mediapro

'U.S. Banking System Is Effectively Insolvent' - Soros

And we have James Baker to thank for orchestrating the takeover of the U.S. electoral process which led to the culmination of Friedmanomics' wacky trickle-down (gimme all your money and I'll decide what to do with it) scheme.

Why should one listen to someone who led the coup d'etat?


On Apr 08 02:15 PM dcb wrote:

> How Washington can prevent 'zombie banks'
>
> By James Baker
>
> Published: March 2 2009 02:00 | Last updated: March 2 2009 02:00
>
>
> Beginning in 1990, Japan suffered a collapse in real estate and stock
> market prices that pushed major banks into insolvency. Rather than
> follow America's tough recommendation - and close or recapitalise
> these banks - Japan took an easier approach. It kept banks marginally
> functional through explicit or implicit guarantees and piecemeal
> government bail-outs. The resulting "zombie banks" - neither alive
> nor dead - could not support economic growth.
>
> A period of feeble economic performance called Japan's "lost decade"
> resulted.
>
> Unfortunately, the US may be repeating Japan's mistake by viewing
> our current banking crisis as one of liquidity and not solvency.
> Most proposals advanced thus far assume that, once confidence in
> financial markets is restored, banks will recover.
>
> But if their assumption is wrong, we risk perpetuating US zombie
> banks and suffering a lost American decade.
>
> Evidence - a mountain of toxic assets, housing market declines, a
> sharp economic recession, rising unemployment and increasing taxpayer
> exposure through guarantees, loans, and infusion of capital - strongly
> suggests that some American banks face a solvency problem and not
> merely a liquidity one.
>
> We should act decisively. First, we need to understand the scope
> of the problem. The Treasury department - working with the Federal
> Reserve - must swiftly analyse the solvency of big US banks. Treasury
> secretary Timothy Geithner's proposed "stress tests" may work. Any
> analyses, however, should include worst-case scenarios. We can hope
> for the best but should be prepared for the worst.
>
> Next, we should divide the banks into three groups: the healthy,
> the hopeless and the needy. Leave the healthy alone and quickly close
> the hopeless. The needy should be reorganised and recapitalised,
> preferably through private investment or debt-to-equity swaps but,
> if necessary, through public funds. It is time for triage.
>
> To prevent a bank run, all depositors of recapitalised banks should
> be fully guaranteed, even if their deposit exceeds the Federal Deposit
> Insurance Corporation maximum of $250,000 (€197,000, £175,000). But
> bank boards of directors and senior management should be replaced
> and, unfortunately, shareholders will lose their investment. Optimally,
> bondholders would be wiped out, too. But the risk of a crash in the
> bond market means that bondholders may receive only a haircut. All
> of this is harsh, but required if we are ultimately to return market
> discipline to our financial sector.
>
> This is not a call for nationalisation but rather for a temporary
> injection of public funds to clean up problem banks and return them
> to private ownership as soon as possible. As president Ronald Reagan's
> secretary of the Treasury, I abhor the idea of government ownership
> - either partial or full - even if only temporary. Unfortunately,
> we may have no choice. But we must be very careful. The government
> should hold equity no longer than necessary to restructure the banks,
> resume normal lending and recoup at least a portion of taxpayer investment.
>
>
> After replacing bank management with new private managers, the government
> should have no say in banks' day-to-day operations.
>
> The FDIC can assist. Just this year, it has placed over a dozen American
> banks - admittedly all small - into receivership. We might also consider
> setting up something akin to the Resolution Trust Corporation, created
> in 1989 to liquidate the assets of failed savings and loans. The
> RTC eventually disposed of nearly $400bn in assets of more than 700
> insolvent thrifts.
>
> To avoid bank runs and contain market disruption, the Treasury should
> announce its decisions at one time. Washington will also need to
> co-ordinate its actions with other major capitals, especially in
> western Europe and east Asia. At best, this will encourage other
> countries to take similar steps with their own banking systems. At
> a minimum, other governments can prepare for the financial turmoil
> associated with the announcement.
>
> This approach is not pretty or easy. It will cost a lot of money,
> with the lion's share coming from US taxpayers, at least in the short
> to medium term. But the alternative - a piecemeal pumping of more
> public money into insolvent banks in the vague hope that things will
> improve down the road - could truly be historic folly.
>
> Eventually our banks and economy will start to recover. When they
> do, we would be wise to avoid another Japanese mistake - raising
> taxes. To counter mounting debt created by government stimulus packages,
> Japan increased taxes in 1997. Consumption dropped and the country's
> economy collapsed.
>
> Our ad hoc approach to the banking crisis has helped financial institutions
> conceal losses, favoured shareholders over taxpayers, and protected
> senior bank managers from the consequences of their mistakes. Worst
> of all, it has crippled our credit system just at a time when the
> US and the world need to see it healthy.
>
> Many are to blame for the current situation. But we have no time
> for finger-pointing or partisan posturing. This crisis demands a
> pragmatic, comprehensive plan. We simply cannot continue to muddle
> through it with a Band-Aid approach.
>
> During the 1990s, American officials routinely urged their Japanese
> counterparts to kill their zombie banks before they could do more
> damage to Japan's economy. Today, it would be irresponsible if we
> did not heed our own advice.
>
> James A. Baker III was chief of staff and Treasury secretary for
> President Ronald Reagan and secretary of State for President George
> H.W. Bush
>
> Copyright The Financial Times Limited 2009