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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

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