Last week, I posed a supposedly tough question:
Why not let all the doomed banks rest in peace and create good banks instead of bad ones?
Well, at least the first half of my idea is gaining support. Günther Oettinger, premier of Baden-Württemberg, said today he would consider insolvency for Hypo Real Estate (HRE), a German property lender. The government already provided more than €100 billion as financial aid for HRE.
In the US, Treasury Secretary Tim Geithner this week proposed a plan to pour more than $1.5 trillion in the economy and the financial system to restore the flow of credit. But more and more voices demand "not to pour more scarce resources into troubled banks that are still run by the executives who got them into trouble in the first place".
Instead, they say, the government -- confronting a deteriorating economy and a cast of financial executives that's largely unchanged despite the near collapse of their industry -- should be setting up incentives to create a healthier and more sustainable financial system down the road.
That means finding a way to cut the too-big-to-fail crowd down to size. [...] If the government actually owned common stock in banks, it would allow regulators to have more of a say in how the banks are managed going forward.
That could make it easier to break up the big banks, which some experts think makes sense.
Economist James Galbraith said in an interview that bailed-out banks should be declared insolvent.
The little bit of checking that has been done appears to reveal that a very large fraction of these securities contain, on the face of it, misrepresentation or fraud in the files. And so, we are looking at an asset which nobody, no outside investor doing due diligence on behalf of a client for whom they have some responsibility, would touch. And that is the issue. That's the problem.
If that is indeed the case, then I think it's fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent, and that the proper approach for dealing with them is for the Federal Deposit Insurance Corporation to move in and take the steps that the FDIC normally takes when dealing with insolvent banks.
And the sooner that you get to that and the sooner that you take these steps, which every administration, including the Bush administration, actually took in certain cases--replacing the management, making the risk capital take the first loss, reorganizing the institution, guaranteeing the deposits so that there isn't a run, reopening the bank under new management so that it can begin to function again as it should have all along as a normal bank--the sooner you get to that, the more quickly you'll work through the crisis.
Photo: Jacques Grießmayer
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