There are some pretty big differences between today’s crisis and that of the S&Ls. We’re already going to end up with an RTC-like entity to deal with the hundreds of community bank failures. That’s baked into the cake at this point. The biggest difference is that this time around we have a small number of HUGE banks (let’s call it 10 banks with almost half of all industry assets and deposits) that have big problems. That wasn’t the case during the S&L crisis.
Shutting down S&Ls (over 700 of them) was pretty easy. Simple business model. Generally small companies. And the rest of the financial world was strong enough to find plenty of buyers for the assets and deposits. So it was easy to make the likes of Ron Perlman, Gerald (not former President) Ford, (Former Treasury Secretary) William Simon, Michael Price, and a whole host of other financiers unimaginably rich from buying assets and deposits from the FDIC/RTC for almost nothing.
(On a side note, people praise the RTC without noting the wealth transferred to the financiers during the process, which was in the high tens of billions. That came directly out of bank customers’/taxpayers’ pockets. I thought the RTC did a good job, all things considered, but at one hell of a cost to the man on the street.)
The problem today is that we have this handful of VERY large and complicated institutions that in aggregate are systemically important, although arguably individually are not. And the Officialdom is understandably reticent to shut these companies down. I think they’re fearful of several things: (1) The complicated nature of their businesses, (2) Who is going to buy all of these assets (and particularly the complex ones) and deposits if they’re all on the market at once, particularly considering how weak the entire global economy is (3) What is the price of lost confidence in the financial system and with the general public, (4) Where is manpower going to come from to handle such a task, and (5) Didn’t we really just make a bunch of financiers very rich the last time we tried this?
So, I think we’re seeing two strategies going forward, one each for the small banks and Big Banks. Shut down the small banks that are having problems – a la the S&L crisis. Should be a few hundred of these by the time all is said and done. But where the big banks are concerned, offer them some form of regulatory forbearance because they’re just too large and complicated to deal with. Zombify them for a few years and let the good parts of each bank – probably 80% of each, or thereabouts – fill up the losses in the bad part. If there are further problems, convert more preferred into common and once that’s exhausted start converting debt into common. Kind of like a slow-rolling pre-packaged bankruptcy. Frankly, I don’t like it, but it’s probably the least-costly resolution to the big banks. And to think this is some sort of freebie for these banks’ shareholders is beyond absurd. If I’m only approximately right about the good bank/bad bank breakdown of these pigs, the common shareholders ain’t gonna make out with much – they’re going to take it right in the keester. THEY are going to have to take on all of these losses at the end of the day, albeit over a number of years. And as a taxpayer (and now owner of TARP preferred) and bank customer that’s my preference, even if it means these companies must shrink over the next several years. And even after these banks are healthy again, another hammer’s going to drop for their shareholders: higher capital requirements, which will end up in massive dilution. So while the equity holders will end up with a number greater than zero under forbearance (as opposed to the Big Zippo under receivership), I doubt it’s going to be a lot greater than zero after all is said and done.
Now, I know a lot of people deride the Zombie Bank concept because they know what happened in Japan. I already pointed out a few of the differences between our to-date Mini-Zombie approach and Japan’s Big Kahuna Zombie approach. But what I find interesting is that a lot of the same folks who are crying “We have to reduce debt in the system!!” are the same ones crying “We can’t have Zombie Banks that aren’t lending!!” People, these are incompatible views, to put it mildly. A significant portion of the total non-government debt in our system is held by these Big Banks. For all intents and purposes, we can’t be reducing overall debt in the system while the Big Banks are growing (again). Think about it for 3 seconds. So, to some extent, Zombifying these banks for a few years will HELP in restraining the ability of businesses and consumers from re-leveraging their balance sheets. That’s a GOOD thing. We NEED less leverage and access to credit. Yup, it’s going to be painful. But there’s no free lunch.
Hope that answered your question. Kind of. More or less.
