"The banks are insolvent and have to die."

[RedEarth]

via..Rolfe Winkler of OptionARMageddon

Martin Wolf’s latest column is a fantastic analysis of our thus-far-impotent bank “rescue” strategy........

Much of the debate is semantic. But underneath it are at least two big issues. Who bears losses? How does one best restructure banks?

Banks are us. Often the debate is conducted as if they can be punished at no cost to ordinary people. But if they have made losses, someone has to bear them. In effect, the decision has been to make taxpayers bear losses that should fall on creditors. Some argue that shareholders should be rescued, too. But, rightly, this has not happened: share prices have indeed collapsed. That is what shareholders are for.

Yet the overwhelming bulk of banking assets are financed through borrowing, not equity. Thus the decision to keep creditors whole has huge implications. If we accept Mr Bernanke’s definition of “nationalisation” as a decision to “wipe out private shareholders”, we can call this activity “socialisation”.

This is a huge point that few grasp. When the government took control of 36% of Citi’s common equity in its latest rescue, many thought the government was 36% closer to nationalizing the bank outright. That is false. Citi’s equity is now worth close to $0. 36% of $0 is still $0. The folks who haven’t absorbed any losses yet are Citi’s creditors. Their ownership stake in the bank remains entirely intact b/c the government keeps running interference by plugging equity into the balance sheet and “guaranteeing” certain assets against loss.

Typically when a bank becomes insolvent, FDIC uses its remaining assets to pay off depositors and then uses whatever’s left to pay back creditors. Creditors take losses while shareholders are wiped out.

An insolvent homeowner who can’t make payments on an upside-down mortgage gets foreclosed on and the bank sells his house for whatever it can get. The bank is the creditor in this equation. And it is forced to eat the loss for whatever amount the final sale price of the foreclosed home falls short of the remaining principal on the prior owner’s mortgage.

The banks are insolvent. Their assets are worth less than their liabilities. Depositors should be paid off and creditors should split whatever scraps are left at the table. If creditors have to eat losses, so be it.

It’s important to remember that when they are forced to eat those losses, it’s going to be painful for everyone. Most of society is a creditor to the banking system. If you have a bank account, this includes you. To bail all of us out, the government will likely have to borrow substantially more than it has in order to bail out depositors, which means higher future taxes. Not to mention that lending will fall even more dramatically. Insurance companies and pension funds, which are among the largest bank creditors, will be hit very hard and may themselves turn up insolvent. Those that rely on them will be forced to eat substantial losses as well. The problem will cascade seemingly without end.

And yet, despite all of this, we have no other choice. The banks are insolvent and have to die. Delaying the inevitable will only multiply the cost.

http://optionarmageddon.ml-implode.com/2009/03/06/martin-wolf-to-nationalize-or-not/

[Skink]

1. So if they are not proped up a giant wave of foreclusers occurs.

if they eventually turn around however our 36 percent stake stands to gain.

[marketcrazy1]

2. our 36 percent "stake" is a myth

constructed to keep investors from losing THEIR money while OURS gets sucked into a black hole of bank debt.. we already spent more on CITI than it is worth! many times more and we will continue to "invest" in it`s losses. foreclosures can be dealt with, new SOUND banks can be created, credit can flow from these. all we are doing now is throwing good money after bad so big investors never have to reveal how stupid and or criminal they are by taking THEIR losses...............

[notesdev]

3. Our 36 percent stands to gain nothing

Citibank will not survive this crisis, it cannot. It has too much debt and too little ability to repay those debts.

The only way that 36% will be worth anything is if it is supported by huge amounts of bailout dollars, which will dwarf any value that stake might have. Otherwise Citi goes bankrupt (as they should) and the share price moves to zero.

[bemildred]

4. It's just amazing what a bunch of dumb fucks these "investment bankers" turned out to be. nt