the Government should take over a portion of the pension obligations seeing as how the government has guaranteed them anyway. After all that is done, you would probably have a car industry that could survive on its own.

The worst possible solution (and the one that will probably happen) will be for the car industry to receive just enough money to keep on being a walking dead man.

(h/t Naked Capitalism)

From the New York Times…

A recent study found that the typical family who filed for bankruptcy in 2007 was carrying about 21 percent more in secured debts, like mortgages and car loans, and about 44 percent more in unsecured debts, like credit cards and medical and utility bills, than filers in 2001.

Their incomes, meanwhile, remained static over those six years, according to the study, which used data from the 2007 Consumer Bankruptcy Project, a joint effort of law professors, sociologists and physicians. Researchers surveyed 2,500 households nationwide that filed for bankruptcy in February and March 2007.

I can’t but help note that in 2005 they change the bankruptcy laws to make it harder for people to get out of their debts. The goal was to force more people to pay what they owed. But the practical effect seems to have made it so that people pile the debt even higher before they declare bankruptcy.

I am not one of those touchy feely poor victim type people. But I never thought that the 2005 law was a good idea. From my perspective, the real problem is that banks were willing to loan people too much money. If you loan people too much money, it does not matter what the law says. You are not going to get repaid.