"The following is a duplicate of a comment I made to another SA article. I bring it here in hopes of getting more discussion. Listening to the bank CEO testimony before Congress yesterday, they all seem to believe they have good prospects and need limited additional direct government help. Are they simply holding weak cards and making poker players' bluffs? Let's take these testimonies at face value. What then should be done with the next $350 Billion in TARP money? Let me throw out a wild idea for discussion. Take $200 Billion of the TARP II and provide investment capital to establish 10 new national commercial banks. This is $20 Billion per bank. The management structure for each bank should be recruited from the private sector and each should have its own individual board of directors, with one government representative on each board. These banks would be unencumbered with legacy assets and liabilities. This would give them much more flexibility than the existing banks in how they deal in the credit markets. This would distribute the banking sector risk across a larger group of banks and make future regulation against monopolistic concentration of banking power more tenable. Getting rid of "too big to fail" banking structures would be easier in the future. In the next few years, these new banks would be taken public with IPO's, the proceeds repaying the initial capitalization and providing some combination of capital gains for the taxpayer (at a prespecified maximum government return, say 15% per annum) and additional capital for the banks (above the government's capital gains). Okay readers, what's wrong with this idea (besides being off-the-wall)"
So here is my take on what I think is wrong with John's proposal. On its face I like it but consider this:
- for a while I debated with others whether Fannie Mae and Feddie Mac were responsible for our economic woes. My position was that they for the most part did not participate in the subprime market until very late in the day - as their underwriting guidelines did not allow it - so they were not responsible for the mess;
- I then read an article that made a lot of sense to me. Fannie and Freddie had an implicit government support. This allowed them to borrow at more favorable rates, which allowed them to lend at more favorable rates. Accordingly, for other banks to compete and make money, they needed to do subprime loans Freddie and Fannie would not do. And to maximize their profit, these financial institutions needed to securitize these loans and lend more. The unfair competition of Fannie and Freddie forced them to desperate means, though they were happy to take on subprime loans that they could securitize at stupid ratings. As long as cerdit rating agencies were willing to give this crap high ratings and as long as the banks could pass this crap to others, all was well. I do not blame Fannie and Freddie for the end of this idiotic process, but having an unfair government advantage, in terms of implicit government support, st the seeds for this process to take hold.
- And so, John, I think creating new banks with no debts sounds great - and I think I have supported same before - but at this point I think it carries too much threat to too many banks. Sure, some are insolvent and in my book need to be taken down, but some should, survive, but cannot compete against a government sponsored bank. I think we need to support those on the edge, yet nationalize and sell off the big fish that got us here. Just my take.
By the way, I am starting a raffle. It is based on banks going down each week. I have read expectations that a thousand banks will fold this year. I consider that on the very high side. Nonetheless, this week my bet is on four banks being taken down tomorrow by the FDIC (they virtually always do it on Friday). If none are taken down, I would consider this a honeymoon the FDIC is giving Obama. Place y0ur bets.
Disclosures: None
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