On MTM, insolvency, and market over-corrections

[davelj]

[quote=TheBreeze]For those of you who like to rely on experts, Bill Black is an expert from the S&L scandal and he disagrees with the policy of bank zombification:

http://www.pbs.org/moyers/journal/04032009/watch.html

It’s a half-hour interview, but there’s so much good stuff in there it’s well worth listening to. His comments on zombification start at about the 20-minute mark.

You also have this article from a fomer chief economist of the International Monetary Fund:

http://www.theatlantic.com/doc/200905/imf-advice

It appears that the good regulators are against zombification whereas most banking insiders and politicians are for it.
[/quote]

Eh, I like Bill Black and the interview was ok. Basically he’s pointing out things that are obvious, however. Regarding his thoughts on Zombie banks he – like many others – trots out the “Japan Argument” without also noting the MANY ways in which our situation is much different than Japan’s. For just one example, we have already charged off almost $800 billion in loans in our domestic financial system. It took Japan almost 8 years to address its bank losses and start recapitalizing. Also, Japan’s loan losses ultimately ended up amounting to almost 22% of its pre-crisis GDP. If we end up at $1.5 trillion in realized losses (domestic alone – which would translate into maybe $3 trillion in global credit losses), we’ll be at around 10% of (reduced) GDP. Finally, Japan’s bubble was 2.5x the size of our bubble relative to GDP and almost all domestic, while over a quarter of our “losses” will be realized by foreigners. I could go on.

It’s funny, it seems like a lot of folks think that if we don’t shut down every bank tomorrow then “we’re going down the same path as Japan.” We’ve been far more proactive with respect to realizing losses, using fiscal policy, and easing monetary policy than Japan was. BUT… clearly the Officialdom doesn’t want to take all of the medicine at once. So, while we’re not exactly racing down the “clean out the dreck” track, we’re FAR ahead of where Japan was at the same point in their crisis. There is a middle ground, after all.

Regarding Black’s interview, I don’t like to pit “expert against expert” in these discussions because it’s pointless – you can always find someone smart who’s on the other side of an argument. That’s what makes a market.

Your final statement – “It appears that the good regulators are against zombification whereas most banking insiders and politicians are for it” – is kind of absurd. Who is defining “good regulators”? You? And I know “banking insiders” that would be happy to see Citi and BofA disappear. So, this is pure conjecture on your part. A more defensible statement would be that “some” or “many” are against zombification, etc. I would agree with that. Reasonable people can disagree.

[Allan from Fallbrook]

Dave: On a more serious, and less scatological, note and leaning on your banking background: It appears to me that much of what we’re experiencing in terms of pain is somewhat unnecessary, given the government’s handling of the situation.

I’m not in banking, but applying my experience in accounting and finance, it sure looks like the present Administration is employing half measures when they have better tools and protocols for solving the problem. I would think that the experiences of the Resolution Trust Corporation in resolving the S&L Crisis of the 1980s would be instructive, wouldn’t they?

However, it appears that (to my unpracticed eye) there is considerable concern regarding the “N” word (nationalization) and the dangers that surround it. So, we’re attempting to fix a massive problem by doling out bailout funds in dribs and drabs and not attacking the core issues (fully addressing a complete valuation on a bank by bank basis, along with the potential necessity of breaking up some of these megabanks a la Ma Bell, and undoing the related corrosive political connections inherent to the system).

Why aren’t we handing this entire mess off to a body similar to the RTC and administered by the FDIC? Just curious as to your thoughts on this.

[Allan from Fallbrook]

Dave: On a more serious, and less scatological, note and leaning on your banking background: It appears to me that much of what we’re experiencing in terms of pain is somewhat unnecessary, given the government’s handling of the situation.

I’m not in banking, but applying my experience in accounting and finance, it sure looks like the present Administration is employing half measures when they have better tools and protocols for solving the problem. I would think that the experiences of the Resolution Trust Corporation in resolving the S&L Crisis of the 1980s would be instructive, wouldn’t they?

However, it appears that (to my unpracticed eye) there is considerable concern regarding the “N” word (nationalization) and the dangers that surround it. So, we’re attempting to fix a massive problem by doling out bailout funds in dribs and drabs and not attacking the core issues (fully addressing a complete valuation on a bank by bank basis, along with the potential necessity of breaking up some of these megabanks a la Ma Bell, and undoing the related corrosive political connections inherent to the system).

Why aren’t we handing this entire mess off to a body similar to the RTC and administered by the FDIC? Just curious as to your thoughts on this.

[Allan from Fallbrook]

Dave: On a more serious, and less scatological, note and leaning on your banking background: It appears to me that much of what we’re experiencing in terms of pain is somewhat unnecessary, given the government’s handling of the situation.

I’m not in banking, but applying my experience in accounting and finance, it sure looks like the present Administration is employing half measures when they have better tools and protocols for solving the problem. I would think that the experiences of the Resolution Trust Corporation in resolving the S&L Crisis of the 1980s would be instructive, wouldn’t they?

However, it appears that (to my unpracticed eye) there is considerable concern regarding the “N” word (nationalization) and the dangers that surround it. So, we’re attempting to fix a massive problem by doling out bailout funds in dribs and drabs and not attacking the core issues (fully addressing a complete valuation on a bank by bank basis, along with the potential necessity of breaking up some of these megabanks a la Ma Bell, and undoing the related corrosive political connections inherent to the system).

Why aren’t we handing this entire mess off to a body similar to the RTC and administered by the FDIC? Just curious as to your thoughts on this.

[Allan from Fallbrook]

Dave: On a more serious, and less scatological, note and leaning on your banking background: It appears to me that much of what we’re experiencing in terms of pain is somewhat unnecessary, given the government’s handling of the situation.

I’m not in banking, but applying my experience in accounting and finance, it sure looks like the present Administration is employing half measures when they have better tools and protocols for solving the problem. I would think that the experiences of the Resolution Trust Corporation in resolving the S&L Crisis of the 1980s would be instructive, wouldn’t they?

However, it appears that (to my unpracticed eye) there is considerable concern regarding the “N” word (nationalization) and the dangers that surround it. So, we’re attempting to fix a massive problem by doling out bailout funds in dribs and drabs and not attacking the core issues (fully addressing a complete valuation on a bank by bank basis, along with the potential necessity of breaking up some of these megabanks a la Ma Bell, and undoing the related corrosive political connections inherent to the system).

Why aren’t we handing this entire mess off to a body similar to the RTC and administered by the FDIC? Just curious as to your thoughts on this.

[Allan from Fallbrook]

Dave: On a more serious, and less scatological, note and leaning on your banking background: It appears to me that much of what we’re experiencing in terms of pain is somewhat unnecessary, given the government’s handling of the situation.

I’m not in banking, but applying my experience in accounting and finance, it sure looks like the present Administration is employing half measures when they have better tools and protocols for solving the problem. I would think that the experiences of the Resolution Trust Corporation in resolving the S&L Crisis of the 1980s would be instructive, wouldn’t they?

However, it appears that (to my unpracticed eye) there is considerable concern regarding the “N” word (nationalization) and the dangers that surround it. So, we’re attempting to fix a massive problem by doling out bailout funds in dribs and drabs and not attacking the core issues (fully addressing a complete valuation on a bank by bank basis, along with the potential necessity of breaking up some of these megabanks a la Ma Bell, and undoing the related corrosive political connections inherent to the system).

Why aren’t we handing this entire mess off to a body similar to the RTC and administered by the FDIC? Just curious as to your thoughts on this.

[davelj]

Allan,

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.

[davelj]

Allan,

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.

[davelj]

Allan,

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.

[davelj]

Allan,

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.

[davelj]

Allan,

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.

[Allan from Fallbrook]

Dave: You did answer my questions and thanks for your complete response. As mentioned, I approach things like this based on my background and experience in accounting and finance.

My approach would obviously be different, but it would also run the very real risk of creating the exact problem it was trying to fix, namely systemic collapse.

I think Japan’s “Lost Decade” is illustrative when it comes to dilatory governmental involvement and half measures. I think Obama and Co. are doing some things well and others poorly and, as you said on another post, we’re too few innings into an overtime game to really ascertain what the final outcome will look like. Well, those of us other than Breezhnev, that is.

[Allan from Fallbrook]

Dave: You did answer my questions and thanks for your complete response. As mentioned, I approach things like this based on my background and experience in accounting and finance.

My approach would obviously be different, but it would also run the very real risk of creating the exact problem it was trying to fix, namely systemic collapse.

I think Japan’s “Lost Decade” is illustrative when it comes to dilatory governmental involvement and half measures. I think Obama and Co. are doing some things well and others poorly and, as you said on another post, we’re too few innings into an overtime game to really ascertain what the final outcome will look like. Well, those of us other than Breezhnev, that is.

[Allan from Fallbrook]

Dave: You did answer my questions and thanks for your complete response. As mentioned, I approach things like this based on my background and experience in accounting and finance.

My approach would obviously be different, but it would also run the very real risk of creating the exact problem it was trying to fix, namely systemic collapse.

I think Japan’s “Lost Decade” is illustrative when it comes to dilatory governmental involvement and half measures. I think Obama and Co. are doing some things well and others poorly and, as you said on another post, we’re too few innings into an overtime game to really ascertain what the final outcome will look like. Well, those of us other than Breezhnev, that is.

[Allan from Fallbrook]

Dave: You did answer my questions and thanks for your complete response. As mentioned, I approach things like this based on my background and experience in accounting and finance.

My approach would obviously be different, but it would also run the very real risk of creating the exact problem it was trying to fix, namely systemic collapse.

I think Japan’s “Lost Decade” is illustrative when it comes to dilatory governmental involvement and half measures. I think Obama and Co. are doing some things well and others poorly and, as you said on another post, we’re too few innings into an overtime game to really ascertain what the final outcome will look like. Well, those of us other than Breezhnev, that is.

[Author]

Posts