The next phase of the bank bailout plan presented by Treasury Secretary Tim Geithner (now slated for Tuesday) is expected to be multi-faceted but missing one key element: An admission by policymakers that major U.S. banks are insolvent.
There are two explanations why the Obama administration (like its predecessor) refuses to even acknowledge this possibility in public, says Martin Wolf, chief economics commentator for The Financial Times:
One, policymakers have better information than private economists and really believe the big banks aren't insolvent, i.e. they continue to view the crisis as a "liquidity problem," and believe so-called toxic assets will return from their currently "artificially low" levels once confidence is restored.
Two, policymakers "are not prepared to admit the truth" because it means existing shareholders and bank managements will be wiped out. It also means "admitting total failure" of efforts to date to stem the crisis, says the author of Fixing Global Finance.
Arguing today's toxic assets are "fundamentally worthless" - and there's lots more losses coming - Wolf says the lack of political will (or outright cowardice) to admit to reality means "we're really in trouble." Why? Because confidence in policymakers will continue to deteriorate as their ill-conceived solutions continue to fail.
Once policymakers (ultimately) agree insolvency is really the underlying problem, there are two options for dealing with the banks:
Nationalize them, and then inject government capital as the U.K. government has started to do with RBS and Lloyds. (a.k.a. The Swedish Solution)
Put them into FDIC receivership or force them into bankruptcy, whereby common stock and preferred debt shareholders get wiped out and "senior" debt holders end up owning the banks.
....scroll down for video one....
http://www.nakedcapitalism.com/2009/02/financial-times-martin-wolf-team-obama.html...second part of interview....
Why the U.S. government is seemingly too afraid to declare bad banks insolvent was the subject of part one of this discussion with Martin Wolf, chief economics commentator for The Financial Times.
The Obama administration is "really frightened" of nationalizing banks and being tarred as having taken an "extremely left, liberal action," Wolf continues here, in part two.
But the bottom line is somebody is going to have to take the loss – whether it's taxpayers or individuals and institutions that own bank shares and debt, says the author of Fixing Global Finance. "We are poorer than we thought we were."
Regarding the financial ramifications of an insolvency of a major U.S. bank, i.e. Citigroup or Bank of America, Wolf says:
It would affect every other banking institutions worldwide, and their shareholders who would rightly fear a similar fate.
"Very serious repercussions" for the global bond market, potentially creating a new set of financial institutions needing government relief, namely bond funds, pension funds and insurance companies that are big holders of bank debt.
The good news is Wolf does not believe the credit market would freeze, as occurred in mid-September after Lehman Brothers was allowed to go bankrupt.
scroll down for video two ...
http://www.nakedcapitalism.com/2009/02/financial-times-martin-wolf-team-obama.html
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