Wednesday, January 21, 2009
Nationalize the Banks or Charge into the Valley of Death!
I had a pleasant month out of the country working on my old sailboat and while things were bad when I left, the last week or so has the US economy in free fall led by the same old suspects, the banks. While I was away I read David McCullough's "John Adams", a fascinating history of John and Abigail Adams and the new American nation in the late 18th century. One of the early steps to stabilize the economy with its patchwork of currencies was the establishment of the first national bank of the United States in 1791 followed in 1816 by the Second National Bank of the United States. It was the establishment of these banks which gave me the idea that a possible way out the current banking morass would be to establish a true national bank which would have most of the features of private commercial and investment banks. It would be staffed by government employees and entirely transparent. I should add that upon closer scrutiny I discovered that these early national banks were in fact private quasi government affairs not entirely dissimilar from the public private banks of today where lately the private sector reaps the profits and the public sector shoulders the debts. The alternative idea would be to nationalize some or all of the banks. This has been partially done already here and in Europe, primarily in Ireland and the UK. It has been a disaster and a failure as the bank losses keep mounting and government front end loaders keep shoveling money into their vaults in a futile attempt to keep them solvent. It must stop. My suggestion would be stop all banking bailouts until the banks open their books and mark to market the toxic assets and derivatives and then we will have a realistic accounting. For example, I have tried to look at what passes for the books at Citigroup from multiple sources. I have a very simplistic and primitive understanding of basic economics and accounting and I may be missing some key concepts but here is what I found. Henry Blodget, a journalist and securities analysis in Wall Street with a storied past(read criminal) pulled some of Citigroup numbers together.
City is said to have $2.05 Trillion in assets. They list $775 Billion in deposits which I assume is part of the $2.05 Trillion. They have short debt(borrowing) of $105 Billion, $393 in long debt and $646 Billion of other debt and liabilities which includes $250 Billion from the Fed. I think this totals $1144 Billion. The problem is that the figure of $2.05 trillion is bogus because as anyone knows, a lot of Citigroup's assets are worth only a fraction of their value and who knows what fraction. Now lets say we have the mother of all bank runs and the $775 Billion in deposit assets are removed from the balance sheet. I am ignoring the reality of fractional reserve banking for the sake of illustrating the simplest asset/liability structure of Citi. That would leave Citi's assets at $1.275 Trillion($2.05-$.775 trillion). If the remaining assets are worth 90 cents on the dollar(.9X1.275) then Citis assets are worth $1.14 Trillion, equal to their liabilities. It is far more likely that these toxic assets are worth less than 90 cents on the dollar and therefore Citi is insolvent. Until City is forced to mark these assets to true book value, difficult as that would be, there is no justification of giving them or any of the other banks one more dollar. There are several banks in the UK and Ireland who are insolvent despite government denials and I have a sneaking suspicion that the same situation exists here. The crash in banking stocks of the past few days comes despite the disgraceful exit of a discredited administration and the coronation of Obama. The sad fact is that the Obama Administration seems quite willing to continue the flawed bailouts of the Bush era. I say either nationalize the banks or let them fail. There is simply not enough money in this country to save these insolvent banks not to mention irrelevant car companies, insurance companies, bond holders, pension funds etc. In the early 1990s Sweden went through a de facto default of its banking system and Sweden took over the banks, fired the management, and marked assets to true value. They cut loose the bond and equity holders and began to run the banks in the interests of the people and businesses of Sweden. That is how it it should be.I know that the Mutual funds and wealthy bond holders will squeal like pigs but allowing them their losses is far preferable to handing the losses to the taxpayer and his children who bear no responsibility to keep an insolvent, incompetent and and corrupt former investment bank in business. The problem is there is very little time and this country needs a change and using the personnel and policies of the Clinton and Bush administrations represents failure as usual. The current actions hark back to Lord Cardigan's famous blunder during the Crimean War in 1854 immortalized by Tennyson in "The Charge of the Light Brigade." If we keep on this present course it wont be Henry Paulson and his cronies descending into the valley of death. It will be the American taxpayer.