"Bailing out Banks" means "Bailing out Shareholders and Bondholders"

[coalition_unwilling]

Long before OWS was a force with which to be reckoned, the so-called 'bank bailouts' were objects of mass scorn and derision, as were the 'banksters' running those institutions.

When we talk about our government with our tax dollars bailing out banks, people should understand that what is really going on is that the government is bailing out the shareholders (those who own shares of common and preferred stock) and bondholders (those who own bonds) in those banks. When the stocks of those banks perform well, those shareholders make healthy or even obscene private profits and capital gains. Because the banks teetered on the brink of failure, those same shareholders stood poised to lose everything or almost everything were the banks allowed to fail.

So when the phrase "Privatize the Gains, Socialize the Risk" is used, what this means is that the shareholders and bondholders of banks enjoy the gains privately, but the risk they stood of being wiped out is 'socialized' (transferred onto the backs of the body politic).

I have been at Occupy Los Angeles the past few weekends and have found in listening to folks talk there that the masses, while angry at 'banks' often do not understand that shareholders own those banks and are the principal beneficiaries of government interventions.

This is one reason why I favor raising taxes significantly on the rich (who tend to be the share- and bondholders in this economy). The rich have benefitted disproportionately from this rigged game and now should have to pay disproportionately for the game to continue . . . if it is to continue.

If this OP belabors the obvious, my apologies in advance. I felt that clarifying the language might help focus people's thoughts and actions.

On edit: By the same measure, the term 'Banksters' means the executives who run those institutions (anyone with a rank of VP or higher) and their Boards of Directors. It does not mean the 'tellers' or 'greeters.' at least as far as I am concerned.

[coalition_unwilling]

1. I'll give this one shameless self-kick for the morning crew. - n/t

[nineteen50]

2. I call this socialism.

[coalition_unwilling]

3. Well, properly defined, it is not 'socialism' because in that system

the banks and other means of production would be publicly owned. These banks are privaely owned. Perhaps we could call it 'socialism for the rich' whereby the shareholders' gains are private but they are immunized from risk of loss?

[Zoeisright]

4. So?

Socialism means roads, police protection, firemen, air traffic control, weather forecasts, clean water, waste disposal, the energy grid, food inspections, medicines, hospitals, school systems, and libraries.

You got a problem with that?

[coalition_unwilling]

5. I consider myself a Democratic Socialist and

personally think that privately-owned banks should be nationalized, along with the healthcare and defense sectors for a start.

I am logocentric though (or was told that by a professor many years ago) and believe that words have meanings. Hence my OP.

Oops, brain fart. Thought you were asking me instead of the other poster :)

[socialist_n_TN]

8. Your point being?

Some of us (and a growing number with each capitalist overreach) don't mind that at all.

[banned from Kos]

6. No. It meant preventing bank runs.

WaMu didn't get bailed out and shareholders and bondholders lost all. Lehman shareholders were wiped out. Bear shareholders wiped out. Fannie/Freddie shareholders wiped out. Citi and Bank of America shareholders lost 95% of their value. Citi shareholders don't feel "bailed out" I assure you.

Too Big To Fail = Too big for the FDIC to unwind.

(BTW - they deserve all their losses for their stupidity and lack of oversight)

[mulsh]

9. In 2007 I inherited shares of BoA, Citi, Chase and the value was wiped

out overnight in 2008. I can assure you that the bail out of those banks did not benefit me all that much. I still have all the shares I inherited, it's pointless to sell them and holding onto them feels spiteful in a good way (get to vote against board recommendations with other shareholders at shareholder meetings)
the share values of those banks have increased incrementally since 2008 but are no where near the value when I inherited them.

[coalition_unwilling]

11. I'm sorry to hear about your losses. They are akin, I suppose, to

those who bought shares in banks at their height (thinking banks were conservative investments), only to see their shares collapse. Has to be heart-breaking, no matter how one slices it. Kudos to you though for continuing to exercise your shareholder rights.

I mentioned your post to my wife and she, the eternal optimist, said, "But if the DUer continues to hold his shares, they may eventually go back to where they were." Her point by extension was that shareholders in other industries and companies were not fortunate enough to have the government prevent an entire default of their positions.

FWIW, back in 2000, I bought shares of Cisco after it had declined from over $100/share to $60/share. I thought I was the JP Morgan of my age only to discover, to my dismay, that Cisco would continue declining to below $20/share, thereby illustrating for me the old adage that 'A fool and his money are soon parted.'

[Yupster]

25. Mulsh is right

The bailouts didn't help the shareholders. Each time the banks have to issue more shares to raise capital it dilutes the shareholders value so BAC stockholders who used to have $ 10,000 of stock now have $ 500 and Citi Bank shareholders are even worse off. Due to dilution, the value will never come back either.

You are right about bondholders though. That was the main purpose of the bailouts.

BAC must have the most bonds out there of any country on earth. Some are held by individual investors, but most are held by large insurance companies, other banks, teacher pension funds, union pension funds.

If BAC goes down it will take every large insurance company, large bank, pension fund down with them and we will be right back in the death spiral after Lehman Brothers bankrupcuy only significantly worse.

[coalition_unwilling]

29. Good points. Do you think the Big 4 (BofA, Chase, Citi and Wells Fargo)

should be nationalized, should they be allowed to fail or should the government intervene to keep them on life support (recognizing that it is share- and bondholders who stand to gain or lose the most)?

Personally, I favor the first option (nationalization), but may not be aware of all the costs and benefits that option presents.

[Yupster]

33. I favor giving them a chance to succeed

That restriction on swipe fees really hurt them almost mortally.

BAC is also just a pin cushion for lawsuits today. They just seem never-ending.

[JustSayn]

44. As much as we would all like that option...

nationalization at this point in time is a bad idea because the idea of nationalization is still taboo. This would cause the very run on the the bank that much of these efforts are designed to prevent and we the people would be left holding the bag with nothing left in it but flaming poo.

First we have to repair the negative image of the government involvement that has been a thorn in our side as far back as the inception of our nation; since the days Jefferson paraphrased a saying that was old even during his time when he said 'That government is best which governs least.' We had almost killed off this vile notion until Reagan revived the concept with his government is the problem line.

We have work to do reversing the damage done in the people's view of the appropriate role of government before we can look toward anything as ambitious as nationalization. We have some successes to work from such as SS which is very popular and run by the government for example, but we aren't there yet. If we pull the trigger too quickly in a gun fight, we shoot ourselves in the foot.

[coalition_unwilling]

47. First of all, a hearty welcome to DU! Having voted in my first election

in 1980 when I cast my vote proudly for Jimmy Carter (no John Anderson for me), I can personally attest to the deleterious effect Reagan-Bushism has had on public discourse and the idea of pulbic service. If we had not seen its apotheosis in the immediate aftermath of Katrina and post-hoc analyses of how much of Katrina's damage could have and should have been prevented, we saw the apotheosis of Reagan-Bushism (read Hooverism) in the financial collapse of 2008.

I share your view that we have much work to do to restore the working class' trust (the so-called "99%") in government. I hope that OWS is able to start reversing the trend you so aptly described.

[mulsh]

51. my shares were inherited and so pretty much "free money" as

far as I am concerned. Grandfathers on both sides did the gambling and were pretty smart about it mostly. One of them actually was a bookie.

At one point in the nineties my father called me and said, "if I die right now you and your bother will be millionaires...on paper" That's all the shares were... paper. share values fluctuate. I'm fortunate that I didn't gamble any real money on them. I hope your wife is right and they regain some of their former value.

I feel for the people who were relying on stocks like this for their retirement and other stuff.

In the first Bush depression I watched 2 401k's I invested a little money in vaporize. Fortunately they were both under a couple of thousand dollars. Unfortunately at the time I was the go-to guy for retirement benefits at my union which administered one of the 401k's. I spent lots of time being told to "get my money back" by people who also had their 401k's vaporize. Watching share value slip into negative numbers isn't much fun if you don't have some sort of sophisticated bet going.

[banned from Kos]

12. Sorry to hear about your losses and the "stupid" I was referring to were

the executives and Board of Directors who neglected to manage risk and harmed the public.

But you confirm my point - TARP was meant to save the depositors and public from systemic collapse and not help the shareholders.

[Cassandra]

21. I inherited bank bonds...

which never make anyone obscenely wealthy BTW, which were bought when big banks seemed stable, not teetering.

[girl gone mad]

20. No bank is "too big for the FDIC to unwind"

The FDIC was ready and willing to put those banks into receivership in 2008.

[socialist_n_TN]

7. The problem with framing it as "bailing out shareholders

and bondholders" is that it leaves the impression that all the shareholders are average folks with a share or two who would be hurt if the banks failed. The reality is that MOST of the shareholders are VERY wealthy people who own a LOT of shares.

You could actually structure a "bailout" (I'd prefer a BUYOUT rather than a bailout to create a nationalized REAL Bank of America or Bank of the United States) where the ACTUAL smaller shareholder (the ones that hold just a few shares) could be compensated at near full exposure and the rich shareholders would be compensated UP to the level of the smaller shareholders, but no higher.

[coalition_unwilling]

10. Your point is well taken. I read somewhere that only about 5% of American

households own equity (shares of stock) in investment accounts (although the percentage is almost certainly higher for Americans who own equity in various retirement vehicles).

In general, I favor increasing taxes on the wealthy (both those with high incomes and those with high net worths), if we are going to retain a capitalist system of privately held large- and medium-scale enterprise. If one did a 'buyout' of the type you propose, I think it might run afoul of the 'Takings' clause of the U.S. Constitution (at least for the rich shareholders), hence my call to raise taxes on the wealthy instead.

[Johnson20]

15. Again nonsense.

[Name removed]

16. Deleted sub-thread

Sub-thread removed by moderator. Click here to review the message board rules.

[Johnson20]

14. I would like to see some

statistics to backup your claim that "most shareholders are VERY wealthy people. That is just plain nonsense as most are probably teachers, fire fighters, union members etc that own shares in their various retirement plans.

[bhikkhu]

27. I found this graph:

which seems to support the statement well. Perhaps there are other interpretations?

[socialist_n_TN]

32. Thanks bhikkhu

:) I HATE looking up shit that I've heard in the past. Plus I just got back on. But yep that does seem to support the statement pretty well. The top 10% own over 81% of the stock market. According to that pie.

[Johnson20]

36. Yes. Like where are the

institutional investors (eg public servant/union retirement funds) in this pie chart? It would seem that they remain unaccounted for.

[bhikkhu]

40. The details explaining the image don't copy through -

and if I go to the image source, its too much stuff to page through...

but according to the source both direct and indirect ownership (mutual funds, trusts, IRA's, retirement funds, etc) is fully accounted for, and the wealth of the ultimate owners is fairly reflected.

[Johnson20]

42. Thank you sir!

[bhikkhu]

41. Here's another one comparing the US with Sweden:

You can just google "distribution of us stock market wealth", then go to the headers and click "images", and there's a bunch of similar things.

[Johnson20]

13. However, that was

far, far from being the case with General Motors.

[coalition_unwilling]

17. Hunh? WTF are you talking about? These drive-by posts of

yours are really fucking annoying.

[sendero]

18. Yes.

... but at least as important in my mind is that the people responsible for managing these banks should be fired, not get more bonuses.

Generally, when a business does poorly those responsible for execution are punished, not rewarded.

[coalition_unwilling]

19. True. Given the way capitalism operates, excessive executive

compensation would be a matter for Boards of Directors and\or shareholders to address. If a shareholder felt bank executives were being unduly rewarded for their role in bringing a bank to the brink of failure, the shareholder could always sell his or her shares.

I think raising taxes on the wealthy would go a long way to redressing the grievance, such that society would be taxing the shit out of any bonus, including those ill-gotten ones.

[Odin2005]

22. The ultra-rich are all on each other's boards of directors.

It's a big incestuous club.

[JNinWB]

23. Practically everyone with an IRA or 401K has mutual funds full of financial institutions.

It's not just the very wealthy.

Where do you think Unions invest their money?

[coalition_unwilling]

24. Not trying to be insulting here, but did you read the entire thread

before posting, specifically posts #9, 10 and 11? You'll find the issue discussed there, as well as in other posts within this thread.

[JNinWB]

26. Thread nannying duly noted.

[coalition_unwilling]

28. LOL! First time I've seen or heard that phrase. Thanks! - n/t

[xchrom]

30. Despite the ignorant thread jacking - recommend for the conversation. Nt

[JackRiddler]

31. It also meant resurrecting vast criminal organizations destroyed by their own frauds.

Too bad about the shareholders. They take the risk, they reap the profits, they take the losses. The entities responsible for the biggest financial fraud of all time should have never been rescued, and allowed to continue their plunder. They control more of the financial sector today (at a cost to the legitimate financial players -- what about their shareholders?!) and exercise greater influence on politics than ever before. The minimum price of a bailout (which I would have never supported) should have been complete management decapitation, criminal investigation, and controlled liquidation of the TBTFs. As you know, it was quite the opposite: Operation Rescue Our Bonuses.

[coalition_unwilling]

34. All valid points you make. I do think some shareholders like Mulsh (in

post #9 upthread) suffered through no fault of his or her own. IOW, he or she inherited shares and never knowingly took on risk. (Mulsh subsequently lost almost all the value in those inherited shares.)

Sounds like you already know the score, so no need for me to preach to the converted :)

[Scuba]

35. You know what they say when one Monopoly game-player has all the money....

"Game over"

[blindpig]

37. It's the Capitalism

money for nothing....

k&r

[justiceischeap]

38. "Bailing out Banks" really means, "Bailing out campaign donors." nt

[snot]

39. One refinement:

It means above all bailing out the executives.

Most shareholders and bondholders have no meaningful control over the bank. Far and away, it's the sr. execs that have the control.

The execs get their bonuses even if the shareholders and bondholders take a haircut. And it's the execs that can decide whether to make their bank make campaign contros, and to whom. (They don't even have to spend their own money on their bribes, because they control everyone else's).

And if the bank were liquidated, the execs just move to another looting opportunity.

[coalition_unwilling]

43. At least in theory, shareholders should have full control through

their Boards of Directors. I'll grant you that, in practice, such Board of Directors' oversight often proves lacking. The Compensation Committees of the Boards decide upon executive bonuses and compensation, so maybe what needs to happen now is a grass-roots campaign to "Occupy the Boards" :)

[Romulox]

45. The essence of "investing" is *risk and reward*. Perhaps shareholders and bondholders need to

research what it is they are buying. :hi:

[coalition_unwilling]

49. Garden-variety investors were sitting ducks for the charlatans and

hucksters. Post #48 lays out the position that little people who thought they were buying safe, conservative investments got taken to the cleaners by the chicanery of the Boards and Execs of the banks and rating agencies.

I'm of course in favor of investors doing research before risking any money. But there are limits to what a layperson with only modest amounts of time can hope to uncover for him- or herself.

[mopinko]

46. lots of "little people" got creamed. those stocks were thought

to be widow and orphan material. a friend of mine, a painter lucky enough to have an inheritance to live on, had half of her money in lehman preferred stocks.
in these days of 401k's, it is even more so.

[coalition_unwilling]

48. But see also post #7 and those that follow for an informal analysis

of equity ownership in the U.S. Someone above pointed out that the real beneficiaries of the bailout were bondholders who, for the most part, were made whole when the banks were rescued. I don't know enough about preferred shares to know where they sit on the spectrum nor how they perform in the event of a collapse like Lehman suffered, except to know that preferred shares reside somewhere between common stock and bonds. I'm assuming Lehaman preferred stock went to almost nothing in the bankruptcy.

This has definitely been an interesting discussion for me and I've learned a few new things from it.

[RegieRocker]

50. 1% Shareholders which I don't give a damn about.

If anyone of the 99% had stocks in these banks then they get what they deserve for trying to make money from nothing.

[jtuck004]

52. All that is very nice. When criminal investigations bring people from

the financial sector into court to answer for the millions of cases of documented fraud that exists, fraud perpetuated primarily by the originators, prosecutions that would reach into the highest levels of the financial sector, we will be able to work toward our freedom again.

Until we elect officials that are going to investigate and prosecute those actions I am quite sure it won't matter much what we do. (Statute of Limitations still not reached, btw) here). Besides, the very existence of the financial sector it its present form prevents us from ever recovering from the tragedy they engineered in this country. If we don't fix it we are owned, and will be as far into the future as we can see.

Thank you for going out there.