Tech Policy

Obama better not stick the taxpayers with this one...

We will know it on May 4th, or somewhere around that time, whether Obama/Geithner/Summers have decided to stoop to their lowest level yet, when they announce how they want the banks to recapitalize. The latest news is that several major banks including BoA, Citi, and Wells Fargo may need to raise a lot of capital (not that we did not know it already). 

There is only one way out of this if Obama and company have the interest of the country in mind: Make the bondholders take the hit, and use that debt to convert in to equity. It's not that difficult to understand (even I can understand it. Read this if you need more: Parts I and II).

Not that converting debt to equity will solve our economic problems, but the current Obama/Geithner/Summers approach is despicable. Obama was not in charge when this problem started, but he owns it now, and except for the stimulus package, there is very little that his administration can say that they have done to address this problem. 

IF Obama decides that he wants to stick the taxpayers with the burden, and proceed with the zombie bank option, he will own the 11-12% unemployment rates that will follow. No amount of work on other fronts will save his presidency.

Another excellent discussion of these issues was on Charlie Rose show with Bill Ackman, Kate Kelly, Joseph Stiglitz, Andrew Ross Sorkin.

UPDATE (04/29): via Barry Ritholtz, this note from Paul Kasriel should make it clear to those who found Hussman's explanation a little long winded. It's really simple to undestand, but Geithner shows no signs of improvement. 

Why Obama/Geithner Policies Lack Integrity...

William Black's interview in this weekend's 

Barron's as well as his appearance last week on Bill Moyes Journal serves as a great book end to Simon Johnson's Atlantic article.

Choice quotes from the Barron's interviews:

"His plan essentially perpetuates zombie banks by mispricing toxic assets that were mispriced to the borrower and mispriced by the lender, and which only served the unfaithful lending agent.

We already know from the real costs -- through the cleanups of IndyMac, Bear Stearns, and Lehman -- that the losses will be roughly 50 to 80 cents on the dollar. The last thing we need is a further drain on our resources and subsidies by promoting this toxic-asset market. By promoting this notion of too-big-to-fail, we are allowing a pernicious influence to remain in Washington. The truth has a resonance to it. The folks know they are being lied to."

"With most of America's biggest banks insolvent, you have, in essence, a multitrillion dollar cover-up by publicly traded entities, which amounts to felony securities fraud on a massive scale.

These firms will ultimately have to be forced into receivership, the management and boards stripped of office, title, and compensation."

"The government is reluctant to admit the depth of the problem, because to do so would force it to put some of America's biggest financial institutions into receivership."

Make no mistake, Obama is not doing so badly on rest of the issues, but when it comes to dealing with the financial sector, the performance so far has been deeply disappointing and disturbing.

Elizabeth Warren Rocks!

Now if only the Obama administration will listen!   

Over the past few weeks, I have been slowly and steadily becoming convinced that "nationalization" i.e. FDIC taking receivership of the big bad insolvent banks, is perhaps the only right way forward. It is not that the plans presented by Geithner et. al will not produce anything positive, but they are unlikely to solve the problem of insolvency! 

For more on why banks need to undergo an FDIC intervention, where current stockholders are wiped out, many if not all bondholders take a haircut, and then the banks are recapitalized and sold back to the private sector, read:

John Hussman

Martin Wolf

Paul Krugman

Simon Johnson

When it comes to Obama, one of the following is true:

* Obama and Geithner do not understand the problem.

* Obama and Geithner understand how to deal with this problem, but do not have the guts to do what is right.

I suspect that the latter is correct.