The Precipice of Change
We're past the point of easy answers.
"There is a road, no simple highway. Between the dawn and the dark of night." --The Grateful Dead
The Minyanville mission is to provoke thought rather than shape it. Judging by the reaction to last week's missive, it's safe to say that we stirred some neurons.
The morning after that column posted, Russian Prime Minister Vladimir Putin argued for the creation of regional currencies on a global scale. That, coupled with percolating tension in China and France, offered fertile food for thought as the chasm between perception and reality seemingly narrowed.
To be clear, I don't support or endorse the creation of a North American Currency. As a trader, my job is to assess risk and assign probabilities to potential outcomes. Given the critical crossroads we're currently at, we must explore options regardless of how far-fetched or foreign they may seem.
Consistent with our ongoing effort to be a part of the solution, I wanted to share the following fare with regard to forward policy. The author of these thoughts, Minyan Peter, was treasurer of a top-tier credit card company and, before that, the treasurer at one of the largest banks in the Midwest.
He is very good at what he does and better at who he is. In other words, he cares and as I have tremendous respect for him, I pass through his views, as expressed in a recent letter to Treasury Secretary Tim Geither, for the collective benefit of our community.
- Immediately suspend all common stock dividends for TARP-recipient banks. Even a penny or a quarter is too much, given the circumstances.
- Immediately suspend all preferred dividends for TARP-recipient banks, including payments to the government. As regulators consider non-cumulative preferred stock as Tier 1 Capital, make it act like Tier 1 Capital. The underlying documents permit up to five years of dividend suspension and most preferred shares are already trading as if that will happen.
- Convert the government's preferred holdings to common stock and offer the same terms to existing preferred shareholders. It's time to build a foundation rather than another house of cards. No investor believes that Tier 1 Capital-let alone "shareholder equity"-is anywhere near tangible common equity so force that convergence.
- Cap deposit rates like you did in 1935. Right now, deposit rates are dictated by the weakest of financial institutions and those rates discount the value of FDIC insurance. Even with all of the Fed's actions, bank net interest margins are not expanding and as a result, banks are having to re-price loans to higher pricing.
- Establish a financial institution governing board made up of bipartisan leadership from Congress and representatives of the Federal Reserve and Treasury and ask Mr. Paul Volcker to chair it. Industry leaders need a single board to be accountable to rather than an endless stream of Congressional committees and bureaucrats.
- Within the top 25 largest financial institutions in the country, begin the internal separation of the good assets and businesses from the bad. What you started inside Citigroup (C) has merit elsewhere. After good businesses are "cleansed," sell a small (10%-15%) minority stake in each through IPOs available to all investors. With transparency and clean balance sheets, there will be strong investor demand, but we must give all investors-not just politically connected private-equity firms-the opportunity to participate and use the proceeds to replenish capital. Over time (measured in years, not weeks or months) the investments can be spun-off and good businesses will cover a significant amount of the incurred losses.
- For smaller, troubled banks, please let them fail. When they do, transfer the assets to an RTC-like entity. Then, using a web-based auction process open to all, invite investors to bid on troubled assets. There will be plenty of demand.
- Decide today what you want the banking industry to look like on the other side of this crisis. Whether it's capital and liquidity requirements, deposit limits or conflicts of interest, the time for proactive thought is now.
While many of these options may be perceived as tough medicine and bitter pills, we're past the time of easy choices. We must now choose the least unattractive option, one that assigns culpability on a relative basis and rewards those who have done the right thing by saving.
We, the people, have two options. We can assume the ostrich position and pray that this passes or work diligently on identifying a solution that mitigates the pain and edges us along the road to recovery.
The cumulative imbalances of the past sowed the seeds of today.
Thankfully, we still have an opportunity to shift course before history passes judgment on our children's tomorrow.
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