Home > Economics - General > Abort, retry, fail ?

Abort, retry, fail ?

March 9th, 2009

Every now and then back in the Dark Ages, I would have to deal with the late, unlamented MS-DOS operating system. It wouldn’t be long, as a rule, before I encountered the message “Abort, Retry, Fail?”

Of these, “retry” sounded the most hopeful so I’d choose it a few times, but I don’t think it ever worked. Usually the best thing was to shut down the machine and start again.

This trilemma struck me when looking at the options for US-based banks, and Citigroup in particular.

Like lots of others, I think the only serious option is “abort”, that is, to take the whole thing into public ownership, sell off what can be sold, and eventually return a drastically cut-down version to private ownership, under much tighter regulation than in the post. There are some big problems along the way, most importantly how to treat the holders of Citi’s debts, but these problems have to be addressed sooner or later.

The alternative, recently advocated by US Senators Shelby and McCain with specific reference to Citigroup is “Fail”. They haven’t spelt out what they mean, and perhaps (as suggested by Calculated Risk) it’s really just a semantic variation on the standard FDIC practice of nationalising failed institutions for which no buyer can be found. It’s worth looking, though, at the idea of closing down the US retail banking operations and repaying the depositors out of FDIC funds, then putting the rest of the group into bankruptcy as was done with Lehman Brothers. Citi has at least $100 billion in insured deposits, so this stage won’t be cheap, and since Bank of America and others would almost certainly fail as well, the FDIC would be up for the best part of $500 billion.

The bigger problems will be the potential for failure to bring down lots of counterparties, and the international operations. In the case of Lehman, the immediate consequence of failure was the collapse of AIG (which had written lots of credit default swaps on Lehmans a few days later). This threatened total collapse of the global financial system, and AIG was expensively rescued.

But the international ramifications are even scarier. Just before it went under, Lehman’s extracted $8 billion from its European operations, to reduce the losses of its US home office. When Iceland looked set to pull the same trick a few weeks later, the UK government invoked the Anti-terrorism, Crime and Security Act against it, to freeze the assets of Icelandic banks and the Icelandic government. A “Fail” policy for Citigroup would present governments around the world with the choice between allowing a Lehman-style expropriation, or seizing what US assets they could at short notice.

After the Lehman debacle, “Fail” is to scary for anyone actually in charge of policy to contemplate. But the Obama administration is still unwilling to go for Abort. As the NYT says, the Treasury is “pursuing a strategy that seeks to avoid either the failure or nationalization of the biggest banks” which is a bit like wishing for a pony that can win the Grand National.

So, every week or so, Geithner and Summers have pressed “Retry”, announcing some variant or other of recapitalization, good bank/bad bank or similar. Perhaps they will keep on doing that until Shutdown brings the whole process to a halt.

Update 10/3 Andrew Leonard talks about Citigroups global sprawl and the difficulties it poses for nationalisation

Sixteen Candles psp

. As I note above, the difficulties are far greater with the “Fail” option

Categories: Economics - General Tags:
  1. March 9th, 2009 at 13:54 | #1

    A change of operating system would be better. What’s the financial equivalent of Linux? A plan that is unattractive, unpopular and yet does the job required with no nasty loopholes hidden from view.

  2. Bruce Littleboy
    March 9th, 2009 at 14:38 | #2

    Pressing is an option too.
    According to Willem Buiter:
    Instead the state would create one or more new ’good’ banks – all state-owned and state-funded to begin with. Effectively, some or all of the existing banks would become bad banks. The good banks would acquire the deposits and the good assets of the bad banks or legacy banks. The good assets are, by definition, easy to value. The creation of multiple good banks may be desirable to encourage competition. One could even create a good bank for every existing bank: New Citi, New RBS, New ING etc…
    In my proposal, the existing banks would become the bad banks and retain their existing ownership structure. No government resources would be wasted propping up the valuations of existing assets.
    http://blogs.ft.com/maverecon/2009/01/the-good-bank-solution/

  3. Bruce Littleboy
    March 9th, 2009 at 14:42 | #3

    Correction Re 2
    Pressing “Esc” is an option too.
    (Not particularly clever, but nothing inserted between “less than” and “greater than” appears to get pasted in…)

  4. Ikonoclast
    March 9th, 2009 at 15:18 | #4

    I seem to remember that pressing abort, retry or fail all had the same result on my computer, ABSOLUTELY NOTHING! The sytem remained frozen. That’s what I expect to happen this time too.

    So the only option is to re-boot our global society with a new social and economic system – a steady state, renewables driven, dirigism directed, social-democratic, mixed economy. Endless growth laissez faire Capitalism has failed! Full stop, end of story and honestly don’t bother arguing. It’ll make you look as silly as an AGW denier.

    According to the ABC website:

    “Global action needed to prevent economic catastrophe: World Bank.”

    http://www.abc.net.au/news/stories/2009/03/09/2510965.htm

    Does the phrase “back in the Dark Ages” begin to sound a little prophetic? There’s a crash landing coming. I just hope we can manage a controlled pancake rather than a vertical nosedive.

  5. rog
    March 9th, 2009 at 15:49 | #5

    Try this opinion on “too big has failed” from the Kansas Fed

  6. carbonsink
    March 9th, 2009 at 16:05 | #6

    It wouldn’t be long, as a rule, before I encountered the message “Abort, Retry, Fail?”

    Yes, the Sad Mac Icon (with an obscure hex code) was so much more helpful!

    The global financial system has bluescreened. We need a reboot, or perhaps even reformat and reinstall?

    After the Lehman debacle, “Fail” is to scary for anyone actually in charge of policy to contemplate.

    too not to.

  7. March 9th, 2009 at 16:20 | #7

    Just before it went under, Lehman’s extracted $8 billion from its European operations, to reduce the losses of its US home office.

    I’m guessing thats one of the reasons behind the unexpected recovery of the USD. The US parent companies stripping assets and sucking money out of overseas affiliates in order to bolster the home balance sheet. A curious case of infanticide.

    Also, I think that a lot of contracts for high-priced commodities (such as oil) were written in USD, since the carrying the USD imposed very little holding costs on account of the low rate of interest. When the price of commodities collapsed many of these contracts were settled in a hurry which meant a RoW big demand for USD to pay back US lenders in their own currency.

    Such, such are the joys of the carry trade.

  8. March 9th, 2009 at 17:00 | #8

    John, (also Jack #7), with regard to the international ramifications, Brad Setser had an excellent post today, as I’m sure you may have seen already.

    Effectively, the argument is that, first, the US financed its current account deficit not through private investment but through foreign bank and SWF support: these sovereign flows exceeded the current account deficit and represented half of the gross flows into the US. Second, the US money market funds played a crucial role in the crisis late last year: prior to the crisis, European banks borrowed heavily from these funds. Following Lehman’s collapse the funds were facing a run, cut everyone off and the banks lost access to USD funding. This in turn triggered a US governmental response (think swap lines established by the Fed) to try and supply the needed USD with the US becoming a net lender in Q4 2008 (despite its deficit). This also explains the USD recovery. Third, European banks lost their other source of funding: world’s central banks: emerging economies faced a liquidity crisis of their own. As such, central bank action contributed to, to borrow Rudd’s expression, the sh!tstorm the financial system went through last year.

    Fascinating and highly recommended.

    http://blogs.cfr.org/setser/2009/03/08/the-shadow-financial-system-%e2%80%93-as-illustrated-in-three-new-papers-that-cut-through-london%e2%80%99s-fog/.

  9. March 9th, 2009 at 17:10 | #9

    Also, the Lehman episode is quite interesting: John Taylor for example argues the authorities focussed excessively and incorrectly on liquidity where the real issue was counterparty risk. In other words the Treasury and the Fed refused to accept the the instruments and counterparties involved really were as risky as what the market was indicating. I am not I fully accept the argument but certainly the attitude seems to have carried over to the Geithner Treasury. They seem to be having cognitive dissonance: they are refusing to accept that Citi and BofA are in fact as bad as they are and need nationalisation and as the result keep pressing RETRY rather opt for ABORT.

  10. March 9th, 2009 at 18:40 | #10

    As I said nearly six years ago, the whole system needs a good purge. TOo much toxic waste debt clogging up the works. Too many wild-catters, swindlers and greater fools “enabling” each others worst vices, to adopt counselling-speak.

    Nationalise the bad banks at current market prices = $0. The share holders can take a bath. TFB give them the Risk/Reward lecture and send them to bed without dinner. Naming and shaming the kleptocratic executives who looted assets in the death throes would also be a therapeutic bit of schadenfreude.

    Write off the bad debts. Recommence trading business, but not as usual. Much stricter lending guidelines. Then, when economic system recovers, sell off the banks for a tidy profit. Keep one or two in the private sector to, as Gough Whitlam used to say, “keep the bastards honest”.

    ON the subject of recurring nightmares: financial history seems to be an endless lather-rinse-repeat of the boom-bust sequence. One way to break the cycle is to keep certain folk from being their own worst enemies. Usually in cahoots with others, which mix creates its own bad chemistry.

    An impolitic proposal: By all means we should celebrate diversity. But to keep temptation out of the way of those easily swayed from the path of financial rectituted lets try to keep such diverse bedfellows as good ole boy Texas Oil Millionaires, greedy New York bankers and NINJNA Hispanic borrowers from being in cahoots in their financial wheeling and dealing. In the endless struggle to dismantle damaging stereotypes it would be helpful if institutions did not reinforce* them.

    Or, as my mother used to say when snatching the cookie jar away from my prying fingers, “I only want whats best for you in the long run, dear”.

    A restoration of traditional banking practice is indicated. The revival of adult supervision could begin by cloning the fossilized DNA of paeleo-conservative WASP bankers and their “ole green eye shade” clerks. (Yes, I know Greenspan sure came accross as old before his time. But lets not forget his life-long infatuation with Ayn Rand, his sax playing and his cult of personality. Always a bad sign in a banker.)

    The regeneration process is already underway as Obama made a great play of having the Oracle of Omaha at his side during the campaign. I see Volcker has been dragged out of retirement to dole out bitter pills. Ten years too late but better that than never.

    This somewhat belated revenge of the skin-flinted geezers is a sight for sore-eyed conservatives.

    * I mean this in the classic Skinnerian behaviourist sense, not the moronic politically correct sense that seems to have slipped into general usage.

  11. Alice
    March 9th, 2009 at 19:27 | #11

    I suggest reboot, quarantine system for complete disinfection of toxic viruses rapidly transmittable from hand to pocket. When clean, erase hard disk to eliminate entire collective memory, bash case and any connected componentry thoroughly to ensure complete destruction of old system. Double wrap residual and carefully place in garbage bin marked economic refuse.

    Finally, upgrade to cleaner, smaller, simpler, more useful model.

  12. Smiley
    March 9th, 2009 at 19:48 | #12

    too not to.

    If you had been really pedantic carbonsink you would have picked up this as well:

    under much tighter regulation than in the post

    But in reality, I don’t know how the professor does it. I think he should be cut some slack for the volume of posts he generates. And given that I’m probably 10 times more dyslexic, it makes me feel halfway human when I read such mistakes.

  13. Ernestine Gross
    March 9th, 2009 at 19:54 | #13

    “Abort, retry, fail?”

    Eventually a fustrated private owner of a MS-DOS operating system can throw the stuff away, causing negligible environmental externalities and no global system failure of the internet information infrastructure. Not even a physically close neighbour on MS-DOS will notice unless being told. Not so with Lehman.

    Considering we had the AllBran analogy economics and the swimming pool analogy economics, …., . Methodology: Abort, retry, fail.

    (o.k., comparing the three examples of economics by analogies also suffers from the famous shortcomings of analogies.)

  14. Alice
    March 9th, 2009 at 20:16 | #14

    Ernestine, lighten up!

    There is nothing wrong with analogies. This is a blog not a textbook.

  15. Alice
    March 9th, 2009 at 20:23 | #15

    I will say though Ernestine, you have some good refs up your sleeve. And the famous shortcomings of analogies is….?? (they are reversible?)

  16. Ernestine Gross
    March 9th, 2009 at 21:35 | #16

    Dear Alice, I am not responsible for your education (re 15 and 14, line 2) and I didn’t adopt you as my mother (re 14, line 1). You don’t have to read what I post.

  17. Alice
    March 9th, 2009 at 22:13 | #17

    I rather thought it had been you calling me to account Ernestine but Ill forgive you and you will have to excuse me if Im off topic. Refer 14.

  18. Ernestine Gross
    March 9th, 2009 at 22:47 | #18

    Alice, I am not responsible for your thoughts either.

  19. SeanG
    March 9th, 2009 at 23:07 | #19

    The only way forward is to separate the bad and good parts of the respective banking books. The impaired assets should be severly marked down and there should be an injection of new capital into the banks. This can only be achieved on an international scale otherwise individual nation states will have their own varied remedy which will invariably do nothing to reestablish international lending.

  20. jquiggin
    March 10th, 2009 at 08:38 | #20

    Can everyone please be more polite and friendly

  21. Alice
    March 10th, 2009 at 08:48 | #21

    Sorry JQ. Will do.

  22. observa
    March 10th, 2009 at 13:10 | #22

    Well I think we can safely say now the Austrians were right and printing more money is not the answer to having printed too much in the first place, with the consequent bad monetary signalling and all its concomitant malinvestments. Anyone still clinging on to faith in the Magic Mugabe Money Machine here?

    SeanG says succinctly what the Kansas Fed(rog link #5)says as they conclude what needs to be done in the US. “The only way forward is to separate the bad and good parts of the respective banking books. The impaired assets should be severly marked down and there should be an injection of new capital into the banks.” Even one eyed Gordon Brown has said as much. The only problem is people like JQ want people like me, who have capital to invest, to believe that the very people who couldn’t manage a simple thing like money supply can manage that Herculean process. One in which ‘bad assets’ and their extent can only be measured over time and clearly the speed of recovery will have much bearing on their ultimate size and scope. Recall these were the people who were raising interest rates to fight inflation a year ago and all their headless chookery in between until that final resigned ‘shitstorm’ statement from their omnipotent leader. The solution apparently is to turn everything over to them now according to JQ. Well my money is staying right in their guaranteed bank and Perth Mint gold thanks very much John and I’ll leave you to consider where his advice will leave most investors like me.

    Now from personal self interest, guaranteeing my investments with the next generation’s tax obligations does have some instant appeal, but alas I’m not one of those- ‘Imagine all the people living for today’ kinda guys. More your- ‘We stuffed it and we own it! sorta bloke which largely applies to my baby boomer generation. We of course largely own all those inflated assets and funny money savings but the question is just how funny are they? The last thing the next generation need is a bunch of baby boomer public servants answering that question on their behalf, particularly given their past track record.(how’s that growth and revenue forecast going Treasury experts?)What does that leave young people? Err..umm… try market forces. You know, the ones my Thatcher/Reagan/Hawke/Keating generation couldn’t get enough of in their heyday when the sun never set on their rising assets. Yes children, the very same people who are all Keynesians now and don’t want you to have your time in the sun with those nasty market forces. Only thinking of you preciousses!

    Sorry(aren’t we all these days?)to burst your bubble children but it’s a case of do as they did rather than do as they say now. You have no interest whatsoever in maintaining their funny money savings and inflated house prices and other assets. Quite the contrary. Your interests lie in picking them up for a song at bottom of the market prices and moving on quickly and that’s not going to happen if you leave it up to a bunch of 47-64yr Keynesian converts to mull over in the fullness of time. Allow bailouts, printing money and nationalising toxic banks in their haste and trust me, you’ll be the ones repenting at leisure.

    So if you’re not to listen to these sudden converts and their new mantra and opt for level playing field, market discipline for all, how best to achieve that? Well the key to that is money supply and it’s banks that dole it out via fractional reserve banking and they’re not going to do that while all those toxic assets are on their books and the Govt guarantees all those funny money deposits propping them up. Essentially that future tax burden guarantee is yours and sits guaranteeing just about every bad loan out their chums. Get the picture?

    Let’s cut to the chase children and I’ll show you where your best interests lie. The Govt guarantees only 60% of deposits and in the event of a run on your bank it’s closed, the equity holders wiped out and it reopens with that 60% guaranteed and each depositor holding prorata shares in ‘their bank’ according to their 40% loss. Yes you get to vote on executive remuneration among other things as shareholders. Now notice each shareholder faces a choice. They can immediately sell their shares on the stock exchange for whatever they can get or hold for the long haul while they wait and see how bad toxic bank assets turn out, being slowly reimbursed via the dividend stream as profitability returns. No public servants to pay and no bailouts to fund in future, the bank paying the Reserve the going rate for any money borrowed to back any calls on that 60% deposit base. Now compare that with what these born again Keynesians have in mind for you.

  23. observa
    March 10th, 2009 at 13:36 | #23

    This financial advisor wishes to advise that he has an imediate genetic interest in a 21 and 25 yr old and as such some of the advice here may reflect that.

  24. MH
    March 10th, 2009 at 13:37 | #24

    At the moment Citi has failed, retry has not done anything nor will Abort, so it is time to clean up the hard drive and install a new operating system. Like a lot of Aussie banks, Citi and others had and have ruinous quantities of CDO’s, CDS’s and other securitised leveraged products (SIV’s)off balance sheet slowly festering. The assett valuations were bogus and the market for the sale of such products never tested or marketed so effectively you may as write them down as zero against the asset ledger. The stream of fees for such exotic instruments was the oil that kept the machine working and made the day to day profit and loss look legal, now the fee stream has dissappeared and they are unable to meet their day to day capital obligations even on their own financial products.

    How do I know, I am one of their customers! My O/D line has progressively been wound back without consultation or discussion, they are getting their money but according to the original terms, buggered if I know how they fund the difference but there not getting any more from me than the original agreement provided, which by the way, was OK by me, so I do not feel cheated or hard done by in that regard. I guess you might say I have a vested interest in them failing and if they keep harassing me I might just help them along a bit by becoming another toxic asset. First time in years I have ever had the upper hand on a bank, Love it.

    Anyway if they can do a better job of raising cattle without feed and rain their welcome to it! Makes you wonder how many other wonderful corporate rural agribusiness investments are now high and dry?

  25. SeanG
    March 10th, 2009 at 16:35 | #25

    MH@ 1.37PM – Citi is a different beast from the Australian banks. The type, and complexity of the products, make up a far larger proportion of their operations than they do in Australia.

    Brown has not created a bad bank in the UK and has instead insure the bad assets.

    The TARP programme was a “bad bank” type deal but which did not have anything like the type of power than a bad bank ought to have.

  26. March 10th, 2009 at 18:23 | #26

    I believe this is relevant to the topic, particularly how decisions are/will be made.

  27. observa
    March 10th, 2009 at 20:27 | #27

    Hmmm.. and a few months back MH, that same Citi was bombarding us to shift any outstanding credit card amounts over to them at generous holiday and teaser rates. They were wasting their time unless they wanted to live on merchant kickbacks.

    Oz is not far behind the ROW as the layoffs are beginning in earnest(not the biggies that hit the meeja but the ones, twos and tens breaking out all over the place at present)and all I can say is beware the Ides of Easter now, because 2 days pay with oncosts isn’t to be sneezed at by small biz under the pump. We’ll see if the Rudd Govt can print jobs with that new IR legislation of theirs. That sop to unions on top of Easter Bunny is no doubt the last straw for decision-making for many SMEs right now.

    As for our financial sector, we’re probably streets ahead of most countries, partly due to better management and Govt, but no doubt mainly due to the fact our banks were only bit players on the world stage. The question remains how solvent are they in a world hungry for cash and if they face a similar crisis, how well prepared are our authorities to do better than their OS counterparts?

    How solid are the banks? Well let me give you an insight into that. Case study-young lady, 21, finished training, first job about 2hrs drive from Adelaide, skills in high demand and safe bet recession wise, needs new car after old car insurance writeoff. No problems for a loan with her Big4 bank and mum and dad’s CU. Just a problem with choice of car and beating off the salesmen. Now get this. Bank interest rate 13.4%. CU interest rate 7.8% and no penalty for fast repayment. What does the Big4 bank know that small CU doesn’t or which one is book-building here with deterrent rates for borrowers? When you’ve answered that question then ask yourself how prepared are our authorities if that Big4 bank’s concerns prove justified? I put it you my solution for any Oz bank in trouble in future is the only one that can avoid all the disastrous dithering we’ve seen OS and we should pave the way right now. Reduce the Govt deposit guarantee to 60% and announce the proposed solution to the other 40% should a solvency issue arise. Nothing else I’ve heard could possibly deal with a run on our banks as speedily and effectively as that with negligible risk to taxpayers and at the same time free up other financial markets immediately. The current 100% guarantee is nonsense and our Govt and Opposition should know better. My hunch is their metoo stupidity and lack of finacial nous will be tested quite soon.

  28. observa
    March 10th, 2009 at 20:59 | #28

    And come to think of it, if the Govt wants to increase liquidity after a bank failure and imposing my solution, it can always stand in the market and buy depositors’ shareholdings afterwards. That’s called not paying too much too soon for toxic assets or willing buyer meets willing seller. OTOH, how are all those OS experts doing with their speedy valuations and liquidity provision by the way?

  29. Ian Gould
    March 10th, 2009 at 23:25 | #29

    D. none of the above

    ” March 10 (Bloomberg) — Citigroup Inc. Chief Executive Officer Vikram Pandit said his bank is having the best quarter since 2007, when it last posted a profit.

    “I am most encouraged with the strength of our business so far in 2009,” Pandit wrote in an internal memorandum obtained today by Bloomberg. “In fact, we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007.” The bank had $19 billion of revenue in January and February before disclosed writedowns, he added. ”

    http://www.bloomberg.com/apps/news?pid=20601087&sid=avjYcESZ4uqs&refer=home

  30. Ian Gould
    March 10th, 2009 at 23:57 | #30

    “Citi will offer to exchange common stock for up to $27.5 billion of its existing preferred securities and trust preferred securities at a conversion price of $3.25 a share. The U.S. government will match this exchange up to a maximum of $25 billion face value of its preferred stock at the same conversion price.”

    http://online.wsj.com/article/SB123573983418294221.html?mod=googlenews_wsj

    In other words, if the Citibank common stock price exceeds $3.25 a share, the US government will be showing a profit on their investment.

    As of 11.56 AEST, 10 March. The Citigroup share price was %1.29.
    Let’s see whwere it is a week from now.

  31. observa
    March 11th, 2009 at 08:37 | #31

    Interesting to note how 2 months of profits by Citi can see stock markets roar back relatively speaking which should be a clear message that their is no shortage of capital, just a shortage at uncertain prices, compliments of interfering Govts everywhere. It might be interesting to speculate where we’d be now if Lehmans was instantly recapitalised with 40 or 50% of depositors and bondholders dough in the manner I suggested and their subsequent shares publicly listed for those who want to cut and run.

    The problem for interfering Govts printing money and driving down interest rates to zero to prop up bad assets is, apart from being deleterious to sound investments, it’s a massive problem on the upswing. Essentially it takes a lot for an infinite bond price to halve if interest rates naturally need to rise from say 4-8%, but next to nothing should they rise from 0.5-1% and guess where the barons of bailout have left us all now?

  32. Ernestine Gross
    March 12th, 2009 at 17:51 | #32

    Try, Retry, ..?

    Hype Real Estate (Germany)is still in trouble.

    Krugman wants Germany to ‘stimulate’ and he is alleged to have made some remark about Chancellor Merkel’s intellect, while Merkel and the CDU/CSU – SPD government are preparing laws to nationalise troubled German banks irrespective of major US shareholders.

    http://www.spiegel.de/international/business/0,1518,612729,00.html

    http://www.spiegel.de/international/business/0,1518,608396,00.html

Comments are closed.