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Friday, March 20, 2009

The Big Bank Fix

There is no credit crisis at most banks, but the lack of trust in the largest US banks still needs mending. Is there a good plan to do that yet?

Fed Chair Bernanke described the plan last month to Congress. But did folks understand?

David Wessel wrote an excellent article in yesterday's Wall Street Journal about the fundamentals of what the government is doing to fix those top 19 banks:
The Treasury has thrown pieces of the jigsaw puzzle on the table, but few outsiders can see the whole of its plan. Here's a modest attempt to show the cover of the jigsaw-puzzle box.

The problem: No one has confidence in the financial strength of the nation's big banks. Even banks don't trust other banks. No one is sure what the loans and securities on their books are worth. No one knows which banks are strong enough to survive the recession.
So what is the fix?
The Treasury's bank strategy is twofold. One, get enough capital into the 19 biggest banks so everyone believes each can withstand a really bad recession. Two, get toxic assets off their books so banks will pick up the pace of new lending, and savvy big-money investors will put money into the banks and help achieve the first objective.
The last piece of the Geithner plan comes soon: Buying toxic loans and securities, mostly linked to real estate, from the banks and others. One challenge is putting a fair price on them. The Paulson Treasury spent months trying to fashion auctions in which the government would buy these assets. It never bought any. The Geithner Treasury decided that approach wouldn't work. What's more, it hasn't nearly enough taxpayer money to buy enough of the assets to make a difference.
So the plan is to form joint ventures between the Fed and money managers like Pimco or BlackRock. The Treasury kicks in, say, $1 for every $1 the private guys put in. The private investors, not the government, decide what securities to buy from the $1 trillion or so in securities linked to real estate or consumer loans. The private guys decide what price to pay. That's their business. Taxpayers and the investors would share the profits, if any. If the Fed lends to these ventures, they'll be able to buy more securities and pay more for them.
The good news is that the plan exists. As the plan is implemented and trust restored in these mega elite banks, that will build confidence again in the US banking system as a whole. And as US consumers move with confidence into spring, a budding recovery will restore hope in an economy that drives and leads world commerce.


  1. Isn't the problem that no one knows what these assets are worth? Why will private firms risk paying too much for the toxic assets?

  2. No pain no gain. They will not risk paying too much... but at some point in time (and at the right price) the trash collectors will come in a begin to peddle the trash.

  3. From what I see (SF Bay area, CA) the toxic assets are already being purged but never mind.
    It is incredible that we should endeavor to "fix" businesses that made massively poor judgments.
    I daresay the cost of the "fix" will ultimately far exceed the cost of breaking up these large banks and selling them off.

  4. Anonymous 2,

    Indeed, I too like your idea of breaking up the large banks and selling them off in smaller pieces to those banks with responsible management. I seem to recall that there were once laws against allowing banks to become too large. We can now see why quite clearly.



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