Geithner Bank Bailout Plan: Fiasco

[girl gone mad]

It doesn't sound good..

Geithner Bank Bailout Plan: Fiasco
http://www.nakedcapitalism.com/2009/02/geithner-bank-bailout-plan-fiasco.html

I am so disgusted with this entire proceeding that I am going to dispatch it quickly.

Let's start with the basics. The US banking system is insolvent. Got that? Insolvent. That does not mean every bank in the US is toast, in fact quite a few are probably just fine, and another large group is no doubt hurting and undercapitalized, but a couple of years of not shooting themselves in the foot again would enable therm (via earnings) to rebuild their equity bases sufficiently to proceed more or less as normal.

The problem is that a significant portion of the very biggest banks are insolvent. And on top of that, most of them have very large capital markets operations which have bean the nexus of credit intermediation. The regulators spent the last decade plus being in studious ignorance of those businesses, at least the complicated ones where all the risk resided. The SEC never was very interested in bonds, and the Fed took a hands-off, "let a thousand flowers bloom" approach to risk management, derivatives and what was called innovation. Author and market observer Martin Mayer warned "a lot of what is called innovative is simply a way to find new technology to do that which was forbidden with the old technology."

But the history of major banking crises unambiguously shows that insolvent financial institutions need to be resolved. There are variations on the theme: the government can take them over and recapitalize them, clean them up and re-sell them, a la Sweden; you can wipe out equity investors and bondholders; you can try new twists, like various good bank proposals that have surfaced lately (making new entities out of the deposits and good assets and leaving the dreck with the existing bond and shareholders). While there would be many important details to be sorted out, this is not path breaking, except in the scale at which it needs to occur. And now, having had four actute phases of a credit crunch, the Fed and other central banks have plenty of liquidity facilites ready to deal with any initial overreaction. Rest assured, although radical measures would not be pleasant or easy, there are plenty of models and precedents.

But...here we have another scowling Treasury secretary, with a bit more hair than his predecessor, serving up the same fatally flawed approach as before: let's just throw money at the banks and hope they get better. This is tantamount to using antibiotics to treat gangrene. You waste good medicine and the progression of the rot threatens to kill the patient.

In fact, the state of affairs may be even worse that I thought. I had grumbled about the fact that the earlier leaks of this plan, like the MLEC and the TARP, seemed little more than a sketch, when its success or failure founder on key details.

[.... callchet ....]

1. Because the upper management could care less if they fail.

They have their money for hundreds if not thousands of years.

[notesdev]

2. Insolvency

"The US banking system is insolvent. Got that? Insolvent."

This needs to be repeated over and over and over again until it gets through the thick skulls who think that this whole thing can be TARPed over and stimulated out of.

Insolvent banks need to be allowed to fail, to create room for healthy ones to take their places. By cementing the incentives for poor behavior with TARP etc., the Fed and the gov't ensure that the process that must take place to heal the economy is stymied if not entirely aborted.

[.... callchet ....]

3. Stimuli and bailouts are stockpiling money for the managers.

It is not going to help anything unless the USA can retrain.

[leftofthedial]

4. To this day, I STILL have no idea, other than utter capitulation to the oligarchy,

why Obama would have appointed the same crew of carpetbaggers who helped create the mess we're in to run his economic team