Thursday, February 12, 2009

Too Much Insolvency, Not Enough Resolve

If it wasn't already, it is now becoming increasingly clear that the stimulus bill will not be the tool for ultimately reviving the troubled economy. While there is an argument to be made for expanding the safety net in a sudden and drastic downturn, it is the near total collapse of functioning credit markets that is at the heart of the matter. Only by restoring the flow of credit will we put ourselves on the road to recovery.

No doubt a large part of our total credit system comes through finance companies that provide money for all types of purchases, but the real center of the broken lending system is the large banks. The notion that these large banks are for all intents and purposes insolvent, is approaching a critical mass, but don't take my word for it: Here is Yves Smith on naked capitalism; CNBC; Historian Niall Ferguson in the LA Times; The Crunchy Con.

Even at this late stage in the crisis though, no one on Wall St. or in Washington seems ready to declare that the emperor has no money and figure out a way to move forward. To that end, I offer the following.

Memo to bank shareholders (and corporate boards): You weren't paying enough attention to the companies that you owned and those companies are now worthless. Therefore, your money is gone. That is what can happen when you invest.

Memo to lawmakers: Stop calling the heads of major banks to Capitol Hill for a ritual flogging that is little more than political theater, resulting in no discernible change in the state of affairs. It doesn't count as calling them on the carpet when they are standing on an $87,000 area rug.

Memo to Geithner: We're twisting in the wind out here while you find your inner Secretary of the Treasury. You want to give the banks a stress test? Great. Here is an instant stress test: Announce that there will be no program under which the US taxpayers will purchase assets for more than market price. Once this is clear, this game of wait and see will be over and we will know which banks can survive and which cannot.

Memo to bank CEO's: We get why you are waiting, as long as Treasury strings you along and keeps you alive, you can wait until taxpayers subsidize all of your terrible decision making. Perfectly logical. I've got news for you though, people in this country are fed up. You had better do a lot better job of making a case as to why we should rescue you, if one even exists. It is not at all hard to imagine your collapse followed by a government takeover that includes restructuring most of your bad loans on terms that have some reasonable chance of being met. Then these scrubbed loans being sold to whatever institutions are left standing after all of this (or possibly some new ones that come into being just to buy up loans that have been through a government restructuring). By the way, just because you don't like the market price of an asset you are holding, that doesn't mean the market is wrong. And if nobody wants to buy the asset you are trying to sell, then it is worth nothing.

Memo to self: Enough already with the memos.............


Steve said...

I agree with Rod Dreber of "Ibelief"
that nationalization of the banks is the most "market-friendly" solution of the financial crisis (and this from a conservative analyst!. Lo and behold even conservatives have common sense sometimes.

Steve said...

(I refer to The Crunchy Con link you posted in your blog.