The US banking sector is not healthy.
There is a fundamental misunderstanding about the Wall Street bailouts amongst the public, and quite a few policy makers at Treasury and the Federal Reserve: Somehow, they â??fixedâ? the banking system. All it took was few trillion dollars in liquidity and a few $100 billion dollars in recapitalization, and all is now fine (I suspect some people at the Fed know the Truth).
In fact, they did nothing of the sort. The banking system was not saved; The massive injection of liquidity temporarily salved the day-to-day operations of banks, but they did not repair what ailed our financial institutions. Indeed, pouring billions into nearly identical management teams that mismanaged the risk, over-leveraged exposure, and drove banks off the cliff in the first place was an invitation for another crisis.
And that crisis now appears to be arriving. And, its our own fault.
Consider what was actually done in 2008-09, and you will understand why none of the underlying problems have been repaired:
"? Bank holdings: Remain stuffed with declining assets, primarily in Housing and Derivative holdings. Another leg down in Housing could be nearly fatal.
"? Transparency: Balance sheets are unnecessarily Opaque; Eliminating Fair value accounting via FASB 157 did not fix balance sheet problems, but instead allowed banks to hide them.
"? Capitalization: Remains too thin; leverage should be mandated back to the pre-2005 rule change of no more than 12 to 1; As we have learned, management does not keep adequate capital unless mandated to do so (sufficient capital reserves cuts into profits);
"? Misaligned Incentives: Compensation and bonus schemes were not significantly changed after bailouts, except during loan repayments. Thus, management and traders still have the same upside to roll the dice, but do not have the downside risks, which remains on shareholders and taxpayers;
Letâ??s use a counter-factual, a simple thought experiment of what would have been had we gone Swedish on banks like Citi and B of A, placing them into a prepackaged reorganization (thatâ??s a polite phrase for â??bankruptcyâ?).
The easy stuff: Senior management all gets fired. More than just the CEO â?? nearly the entire top floor at the bank, including the Board of Directors, gets canned. Equity shareholders get wiped out. Whatever is left over after all is said and done goes to the bondholders, typically, at about 25-50 cents on the dollar. (Note that in Sweden, bondholders got 100 cents on the Kroner, but that currency was significantly devalued â?? so the bondholders were not made whole, they lost between 50-75%).
Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. All of the bad holdings, mortgages, derivatives and other liabilities are pulled out, and auctioned off. This includes the REOs, the CDS/CDO book, defaulted mortgage obligations. Remember, there is no such thing as toxic assets, only toxic prices. At some valuation, these are worthwhile investments â?? just not 100 cents on the dollar. Let healthy buyers pay 15-30 cents.And anything that is worthless is written down to zero.
We recapitalize the parent bank, and spin off each division: IPO Merrill Lynch for $20 billion, spin out a clean Countrywide at $8 billion, sell of all of the non depository bank pieces. What you have left over is a well capitalized bank, owned by Taxpayers, with well capitalized former divisions as stand-alone companies. All of the above have transparent balance sheets (No FASB 157 required to hide the garbage investments). Eventually, everything is spun out back to the public markets. Uncle Sam is repaid, and what is left over goes to the bondholders.
This would have created a transparent, unleveraged, adequately capitalized banking system that would be contributing to, rather than detracting from, the US economy.
But all that was a missed opportunity â?? for W and O alike. What we have today instead is an over concentrated set of banking behemoths, barely off life support. Many of these remain mortally wounded by the holdings â?? holdings that they would have to shed through a healthy reorg.
The recent downturn in the banking sector? I suspect it amounts to nothing more than a credible bet that these banks are not in any condition to withstand the next recession. (No, it was not Henry Blodgetâ??s Fault). A rise in unemployment and another next leg down in Housing could very well be fatal.
If the banks come crawling back to Uncle Sam for another bailout, it will be proof that â??rescuingâ? failing financial institutions that blow themselves up is the exact wrong strategy.
Real Capitalists know failure is part of the process. I suspect we may have another chance at a banking reorg. Letâ??s hope we do it correctly this time . . .
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Previously:
Banking Sector Remains (literally) Unchanged (January 4th, 2010)
Bank of America Credit Spread: FUGLY (August 23, 2011,)
GM Style Reorg for BAC, C (August 9th, 2011,)
Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data, ability to repeat discredited memes, and lack of respect for scientific knowledge. Also, be sure to create straw men and argue against things I have neither said nor even implied. Any irrelevancies you can mention will also be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.
â??And the banks â?? hard to believe in a time when weâ??re facing a banking crisis that many of the banks created â?? are still the most powerful lobby on Capitol Hill. And they frankly own the place,â? Senator Durbin, 2009.
The owners of congress wonâ??t let the government stop their fun
Please write that in the WaPo.
Ditto. Probably BRâ??s best essay of the year. Watch the MSM pretend it donâ??t exist. But word gets out â?¦
Well weâ??ve been struggling with this problem since the 80â?²s in one form or another.
The central problem is a very large chasm in viewpoints between two completely different worlds.
You have the economic models of the Boomers â?¦ Coca Cola, Buffett, Picnics at the park near your closest Levittown, a F150 and a load of mulch in every drivewayâ?¦.. And Gen- X and Gen-Y.
Video Games, Heavy Metal and Punk. Fly by the seat of the pants. Whereâ??s the next wave? Take â??nothingâ? seriously including Uncle Sam and his precocious greenback.
Itâ??s the same ole story. Old men with old capital trying to prove to the rest of the world that they STILL are the King of this Thar Hill.
When to be completely honest, people were laughing at the Reagan masks over a decade ago.
Thereâ??s really no problem to be fixed. Itâ??s just another wave of America.
Now donâ??t get me wrong, if youâ??re broke and indebted to one of these behemoths and are landlocked feeding your kids through your local gig as a gravedigger, youâ??re obviously going to have a completely different viewpoint from someone free to pursue his or her own path in the land of the red white and blue.
But come on, we have those people all the time. Itâ??s like florists. Youâ??ll find one on every main street. Itâ??s just all of the gosh darn sudden weâ??re overly concerned about the plight of the florist. The Internet is to blame, plain and simple, because as Iâ??ve said it gives people the impression they can reduce large â??macroâ? economic forces which are the result of millions of people pursuing their own self interest into some personal application to their lives.
Why should I pay my electric bill? Lloyd Blankfein owns a nice boat. The two are completely unrelated.
Maybe a day of national catharsis. We can have a bunch of hippie progeny burn Trump, Jamie, Lloyd and whatever else is the flavor of the month in effigy, and then run around like a group of Libyans who just freed Tripoli. To be honest, I canâ??t believe thereâ??s still this push for a witch hunt. There is no sacrificial lamb. Get on the board, howlie. The next wave is coming over the horizon.
Oh and I have a big mouth and an even bigger pen and both write and speak too much :->
â??Just donâ??t sit down cause I moved your chair.â?
The 2001 Nobel Prize in Economics went to Akerlof, Spence, and Stiglitz forâ?¦.wait for itâ?¦.ASYMMETRIC INFORMATION.
So we have some of the most powerful â??capitalistsâ? in the world hiding behind asymmetric information for fear of what would happen in a truly competitive market (the kind they defend in public but not private â?? who can forget the public statement that GS was doing â??Godâ??s workâ?). The govâ??t supports them as it continues to fear TBTF and cannot accept that failures are a defining part of competitive markets and capitalism.
BR, pls make this topic numero uno for all future TV appearances, print columns, etc. that is all.
Having just finished â??Bailout Nationâ? this morning, these recommendations are from the last chapter. They are still good recommendations. Why the government and the Fed thought that just papering over the long term problems with â??extend and pretendâ? was going to work, is mystifying.
As long as we are going to fire top management and the boards at these failing banks, how about we go ahead and fire the management of the Fed, SEC, FDIC, etc and start all over there, too.
The big banks are animated corpses, nothing more.
â??Let's use a counter-factual, a simple thought experiment of what would have been had we gone Swedish on banks like Citi and B of A, placing them into a prepackaged reorganization (that's a polite phrase for "bankruptcy"?).â?
â??Temporary nationalization is the play: Uncle Sam provides debtor-in-possession financing to keep operating. â?
Excellent post and no doubt would have resulted in a much better outcome â?? but the word â??nationalizationâ? is demonized by the Right and would never fly â?? but you know that. Current political rancor makes it hard to envision a practical workable solution that could actually pass.
FASB 157 allowed them to hide a lot of junk in the trunk, there are still enormous RE chickens that need to come home to roost.
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