What We Need Now: Real Capital
By Peter Atwater Oct 07, 2008 3:55 pm
Common equity necessary to rebuild capital structure.
And yet today their firms, despite their assertions to the contrary, are gone. But I'm sure on a psychiatrist’s couch, each would say “I thought I could outrun it.”
But it isn't a normal credit cycle correction snowball. It's an avalanche.
And unfortunately, as we're now witnessing, all the liquidity in the world can't outrun an avalanche.
What we need now, and have needed all along, is more capital. Not the hybrid stuff, but the evisceratingly dilutive common equity stuff. Solid ground on which you can rebuild a capital structure. Not senior debt below which you have layer after layer of quicksand.
This afternoon, Ben Bernanke announced that he welcomed ideas as to how to reopen the credit markets. Well, here are mine:
1. Establish a moratorium on all US bank common and preferred dividends. Sorry, but we need all the capital we currently have in the system.
2. Declare insolvent all banks on the FDIC and FSLIC problem bank list and merge them into a stronger financial institution (any bank with assets larger than $20 billion whose September 30th Tier 1 capital ratio is less than 8%).
3. Take the $700 billion authorized by Congress and put it as common stock into any bank sufficient to raise the systemwide bank Tier 1 capital level to at least 10%. Then go back to Congress and get authorization for another $500 billion, just in case.
4. Establish a marketplace for the public trading of toxic debt; however, don't provide government funding to purchase the assets. This will begin a flooring process. Tell banks they have 12 months to get the bad stuff off the books. And as assets are sold at a loss, commit to using the $500 billion in additional funding. Agree to “make whole” all financial-institution Tier-1 capital ratios at no less than 6% through 2010.
5. Go raise super senior preferred stock from the private sector and pay market rate dividends on it.
That’ll get you started. And with a strong base, we can rebuild a banking system that all Americans can once again be proud of.
No positions in stocks mentioned.
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Reply
2008-10-07 16:18:46
banks Wall St
Recapitalizing is needed yet even more is trust, their is no trust at all in wall st or bankers or the regulators that are in bed with each other and do not forget the politicians and the K street creeps.
to reestablish trust a massive prosecution of those that deliberately created this mess and the regulators that turned there eyes from what was going on should be tried for treason
then trust might be established
to reestablish trust a massive prosecution of those that deliberately created this mess and the regulators that turned there eyes from what was going on should be tried for treason
then trust might be established
2008-10-07 17:04:09
Old or new?
There's a lot of talk about saving banks, but as a thought experiment, what would happen if one didn't try to save the old banks, but instead funded completely new banks?
They would not be burdened with the same trust issues or hidden bombs off-balance sheet, and they would not be constrained by the necessity to preserve capital for minimum reserves as their assets implode. There would also be much less moral hazard and much less citizen anger.
Personally I'd prefer moving to full-reserve banking, but if various governments insist on throwing money into an unsound banking system, perhaps throwing them less directly into the churning maw of credit destruction would be a less costly way of stabilizing access to credit.
They would not be burdened with the same trust issues or hidden bombs off-balance sheet, and they would not be constrained by the necessity to preserve capital for minimum reserves as their assets implode. There would also be much less moral hazard and much less citizen anger.
Personally I'd prefer moving to full-reserve banking, but if various governments insist on throwing money into an unsound banking system, perhaps throwing them less directly into the churning maw of credit destruction would be a less costly way of stabilizing access to credit.
2008-10-07 17:07:14
banks Wall St
TREASON ?? rotflmao.
I challenge you. Besides fraud (which is a cheap calumny of an offense to allege), what actual crimes do you think could be successfully prosecuted, under the rule of law, against any participant in the buildup and current process of the credit crisis ?
I challenge you. Besides fraud (which is a cheap calumny of an offense to allege), what actual crimes do you think could be successfully prosecuted, under the rule of law, against any participant in the buildup and current process of the credit crisis ?
2008-10-07 18:01:01
Old or new?
Indeed. Full reserve and abolish the Fed. Building an economy on the ability to lie into paper prosperity is building to fail from the outset.
2008-10-07 19:59:04
banks Wall St
When you're right you're right. If we were to start posecuting people for arrogance, greed and gluttony we wouldn't have much of a country left.
That said, if you're looking for jurors where do I sign up?
2008-10-08 09:50:24
Trust
Lots of pundits like to throw around the T word, like it's something that can be bought.
Maybe it can, if the people we need to trust had any real money. But they don't. They only have the debt chains that were too heavy for us to swim with in the first place. Now, the government(through taxes and bailout) and the Fed (by lowering interest rates) want to make the chains even heavier for us so they can buy our trust with our own money.
Real capital comes from the needs and production of people living within their available resource means.
What needs to occur is Resource Discovery at this point, then we can think about value discovery and price discovery. Hint: Financial algorithms are not a resource, they're overhead liability.
Meanwhile, yet another pundit was on the radio saying we "need to increase savings and reduce consumption", yet doesn't mention the one thing that would do that: replacing income taxes with a consumption tax.
Maybe it can, if the people we need to trust had any real money. But they don't. They only have the debt chains that were too heavy for us to swim with in the first place. Now, the government(through taxes and bailout) and the Fed (by lowering interest rates) want to make the chains even heavier for us so they can buy our trust with our own money.
Real capital comes from the needs and production of people living within their available resource means.
What needs to occur is Resource Discovery at this point, then we can think about value discovery and price discovery. Hint: Financial algorithms are not a resource, they're overhead liability.
Meanwhile, yet another pundit was on the radio saying we "need to increase savings and reduce consumption", yet doesn't mention the one thing that would do that: replacing income taxes with a consumption tax.
2008-10-09 20:26:58
Minyan Peter for Treasury Sec/Fed Chairman
Thanks for sharing the great ideas, and for all the other thoughtful pieces. Minyans should send these ideas to Washington, the Fed, Obama and McCain.
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