Banks Negotiate Watered Down Stress Results [View article]
Paul_L - - -
I read the article you reference in the New Yorker earlier this morning. Anyone reading this article should also read that. I addressed the same question in seekingalpha.com/artic... Also, there is an interesting comment stream on the New Yorker article at seekingalpha.com/news/...
Paul, thanks for posting the reference. It adds another dimension to this discussion, although I disagree with some of the author's conclusions.
What the Treasury Plan Needs: Price Discovery, Writedowns and More [View article]
Listening to the bank CEO testimony before Congress yesterday, they all seem to believe they have good prospects and need limited additional direct government help. Are they simply holding weak cards and making poker players' bluffs?
Let's take these testimonies at face value. What then should be done with the next $350 Billion in TARP money?
Let me throw out a wild idea for discussion. Take $200 Billion of the TARP II and provide investment capital to establish 10 new national commercial banks. This is $20 Billion per bank. The management structure for each bank should be recruited from the private sector and each should have its own individual board of directors, with one government representative on each board. These banks would be unencumbered with legacy assets and liabilities. This would give them much more flexibility than the existing banks in how they deal in the credit markets. This would distribute the banking sector risk across a larger group of banks and make future regulation against monopolistic concentration of banking power more tenable. Getting rid of "too big to fail" banking structures would be easier in the future.
In the next few years, these new banks would be taken public with IPO's, the proceeds repaying the initial capitalization and providing some combination of capital gains for the taxpayer (at a prespecified maximum government return, say 15% per annum) and additional capital for the banks (above the government's capital gains).
Okay readers, what's wrong with this idea (besides being off-the-wall)?
Thanks for commenting. Two items: 1. BK had $98 billion cash and cash equivalents as of 9/30/2008. Maybe you have more recent numbers? 2. BK was not alone in being "forced" to take TARP funds. Several other banks also maintained they didn't need the money, including Bank of America (who may have lied or had their heads in the sand). Many believe the rational for these forced payouts was that it provided cover for those who deperately needed TARP, like Citibank. The argument was that if only the needy were exposed to TARP, short runs on their stock could bring them down. This observation relates to constructe's comment.
Infusion of capital is superior to buying unmarketable paper in the following aspects:
1. The recipient of the equity makes interest payments until the equity is repaid.
2. Repayment prospects are more narrowly defined compared to that of toxic paper.
3. The taxpayer money is put into something that can be regulated.
4. The workout from the pyramid of debt and its costs are born by the perpetrators rather than the U.S. taxpayer. In otherwords, the perpetrators (banks) face more pain than if they were simply relieved of some of their mistakes.
The buying of unmarketable debt by the the government has the following advantages:
1. Banks immediately improve their balance sheets without having to do as much deleveraging because they have unloaded some of their first leverage problems. Therefore, more credit liquidity is available in the near term than with the equity infusion. In the equity infusion, much of the money may be used for increasing reserves and deleveraging.
2. The potential exists for a higher ultimate return for the taxpayer. Unfortunately, there is also the potential for significant loss. The outcome depends on the intitial purchase prices and the ultimate default rates.
3. The government will have less direct control over how the banks operate. Some might argue that this is not a good thing.
Banks Negotiate Watered Down Stress Results [View article]
Thanks for another comment which could be an article. I see you have started an Instablog. I've signed up as a follower.
Banks Negotiate Watered Down Stress Results [View article]
I read the article you reference in the New Yorker earlier this morning. Anyone reading this article should also read that. I addressed the same question in seekingalpha.com/artic... Also, there is an interesting comment stream on the New Yorker article at seekingalpha.com/news/...
Paul, thanks for posting the reference. It adds another dimension to this discussion, although I disagree with some of the author's conclusions.
What the Treasury Plan Needs: Price Discovery, Writedowns and More [View article]
Let's take these testimonies at face value. What then should be done with the next $350 Billion in TARP money?
Let me throw out a wild idea for discussion. Take $200 Billion of the TARP II and provide investment capital to establish 10 new national commercial banks. This is $20 Billion per bank. The management structure for each bank should be recruited from the private sector and each should have its own individual board of directors, with one government representative on each board. These banks would be unencumbered with legacy assets and liabilities. This would give them much more flexibility than the existing banks in how they deal in the credit markets. This would distribute the banking sector risk across a larger group of banks and make future regulation against monopolistic concentration of banking power more tenable. Getting rid of "too big to fail" banking structures would be easier in the future.
In the next few years, these new banks would be taken public with IPO's, the proceeds repaying the initial capitalization and providing some combination of capital gains for the taxpayer (at a prespecified maximum government return, say 15% per annum) and additional capital for the banks (above the government's capital gains).
Okay readers, what's wrong with this idea (besides being off-the-wall)?
The Banker: Not a Clue [View article]
Thanks for commenting. Two items:
1. BK had $98 billion cash and cash equivalents as of 9/30/2008. Maybe you have more recent numbers?
2. BK was not alone in being "forced" to take TARP funds. Several other banks also maintained they didn't need the money, including Bank of America (who may have lied or had their heads in the sand). Many believe the rational for these forced payouts was that it provided cover for those who deperately needed TARP, like Citibank. The argument was that if only the needy were exposed to TARP, short runs on their stock could bring them down. This observation relates to constructe's comment.
Schumer Is Way Off [View article]
1. The recipient of the equity makes interest payments until the equity is repaid.
2. Repayment prospects are more narrowly defined compared to that of toxic paper.
3. The taxpayer money is put into something that can be regulated.
4. The workout from the pyramid of debt and its costs are born by the perpetrators rather than the U.S. taxpayer. In otherwords, the perpetrators (banks) face more pain than if they were simply relieved of some of their mistakes.
The buying of unmarketable debt by the the government has the following advantages:
1. Banks immediately improve their balance sheets without having to do as much deleveraging because they have unloaded some of their first leverage problems. Therefore, more credit liquidity is available in the near term than with the equity infusion. In the equity infusion, much of the money may be used for increasing reserves and deleveraging.
2. The potential exists for a higher ultimate return for the taxpayer. Unfortunately, there is also the potential for significant loss. The outcome depends on the intitial purchase prices and the ultimate default rates.
3. The government will have less direct control over how the banks operate. Some might argue that this is not a good thing.