True, but the insurance analyst’s valuation opinion is only going to be as good as the underwriting on each of those individual policies. For banks, the underwriting has been atrocious for the last several years. Garbage in, garbage out.
No one is making the banks sell their assets within a week, so this is hyperbole on your part. Asset prices will likely continue going down throughout 2009 (absent massive government stimulus) so banks could be given a year or more to sell and they would still be insolvent. Banks are insolvent because they are insolvent.
In an ideal world where there wasn’t all this financial “innovation”, banks would borrow long at x% and lend for the same time period at x% + y%. Further, banks would value collateral conservatively and only lend against a portion of that collateral (say 80% maximum). If banks did this, and the borrower stopped paying, then they could liquidate the collateral in a reasonable period and pay off their obligations.
But they didn’t do that. What banks did during the recent “bankster” era is borrow short, lend long against 100+% of collateral, and push for crappy underwriting (stated income, inflated appraisals, etc). I’m no bank historian, but I would imagine that any time banks get away from sound money management principles you get these types of bubbles.
So the problem isn’t that banks are being forced to sell their assets within a week, the problem is that the assets are feces and, like you say below, everyone is trying to liquidate their feces at the same time.
Maybe the market recognizes that the “good” assets were only “good” during a housing bubble? Who’s to say what assets are going to be “good” on the other side of this recession/depression?
What happens if we just let all the bad banks fail? Obviously we have massive unemployment, but the government could just extend unemployment benefits and do massive public works projects to help reduce that. To me, this is preferable to propping up the value of crappy assets as it will force people into productive work.
Philosophically, I’m opposed to the government getting involved in propping up asset prices as it just further distorts the market and keeps people employed in unproductive jobs. Capitalism is all about creating efficiencies and propping up the prices of crappy assets is not efficient. I would rather see the government invest in research, alternative energy, infrastructure improvement, or something that is likely to benefit society (DARPANet anyone?) than get involved with propping up the prices of crappy assets. Maybe the government makes money on those assets, but buying crappy assets is more likely to benefit banksters than society as a whole.
Thanks for your responses on this. [/quote]
In order:
You completely missed the point in my insurance company analogy. Yes, it’s garbage in, garbage out in the case of these mortgage securities. But the manner in which you determine the value of that garbage (maybe it’s 50 cents, maybe it’s -50 cents) is by doing the same sort of statistical analysis that you’d do on any large pool of policies, assets, etc. that have similar characteristics. You use the same process to determine value. Even if the value is negative.
Ok, let’s give every financial institution a year to sell all its assets (as opposed to a week). Who’s going to buy them? You think the majority will need bank financing? Do you really think there’s enough private long-term capital to buy all of these assets (you pick the time period)? “Banks are insolvent because banks are insolvent”? Really? I will agree that some banks are insolvent and most of these will ultimately fail. But do you think ALL banks are insolvent? And how are you defining insolvency in the case of banks? Please be precise.
Most banks actually followed the time-honored precepts of good lending, even during this bubble (it would probably surprise you to know how many folks weren’t reckless – but you won’t read about them in the paper). But certainly almost all of the bigger banks did not. So, I’ll assume, unless you tell me otherwise, that when you refer to “banks” generically, you’re really referring to the largest (and most careless) US banks. The vast majority of community banks in this country will sail through this crisis largely unscathed.
I think we should let the vast majority of the bad banks fail. But not all at once. And the biggest banks need to survive in some form, although I have no issue with wiping out all the common and preferred equity of these pigs. I want to let the creative destruction process work, but I don’t want to let it work in such a hurried manner that it completely undermines faith in the financial system and blasts us back to an agrarian society. Although perhaps that’s your preference.
I don’t disagree with your last paragraph, but we’re trying to get from A to B with the system in tact. I don’t have all the answers. The Officialdom doesn’t have all the answers. And you don’t have all the answers. We’ll muddle through… after some serious pain. Frankly, I spend less time thinking about the details of how we’re going to get from A to B, but rather more time on how to take advantage of the dislocations. Shit’s always going to happen. The outcome’s always going to be unfair. I just accept it and plan accordingly.
