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Why Are We So Afraid To Fix Banks The Right Way?
Henry Blodget | Jan 19, 09 8:57 AM

What's the right way?

  • Temporarily seize the banks
  • Write their assets down to nuclear-winter levels (or, if desired, put them in a big bad bank, as Sheila Bair wants to do.)
  • Convert enough of their debt to equity to put them in a strong capital position.

That's it.  No taxpayer money.  No citizen outrage.  No comical "Yes, we're lending" assurances when what the banks are really doing is, sensibly, hoarding everything.

We could do this to Citigroup and Bank of America tomorrow afternoon, and on Wednesday morning, two of our biggest banks would be rock solid (they could also still be publicly traded, under the same ticker symbols, with different shareholders).  The banks would have hundreds of billions of dollars of assets on their balance sheets that would be marked at or below market, and they could sell them for gains or hold them as their managers saw fit.  They would be liquid and able to lend.  They would have no reason not to lend because their assets had already been written down to the worst-case scenario. (Another plus: Management wouldn't have to lie about the value of their assets anymore).  Bank employees would still have jobs. Senior management would now be free to pay themselves whatever massive bonuses they wished--without doing it at taxpayer expense.  Sanity and fairness would have been restored.

The drawbacks?  It's hard to even call them drawbacks:

    * Today's common shareholders would get wiped out
    * Today's preferred shareholders would get wiped out
    * Today's debtholders would take a big hit, with unsecured debtholders ending up with equity stakes.

But wait--isn't that unfair? Arbitrarily deciding that shareholders and debtholders will get dinged?  Isn't that an abandonmnent of free-market capitalism?

Please.  These banks have already failed.  If it weren't for our having already abandoned free-market capitalism, they'd all have ended up like Lehman. Adults made bets on these securities on their own free will (on the apparent assumption that they come with implicit taxpayer guarantees). These adults can now, finally, accept responsibility for their decisions.

IMO, were government money involved, it should be directed first to those who had their retirement savings in the stock of their employer, especially if there was lack of options or coercion.  Next in line would be other small stock holders with funds invested in affected banks.  Put an FDIC type gurantee up to, say, $50K for other than net high worth individuals.

Unfortunately, Obama is likely to do this only after squandering more money on predictably ineffective solutions and only after it is the consensus that more donations to bankers is futile.  He probably prefers being ineffectual to being radical.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 12:19:17 AM EST
and it could be done in a few days

In the long run, we're all dead. John Maynard Keynes
by Jerome a Paris (etg@eurotrib.com) on Thu Jan 22nd, 2009 at 02:21:38 AM EST
[ Parent ]
I don't think fixing the banks' balance sheets by creating new government credit is remotely good enough. As asset prices fall, that only stops the credit bleeding from the wounds we can see.

The problem is the internal credit haemorrhaging of investor capital which we can't see. That consists of all of the credit created by the "shadow banking" that went on. Most of these declining credit balances are sitting overseas, and the debtor nations in the West are dependent on these creditors keeping their investments in the West.

ie here's the deal, Suckers, what we paid you with has just gone down the toilet, and we'd like you to keep on exchanging your oil for our deficit-based dollars and pounds. I think that creditors would only do that for want of an alternative. And I believe that there actually is an alternative, involving the direct connections of the Internet, and some lateral thinking.

Peer to Peer Investment - Unitisation -  changes not the Quantity of financial claims, but their Quality - and it will stem the credit haemorrhage by replacing much of the National Debt - ie that part of our current money = debt which relates to the stock of productive assets, which is not in circulation, and hence cannot be inflationary - with a National Equity.

Peer to Peer Credit - mutually guaranteed bilateral credit creation and Credit Clearing - gives the transfusion, and credit in circulation constitutes a shrunken National Debt.

In both of these dis-intermediated mechanisms, banks are no longer credit intermediaries putting their capital at risk, and become service providers.

"The future is already here -- it's just not very evenly distributed" William Gibson

by ChrisCook (cojockathotmaildotcom) on Thu Jan 22nd, 2009 at 05:16:44 AM EST
[ Parent ]
Unfortunately, Obama is likely to only implement such a fundamentally radical solution well after he has tried fixing the banks as described above and found even that to be inadequate, and probably would do so only after such a program had been successfully adopted several times in the private sector.  Warren Buffet is probably a much more likely early adopter of such a system than is Barak Obama.  I like to style myself a "radical pragmatist."  I am prepared to accept changes that go to the root of the system provided they can be shown to work.

The problem with adopting your proposals is more that they would work than that they wouldn't.  In the process they would fence off a huge portion of the economy from the sort of "let the rich get richer quickly" schemes that have been the major feature of what has passed for economic policy in the USA and Great Britain.  

Such approaches will only be adopted when they can be sold to a significant portion of the population.  Few want to think sufficiently deeply to understand that what they have previously believed is a collection of noxious fables and "just so" stories fed to them since early childhood to lock in a world view whose chief virtue is the efficacy with which it has served the interests of the very wealthy.  Call it Paul Mellon's revenge--served very cold.

While things are likely to get bad enough for people to demand radical solutions, in such a situation pragmatic considerations usually lose out to more direct appeals to emotion.  In the USA this would likely take the form of some religious fascist distopia.  With such a prospect looming, a President  with Obama's skills and values may be able to negotiate a passage to such a relatively desirable option as that you describe as the least worst option, from the point of view of the wealthy.  That may just be preferable to being led by one who surrounds himself with snake eating geeks--or not.

"It is not necessary to have hope in order to persevere."

by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Thu Jan 22nd, 2009 at 12:51:20 PM EST
[ Parent ]


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