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Feb 13, 2009

The banks aren’t too big to fail. They are too big to save.

By Alan Stoga

Secretary Timothy Geithner’s initial effort to restore confidence in
the banking system or, at least, the government’s ability to rescue the
banking system flopped miserably.
First, it failed to address the core problem of rotting mortgages,
other than with assurance that the problem is still on the list. The
subprime disaster started the crisis; rising defaults and foreclosures
are keeping it alive. Until the root cause is addressed, the crisis
will continue to worsen.
Second, Geithner failed to address the reality that big banks like
Citigroup and Bank of America are effectively broke. No one want to buy
their assets for what the bankers still pretend they are worth. Maybe
even more importantly, the banks’ underlying business models don’t make
sense any more.
Third, for all of the tough talk about stress tests and hundreds of
billions in new capital for the banks, the dead-on-arrival Geithner
plan almost certainly continues to underestimate the amount of money
actually needed to recapitalize the banking system. New York University
economist Nouriel Roubini puts banking losses at almost $2 trillion,
compared to only $1.4 trillion in bank capital.
Banking crises—from our own savings and loan crisis of the 1980s to the
Swedish and Japanese crises of the 1990s—don’t end until insolvent
financial institutions are made whole or disappear. While there are
variations on the theme, the basics are the same. Existing shareholders
are wiped out, balance sheets cleaned, new capital raised—if necessary
from taxpayers, if possible from the market.
Only when all that is done can the banks start to grow again.
Part of the problem is that Geithner and Obama are no more willing than
were Paulson and Bush to call a spade a spade. Bailing out the banks is
not about free markets; it’s about intervening in the markets so that
collateral damage from their failures can be contained.
Another part of the problem is the continuing fiction that the Citigroups
of the world are too big to fail.
Why are mega banks essential? Why is the national interest served by
bulking up financial institutions to ever-greater levels? Why, for that
matter, is it in shareholder’s interest: bank stocks have dropped 65
percent over the last year and show little sign of recovery.
Why not—as a condition of taxpayer support—break them up?
Since 2001, Bank of America has bought FleetBoston, MBNA, U.S. Trust,
LaSalle Bank and Countrywide, in addition to Merrill Lynch. That made
it too big to manage, not to big too fail—since it has already failed.
The same applies to Citi. If the bank is too big and too broke, why not
sell pieces like Banamex, Mexico’s largest bank, which could raise $10
to $20 billion, and return it to a more manageable size?
It’s time to rethink Washington’s underlying assumptions about solving
the financial crisis. This shouldn’t be about saving the banks, their
management or their stockholders.
It should be about saving the rest of us.


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Money does not grow on trees. Money is an artificial construct. “The Bank” can be replaced by a computer program. There is no need for any human being to own a bank or part thereof.

Alex Stollberg
Feb 22, 2009