The Insolvent US Banking System

Another day, another post on the health, if one can call it that, of the nation's banking system. The Geithner Plan, which seems to divest the President of ownership of the plan to save the nation's bank system should it fail, is a day late and several trillion dollars short. Just how insolvent the US Banking system is anybody's guess but Nouriel Roubini of RGE Monitor who has been right so far in his assessment of the crisis finds that "writedowns by US banks have already passed the $1 trillion mark." Put another way that already surpasses the amount of funds first made available in the TARP. Both Goldman Sachs and the IMF are now predicting bank sector lossess of over $2 trillion prompting Mr. Roubini to run his numbers again. He now thinks losses will approach $3.6 trillion. He writes that we are seeing:
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?

Tags: Treasury Secretary Tim Geithner, US Banking System (all tags)

Comments

3 Comments

Exact.y! Let's just get on with it.

We have the infrastructure/historical effort in place to clean all this up (RTC-like entity and/or the FDIC), so let's stop beating around the bush and just get it done. Bye, bye Citi and BofA...

by bobswern 2009-02-13 02:55AM | 0 recs
Re: The Insolvent US Banking System

Roubini and others have been correct for a long time. I don't disagree with them in their assessment of banks. However they operate in the realm of academia and finance not politics.

The public has to be prepared for nationalism; the current "stress test", that will report in 3 weeks, will allow the administration to show how the administration was deliberate and through prior to putting banks into receivership of the US government.

It is a foregone conclusion that the Republicans and Blue Dogs, assuming there is a difference between the two, will go apoplectic when shareholders of the banks lose their investments.

Obama has to presell the idea to the public, prior to pulling the trigger.  The public cries for nationalization by economist will also help lay the groudwork.

Maybe, just maybe, the Obama team has been thinking about how to do this for sometime.  They have had working groups on problems like this for years, so I don't think they are flying by the seat of their pants.

It could be, that they are the smartest guys in the room and we need to chill and see how this plays out.

by Organic George 2009-02-13 03:32AM | 0 recs
Re: The Insolvent US Banking System

Your argument seems contradictory. On the one hand you say Obama and his administration need time to sell the idea to the public, and that economists advocating for nationalization will help lay the groundwork, but then you tell us to chill out.

How does that work? Shouldn't we be helping to lay the groundwork by speaking out? Isn't the whole point of Obama's "change from the bottom up" that those of us here at the bottom are obliged to speak out and demand change?

by souvarine 2009-02-13 06:34AM | 0 recs

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