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Rationalize The Banks! Barack Obama's plan to subsidize failing banks is a bad deal.

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depakid Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Feb-04-09 08:10 PM
Original message
Rationalize The Banks! Barack Obama's plan to subsidize failing banks is a bad deal.
Leaks in the media indicate that the banks are about to inhale another helping of taxpayer dollars. This round is likely to be considerably larger than the $350bn they swallowed in the bail-out last October.

The leaks from Obama administration officials without names suggest that the money will provide a further subsidy to bank executives and shareholders and may not even resolve the banks' financial crisis. In other words, the banks may yet come back for more.

The rumored plan is for the government to buy up hundreds of billions of dollars of bad debt from banks and place it in a "bad bank". The bad bank would then resell these assets for whatever price it could get from private buyers.

The basic problem with this sort of plan is that it requires that the government overpay for the bad assets. If we just pay Citigroup, Bank of America and the rest what their assets are worth, then they would be bankrupt. They have taken enormous losses on these assets. If they had to own up to their losses, it would wipe out the capital of many, if not most, of the banks in the country.

Recent estimates from Goldman Sachs and Nouriel Roubini put the cumulative losses to the banking system at around $2tn. There is a lot of room for guesswork in such estimates, but there can be little doubt that this number is in the right neighborhood.


There is a simple alternative, which can be called "bank rationalization" in order to avoid the "n" word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market. It is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can't let them be tied up in bankruptcy proceedings for years.

Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honor all the debts of the banks at 100 cents on the dollar, which has been current practice.

While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honor bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.

To force banks to own up to insolvency, bank rationalization can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers.

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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Feb-04-09 08:14 PM
Response to Original message
1. I Assume You Meant to Say "Nationalize" the Banks?
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depakid Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Feb-04-09 08:48 PM
Response to Reply #1
2. Dean Baker's word was "rationalize"
Personally, I've favored an RTC type entity to deal with the problem- for the same sorts of reasons that Baker outlines.

I supported the first bailouts- and voted (despite some reservations) for Obama (rather than vote Green in a safe state) because I had hoped that an Obama administration would make a clean break from failed policies of the past and embrace rational solutions based on honest assessments of the macroeconomic situation.

Thus far, along with others- I'm unimpressed both on the substantive level- and with the processes by which the financial and economic policies are being "advanced."

Rather than acting decisively- marshalling their unprecidented political capital to pu foth bold and effective policies, Obama and the Dems seem to be running things up the flagpole to see if anyone salutes.
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Demeter Donating Member (1000+ posts) Send PM | Profile | Ignore Wed Feb-04-09 10:24 PM
Response to Reply #2
3. Obama Is Trying Out the Conventional Options
I figure by the end of the summer, if not earlier, he will realize the futility of it all and start getting creatively liberal, if only because he will have no choice and no more time left to waste on futile, foolish theory.

A more driven, liberal, or wiser man wouldn't take so long, but he's young and in way over his head, and only one person (if you don't count those of us who actually voted for him, and you know they don't count us, not really. Not yet.).

I'm waiting for the morning he wakes up, says F--- This! and starts renovations on the Ship of State.
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