Andy So

Are U.S. Banks Really Worthless?

The idea is sound, but in practice it would be difficult to implement such a plan. I see two issues in your article. The first is the degree of leverage. In your sample bank you wrote:

"given the leveraged nature of a bank, significant losses in its portfolio of assets -- in this case, 11% of total assets -- can very quickly result in negative equity"

We only know an approximate degree of how leveraged banks are.

There is already a problem of transparency in the products held by banks. There is a fear of what else might be hidden. You have to remember that many of these products were spawned by a structured products industry that simply didn't exist. These packaged derivatives have all kinds of clauses that can very quickly lead to cash calls and erosion of your NPV.

So the first problem is how to absolutely quantify the total value of these bad assets. Do you use the last mark-to-market value? Average historical prices? Also not every bank wants to come clean about these assets since some of the risks they took are borderline illegal. Full disclosure will involve government intervention and assuredly something bad is bound to come up. Just look at the very simple example of hidden expenditures tied to structuring fees for these products. Which bank wants to get their name out there? That's why this is taking so long to sort out.

So your theory states that "All troubled legacy assets are placed in a special portfolio of non-performing, non-earning assets that have to be charged off over time." In my comment above, it's never going to be "All" but rather "Some". That figure is never likely going to be fully trusted either.

The second problem with your idea is the backbone of your article.

"An ROA of 1.1% is applied to the performing earning assets, after charge-offs from delinquencies in these assets. The ROA on earning assets is conservative, given that many US banks have historically achieved ROAs of 1.2%-1.4%."

What if there were flat to negative ROA figures? Banks will never be what they were for the past twenty+ years. If you take away or minimize structured products, investment banking and broker/dealer operations, what you are left with is the brunt of earnings dependent on consumer and commercial lending. Remember twenty to thirty years ago we didn't have structured products or investment banking operations on the scale that we've had in recent decades. Some of these things (CDS, ABS etc.) didn't exist 10 years ago.

Assuming there is government intervention and forced lending to the public. Your comparison to Japan becomes increasing valid since we are throwing good money after bad. You are lending money to an American public that has a savings rate of 1% and no driving industry or growth in sight. There's no biotech boom like the 80's, .com boom like the 90's, or structured finance boom of our current decade around the corner. We are likely to face Japan like conditions of flat growth.