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Bank bailout could cost $4 trillion
Banks don't have enough capital to fix their problems, which means the Obama administration may need a lot more money to clean up the financial mess.
NEW YORK (Fortune) -- The cost of the bank bailout is likely to be much higher than $700 billion.... "The amount of working capital you'd expect the government to take into this would be around $3 trillion to $4 trillion," said Simon Johnson, a senior fellow at the Peterson Institute for International Economics..”
My neck snapped back and I channeled Jon Stewart with a mighty, “Whaaaaaaa?”
Four trillion? Get outta here. I spent a quarter century reporting on financial institutions and the people who run them, and I gotta tellya, there ain't nothing there worth $4 trillion of yours and my dollars. Nada, Ziparino.
If that's what it will really take to put these pinstriped accidents waiting to happen back in action again, then I say, no. No, no, no, NO!
Instead of solving a problem of their own making, why don't we instead solve the problem they created for us instead. And start by letting them go so they can, as they say in human researches parlance, “pursue other opportunities.”
In short, for far less than $4 trillion the Treasury could put every troubled bank in federal receivership. The banks would maintain their individual branding, except all their names would include the word “federal.” (i.e. Federal Bank of America)
Then, before any taxpayer money starts flowing, crack teams of management experts would review each banks existing management team and decide who stays and who goes. That decision would be based on how much each executive had to do with the decisions that led to the institution's problems. (Criminal referrals would also be sent directly to the DOJ when appropriate.)
Federalizing these troubled banks would, of course, wipe out shareholder equity immediately. Stock in those banks would be worthless. Good. Because if we are going to continue adhering to a capitalist model then risk – real risk, rather than academic risk – needs to be reinstitution into the system. No company, no bank, no brokerage firm, no ice cream stand, can ever again be considered, “Too big to fail.” (BTW, "too-big to fail" seems to also to translate to -- “too big to jail.” )
Risk is the key ingredient in capitalism's secret sauce. It's the governor that assures the capitalist engine does not race out of control, (i.e. bubbles.) It does this my putting the genuine fear of loss into the hearts and minds of anyone putting skin in the game.
Bailing out failures defeats the risk-governor, setting us up for inevitable rounds of bailouts down the road. (This is the biggest “DUH” in economics, yet we persist in getting it wrong every time. Instead of letting giant failures fail, we treat them like someone drowning who deserves our best rescue efforts. This is wrong... dead wrong. Let them drown, right in front of those on the beach thinking of diving in themselves.)
I also should note that the biggest failing banks are so loaded down with risky derivatives that they cannot be saved no matter how much federal dough Washington pounds up their butts. (Look at this US Treasury chart -- at bottom of pfd)
Your eyes are not decieving you. It says taht those five giant banks have $10.5 billion in non-derivative assets, and nearly $176 billion in crap they couldn't sell if they provided buyers 72 virgins with each sale.
Of course conservatives will scream “bloody socialism” the second anyone suggests nationalizing these troubled institutions. But what do they want to do instead? They want to give these giant, bonuses taking failures, $4 trillion of your money and mine and our great grandkids. To Republicans that apparently, is not “socialism.” Go figure.
But enough of what Republicans think -- and yes, we've had quite enough thank you very much -- back to what we think. We think severely troubled banks should be put in federal receivership - “nationalized” - and put into the hands of turnaround experts who would dispose of troubled loans and assets the same way the Resolution Trust Corporation did with troubled S&L's.
Once stabilized these institution's would be sold back into the private sector. Those banks that can't attract bidders would be merged with more attractive candidates for sale. Who knows, maybe their old management teams will scrape together what's left of their last bonuses to buy back their banks. But if they do they'll know for certain that if they run them into the ground again no one is going show up with bags of money to save their asses. Oh, and their would-be shareholders will be watching them like hawks – thousands babysitters with one finger on the “sell” button.
Memo to Congress:
Look boys and girls on The Hill, we know you hate making these kind of “black or white” decisions. Rather than clearly deciding whether to sh-t or go blind, you run around with one eye shut farting. But you're not going to get away with that kind of risk adverse, passive aggressive behavior this time around.
Because when it comes to economic models, we can't be a little bit pregnant. We're either a “free enterprise” capitalist economy in which rule No. 1 is “the higher the potential profit the higher the potential risk,” is enforced, or we're not a capitalist economy. If the government is going to provide welfare to failed private businesses, and the people who failed them, then that fits NO definition of capitalism.
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