It's Time Banks Broke Up and Moved On

If we live in a capitalist society then distressed firms have to raise capital, be acquired or file for bankruptcy.

The condition of a weak institution, as determined by the Stress Tests is of reduced importance unless the firm can disrupt the system in its entirety, as in the case of AIG. The question on the table isn’t can distressed firms avoid collapse but rather can the American financial system avoid collapse?”

In 2008, the goal of the bailout was to nurse the financial system back to health; functioning without additional funding from the government.

It was said that if the bailouts did not occur, the entire system would give way. That means in addition to increased job loss on Wall Street and Main Street, the credit markets would disintegrate, pensions, 401K’s, IRA’s, savings and insurance would be in jeopardy.

Now, the landscape has changed. We are not on the verge of collapse.

If the system can stand on its own, let it stand.

The understandable fear and lack of consumer confidence of the current situation may make progression less orderly, but as long as solid institutions are in existence then the system can to take care of itself, right?

The thought of fading banks is unnerving, but healthy businesses can pick up the pieces; offering consumers a safe haven for their money. The increased clientele of healthy institutions could mean additional staff.

Great!

Some of the workers of distressed companies can get new positions at stronger firms.

The ideal situation would be orderly acquisitions with private funds, so as to protect employees and not cause angst amongst consumers. But, even though it’s still too soon to tell, many feel Bank of America (BAC) would be in a better position if it had not acquired Merrill; contributing to the nervousness and distrust over acquisitions. However, Wells Fargo's (WFC) purchase of Wachovia and PNC’s (PNC) acquisition of National City has not created as much speculation or concern.

But bankruptcy is a viable option; it would allow healthy banks to offer services to the clients of troubled firms and provide the opportunity to purchase pieces of distressed businesses at bargain prices. Healthy institutions that don’t want to acquire a mess could incur less risk and more customers.

If indeed the worse is over and we are at a point where the financial industry shrinks, then let it shrink. The now visible hand can go back to its state of invisibility.

Comments

[horrid:]

Yes, I see your point. Maybe the gov shd also be doing "stress to the system" tests- looking for impacts of failures, bankruptcies and receiverships!

May 06 06:11 AM

[normthefedup:]

...and here we go again....do you know Felix Salmon by any chance?

May 06 08:42 AM

[Barbara Horne:]

No, but if he feels the same way, I would like to meet him. Feel free to make an Introduction. ;-) (Thank You So Much for your comment it is appreciated)


On May 06 08:42 AM normthefedup wrote:

> ...and here we go again....do you know Felix Salmon by any chance?

May 06 09:08 AM

[Timothy Bar...:]

I would agree with you, but what about the defaulting commercial loan and resident loans securitized in these banks portfolios? PNC is getting ass-kicked because it didn't have time to peform adequate due diligence in the NCC purchase and the books are worse than anticipated. It's just too easy for these banks to hide their terrible portfolios, especially since they get to value them anyway they want. Something must be done to protect the mortgage holders. A moratorium on foreclosure and judicial power to reduce the debt level would settle the economy and allow banks to properly value their loans. The other shoe has still to drop on the commercial debt losses.

May 06 11:11 AM

[flow5:]

We live in a predatory society...thus we have regulated capitalism. Even so, the bankers have never lost a single battle in Congress (maybe because the bankers donated more money to legislators than any other constituency in the last 10 years (this has probably always been true).

It should then come as no surprise that the FED's research is politically coordinated, targeted to justify its monetary policy objectives - those that appease the banking community.

Monetary policy is not conducted based on regulatory efficiency nor nor the (system's) cost structure, but it is the "patch work" of the banker's profit proclivities.

That is, bankers pay for what they already own. The banks (collectively) would be more profitable if the FED prohibited the banks for paying interest on their deposits (as anyone who has applied double entry booking on a national scale should know). In otherwords, money flowing to the non-banks actually never leaves the member banking (system).

The only workable prescription is to nationalize the banks. Take Continental Illinois as an example:

Without the Fed’s involvement in 1984, Continental Illinois Bank (the 7th largest bank) would have failed. The FDIC’s reserves were inadequate to meet the challenge of a wholesale run on the Bank, and the probability of runs on other banks. Foreign corporations had billions of dollars on deposit. The Bank’s failure could have eliminated the dollar as the principal reserve and transactions currency of the world.

Newly created interbank demand deposits can be put at the disposal of any bank in the System through the “discount window”. Continental Illinois was advanced over $6b (11% of the system’s legal reserves). These deposits are not only money to the recipient bank, they also become a part of the legal reserves of the System.

The dimension of Continental Illinois’ rescue operation had to be limited, and of short duration. When the credit of the Fed was substituted for that of Continental Illinois, depositors knew their money was safe. Consequently, the “run” on the Bank was reduced to management proportions, and runs on other banks were forestalled.

The FDIC purchased bad loans from Continental Illinois, injected new capital, and covered all deposits without limits. It fired the existing management, as well as the board of directors, who were responsible for its failure.

"The FDIC took an 80% stockholder position, but took time to unwind its ownership, thereby minimizing the “sell stops” in the market, by selling its shares between 1986 until 1991. The taxpayers lost 1.1b."

In Bernanke’s speech: “If a federal agency did have such tools on Sept. 16, they could have been used to put AIG into conservatorship or receivership, unwind it slowly, protect policyholders, and impose haircuts on creditors, and counterparties as appropriate".

Without the gov’t, there would be no bad bank “takeovers”, though receivership may involve eliminating the bank’s common stock, preferred stock, and bonds. Bernanke should follow his own prescription, and do it without the taxpayer’s money.

This charade is even more wicked. It is mathematically impossible to miss an economic forecasts. The only long and variable lag is one of ignorance and arrogance.

May 06 02:26 PM

[flow5:]

Maybe someone should find out how much money the FED paid on their "interest on reserves" regime.

May 06 03:01 PM

[Econ 101:]

Support the Audit of the Federal Reserve. Tell your congress person to support HR 1207!

YOU have to call!!!

May 06 08:43 PM

[Barbara Horne:]

The American Financial System needs to be tested. Yes, as stated above “Stress to the System Tests”
It concerns me that we are not asking the right question(s) or looking at the right factors. I know it's a large undertaking, but it seems as if we may have wasted a lot of money pacifying people with "Bank Stress Tests" yet not getting valuable answers,
"Can the American financial system avoid collapse if...?" and “How?"
If we were testing the system the defaulting commercial loans and other “toxic” assets would be taken into account. The difference is we would also be asking the question “are the healthy businesses able to function if any or all of the 13 businesses in question collapsed?” I think the answer might be yes, IF people knew there were stable companies in a stable system that they could work at and invest in.
I find it infuriating that we spent so much time and money in the middle of a recession when people are desperately in need and the sheer value of the outcome is in question.

May 07 08:18 AM

[Denise Will...:]

It's interesting how words to are chosen to describe financial handouts.
A handout to the rich is called a "bailout" while a handout to the poor is called "welfare".
One is spun in a positive forward looking context (guess which one), the other is used pejoratively.

May 08 10:50 AM