Michael Shulman

America's Banks: Are They Really Insolvent?

Insolvency, in banking does not mean a bank shuts down in a meaningful way -- the customers can get their money, the loans are still serviced and so on. Insolvency means the banks have less tangible equity than liabilities -- and this is truly the case for several very large banks. Geither would not look like a deer caught in the headlights if this were not true -- and check out page 21 of the Citgroup town hall meeting presentation last November where they use acronyms to describe more than $1.2 trillion in off balance sheet assets. What insolvency means is shareholders in selected banks, over time, will be wiped out and so will some unsecured bond holders. Any solution you come up with, including bone head ones like suspending market rules, and there is so much dilution and so little of the current equity left shareholders get killed. And that is exactly the way it is supposed to play out. When I said this on Fox Business a week or two before Freddie and Fannie disappeared Ben Stein made fun of me, saying this was somewhere between improbably and impossible. So.....