The Insolvent US Banking System
by Charles Lemos, Thu Feb 12, 2009 at 10:24:32 PM EST
rising losses on subprime, near prime and prime mortgages; commercial real estate; credit cards, auto loans, student loans; industrial and commercial loans; corporate bonds; sovereign bonds and state and local government bonds; and massive losses on all of the assets (CDOs, CLOs, ABS, and the entire alphabet of credit derivatives) that had securitized such loans.
It is time to recognize that many banks are insolvent and that the longer we delay cleaning them up the steeper the price tag. Mr. Roubini contends that nationalization is the best alternative.
"Paradoxically nationalization may be a more market-friendly solution of a banking crisis: it creates the biggest hit for common and preferred shareholders of clearly insolvent institutions and -- most certainly -- even the unsecured creditors in case the bank insolvency hole is too large; it provides a fair upside to the taxpayer."
And Mr. Roubini is not alone. As IMF Managing Director Dominique Strauss-Kahn noted in Kuala Lumpur earlier this week:
* Re-examine bank balance sheets on a worst-case basis, determine the viability of various institutions, and restructure them if required. Authorities need to be ready to respond as needed, including full-fledged intervention.
* Provide public support where necessary to banks that can be rehabilitated, in the form of capital, bad asset carve outs, and guarantees.
* Sell or wind-up insolvent banks quickly, depending on whether any franchise value remains.
* Establish new public resolution agencies to manage "bad assets" to maturity or sale.
It's time to admit reality, restructure banks and, above all, to close failing financial institutions whose levels of under-performing assets cannot be supported by balance sheet restructuring. If you can't read between the lines, then allow me to be blunt: it's time to nationalize the tettering banks that can be saved and to close those that cannot be saved. Shareholders will be wiped out but deposits guaranteed. Putting this off only causes more pain, brings more lingering trouble and higher costs in the long run. It is foolhardy for the Obama Administration to believe that we can simply ride out this economic storm since it is more now like a tsunami that is sweeping assets out to sea. If you think the sub prime crisis was bad, just wait for the commercial real estate crisis to hit. Act now or otherwise, we will be taking about more than just a 'lost decade'. Just as a hint if Mr. Roubini is right then $3.6 trillion amounts to 26% of US GDP. Can we afford to be wrong about a quarter of our GDP?