The Obama administration is reportedly considering several fixes for the banking system. Unfortunately, none of these include the most important step: writing down the value of bank assets to nuclear winter levels. And most of them include the wasting of hundreds of bilions of taxpayer dollars to bail out bank stakeholders.
In other words, these are the same solutions as put forth by the Bush administration.
Some of the specific remedies under consideration include:
- A huge “bad bank” that would buy up crap assets. Unless the government buys these crap assets at fair value–which is to say, often far below the value that banks say they are worth–this will be a giveaway from taxpayers to bank bondholders and stockholders. This is unnecessary, unfair, and infuriating. Whitney Tilson likens it to a $1 trillion theft.
- Injection of more capital into banks via securities that would convert into common stock (bonds or preferred stock). This would leave the government owning the banks, which is fine. But unless this is done in conjunction with writing down the value of the bank assets, the bailout cycle will continue quarter after quarter until the government ends up owning the banks anyway.
- Guaranteeing further losses on crap assets but leaving them on bank balance sheets (the Citigroup “solution,” also known as “ring fencing.”) This postpones the burning of taxpayer money, but it also exposes the taxpayer to massive losses, because the banks will be sure to give taxpayers the worst-valued assets they own.
Buying up crap assets is OK as long as the government pays fair value for them and THEN injects new capital (a combination of the first two fixes). In most cases, this will wipe out the stockholders and leave the government owning the banks. For some reason, the government seems unwilling to even consider this.
This slate of proposed Obama fixes is galling because 1) it’s a continuation of the same outrageous and ineffective Bush fixes, and 2) there is a simple, fair solution.
What’s the simple, fair solution?
- Seize the banks, which are insolvent (banking regulators can do this)
- Write the bank assets down to nuclear winter levels
- Convert enough bank debt to equity to make the bank well-capitalised
This can be done quickly, so the banks don’t spend long in government hands. It can be done without screwing the taxpayer, because the banks’ stockholders and bondholders will pay for most of the losses.
Why won’t the government even consider this solution? Probably out of fear of triggering another Lehman Brothers, even though this solution would NOT affect the customers or depositors of the banks.
Protecting clients and depositors is wise. But protecting debtholders and shareholders has ALWAYS been a bad idea. And now that change has come to America, it shouldn’t be beyond the realm of possibility that the Obama administration will address this problem in an effective, intelligent way.
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