Bad bank, bad plan (Dean Baker)

[chill_wind]

Bad bank, bad plan

Barack Obama's plan to subsidise failing banks is a bad deal. Instead, the US should take posession of them

o Dean Baker
o guardian.co.uk, Monday 2 February 2009 17.00 GMT

Leaks in the media indicate that the banks are about to inhale another helping of taxpayer dollars. This round is likely to be considerably larger than the $350bn they swallowed in the bail-out last October.

(see the mind blowing discussion of the sums of money and the pitfalls involved...)

There is a simple alternative, which can be called "bank rationalisation" in order to avoid the "n" word. Under this scenario, the government would take possession of insolvent banks. This is not interference with the market. It is the market. Bankrupt banks go out of business, but due to their importance to the economy, we can't let them be tied up in bankruptcy proceedings for years.

Dealing with the matter all at once can both allow for a quicker fix to the financial system and also ensure fairer treatment of bank creditors. First, the shareholders of bankrupt institutions must be forced to eat their losses. However, we may not want to honour all the debts of the banks at 100 cents on the dollar, which has been current practice.

While the government has guaranteed most deposits, it has not guaranteed the bonds and commercial paper of the banks, nor their commitments on credit default swaps (CDS) and other derivative instruments. If it takes possession of all the bankrupt banks at once, it can apply a uniform policy. For example, it could honour bonds at 90 cents on the dollar or only pay off full CDS obligations to those who actually own the bond that was being insured against default.

To force banks to own up to insolvency, bank rationalisation can apply punitive terms to banks that fail subsequently and allow their creditors to hold bank executives personally liable for their losses. Such rules would lead to more truth telling from our bankers

In short, bank rationalisation is both much fairer and better for the economy than the bad bank plan. If only the people who missed the housing bubble can be forced to recognise this fact.

http://www.guardian.co.uk/commentisfree/cifamerica/2009/feb/02/obama-bad-bank-plan

http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-columns/time-for-bank-rationalization/

Where's the Nationalization vs "Bad Bank Plan" *debate*?!

http://www.democraticunderground.com/discuss/duboard.php?az=view_all&address=132x8159849#top

[w4rma]

1. I still say let them fail and liquidate them, but this is better than the current Rubinite plan.(nt)

[slipslidingaway]

2. Thanks, here is what Schumer said today...

http://uk.reuters.com/article/rbssFinancialServicesAndRealEstateNews/idUKN0353120120090203

"NEW YORK, Feb 3 (Reuters) - U.S. bank shares fell as much as 6 percent on Tuesday after U.S. Sen. Charles Schumer criticized government plans for a "bad bank" to buy banks' distressed assets.

Schumer told CNBC he would prefer the government guarantee distressed bank assets rather than use a "bad bank" to buy them up. Bad assets, such as risky corporate loans and mortgages, have caused bank losses to mount since the credit crisis began more than a year ago.

Schumer's statements stand in contrast to comments from other sources last week indicating the government was looking hard at solutions including a "bad bank."

His comments prompted investors to worry that government plans to shore up the banking system are less far along than many had hoped, and hurt bank stocks..."

[chill_wind]

3. Chuck ("Simply no equal to Hank!") Schumer-- :faint:

Good to see any growing debate about the Bad Bank Plan at all.

Any actual arguments about alternatives, (including actual nationalization) don't seem to getting much traction under Geithner, but that there's any controversy at all about The Plan has some rupturing a spleen on page 2.

Jamie Dimon said, "I think it's very important that people stop talking about nationalization."

Not the first demand from him of this kind:


"JPMorgan would be fine if we stopped talking about (the) damn nationalisation of banks ... we've got plenty of capital," Jamie Dimon said, at the annual meeting of the World Economic Forum in Davos, Switzerland.

http://www.portfolio.com/views/blogs/market-movers/2009/01/29/wheres-the-nationalization-debate?tid=true

[slipslidingaway]

4. Yes glad there is debate, just curious to find out what we are

buying, how much it will cost and what the financing costs will be.


Jamie Dimon said, "I think it's very important that people stop talking about nationalization."


http://www.marketwatch.com/news/story/geithner-says-bailout-plan-soon/story.aspx?guid=%7B69FBDA60-5510-480D-8CA4-8C867FF5580E%7D

"...Geithner indicated he was opposed to nationalizing banks, as some have speculated the government might consider doing. "We have a financial system that is run by private shareholders, managed by private institutions, and we'd like to do our best to preserve that system," Geithner said..."

[Cronopio]

5. I think it's more important that Dimon stop trying to repress criticism of bad policy.

And I'm right - Dimon is wrong.