The Bad Bank Assets Proposal: Even Worse Than You Imagined

[girl gone mad]

The Bad Bank Assets Proposal: Even Worse Than You Imagined
http://www.nakedcapitalism.com/2009/02/bad-bank-assets-proposal-worse-than-you.html

Dear God, let's just kiss the US economy goodbye. It may take a few years before the loyalists and permabulls throw in the towel, but the handwriting is on the wall.

The Obama Administration, if the http://www.washingtonpost.com/wp-dyn/content/article/2009/02/03/AR2009020303782.html?hpid=topnews">Washington Post's latest report is accurate, is about to embark on a hugely costly "save the banking industry at all costs" experiment that:

1. Has nothing substantive in common with any of the "deemed as successful" financial crisis programs

2. Has key elements that studies of financial crises have recommended against

3. Consumes considerable resources, thus competing with other, in many cases better, uses of fiscal firepower.


The Obama Administration is as obviously and fully hostage to the interests of the financial services industry as the Bush crowd was. We have no new thinking, no willingness to take measures that are completely defensible (in fact not doing them takes some creative positioning) like wiping out shareholders at obviously dud banks (Citi is top of the list), forcing bondholder haircuts and/or equity swaps, replacing management, writing off and/or restructuring bad loans, and deciding whether and how to reorganize and restructure the company. Instead, the banks are now getting the AIG treatment: every demand is being met, no tough questions asked, no probing of the accounts (or more important, the accounting).

Why is this a bad idea? Let's turn to http://www.nakedcapitalism.com/2008/09/new-imf-study-of-banking-crises.html">a study by the IMF of 124 banking crises. Their conclusion:

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense. The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.


In case you had any doubts, propping up dud asset values is a form of forbearance. Japan had a different way of going about it, but the philosophy was similar, and the last 15 year illustrates how well that worked.

[terisan]

1. I agree with much of this-I think Obama's Continuing Bank Bailout is Destructive.nt