However, the market evidently does not believe the story that the banks are really solvent. To wit: Citibank claims on its balance sheet that it's worth more than $150 billion. But if you add up all the Citibank stock out there, which is how you find out what the market thinks Citibank is worth right now, Citibank's total value, according to the stock market, is less than $10. This is particularly alarming since Citibank historically has been one of the largest companies in the world.
So what you see here are two different stories. What the banks are saying about their balance sheets is the first story. And what people outside the banks (e.g. traders on Wall Street) are saying is the second. Not surprisingly, the government is siding with the banks, at least for now. And this lie must be kept if the economy is not to collapse. At least that's what Obama's advisors have convinced him is the case.
What one thinks should be done about the banking crisis depends on which version of the truth you believe. The Secretary of the Treasury and the Fed say that Citibank and all the major banks are well capitalized ... and just need a little cushion for insurance, which the Fed is happy to provide, in the hundreds of billions.
So in a nutshell, here's the situation our country is in
If the Wizard of Wharton and the stock market are right, two of our largest banks are either insolvent, or really, really close to it -- and so are lots of others most probably. But just these two banks -- Citibank and Bank of America alone -- have over a quarter of all the money in the US banking system. And more than 90% of all the money anybody has on deposit in the US is in just the 20 largest banks, most of which, if not all of them, are actually insolvent because of the absolutely huge amount of toxic mortgages that are on their books. And if these banks should start falling, because of some reckless release of proof of the terrible truth about their true financial condition, the US economy and the world economy, are, basically, done for. At least for a while.
So, what can we do?
There are two options that have been widely discussed. One option was the one that former Treasury Secretary Henry Paulson originally proposed with the first TARP -- which you'll remember stood for Troubled Asset Relief Program, and now those euphemistic words, "troubled asset," might make more sense. The idea here is pretty simple. Consider Caitlin's dollhouse as a typical troubled asset. Houses like that are selling right now for only 50 dollars. Under TARP the government agrees with Banker Bob that someday the market will pay a lot more for that dollhouse ... and so it buys it from Banker Bob for a higher price than he could get now, were he to try and sell it on the open market -- let's say the "government" (his mother) gives him 92 dollars for that doll house -- very close to the original hundred that he loaned out to Caitlin so that she could buy it at that price.
In agreeing to the deal, Banker Bob's reasoning goes like this: "I'll still take a hit to my capital: I'll lose a lot of my money -- 8 of my 10-buck investment, but at least I'll get to keep my bank, and I'll keep my depositors, like Alex.
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