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ANALYSIS
March 2, 2009
Sagging Index no longer reflects what’s going on in the market, some say, Replacements? Google it, to start.
March 2, 2009
Downward price spiral will actually boost the cost of capital for most companies. CFOS, take note.
March 2, 2009
The latest bailout at AIG could be a preview of how the president will deal with Wall Street.
March 2, 2009
No corporate defaults. Big debt offerings. Percolating CP issuance. Things may be looking up in the capital markets.
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January 26, 2009 12:01 AM ET
Timothy Geithner (Bloomberg)
Investors have little confidence in the banks’ ability to pull themselves out of the credit mess and are growing frustrated with a government response seen as haphazard. This is putting pressure on President Barack Obama to come up with a bolder plan. His economic team has dropped strong hints that an idea to buy up bad assets, which was proposed but then discarded under former President George W. Bush, may soon be resurrected. While the word “nationalization” is rarely uttered in official public discussion, the end result may be the same. By carving out the bad assets that are blocking the normal flow of credit and then pumping taxpayer money into the remaining healthy part, the public’s stake in these institutions may exceed private holdings. “It’s really a question of semantics and what you call nationalization,” said Kenneth Rogoff, a Harvard University professor and former chief economist of the International Monetary Fund. “The banking system can’t stand on its own at the moment and it needs to be cleaned up and recapitalized.” At issue is the same problem that has been plaguing financial firms and the economy for well over a year. Lax lending standards left banks with too many souring loans and insufficient capital to cover them. A series of government efforts to clean up the mess have fallen short, as evidenced by banks such as Citigroup and Bank of America coming back to government coffers for more money, in return for partial public ownership. Goldman Sachs economist Jan Hatzius has estimated that total credit losses may exceed $2 trillion globally, and banks have so far recognized less than half that much. Mr. Rogoff, whose academic research has focused on banking crises, said the current U.S. situation was no different from what countries such as Sweden experienced in the 1990s, and there is a “pretty standard playbook” for how to resolve it. In essence, the government takes over the troubled banks, separates the good and bad assets, and later resells the cleaned up bank to the private sector. Meanwhile, the bad assets sit in a publicly-funded “bad bank,” and are eventually sold off, often at a substantial loss to taxpayers. Britain, in its latest attempt to tackle its own banking crisis, stopped short of hiving off bad assets. Instead it offered guarantees against future losses in the hopes that the banks would resume lending. The British government also intends to set up a 50-billion-pound fund to buy up high-quality securities like corporate bonds to try to get credit markets moving. But many economists thought that would be too little to solve the underlying problem of banks buried so deeply under bad debts that they cannot emerge. Until the bad assets are repriced, it makes little sense to pump more money into the banks, said Alex Pollock, a resident fellow at the American Enterprise Institute in Washington. “Write down first and then recapitalize is the best that you can do,” he said. “Japan learned the hard way what happens if you belatedly reprice and recapitalize.” Scholars have dubbed the 1990s as Japan’s “lost decade” because of policy-makers’ halting approach to a financial crisis that strangled growth. Mr. Obama’s administration is not keen to rush into any big decisions, but seems resigned to the fact that bold action will soon be required to stop the crisis from worsening. “In a crisis of this magnitude, the most prudent course is the most forceful course,” Treasury Secretary-designate Timothy Geithner said at his Senate confirmation hearing on Wednesday. He also said setting up a good bank/bad bank system is “enormously complicated to get right,” stressing that any move in that direction would be cautious to avoid taking undue risks with public funds. For starters, said Wayne Abernathy, a financial policy expert with the American Bankers Association, it is tricky to develop and oversee an auction system for the assets, and there are quicker ways to get credit moving. “How do you auction bundles of assets that are so different? You’d have to have a lot of little auctions if you want to go that route. It would be a management nightmare,” he said. Another problem is distinguishing the good assets from the bad. Harvard’s Mr. Rogoff said that as the credit crisis has moved well beyond its roots in the mortgage market, even garden variety consumer loans for things like cars or credit cards were defaulting at an increasing pace. The risk is that even after the government has tried to separate the good from the bad, there will be too many non-performing assets on the good bank balance sheet and no willing buyers will step up. “The good bank/bad bank is not as pristine as it sounds when you’re in the middle of a recession,” Mr. Rogoff said.
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