Comin’ or Cohan

Peter Cohan, writing in AOL’s February 20^th Daily Finance argues against putting taxpayer money into the mega-banks that are failing – effectively nationalizing them (Cohan: “Unfortunately, many of the proponents of nationalization only have a hammer on their tool belt”) – and instead is pressing for the government to create brand new banks with the remaining TARP money.

He’s dealing with the same figure, $1.9 trillion of totally lost credit in the U.S. markets stated in my Sooner or Later Revisited blog. His take: “[I]f , the U.S. used the second $350 billion of TARP to capitalize new banks, at a 9:1 assets/equity ratio, it would create $3.5 trillion in lending capacity to meet demand (more would be available if private investors chipped in).” This number would, in his opinion, more than make up for $1.9 trillion lost.

In the same blog referenced above, I noted that those “securitized bundles” of loans that had been floated in the pre-September 15^th meltdown were viewed by the market as toxic assets which no one wants to buy, further freezing the credit markets (because no one values these bundles of bank loans).

Cohan has a solution for that too: “[L]et the FDIC buy the, say, 15% of those mortgages that aren't paying. This would free up the mortgage-backed securities to trade freely since the remaining 3,400 mortgages in that security I mentioned above would consist of paying mortgages that would have a real value. Banks could then sell those securities or keep them on their books at a high value. And they'd be able to lend out their capital instead of hoarding it. Meanwhile, the FDIC could work with mortgage holders to restructure the loans and keep their houses off the market.”

Looks like a set of viable alternatives, and I thought my readers would like to explore all the options. There’s no one clear path or we’d probably be on it by now.

As much as I like the numbers in Mr. Cohan’s analysis, I actually pictured how the U.S. government would physically create these new banks, hire the management, choose where they would be located, etc. My freezing ticking clock turned quickly into the turning pages of a monthly, then yearly, calendar. The theory may or may not work, but the government probably would do better by taking over a couple of existing big banks where shareholders face the ultimate loss and use these shells to implement Gary ’s policies. Back to that “n” word again.

And clearly, draining the worst debt bundles out of the mortgage securitization market does tend to remove a cork in our credit flow. I’d be happy if the FDIC chipped right in on that one. But in the end, it will take direct action from the government, not inducing or trying to incentivize the private sector to take the first steps which the markets are clearly telling you they are not willing to do, to start the thaw. At least the two Peters seem to agree on that one.

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