Saturday, February 7, 2009

The Road Ahead

The more I dig into this, the more I realize that there is no easy way out. Recapitalizing a worthless bank pretty much guarantees a loss for the taxpayer. The taxpayer will have to eat the losses first just to get the bank back up to $0 book value, then pump more money in to move equity into positive territory. Now the taxpayer could make that money back in the future, but that's far from assured, what's clear is that the taxpayer is "overpaying", which is why private equity doesn't step in right now.

We have to figure out a way for taxpayers to be able to make money through future profits or a future sale. However, we also don't want government to run the bank because government is terrible at running things and politics would enter into the daily operations of the bank. If only we could trust that politicians wouldn't interfere but we know they will by demanding loans to "low income" borrowers (translation: ultra-high risk subprime borrowers) and to forgive outstanding mortgages in default. That means more bad loans will be made and the nationalized bank will face insolvency again a few years down the road, the crisis will be prolonged.

That's why we have very little choice but to use taxpayer money to recapitalize the banks while still making sure they are in private hands. The government can and SHOULD demand changes to the Board, but only qualified bankers should replace those ousted, please no more political hacks like Daschle, maybe someone competent like Warren Buffet would take the job as a service to the country. The Board would decide on a new CEO, again with the sole focus on competency and profitability. That might mean financial sector employees further down the ranks would be promoted or given the CEO job. Again, there will be the usual cries of enriching Wall Street, but only people with banking experience can be expected to run a bank. Those calls will have to be ignored and Obama will have to use his golden voice to explain that to the public. Obama will lose favor with the leftist extremists who are out of touch with reality, and be called just another Bush. He will have to take the criticism for the sake of doing what's best and hopefully he will be able to articulate why only Wall Street people are being given CEO jobs. A tough task lies ahead.

1 comment:

W.C. Varones said...

You forget the best solution: give the bondholders a haircut.

Government should step in, wipe out the common and preferred equity, and turn the debt into new equity. Problem solved.