TW: The economic blogosphere is over-run with commentary regarding what to do with our banking system. This piece seems to address it as succinctly as any but most of all makes no false or ill-informed claims regarding a solution. There are hundreds of billions of overvalued assets (probably in excess of a trillion perhaps a couple of trillion or more) polluting our nation's and the world's banks. Somehow those asset values must be addressed without sending the banking system into a truly scary infarction.
The best solution will require partisanship to be minimized domestically while cooperation with our international partners needs to attain new levels of effectiveness. Two very tall orders, the latter more likely than the former.
From Baseline Scenario blog:
"I don’t envy President Obama’s economic team. When it comes to fixing our banking system, there is no easy solution.
...Assume for the sake of argument that all of our major banks are insolvent if they have to mark these assets down to market value. The crux of the issue is that any scheme in which the banks receive more than market value is a gift from taxpayers to bank shareholders, and any scheme in which they are forced to take market value is one that the banks will not participate in. [TW: in other words either the government overpays or "pays cash for trash" as certain pundits say or the government nationalizes the banks blowing out both equity and bondholders at least partially or the banks try to remain independent but since they are insolvent once they actually mark to market values they will collapse leading to a truly nasty credit crisis]
Let’s look at a few possibilities:
The government forces banks to write down their assets to reflect worst-case scenarios (unless they do this, no one will have confidence that the asset values won’t fall further), and then recapitalizes them to make them solvent. This is a desirable outcome, but bank shareholders won’t go for it because they will be mostly wiped out. This is roughly what Sweden did with two banks, but Sweden nationalized them first, so the shareholders didn’t matter.
The government creates an aggregator bank to buy up toxic assets. If the aggregator pays market value, no bank will sell; if it pays above market value, it’s a gift. The current idea I’ve heard is that the aggregator will only buy assets that have already been significantly marked down, but that doesn’t really help the banks any.
Another idea is having the government guarantee toxic assets, as it did for Citigroup and Bank of America so far. But this doesn’t solve the problem. There is already a market to insure toxic assets - it’s called the credit default swap market. If the government provides insurance at existing market prices, no bank will buy it, because the cost of the insurance would make it insolvent. If the government provides cut-rate insurance, as it almost certainly did for Citi and B of A, then it is a gift. The only “benefits” of an insurance arrangement are: (a) it’s much less obvious that the government is giving bank shareholders a gift; and (b) the way Citi and B of A were structured, it wouldn’t require a lot of cash from Treasury (and hence from Congress), because most of the guarantee was provided by the Fed.
Meredith Whitney thinks that the banks should sell their “crown jewel” assets - presumably, businesses they have that are still in good shape - to private equity firms, and use the cash to repair their balance sheets. This would be a nice solution, but I don’t foresee it happening. Given the choice between selling the good operations and being left with barely-solvent portfolios of runoff businesses, or holding onto the good operations and hoping for a government bailout, I think all the Wall Street CEOs are betting on the latter.
I think there are two possible outcomes to all of this: (1) the government makes a gift to bank shareholders and justifies it on the grounds that there was no other choice; or (2) the government forces the banks to sell assets at market value and accept a government recapitalization program - either by exercising its regulatory authority (similar to an FDIC takeover) or by just buying out all the common shareholders at their current low prices. In option (2), the government would then re-privatize the banks at some point. But there’s no easy solution."
http://baselinescenario.com/2009/02/03/searching-for-a-free-lunch/
No comments:
Post a Comment