Norris

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Tuesday, October 14, 2008

October 14, 2008, 7:35 am — Updated: 7:35 am -->
Putting Out Cash Is Easy
There is an old saying in the banking business: Lending is the easy part. It is getting the money back that is hard.
To the list of unprecedented things that happened in 2008, add the government demanding that banks take its cash — or, rather, the cash it plans to borrow. The hope is that a recapitalized banking sector will get the financial system working again, but Libor rates remain very high. Guaranteeing bank debt ought to bring them down, and soon.
Do you remember moral hazard? Fear of that was a justification for letting Lehman Brothers fail. That decision — which now appears to be one of the worst financial decisions ever made by the United States government — led to an intensification of the crisis and to the decision to guarantee almost everything in sight.
This has stemmed the financial panic, at least for now. But it will not end the recession that has gone global. Among economists — at least the ones I talked to who were gathered in Washington this weekend — the consensus is that the recession will be the worst since the early 1980s, if not the worst since the Great Depression.
The banks, meanwhile, seem to be in a complete panic about mark-to-market accounting. (Or at least they were on Monday, before the latest rescue plan was announced.) The American Bankers Association is demanding the Securities and Exchange Commission stop the Financial Accounting Standards Board from requiring them to mark crazy assets at depressed market values. The banks have decided that the interpretation of the rule they liked only days before is not enough.
One banker told me the panic was over potential write-downs at year-end, which the auditors presumably will be carefully reviewing. They think those could set off a new round of bank failures.
Now that the government is handing out cash by the tens of billions, the better solution would be for those banks to take every possible loss, to get the figures down to even the “fire sale” levels that the banks moan about. If that happens — and more important, if it is perceived to have happened — then banks that remain well capitalized would be trusted and would have enough confidence to resume lending,
There may be some banks that are so far gone that the government should refuse to recapitalize them. That too would help to reassure other banks and the public that the remaining banks were safe, since they had survived the scrutiny that led to other banks being allowed to collapse.
When the government gets its money back, with a profit, we will know the disaster brought on by Wall Street is over.
Well before that, we have to hope that it will be easy for the government to borrow $1.5 trillion or so over the next year. Much of that will have to come from overseas, and that could easily drive up interest rates at a time of weak economies.
Tag List
S.E.C. 53
CREDIT CRUNCH 45
FEDERAL RESERVE 24
HOME SALES 21
MORTGAGE 20
RECESSION 17
SHORT SELLING 17
EMPLOYMENT 17
HOME PRICES 17
STOCKS 16
UNIVERSAL EXPRESS 15
OVERSTOCK.COM 14
BANKS 14
MORTGAGES 13
ACCOUNTING 12
SUBPRIME 12
BAILOUT 10
CITIGROUP 10
INFLATION 9
HOUSING 9
BEAR STEARNS 9
CONSUMER SENTIMENT 8
OPTIONS 8
MBIA 7
SARBANES OXLEY 7
AIG 7
DERIVATIVES 7
STOCK MARKET 7
FREDDIE MAC 6
GASOLINE 6
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