Op-Ed: Are US Banks Worthless?
By Minyanville Staff Feb 24, 2009 10:00 am
Shockingly, the answer is no. Here's why.
The declaration that US banks are “insolvent” has been repeated so often, so emphatically, and by so many, that it’s practically considered a truism, requiring no explanation.
And it’s creating very negative consequences for financial markets (as a quick look at the current shareprices of Bank of America (BAC), Citigroup (C), Wells Fargo (WFC) and JPMorgan (JPM) will attest) and the economy as a whole: It’s been used to rationalize both massive bailouts and, more recently, outright nationalization of the banking system.
But I have yet to see a single commentator present a model of a bank’s balance sheet that demonstrates that a particular bank is in fact insolvent and/or unable to lend. Of course, the arguments of the Cassandras do contain a grain of truth. But they lead to dangerous falsehoods.
I believe that the current misunderstanding stems from a fundamental lack of knowledge about how banks work. It’s true that many US banks may have negative book value if their assets are marked to market or even if they are marked to their hold-to-maturity value. However, that is very different from the claim that the common equity of banks have no value and that private banks need either to be bailed out at taxpayer expense or be nationalized.
Let me be clear:
1. It is categorically false that the intrinsic equity value of banks with negative book value is zero.
2. It is categorically false that it is necessary for taxpayers assume the burden of losses created by private banks.
3. It is categorically false that nationalization is a necessary step to “clean up” bank balance sheets and free up credit.
Let's take an example of a bank that, due to poor investment decisions and/or systemic economic conditions, has become “insolvent” - if we understand that term to mean an entity with negative adjusted book value.
It's assumed here that the bank is forced to immediately write down the full “hold to maturity” (or HTM) value of losses from troubled assets.
Click to enlarge
As can be easily observed, given the leveraged nature of a bank, significant losses in its portfolio of assets -- in this case, 11% of total assets -- can very quickly result in negative equity. However, does this mean that the value of the common equity is worthless? Or that the bank should be bailed out and/or nationalized?
But a bank can have negative book value and a highly positive Net Present Value (NPV) of equity.
No positions in stocks mentioned.
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2009-02-24 11:29:47
Cram downs
I would like to take this article and cram it down the throat of congress people, the president, and his advisors. There would be some problems with doing that. Congress people can't understand financial statements, advisors are to arrogant to accept the concept, and the president has to be careful which battles he can fight, and when he can fight them. The current economic choas is a problem of over consumption subsidised by debt growth, and under productivity subsidised by imports since the 1970's. I really do appreciate your article.
2009-02-24 11:37:07
banks
Wow, with bull goose looney Noriel Roubini running around waving his arms in the air beseeching the great god of wonder bread to nationalize the banks before the world ends and previously proven brilliant analysts like Henry Blodgett slathering nationalization all across our Yahoo screens, its sure refreshing to get a calm, cool, other side of the trade.
James, if you've got Jimmy and Timmy's fon #, a call might save all of us a lot of grief. Many thanks for an excellent post.
James, if you've got Jimmy and Timmy's fon #, a call might save all of us a lot of grief. Many thanks for an excellent post.
2009-02-24 11:48:21
unexpected outcomes of securitization
What the author says is true, with respect to bank-generated business, kept on their books. It's only when this business is securitized, and sold on to a new owner, that "mark-to-market" become necessary. Bringing "mark-to-market" into the world of banking will prove to be one of the more unpleasant outcomes of securitization.
The other big unexpected outcome I see - and I confess, this is a guess - is in the functioning of the fractional reserve system. I suspect central bank's estimates of the amount of liquidity generated by a given amount of reserves turn out to be understated during the bubble years, as the practice of securitization enabled banks to generate more business than would be the case under strict FRB.
Does that mean the practice will be banned ? pfffft.... first Congress would have to understand what I just wrote. In this I agree with Minyan Ron.
The other big unexpected outcome I see - and I confess, this is a guess - is in the functioning of the fractional reserve system. I suspect central bank's estimates of the amount of liquidity generated by a given amount of reserves turn out to be understated during the bubble years, as the practice of securitization enabled banks to generate more business than would be the case under strict FRB.
Does that mean the practice will be banned ? pfffft.... first Congress would have to understand what I just wrote. In this I agree with Minyan Ron.
2009-02-24 12:10:41
Is there a big assumption here?
Isn't there a big assumption here that the bank investers will stay put for 10-20 years, patiently gathering the super-low return, while ignoring opportunity costs of capital? I guess for absolute return investers, a 1-2% return for 20 years may be acceptable. Somehow, I suspect, they will think of all the ways to extract value from the banks (like paying themselves bonuses), while sticking the gov and depositers with the bad assets in a couple of years, rather than waiting for 20 years to re-coup their little capital and pennies of returns.
2009-02-24 13:04:56
Great Theoretical Piece
and perhaps it would have had practical applications in real life, if not for the banks, who despite losing billions in bad loans due to greed/stupidity, nevertheless decided to reward themselves bonuses even after accepting billions in government aid. In doing so, imo, they themselves have turned this mess into a political issue in addition to the obvious financial & broader economic issues created from the "credit crunch".
Banks aren't just in the money business - to clarify, they are in the business of safeguarding the money (capital) of their depositors, using it prudently to make loans to credit-worthy customers thereby generating a return for their other providers of capital (namely shareholders). Their "product" is in essence financial integrity and trustworthiness, and on that scale, they are bankrupt, morally as well as financially, imo.
To have failed to administer the 5 "Cs" test (i.e. capacity, collateral, creditworthiness, character & conditions) on such a massive scale is beyond comprehension. The fact there appears to be little to no accountability or consequence arising from their mismanagement and that the solution appears to be for the government to provide yet more capital to those same institutions' largely responsible for this mess spreading into the broader economy, imo, is irrational to the point of being suggestive of more nefarious purposes being served.
Anyone who objectively observes this fiasco from a distance shouldn't be surprised, imo, at the growing groundswell of anger and even outrage at the audacity some bankers have shown. Whether they want to acknowledge it or not, this mess is far from over and a reality "check", so to speak imo, is coming...perhaps in the form of Mr. Santelli's tea party, and i have a feeling it just may "clear" the bank.
I say, let the FDIC move in and take over those banks who have fallen off the wagon, sell-off all their assets, which should pave the way for well-run banks to buy and manage those assets, just like with any other insolvent business, which should then help restore confidence in the marketplace. what good reason is there for that not happening? i haven't heard anyone provide (or even attempt) to answer that question.
Banks aren't just in the money business - to clarify, they are in the business of safeguarding the money (capital) of their depositors, using it prudently to make loans to credit-worthy customers thereby generating a return for their other providers of capital (namely shareholders). Their "product" is in essence financial integrity and trustworthiness, and on that scale, they are bankrupt, morally as well as financially, imo.
To have failed to administer the 5 "Cs" test (i.e. capacity, collateral, creditworthiness, character & conditions) on such a massive scale is beyond comprehension. The fact there appears to be little to no accountability or consequence arising from their mismanagement and that the solution appears to be for the government to provide yet more capital to those same institutions' largely responsible for this mess spreading into the broader economy, imo, is irrational to the point of being suggestive of more nefarious purposes being served.
Anyone who objectively observes this fiasco from a distance shouldn't be surprised, imo, at the growing groundswell of anger and even outrage at the audacity some bankers have shown. Whether they want to acknowledge it or not, this mess is far from over and a reality "check", so to speak imo, is coming...perhaps in the form of Mr. Santelli's tea party, and i have a feeling it just may "clear" the bank.
I say, let the FDIC move in and take over those banks who have fallen off the wagon, sell-off all their assets, which should pave the way for well-run banks to buy and manage those assets, just like with any other insolvent business, which should then help restore confidence in the marketplace. what good reason is there for that not happening? i haven't heard anyone provide (or even attempt) to answer that question.
2009-02-24 13:31:43
Great Theoretical Piece
...."Whether they want to acknowledge it or not, this mess is far from over and a reality "check", so to speak imo, is coming...perhaps in the form of Mr. Santelli's tea party, and i have a feeling it just may "clear" the bank."
Your response is more realistic of our current situation, because the missing ingredient is "accountability." I fear this will have to be forced, as our federal government has not, and apparently, will not respond in an honest, principled way to do the right thing. It seems, the uneducated and indifferent citizens are used as a sort of shield between those that are aware of their great misdeeds (us), and the perpetrators (you know whom).
The day of reckoning is not here yet, but the pot is boiling hot.
Your response is more realistic of our current situation, because the missing ingredient is "accountability." I fear this will have to be forced, as our federal government has not, and apparently, will not respond in an honest, principled way to do the right thing. It seems, the uneducated and indifferent citizens are used as a sort of shield between those that are aware of their great misdeeds (us), and the perpetrators (you know whom).
The day of reckoning is not here yet, but the pot is boiling hot.
2009-02-24 15:44:17
Problem with this analysis
Everything the OP wrote would be fine if the banks had gone out and funded all of their asset acquisitions with 30 year paper. Unfortunately, they did the opposite, funding a huge percentage of their long-dated assets with commercial paper.
Since the liabilities the banks have come due long before 15-20 years then the losses have to be recognized that much faster. In the case of overnight commercial paper - tomorrow
Kind Regards
Since the liabilities the banks have come due long before 15-20 years then the losses have to be recognized that much faster. In the case of overnight commercial paper - tomorrow
Kind Regards
2009-02-24 17:25:07
So we shouldn't worry about Federal deficit either?
After all, they can tax their way out of the hole at some point in the future.
This all reminds me of the gambler who wants to borrow money from the house, which he'll repay out of his winnings.
When you owe more than you own, you're insolvent. The fact that the auctioneer can generate some cash flow from your corpse doesn't change that.
This all reminds me of the gambler who wants to borrow money from the house, which he'll repay out of his winnings.
When you owe more than you own, you're insolvent. The fact that the auctioneer can generate some cash flow from your corpse doesn't change that.
2009-02-25 05:55:49
Nice Job
Glad to see someone elevate the discussion on the banking industry and actually back up his claims with some numbers.
Great Job!
Great Job!
2009-02-25 08:36:21
One more thing...
James,
The more I think about this article the angrier I get. At first I didn't really know why. I mean, there are always going to be crooks and people like Mr. Kostohryz to apologize for them, if not downright co-conspire with them, so that can't be it.
The fact that what these banks did is 'legal' is part of the issue but to an even greater degree its exactly as you say.
These banksters and their bought and paid for politicians, regulators and pundits are going to try to 'reinvent' themselves so they can continue the fraud and corruption at our expense.
Even that isn't sufficient to explain my rising anger though. After all, its their nature and I can't really expect any different. No the thing is, deep down I'm outraged because...
THEY ARE GOING TO GET AWAY WITH IT!
2009-02-25 08:36:29
Bad assumptions?
You made some assumptions in your analysis which demonstrate a large part of the problem. I will start by stating we are and continue to be in a crisis of corruption. For unknown reasons, the banks, the government, and the media have constantly and consistently lied to the public and markets for years. With all the money flowing amongst those groups, it is no wonder they all tow the party line, BUT when the truth comes out (and it has time after time), they have lost all credibility. Thus until we have the FULL TRUTH, FULL TRANSPARENCY, and restored ETHICS, one can only logically assume that whatever good things the banks are saying about themselves or the government is saying about them is absolutely false.
The question is furthered by the fact that:
1) NOBODY knows what the banks have off book (and their activities are so complex and far flung that it would take armies or regulators eons to unwind and decipher);
2) NOBODY knows what the banks have on book (consider Societe Generale's "rogue trader" losse last year, or last night's headline that Merrill apparently through a breakdown in internal controls around their derivatives lost half a billion dollars more last year than they disclosed.
3) Going back to point (1), the regulators have proven to be incompetent (eg, not finding that Madoff did ZERO trades for his clients in 13 YEARS despite numerous audits), corrupt, reined in, or too busy watching porn. BTW, where is that investigation of multi-billion dollar far out of the money Bear Stearns puts with two weeks or less to expiration?
4) If the banks ARE solvent, why all the gyrations and acrobatics under the cover of darkness to sell toxic assets to the Fed and for the Fed and Treasury avoid showing where they spent all that money from TARP and the other acronym alphabet soup of programs to shore up the banks?
And all of this is forward looking because I will not even go into how these bank execs should have their heads on pikes rather than being given multi-billions in bonuses while being bailed out. (Oh, yes I will because there I did).
The ONLY logical conclusion in this situation is that the banks are insolvent. Otherwise, their books would be open to the light of day, they would need no bailouts, and the system would not be burning down as Ben, Timmy, and His Obaminence give speeches full of lies and play the fiddle.
The question is furthered by the fact that:
1) NOBODY knows what the banks have off book (and their activities are so complex and far flung that it would take armies or regulators eons to unwind and decipher);
2) NOBODY knows what the banks have on book (consider Societe Generale's "rogue trader" losse last year, or last night's headline that Merrill apparently through a breakdown in internal controls around their derivatives lost half a billion dollars more last year than they disclosed.
3) Going back to point (1), the regulators have proven to be incompetent (eg, not finding that Madoff did ZERO trades for his clients in 13 YEARS despite numerous audits), corrupt, reined in, or too busy watching porn. BTW, where is that investigation of multi-billion dollar far out of the money Bear Stearns puts with two weeks or less to expiration?
4) If the banks ARE solvent, why all the gyrations and acrobatics under the cover of darkness to sell toxic assets to the Fed and for the Fed and Treasury avoid showing where they spent all that money from TARP and the other acronym alphabet soup of programs to shore up the banks?
And all of this is forward looking because I will not even go into how these bank execs should have their heads on pikes rather than being given multi-billions in bonuses while being bailed out. (Oh, yes I will because there I did).
The ONLY logical conclusion in this situation is that the banks are insolvent. Otherwise, their books would be open to the light of day, they would need no bailouts, and the system would not be burning down as Ben, Timmy, and His Obaminence give speeches full of lies and play the fiddle.
2009-02-25 10:07:13
"I have yet to see a single commentator present a model of a bank's balance sheet that demonstrates that a particular bank is in fact insolvent"
How would anyone present any kind of argument about a bank's balance sheet given that they won't open their books for any commentator to examine!!!!
Given the lack of transparency with regard to their 'toxic assets' a prudent person can only assume the worst.
This article represents what is at the root of this crisis...the belief that mathematical models (which take no account of human nature) can be susstituted for the free market (which does). This allows all kinds of magic tricks to be played and rationalized. This author would have you believe that prosperity can be built on accounting .sleight of hand...as long as we have a long enough time horizon. Can anyone spell Ponzi scheme?
Here is the truth. These banks were leveraged up to 50% and were more gambling dens than financila institutions. Derivatives and CDS policies were basically bets placed by entities without the ability to pay up if they lost. Where I come from that would get your arm broken at the very least. If these 'banks' are solvent then they should just pay up on their debts and put away their tin cups. I for one am not in a giving mood.
The author rightly states that banks aren't 'normal' businesses. The biggest difference is that the government (that's all of us...yes, you and me!) guarantee their deposits (i.e. their only real assets). Because of this they OWE us a sense of responsiblilty and decency. Instead they allowed greed to run amok and now want to blame their behavior on the regulators (who they bought off in one fashion or another) and because 'everyone was doing it'.
If these banks are as solvent as the author wants you to believe we should pull out all Treasury and Fed funding and let them sink or swim based on private investment. This is NOT a liquidity issue. There is plenty of money out there. Just look at the huge sums flooding into treasuries. If banks are such a great investment...WHERE are all the investors?
2009-02-25 10:31:42
One more thing...
Without trust the entire concept of banking isn't viable. These large banks squandered this asset in their rush to pad their bonuses.
Mr. Kostohryz, for all your data and equations I missed the part where you discussed the low level of trust on these banks' balance sheets. What makes this particularly ironic is that these same banks probably ARE counting Goodwill as an asset. As if names like Citi or BofA are still perceived positively by any sane person.
2009-02-25 10:48:04
One more thing...
The banks must be reeling, or quietly hiding whatever (personal) wealth the CEO's can squirrel away, because they have not started what they will eventually have to accomplish. (Not saying they have this capability)
First, the facelift. New names, scrap shitibank, er Citibank, and try NationsTrust.
Hire hard-hitting, trusted P.R. person. Like Iacocca did for Chrysler.
Sell the plan (must have one) as the red, white, and blue thing to do (Join Us as we Rebuild America).
That sort of thing is their only hope, IMO.
First, the facelift. New names, scrap shitibank, er Citibank, and try NationsTrust.
Hire hard-hitting, trusted P.R. person. Like Iacocca did for Chrysler.
Sell the plan (must have one) as the red, white, and blue thing to do (Join Us as we Rebuild America).
That sort of thing is their only hope, IMO.
2009-02-25 11:18:07
Is there a big assumption here?
Thanks for the reply, but those NPV and assumptions are only for the "good bank" part. Since all or most of those profits are going to cover the losses of the "bad bank" part, the overall return is like 0 or some small number for 20 years. Doesn't that equal almost 0 NPV overall?
2009-02-25 13:01:37
There's more than one assumption of goodness...
So basically, for us non-financial folk, the concept is that the banks "value" as defined by the market is higher than zero (otherwise nobody'd own any stock in them), so if they are simply allowed to write-off bad debts over a longer time period, they'll continue to be solvent and will simply build equity back up through business and trading over the next X number of years.
Ok, but there's some pretty big problems with that idea. As someone already pointed out, nobody knows EXACTLY how much bad debt there is on the books -- not even the banks. We might be comfy letting them write down bad assets over 10 or 15 years, but what if it would take 50 years to write them down at a low enough percentage to keep from impacting the bottom line? 70 years? We don't have the faintest idea where it all sits and until the banks come forth and say, "Here's where we are, or at least, our best guess", I don't see the point in taking the chance.
I also agree with the sentiment of, "Well, if there's no problem, then why's the market jittery?" Although I'd be the first to say that the market jumps first and looks second more times than not, there's usually some motivation behind the jump and if it's all smoke and mirrors, I'll be surprised. And that's a big concern -- so what if the market *doesn't* come back when we announce that the banks will have to simply write these debts off over the next quarter century and make it up as they can?
As much as I hate it, there's sometimes a point at which you cut and run. But we need more information before we can really know what we're dealing with.
Ok, but there's some pretty big problems with that idea. As someone already pointed out, nobody knows EXACTLY how much bad debt there is on the books -- not even the banks. We might be comfy letting them write down bad assets over 10 or 15 years, but what if it would take 50 years to write them down at a low enough percentage to keep from impacting the bottom line? 70 years? We don't have the faintest idea where it all sits and until the banks come forth and say, "Here's where we are, or at least, our best guess", I don't see the point in taking the chance.
I also agree with the sentiment of, "Well, if there's no problem, then why's the market jittery?" Although I'd be the first to say that the market jumps first and looks second more times than not, there's usually some motivation behind the jump and if it's all smoke and mirrors, I'll be surprised. And that's a big concern -- so what if the market *doesn't* come back when we announce that the banks will have to simply write these debts off over the next quarter century and make it up as they can?
As much as I hate it, there's sometimes a point at which you cut and run. But we need more information before we can really know what we're dealing with.
2009-02-25 20:46:49
Bad assumptions?
Thanks James.
I, for one, appreciate your contributions to Minyanville, and hope you will continue. It is imperative that we all learn from each other. Your arguments are straightforward and valid, and I am sure I am not the only one who has gained something from the reading. If only the larger society would take an interest, we should all benefit.
Regards.
I, for one, appreciate your contributions to Minyanville, and hope you will continue. It is imperative that we all learn from each other. Your arguments are straightforward and valid, and I am sure I am not the only one who has gained something from the reading. If only the larger society would take an interest, we should all benefit.
Regards.
2009-02-25 23:20:17
To James K, RE So we shouldn't worry about Federal deficit either?
My point was simply that your argument about technical insolvencies and future cash flows reminded me of its mirror image in many people's complaints about the federal government's technical insolvency. Which really just made me chuckle.
There is a point, with habitual gamblers and with banks, where the house will determine that promises to "win their way out of debt" do not conform to the actual circumstances.
I am inclined in this case to view their lack of transparency, their recklessness, the massive red flags, and the downright pathologcal behavior and decide it is best to cut our losses with those operations, rather than extend the line of credit one more time for another roll of the dice.
There is a point, with habitual gamblers and with banks, where the house will determine that promises to "win their way out of debt" do not conform to the actual circumstances.
I am inclined in this case to view their lack of transparency, their recklessness, the massive red flags, and the downright pathologcal behavior and decide it is best to cut our losses with those operations, rather than extend the line of credit one more time for another roll of the dice.
2009-02-26 00:45:35
To James K, RE So we shouldn't worry about Federal deficit either?
Nationalization places the burden of bad decisions on the investors who made those bad decisions and gives the benefits of providing rescue funding to an insolvent company directly into the hands of the people who provided that funding - the taxpayers. Isn't that how the free market is supposed to behave?
I do not buy your argument that the world of banking will end of we don't continue to contribute endless no-strings attached funds into the black and secretive hole of failed corrupt firms. I say: let's try it and find out what really happens. I think we can back-stop the essential services of banking, the economic lubricant part, with something less than a couple trillion dollars, responsibly leveraged. Plus another few trillion that we are already lubricating in mortgages. All far less than we have already spent and loaned and guaranteed so far using the try try again model.
The world may end for the bank-as-speculative-hedge-fund model though. That will not be missed by me and millions others.
I also do not find your argument very compelling that we should throw good money after bad and avoid nationalization simply because we all know that the same creeps will be back at it someday again, running the nation off another cliff.
We have nationalzed the banks already, with our negative real discount rates, our subsidies, our laundering of their toxic debt, our tolerance of their secrecy and speculation and manipulation, with our waiving accounting rules and protecting them from shorts, our guarantees of their deposits and the money market fund system, our guarantee of their mortgages, our guarantees of their debts and underwriting of their deals, and our billions and billions and billions of direct payments to them. We have nationalized them already.
The problem is, we forgot to get anything in return. Not a single thing in return. Just the vague and unwritten hope that they will not drag us off a cliff with them.
I do not buy your argument that the world of banking will end of we don't continue to contribute endless no-strings attached funds into the black and secretive hole of failed corrupt firms. I say: let's try it and find out what really happens. I think we can back-stop the essential services of banking, the economic lubricant part, with something less than a couple trillion dollars, responsibly leveraged. Plus another few trillion that we are already lubricating in mortgages. All far less than we have already spent and loaned and guaranteed so far using the try try again model.
The world may end for the bank-as-speculative-hedge-fund model though. That will not be missed by me and millions others.
I also do not find your argument very compelling that we should throw good money after bad and avoid nationalization simply because we all know that the same creeps will be back at it someday again, running the nation off another cliff.
We have nationalzed the banks already, with our negative real discount rates, our subsidies, our laundering of their toxic debt, our tolerance of their secrecy and speculation and manipulation, with our waiving accounting rules and protecting them from shorts, our guarantees of their deposits and the money market fund system, our guarantee of their mortgages, our guarantees of their debts and underwriting of their deals, and our billions and billions and billions of direct payments to them. We have nationalized them already.
The problem is, we forgot to get anything in return. Not a single thing in return. Just the vague and unwritten hope that they will not drag us off a cliff with them.
2009-02-26 00:56:47
To James K, RE So we shouldn't worry about Federal deficit either?
Let me put it another way. There is a premise underlying the anti-nationalization adovcacy that is based on the notion that the government would be worse at banking than bankers have been. I challenge that. How could the government posibly do it worse than the curent crop of geniuses? Seriously. How much worse could they do?
You make some car loans, you give away toasters, make an inventory line of credit loan, then go golfing. It's not rocket science. At least not the part of banking that actually adds value to the real economy, rather than sucking wealth out of it.
Really. I mean, let's not allow G W to make the appointments, let's hire some actual experienced civil servants to do the job. How bad can they mess up? Any worse? I doubt it.
Short of sending pallets and pallets of cash into a war zone without any tracking, how bad could the government mess this up?
Oh wait; nevermind.
Good night.
You make some car loans, you give away toasters, make an inventory line of credit loan, then go golfing. It's not rocket science. At least not the part of banking that actually adds value to the real economy, rather than sucking wealth out of it.
Really. I mean, let's not allow G W to make the appointments, let's hire some actual experienced civil servants to do the job. How bad can they mess up? Any worse? I doubt it.
Short of sending pallets and pallets of cash into a war zone without any tracking, how bad could the government mess this up?
Oh wait; nevermind.
Good night.
2009-02-26 10:47:40
"I have yet to see a single commentator present a model of a bank's balance sheet that demonstrates that a particular bank is in fact insolvent"
Mr. Kostohryz,
First, i don't know you so this isn't personal. However, I strongly disagree with your analysis of the solvency of these banks and your apparent belief that nothing good can come from nationalizing them.
Where in your tranparent assumptions about these banks do you consider the possiblity of a run on the bank due to lack of trust?
You say that trust "is gained, lost and gained again". Even when the same crooks are in charge? I know the American people are gullible but as this recession worsens, unemployment rises, the value of their homes and retirement accounts decrease I don't see these banks regaining anyone's trust.
I didn't see any evaluation of moral hazard either. You make the assumption that the shareholders will pay for bad decisions. The management of these banks win (at least in the short run) through huge compensation packages and they will continue to win in the long run if you have your way. Even if the banks manage to pay back their debts in the long run (rather than lose even more money) what lesson will these banksters (and others) learn from theis government bailout you support? And if you are counting on shareholders to take charge of the companies they presume to own...well good luck with that! The average shareholder couldn't even tell you who is on the Board of Directors...and these CEOs and Directors like it that way.
Banking is a rigged game that any dunce ought to be able to keep profitable except for another part of human nature that your transparent assumptions fail to address...greed. Undying, insatiable, infinite GREED!
Nationalization won't be pleasant but I liken it to cauterizing a wound. You have to kill off the diseased tissue before the body as a whole can heal. These banksters are diseased tissue!
Ultimately, we seem to have different perspectives. I don't think simply returning these banks to solvency is a valid solution beause it will simply result in more of the same behavior. Nationalization isn't a cure-all but its a start because it (at least temporariy) sends a message to these arrogant 'masters of the universe'. Sure, another round of crooks will probably emerge in time. After all, it's human nature. That doesn't mean we should abandon accountabilty.
The price of free markets is eternal vigilance.
2009-02-26 11:21:07
"I have yet to see a single commentator present a model of a bank's balance sheet that demonstrates that a particular bank is in fact insolvent"
One thing I would like to point out is there are some VERY GOOD banks out there with moral, ethical business practices. That is where you draw your talent and banking know-how, you look at their track record. I would have to agree with James, it is fixable, although the missing ingredient is still trust.
I fear that our leaders do not have the ability to do anything but serve themselves and save themselves, but we will see I suppose.
I fear that our leaders do not have the ability to do anything but serve themselves and save themselves, but we will see I suppose.
2009-02-26 12:32:18
"I have yet to see a single commentator present a model of a bank's balance sheet that demonstrates that a particular bank is in fact insolvent"
If there is any value (or potential value) left in these banks then the taxpayers would receive that value when the bank assets are sold.
You are correct that if the same crooks buy back into the reconstituted banks then the process begins all over again. I guess we not only get the government we deserve but the banking system as well.
The amount of money the government is pumping into these banks far outstrips their market value. Why give taxpayer money to banks (some of which are going to fail) in amounts that would allow you to purchase the bank outright but then not take ownership?
Should we continue to give tax dollars or borrowed money to crooks and hope they will do the right thing when people stop watching? Heck, even while we are watching they take junkets to lavish resorts and then have the audacity to tell us 'we didn't use bailout money for the party, we used money in are other pocket'!
Even if the only thing nationalization accomplishes is to trade in this group of crooks for another group of crooks I still say its worth it. Maybe that only makes me 'feel' something is being done but it is better than allowing these banksters to laugh at us with virtually no consequences.
As for "redistributing wealth", the banking system is already rigged to redistibute wealth away from the masses into the hands of these leeches on society.
In the system you want to sustain it is heads I win, tails you lose for the bankers. It takes some giant cajones to talk about redistributing wealth in such a system!
2009-05-14 18:25:26
The model is unrealistic. It does not tackle the main problem - a run on the bank
If the market perception is that the current adjusted book value is negative, nobody of the creditors (retail depositors, wholesale depositors, institutional investors, etc) will wait for 10-15 years to see "future" profits building capital again. Due to pure, basic fear.
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