The Left Bank (Our New Nationalized Pastime?)

Fact: The big bad banks that got most of the bailout money under TARP are worth considerably less today that they were when they got government money. Why? Well for one thing, no one has been willing to “come to Jesus” with the real value of those “assets” (read: over-valued, over-leveraged, under-performing loans packaged into toxic derivatives) that dominate the balance sheets of the mega-huge banks and insurance companies. Since 1999, banks could have investment banking divisions and vice versa. Weeee! And investment banks love to ride the leverage train.

But if these financial institutions really carried those toxic assets on their books at their real value, you might see a tsunami of bankruptcies of some of our biggest banks, particularly the wondrous Bank of America (the government shoved Merrill Lynch down their throat making a bad situation truly vile), maybe even CitiGroup… and guess who would have to bail out the depositors? Yeah, us again. Our entire financial sector would collapse, and we would actually have a full-blown depression.

Those biggest investment banks, and we’ve all ready lost two “too big to fail” institutions (Bear Stearns and Lehman Bros.), reaped the benefits of cheap money and virtually no cap on how much they could borrow (33 parts debt to one part equity… no problem!) that came from a fateful decision by the SEC on April 28, 2004 – that the really big investment banks were exempt from common sense and a manageable debt-to-equity ratio.

And, believe it or not, the government’s TARP investment also came in as de facto debt (often non-voting, interest-bearing securities with a “preference” – they get their money before the shareholders’ equity) to protect the taxpayers. Problem is that we “taxpayers” didn’t get voting control, are going to have to hurl in good money after bad to keep our entire financial sector from imploding, and the banks didn’t get the kind of equity they actually needed to permit them legally to unfreeze the credit markets and begin lending again. All we got, rather literally, is a throw-away of a good chunk of the $300 billion dollars “invested.”

The Associated Press reported on February 5^th: “[Harvard Law Professor] Elizabeth Warren, who chairs an oversight committee set up by Congress to oversee the bailout, says the Treasury Department failed to specify its goals and methods in helping more than 300 institutions. ‘There may be good policy reasons for overpaying, but without a clearly delineated reason we can’t know that,’ Warren said… In 2008, [Treasury] paid $254 billion and received assets with about $176 billion.” She was being kind.

So why not just let these puppies go into bankruptcy? Felix Salmon, quoted in the February 5^th, theDeal.com: “Now the red-blooded American way of dealing with insolvent companies is bankruptcy: either Chapter 11, where the company continues as a going concern, or some kind of liquidation. For a bank, Chapter 11 is pretty much impossible, since you're not going to find anybody to provide debtor-in-possession financing to keep it going. Except the government. And if the government is in possession, then, hey, you've just nationalized the bank.”

Hard to have the slightest sympathy for failed financial institutions with executives who earn more in a year than most folks earn in a lifetime, who give huge bonuses and live with lavish perks. If President Obama can enforce the compensation ceiling he has ordered, we might stem this tide – a bit (I’m very skeptical – loophole experts are lurking too close) – but these behemoths have us by the… er … short hairs. If they go down in flames, so does the rest of this economy. If they are not restructured to release the credit markets, the jobless rate will surge way beyond the 10% predictions, housing prices will collapse further to truly untenable levels no matter what incentives the government supplies, and the “Big D” – depression – will be our new roommate and constant companion for years to come.

So if we are going to have to bail them out, if the fix is not implemented soon by the next round of bailout money from the American Recovery and Reinvestment Plan, we just have to accept that the government is going to have to take over direct ownership and control of these banks… trillions of dollars will be deployed… and flip them back out to the “free market” when the markets stabilize. If it comes to that… and we are getting there, pick one: major depression that crushes the economy and lasts for many years or a really bad recession with some serious bank nationalization. There is always the option of a root canal without an anesthetic to distract you for a moment.

I’m Peter Dekom, and I am still just shaking my head.