Tuesday, January 20, 2009

How to recapitalize the banks

You can seize the banks, and wipe out their shareholders, and write down their "assets" that aren't worth what the banks say they are, to a level that you will actually find real buyers, and then give debt holders an equity stake, and it won't cost the taxpayer a penny.

But this will cost common and preferred shareholders, and bond holders, will get a haircut and the recapitalized equity.

Or you can get a TARP II, or a "bad bank" that will overpay by buying the toxic assets at prices that are fiction, to recapitalize the banking system and stick the taxpayer with the tab.

Now which plan do you think they will do?

The only problem is that the problem assets are far greater than the bankers will admit. Which is why Roubini says losses could total $3.6 trillion dollars, and that the banking system is essentially insolvent:

U.S. financial losses from the credit crisis may reach $3.6 trillion, suggesting the banking system is “effectively insolvent,” said New York University Professor Nouriel Roubini, who predicted last year’s economic crisis.

“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”


So bankers will do what they do best. They will lie. And pretend that their assets are worth more than they are.

Until the market crushes the common stock to oblivion, and forces a de facto nationalization.

Because now no one even believes the bankers lies.

Which was the lesson learned on Wall Street in State Street today.

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