US Banks, follow up

Simply throwing $ at the likes of Citi or GM is a fool’s errand and we all realize that now. For example, in exchange for the $17+ bln Bush gave GM and Chrysler, they were required to come up with a plan to regain viability. They have. They need another $22 bln! Too much. Scare tactics by the near-deceased bore fruit - "GM dies and we all die". This panicked most of Congress. But taxpayers have seen through that tactic; most Americans have now come to agree with our earlier assessment for the vehicle industry - Drop Dead.

Ideally we want to rely on the time-tested process of creative destruction for all of the economy, the workings of a free market. Should we have done that with the banks, simply stepped away? Was von Mises right? Well, ya, but then we’d all need to know where the grubs are located. So the answer is "No," at least for what we encountered Q4 - the liquidity crisis and contagion.

For banks unfortunately we must compromise, at least for some and at least temporarily. This is because some non-banking parts of banking companies are so large and entwined that their failure will impact all of us. Should have been regulated earlier along with the twins you say? Maybe so but here we are. In our Feb/24 sketch we touched on two methods we think would accomplish this resuscitation, neither necessarily mutually exclusive of the other, and both time tested (in the case of full yet temporary nationalization - Sweden).

Peter Morici, now a prof a the Univ of Maryland Bus School and earlier, chief economist of the US International Trade Comm expands on one of them: "No solution to preserve private banking can be found without halting the free fall in housing prices. That will require an aggregator or bad bank to purchase about $2 trillion in mortgage-backed securities at current mark-to-market values on the banks books. It could be capitalized with $250 billion in TARP funds, $250 billion in share sales to private shares, and $1 trillion in bonds. Banks and others could be paid for securities with 75 percent in cash and 25 percent in aggregator bank shares." He goes on: "Performing triage—leaving alone mortgages that will be repaid, reworking those that could be repaid with some adjustments in principal and interest terms, and foreclosing on the rest—the aggregator banks could fix the number of foreclosures and limit the fall in housing prices. As many mortgages would be saved, the aggregator bank, like its predecessor the Savings and Loan Crisis RTC would likely earn a profit for investors."

Makes sense. Ready Geithner, Obama? The "stress tests" are fine, a good idea. Let’s get to it.

Robert Craven