Will Be Held to Account
Posted by Larry Doyle on January 21, 2009 8:25 AM |
All eyes were fixed on Washington on Tuesday. Prior to addressing dramatic developments in the world of finance, I would like to make a brief comment about the inauguration of Barack Obama from a historical perspective. I am proud to be an American and revel in seeing the smooth transfer of power. I think back to the stories my Dad shared with me as to how Irish politicians in Boston gained power. In the late 1800s, many job listings in Boston, and I assume other cities as well, included the letters NINA. “No Irish need apply” branded my ancestors as second class citizens. My Irish forefathers had a burning desire to move out of the ghetto. That desire was aided by the general ascent of the Irish to political power in Boston.
While I certainly do not agree with President Obama on a wide array of issues, I do hope President Obama’s ascendancy to the highest office in the land inspires current and future generations of African Americans and others who may have felt disenfranchised. For our country and all her citizens, I wish him well as he undertakes his role.
In the course of his speech this afternoon, President Obama remarked, “those of us who manage the public’s dollars will be held to account–to spend wisely, reform bad habits, and do our business in the light of day–because only then can we restore the vital trust between a people and their government.” I am going to take him up on this.
As I heard this remark, I thought of my desire to pursue further questioning of proposed SEC chair Mary Schapiro. Rest assured, we will push on for the simple reason that our democracy deserves no less. I hope everybody who reads our work will join our efforts and, as necessary, will write or forward material to your respective representatives in Washington.
Despite the total focus on Washington, the world of global finance did not have a holiday but did have some ENORMOUS developments. In an attempt to save on verbiage, allow me to share some figures with you. On Tuesday, we saw the following price changes:
DJIA -332pts -4%
Nasdaq -88pts -5.8%
S&P 500 -45pts -5%
10yr Tsy -6/32 !!! No bond rally today!
Municipal Bonds -1%
High Yield Bonds -1.5%
RBS (Royal Bank of Scotland) -70% !!!!!!!!!!!!
State Street Bank -59%
Bank of America -28%
JP Morgan -20%
Wells Fargo -24%
Goldman Sachs -19%
What happened you may ask? I would respond with the following:
1. The virtual certainty that parts of the banking system in the UK will be nationalized.
Read how “In U.K., Currency Tumbles on Fear Bailout Will Fall Short.” Including the fact that European government bonds and the Euro itself are selling off given the expected further capital injections. Is that a precursor for government and mortgage rates here in The United States? I think so.
2. The strong likelihood that the banking system in the United States has some form of nationalization. These are truly historic and challenging times and how this banking meltdown is handled from here will be both gut wrenching and critically important to our immediate and long term economic health and well being. We will be watching VERY closely.
3. State Street “warned investors that some obscure off balance sheet assets could leave the bank at risk of heavy losses in the future.”
4. On November 12th, a reader asked how and why he could ever invest in a bank. I responded “that is a very good point. Investing in banks is now a much higher risk proposition because one does not know just how deep losses are in individual banks.”
The WSJ offers, “State Street Earnings Drop”
Good Bank/Bad Bank Model
There has been significant speculation and discussion on this topic. In the midst of an interview this morning, Senator Chuck Grassley was asked his opinion on how this topic should be addressed. He responded, “I’m not sure. I can’t answer your question. I’m not sure anybody in this town can answer your question.” Well, Senator, enjoy the ball this evening but tomorrow we better get to work on this. As I mentioned on my show Sunday evening, I do not believe that we should allow the banks themselves to establish good banks and bad banks under their own bank holding company umbrella. We have always needed strong hands with real staying power to gain control and the only entity that can do that is Uncle Sam. Thus, I do believe with certain banking franchises, the government should literally declare them as insolvent, take over the bank, and guarantee creditors.
From there, Uncle Sam can sell desirable assets to offset costs, save the taxpayer from continuing to inject more good money after bad for existing management, erase the remaining shareholder equity, guarantee creditors and depositors up to the FDIC limit. To the extent that some form of the bank can resurrect itself over time with the injection of private capital, then a new banking system will rise from these ashes. For those banks that have more judiciously managed their affairs, at this time to the victors go the spoils. This approach is largely the model being promoted by Sheila Bair and is similar in nature to what occurred in the late ’80s and early 90s.
Aside from the shareholders, the current employees at many of these banks may also suffer as businesses are liquidated or downsized. While this scenario is playing out, the healthy banks will gain market share and the government will want to direct capital to them to increase lending.
So much more to address as we move forward. To the extent you have issues or questions that you would like me to look into, please do not hesitate to ask. God Bless America!!!