It is old news that fixing the problems at America's large banks cannot be completely accomplished unless the toxic assets and toxic loans on their balance sheets recover their value or are sold to other entities. A recovery in value is almost out of the question, at least for several years. Too much of the value of the paper is based on the housing market and the general economy.
The federal government has been adroit in dodging the issue. Paulson elected not to buy bad assets with TARP money. He put the money directly onto banks balance sheets instead. When the failure of value in large pool of assets at Citigroup (NYSE:C) began to falter, the Fed agreed to share losses that the bank might incur on the bad assets.
It has started to dawn on the Obama economic and financial team that none of the past actions has addressed the real problem. The creation of a national "bad bank" to take in most of these assets and allow banks to go on operating without them may be the only way to create a safety net under the entire credit system.
According to The Wall Street Journal (subscription required), "Officials at the Treasury, Federal Reserve and Federal Deposit Insurance Corp., in consultation with the incoming Obama administration, are discussing a plan to create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report."
What is still left unspoken in these conversations in what the government, the taxpayers, get in exchange for taking on all this worthless junk. The piles of toxic assets may continue to lose value. What is the compensation for that?
The answer is, almost inevitably, the the government owns more of the banking system either through having equity or senior debt from major financial firms. That brings the conversation around to the fact that, at some level, the U.S. financial system is being nationalized.
Douglas A. McIntyre is an editor at 247walls.com.
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Reader Comments (Page 1 of 1)
1-17-2009 @ 10:38AM
Mary said...
One world one money for all nations it is a coming....
1-17-2009 @ 12:35PM
Ann said...
But doen't the people own the government? that means tax payers are not in so much debt after all. Furthermore, the government can modify people's mortgages if they want; to help the economy, asap!!!!
1-17-2009 @ 2:15PM
Richard Sifton said...
If the banks, at least the largest ones, do
end up nationalized, it will be because of
the private sector's total failure to run the system properly. Nationalization is
not a choice but a necessity. Attempts to
give the existing power structure another
chance are doomed to failure. A quick
review of Dick Fuld's behavior should be
enough to prove the point.
1-18-2009 @ 8:51AM
Lawrence Phoenix said...
WOW. THANKS FOR THE NEWSFLASH DOUG...RANKS RIGHT UP THERE WITH YOUR "SUN RISES IN EAST, SETS IN THE WEST " EXPOSE WHICH BLEW THE LID OFF THE ASTRONOMY INDUSTRY..
1-19-2009 @ 9:01AM
Matt Miller said...
Common stock holders will not lose their value/money. A bad bank will be done, and what the public gets for their investment is protection against the collaspe of our entire financial system. In the end, the Feds will take 50-60% of the shares and "sell them back" to the banks once viable. Got a 5 year outlook? ... buy C, BAC, UYG.