Can We PLEASE Just Fix Banks The Right Way?


The latest bailout-for-bonuses and cap-Wall Street-pay-at-$400,000 storms have demonstrated the absurdity of our current approach to fixing our bankrupt banking system:

  • Wall Street’s insistence on paying its executives tens of billions of bonuses because they “work hard” and “might leave” shows that any passive bailout scheme is doomed.
  • Washington’s rush to seize on the bailouts-for-bonuses scandal and, henceforth, regulate lending and wages shows just how quickly we have veered into socialism (which may sound fair in some moral sense, but which just doesn’t work), and
  • The understandable refusal of any bank not on death’s door to accept bailout money shows that taxpayers will have to vastly overpay for crap assets to get banks to play ball–and, thus, transfer taxpayer money to bank bondholders, shareholders, and managers who don’t deserve a cent of it.

What’s the alternative? 

Fix the banks the right way:

  • Declare any weak bank insolvent and put it into receivership (with the insolvency decision to be made by the FDIC and Treasury, not the bank). This is what we did with WaMu, Fannie, Freddie, and IndyMac, and it’s what we can do with Citi, BofA, and any other wobbly institution.
  • Write down the value of ALL the banks’ assets to nuclear-winter levels, so private-market investors AND taxpayers can be assured that there will be no further writedowns.
  • Recapitalize the banks by converting debt to equity, thus merely forcing those who made the bad decisions to pay for them (instead of hosing 200 million taxpayers who didn’t).  If necessary, taxpayers can top up the tank.
  • Refloat the banks immediately, so the government is not in the business of forcing banks to make stupid loans or determining what is and isn’t appropriate for people to get paid.

We’ve tried halfway measures.  They don’t work.  So it’s time to just step up and do the right thing.

See Also:
Wall Street: We Deserve Our Bonuses
Senate Threatens To Cap Wall Street Pay At $400,000
Why Are We So Afraid To Fix Banks The Right Way?

For some reason, our software has decided I am a spammer and refuses to accept my comments, so I’ll have to add them here (at least until it is determined by the court of public opinion that I AM a spammer).  Here’s my response to Porter’s smart comment below:

Thanks, Porter.  Good point. 

I think this issue could be managed by just giving an appropriate haircut to the carrying value of every type of asset–with the haircut determined by the fair value in the marketplace at the time (and not some theoretical value). 

I still think you’d have to apply a “likely future loss” haircut to those values, however, or we’ll still be in the same death by a thousand cuts nightmare we’re in now.  Until investors are comfortable that we’ve acknowledged the worst, you won’t get new capital coming in.