When one or two banks have a problem, shame on them. When all banks have a problem, shame on the system. Banking executives are getting way too much of the blame for this crisis. Subprime didn’t begin with these executives. It began in Washington. The packaging of loans did not begin on Wall Street. It began in Washington. It’s time to call a duck a duck. Washington got us into this mess with bad policy and bad regulation and the only way out is to fix the policy and fix the regulation. We have all been brainwashed into believing that taxpayers are giving Wall Street a bailout; no, no, no. If it was two banks I would agree, but it’s the whole system. Taxpayers are paying for the failed policies of our own leaders. If you’ve been asking yourself why we haven’t had a crisis like this before it’s because we’ve never had to deal with these laws before. The unintended consequence of increased regulation post Enron has killed our banking system. This new method of transparency is faulty and we cannot afford it any longer. It will throw us into a full fledged Depression.
AIG’s latest request for additional funding reveals very clearly what the underlying problem is. Short term writedowns of long term assets. This foolishness messes with the balance sheet in ways that are not indicative of its long term strength. If Obama wants to end this madness and fix the system we should look for the following solutions:
1-Recognize the root of the problem. Yes, Wall Street was too exposed to these toxic assets, yes Wall Street utilized too much leverage but they are not the only ones to blame. This crisis is the result of a perfect storm of mismanagement on Wall Street but also mismanagement in Washington. Wall Street is doing their part to fix things. Now Washington will do our part. We will usher in a new era of improved transparency. Underlying mortgages are performing much better than the mortgage securities reflect. We will do away with the mark to market accounting regulation that was implemented post Enron as we have come up with something even better that gives us a more accurate view of what these banks really own. This new method of transparency fall under the jurisdiction of the Federal Reserve as they are the entity to deal with bank panics, I am confident in their ability to find solutions.
2-Nationalization is not an American ideal. Those of you who are for nationalization should pack your bags and head elsewhere. America is a place where free markets will endure and thrive. Our success is dependent on the private sector. Our former Treasury Secretary Hank Paulson thought that he was running a hedge fund and that he needed to provide taxpayers with common equity in the institutions we were helping. Hank took his eye off the ball. The government should never find ourselves in a position of owning a majority stake in one of these banks. Never. When we loan money to help a troubled institution we will craft terms that encourage quick repayment but we do not need common shares of stock that will cause dilution to current shareholders and limit future growth. We know that we are helping a bigger cause. The real benefit to taxpayers is a strong banking system that will build the foundation of an economic recovery. Hank was chasing nickels while dollars rolled out the door. Taxpayers have been focusing on billions while we lose trillions. The days of requiring a short sighted stock repayment to the U.S. government are over.
3-Confidence will be restored. By fixing the bad mark to market regulation that is currently is place, we have eliminated any short term threat of bank failure. Balance sheets are strong. Lending conditions will improve. Private capital will return. Small businesses and individuals will have access to capital that will bring our economy to new levels of prosperity. If our nation were to take over these large financial institutions and try to fix them ourselves it would be chaos. This is not Sweden. We would risk losing entire executive teams who would abandon their banks in unison. CEO’s like Ken Lewis at Bank of America (BAC) and Jaime Dimon at JP Morgan Chase (JPM) want no part of a government takeover. We would lose these bright men. Instead of losing them, we will give them the tools they need for success. This is a new era of change, we are building a new economy to meet our modern day demands. Bank of America, JP Morgan Chase, Wells Fargo (WFC), Citigroup (C), AIG, and all of the other banks who support our economy will return to greatness.
Disclosure: Long BAC