Friday, January 30, 2009

Someone Will Pay For The Banking Crisis In The US (Now Pick A Group Of People)

On Tuesday night, CNBC reported the rumor that a "bad bank" option was being considered by the Obama administration. The Wall Street Journal, The Washington Post, Reuters and various other news media confirmed that such a discussion was under way.

Just a few minutes ago, CNBC reported that that no weekend meetings are being held and that a "bad bank" plan is now on hold, as a variety of other initiatives are being considered.

So possibly the rumors were overblown in the first place, or the feedback on such a plan was so negative that the administration decided to drop the idea. Or, here's another explanation: possibly the administration underestimated the strength of the bankers' behavior of self-interest.

Frankly, the solution to the banking problem is a combination of time/price discovery. Someone is going to have to take the loss -- whether it be short-term, intermediate, or long-term in nature. Will it be the banks or the taxpayers?

Short-term, yes, someone books a "loss." If the government bought up all the crap assets at some model-induced price, the taxpayers would show a "loss" in the short and medium-term. However, these crap securities ARE paying. In the long-term, the taxpayer would book a "gain" (to just be wasted by the federal government of course). What would very well happen might be that the government could sell a significant number of these securities after a few years - at higher prices - when buyers realize these things are worth way more than .12 on the dollar, or .22 on the dollar, or whatever. The valuations attached to these securities as of this instance do not reflect reality at all (or most possible realities at least). In the meanwhile, the market is left without clarity or direction.

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