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Reason for Optimism . . . Not So Fast!

Posted by Larry Doyle on February 5, 2009 12:53 PM |

Last week I wrote the prospects for the implementation of a “bad” bank (I designated it Bank Transition) seemed to be increasingly likely. My post, Reason For Optimism, highlighted the fact that a Bank Transition would facilitate the clearing of toxic assets from bank balance sheets. In so doing, the “transitioning” process should promote an environment in which banks can feel more comfortable lending to qualified borrowers. An update on this “Bad Bank” concept started to break yesterday. Regrettably, the government and banks can not seem to agree conceptually on the necessary steps to launch this bank.

In lieu of a bad bank, the main initiative now being proposed is the concept of the government “guaranteeing” the losses on these assets from a certain point. I view this approach in a less positive light. I believe strongly that this insurance approach is the equivalent to the Japanese style approach used in their banking crisis of the early 90s. Instead of recognizing losses to a certain point and then transferring them, the insurance approach puts a much greater emphasis on “buying time” to generate revenues as a means of increasing capital within the system.

Buying time strikes me as prolonging the period of lower growth and lessened opportunities.

We will see what comes out of Washington on these topics, but if in fact this is the primary approach for addressing toxic assets, I no longer have that “reason for optimism.”

LD






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