Good morning. Although I stand by my idea to start unloading the banking system's mortgage debt from yesterday, I met with a Wall Street strategist yesterday and I think the scale must be a lot larger than I was discussing.
This guy's numbers were that there are $7 trillion in loans on bank balance sheets and he estimates approximately $1 trillion in losses that need to be taken on tangible equity of between $200 and $300 billion. With a third of the $1 trillion being first lien mortgages, those alone would knock out the $250 million in equity and render the banking system technically insolvent, so my piddly plan doesn't do much! However, I am not Dr. Roubini, or Dr. Doom as he is known, I have an alternative.
The plan should still be to open up the books and get to work! Most of our Congressmen are as suited to deal with a financial crisis as Joe the Plumber. So, I do not blame them directly for not finding solutions. They have no idea what they are dealing with and their incentive system is as screwed up and short-term as the bankers that were putting all this junk together in the first place. Congressmen are worried about short-term reelection and campaign contributions far more than how their grandchildren will repay the impending debt. So instead of calling all the bank CEO's to Washington to embarrass them in hearings about prior misgivings (scheduled for today), how about calling them to Washington to work on a solution!
Let's bring all the banks, all the pols, and any willing and able private investors together and open up the books! Use the DC armory or Verizon Center and sit all these people down and have some price discovery. The government can do its job, providing goods and services that others are not incentivized to, and start facilitating the movement of assets from weak hands to strong hands. In the process, if a few banks go under, so be it. These clowns have had long enough. It will not take a Sunday afternoon and there will not be immediate shock and awe so the markets rally and constituents feel better. Instead, there will be months of price discovery and auctioneering back and forth between strong and weak banks as well as strong private investors and weak banks. The government's roll is to facilitate all of this and backstop depositors at the weak banks - in order to maintain Main Street confidence.
Technically we could accomplish this by creating a database to put all the debt paper into and then screen for attractiveness and valuation purposes - admittedly not an easy thing to program. (And if we cannot today, then get a team of software engineers in a room and get to work.) The strong hands then make a bid and the weak hands are forced to take it. The tangible equity of the banking sector appears negative right now, but we will support it with private equity and equity of any remaining strong banks. The government will facilitate the transition that has not happened because everything has been kept so opaque.
The banks have not been interested in writing this crap down (they have their own separate short-term incentives just like the pols), so they need to be forced to by the government in order to force a bottom and restart of lending (from strong institutions) without government help. I believe this is possible. And I believe it is possible without spending $3 trillion and seeing what sticks. The people in charge just need to make the hard decisions and actually put some work into it rather than conducting any more Sunday afternoon hatchet jobs made to placate various constituents and temporarily makes us feel good!
-2outof4
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I say liquidate the liar loans and the last bank standing wins! Or if there are none left I will start my own. Win/Win.
ReplyDeleteThen again, I don't hold any equity in them (outside a target-date mutual fund) or rely on them for a paycheck. Doubt the government would every let that happen.
PS: I'd love to see your analysis of the recovery.gov website when it goes live.
The doctors have misdiagnosed the symptoms here. With the entire global economy deleveraging, forcing credit to flow is like locking fat people inside a Golden Corral and telling them to lose weight.
ReplyDeleteWe need less debt, which means fewer and cheaper houses, cars, clothes, etc. This spring could get pretty ugly when it becomes apparent we're pouring a glass of water on a forest fire.
That's exactly right. It is just politically easier to dressdown the bank CEO's and say why can't my constituent get less than a 24% APR on his credit card.
ReplyDeleteOne of the points of the post above, is that the players in this situation need to be much clearer with each other and the public.
Banks do not want to loan to people or businesses that are already highly levered and should be as you say, deleveraging! With deleveraging comes lower asset prices. Once at a more reasonable level of both leverage and asset prices maybe the economy can grow again.