Some information from my trading buddy Madscientist about the best way to solve our current economic crisis and the never-ending slide in the stock markets.
"[Sweden] took over the banks, nationalized them, got rid of the bad assets,
resold the banks and, a couple years later, they were going again. So you'd
think looking at it, Sweden looks like a good model. Here's the problem;
Sweden had like five banks. We've got thousands of banks.
-- President Obama
Fair enough. Then again, I don't think anyone has called for every American
bank to be nationalized. Just the bad ones. In fact, I'd be content with
just two: Citigroup and Bank of America.
Why? A few reasons. First, Citigroup has $93 billion of tangible equity,
most of which is claimed by preferred shareholders, almost all of whom are
the government. Bank of America has a market cap of $29 billion, after Uncle
Sam pumped in $45 billion of capital. Anyone who thinks these two aren't
already effectively nationalized is fooling themselves.
Second, let's be real: What are our other options? First Hank Paulson, and
now Treasury Secretary Tim Geithner, have been running in circles for almost
five months, trying to craft a plan to purchase toxic assets at some
Goldilocks number that's high enough to keep banks intact yet low enough to
avoid a taxpayer ripoff of Madoffian proportions.
While we've yet to see exactly what Secretary Geithner has in mind, 2+2 will
never equal 1,000, no matter who's in charge. In the end, taxpayers are
guaranteed to swallow the amount between what banks need to stay afloat, and
what the market is willing to pay for toxic assets. By any estimate, that'll
end up as a massive wealth transfer from taxpayers to bank shareholders and
bondholders. If Merrill Lynch's $30 billion CDO sale for the equivalent of
$0.06 on the dollar is any indication of private thirst for these assets,
the taxpayer-to-shareholder wealth transfer could easily approach trillions
of dollars.
Anyone in favor of that?
Didn't think so.
Now, this hardly means I'm an anti-TARP-ian. I realize this debate is as
heated as it gets, but the $700 billion bank bailout was never a plan to
save consumers' love for American Express, nor a strategy to "get banks
lending again." It was, from Day 1, a Hail Mary endeavor to halt a run on
the banks that threatened the collapse of everyone from Goldman Sachs to
JPMorgan Chase, as well as, according to Congressman Paul Kanjorski, "the
end of our economic system and our political system" and the entire global
economy within 24 hours. Say what you will. I think TARP was undeniably
necessary.
But now that last fall's all-out panic has subsided, we need a long-term
solution to getting our largest banks back on track. Doing nothing isn't an
answer -- they can't survive on their own. Hoping to lure in private capital
to purchase toxic assets is fundamentally flawed -- investors can already
buy assets. They either choose not to, or banks aren't accepting their bids.
"Ring-fenced" asset guarantees are as un-transparent as it gets. Hoping
legacy management will get right what they've proven spectacularly incapable
of brings new meaning to "moral hazard." Our current plans are not, and
likely will not, work.
So, what's the solution?
Just bite the bullet already
However the "stress test" the Treasury is toying with works, I have a
suggestion: Don't give "contingent capital" to those deemed unstable; give
them a contingent funeral. Nationalize them. Wipe out shareholders. Strip
them down. Hose them off. Replace management. Fire the board of directors.
Quarantine the bad assets. Don't worry about trying to find a "fair price"
for assets. Just hold them for Pete's sake. Then, as soon as possible, spin
off the stripped-down, streamlined, lesson-learned banks back into the
private market. The quicker, the better.
Bottom line
There are several banks that kept their noses clean during the boom years --
including Wells Fargo, BB&T, and US Bancorp -- that will probably make it
out alive. There are also a select few that have proven utterly incapable of
surviving as private firms. They need to go.
The U.S.'s top economists and politicians spent years criticizing the
Japanese for trying to resuscitate zombie banks. Now, we're hoping to avert
a "lost decade" of our own by resuscitating a problem that's magnitudes
greater, even though we know the catalyst that finally pulled Japan out of
its slump was wiping the slate clean and starting anew. It makes no sense.
Nonetheless, we now realize why it took Japan so long. Nationalizing is
politically detested and free-market suicide. It's the last thing anyone
wants. No one doubts that. Regardless, Japan taught us exactly what not to
do. I hope we learned its lessons."
by Morgan Housel
February 13, 2009
I myself believe this is the best way forward. However after studying so much about the history of mankind, i can conclude that human beings do not learn from history.
