Banking and the Not Worth Concept

An unpleasant but necessary component of bottoming out and setting the stage for recovery, in addition to the housing and job crisis fix, is stabilizing the nation’s circulatory system – the financial sector. The Obama administration in general, and Treasury Secretary Timothy F. Geithner in particular, are grappling with how to help banks deal with the very assets they carry on their books, the Emperors they claim is a substantial value; everyone knows they have no clothes. We are likely to see new legislation and administrative rule-making that will allow the government to “buy” these bad assets from banks and perhaps other comparable financial institutions and insurance companies.

There may be a direct purchase of these “bad assets” from banks by Treasury or other appropriate government agencies, or we may see the establishment of a modern day version of the Resolution Trust Corporation – created by the government in the 1980s to buy and subsequently sell failed and failing savings and loan assets (mostly real estate related) – something that the financial industry refers to as the bad bank. But exactly how is the government going to know how much to pay to take these assets off our financial sector’s hands?

We already know we cannot trust the credit rating agencies, themselves about to be reinvented with a litany of regulatory standards that should have been implemented a long time ago based on their consistent overrating of toxic derivatives. The banks and other comparable institutions are carrying many of these assets, bad mortgages (and derivatives based on bad mortgages), foreclosed homes, questionable credit default swap instruments, corporate bonds and other borrowings, etc., at less than they are probably worth. Trading in these assets has come to a virtual standstill because there is major disagreement as to value. Further, investors fear that since the economy is nowhere near bottom, these assets, even those with significant value, will continue to fall in the immediate future.

It doesn’t help that notwithstanding the initial TARP stimulus package and a reduced discount rate from the Federal Reserve, the credit markets remain frozen solid. President Obama in a recent YouTube address: “While the package helped avoid a financial collapse, many are frustrated by the results — and rightfully so… Too often taxpayer dollars have been spent without transparency or accountability. Banks have been extended a hand, but homeowners, students, and small businesses that need loans have been left to fend on their own.”

Add in the recent headline of the Wall Street bonus excess at the end of 2008, and there is justified skepticism in the eyes of the public and their representatives. Not to mention the elephant in the room: the remaining $300 billion of TARP money, even assuming it is all applied to buy bad assets, is probably less than a third of what is really needed to stabilize the system, all of this in addition to the bailout legislation pending in Washington right now.

It an unavoidable blackmail scenario, however, since without the life blood of credit flowing back into the system relatively soon, America, perhaps even the world, faces a further economic fall that could generate full Depression-era numbers. The New York Times (February 2^nd): “‘To date, the banks have stuck their heads in the sand,’ said Lynn E. Turner, a former chief accountant for the Securities and Exchange Commission, ‘and demanded that they be paid the price of good apples for bad apples.’”

The magnitude of the current problem dwarfs the savings and loan crisis from the 1980s, and the shock to the system is that we subsequently reduced our regulatory schema or simply failed to expand it to cover new instruments created by Wall Street loophole experts, so that when this kind of failure occurred against, triggered in 2008, it returned with a vengeance. But this time the problem is so big that if the banking sector is not solidified, the government may be forced to do something that Republicans and Democrats are terrified might be necessary: simply take over (“nationalize”) our largest lending institutions, requiring taxpayer infusions of cash at even staggeringly higher levels.

The battle rages on another level, as Republicans want severe limits on governmental regulation of the financial sector, notwithstanding the backlash over the above-noted Wall Street bonus announcement; they focus instead on the failures of the government-created Freddie Mac and Fannie Mae. Democrats rail against unbridled institutions that were purportedly “too big to fail,” citing Harvard economic historian David A. Moss who, according to the February 3^rd Los Angeles Times, believes “that strict regulation during the half-century between the New Deal and the Reagan revolution produced an era with few financial failures, but loose regulation both before and after resulted in many more failures and a string of financial panics.”

But since the passage time without solutions is simply a vote for a continued free-fall in values, I believe that even a second rate decision to intervene is better than no intervention at all. Hard to pressure a President and his administration when they are literally days into their new term, but we really need a program operating in the next few weeks, a month or two at the latest. While all this is happening, Congress and the President have to deal with a few other minor issues, not just the housing and job crisis, but few not-so-minor foreign relations issues as well: a growing nuclear menace in the Middle East (Iran), the Israeli-Palestinian conflict in Gaza and the escalating failure of policy in Afghanistan. Just think: McCain and Obama actually wanted this job!

I’m Peter Dekom, and I approve this message.