The Administration has evidently launched a campaign to warn the American public that the
black hole banking industry will need more in the way of recapitalization funding than is currently on offer.
Mind you, we are NOT opposed to this sort of thing were it done correctly: tough minded banking industry reforms, seizure of the dud banks, installation of new management (trust me, there are a lot of good bankers over 50 who were cashiered or retired because they were not on board with the credit party). And like it or not, the financial services industry is so badly impaired that more money is almost certainly necessary. But throwing money at sick banks with no plan as to how to shrink and rationalize the industry does not strike us as a sound way to proceed (and the TARP II notion of buying bad assets at certain to be inflated prices is a cosmeticized equity infusion and not a real solution).
Perhaps as important, the public is sufficiently outraged over TARP I that something quite different (as in more punitive to incumbent management, stockholders, and in some cases, bondholders) is required to muster Congressional support. I don’t have the sense that Team Obama fully appreciates that.
From the Financial Times:
Lawrence Summers, head of the White House National Economic Council, said the administration would use the $350bn remaining of the $700bn that Congress provided to start tackling the financial crisis. He suggested, however, that it would later have to assess whether that amount was sufficient to stabilise the financial system.
“We can make important progress and get started with the support that has been provided . . . What ultimately will be necessary is something that will play out over time,” Mr Summers told NBC television.
His comments were made after Nancy Pelosi, the Democratic speaker of the House, suggested that Congress might have to provide more money for the so-called troubled asset relief programme….
Speaking to ABC television, Mrs Pelosi said she was “open to resolving the financial crisis”, explaining that there might be a need for “some increased investment” to shore up the banks. But she stressed that any future funding for the banks would have to be dispersed with more transparency.
“Whatever we have to do will have to be clearly explained to Congress and to the American people as to what the purpose of the money is, why it’s urgent, and then accountability for it as it is distributed,” said Mrs Pelosi…
Asked whether the best way to shore up the financial system was to nationalise US banks, Mrs Pelosi said any future relief programmes should be structured to allow the American taxpayer to benefit from “some of the upside” that arises from the strengthening US banks.
She stressed that she was “not talking about total ownership” for the government but added that the “taxpayer should have equity”.
The last notion is a crock. The scale of the infusions relative to market values of equity DOES put the taxpayer in a control position in any of the seriously flagging banks. And the taxpayer is not getting commensurate rewards for the risk. Given that most banks would be insolvent if there assets were valued realistically (off balance sheet exposures consolidated, tougher marks on Level 2 and 3 assets), Uncle Sam would rightfully own these banks. But no one in power is willing to be honest about what is going on here.
Bloomberg reports on the Summers interview and other Administration efforts to prepare the public for higher government expenditures:
White House officials warned Americans that economic prospects are darkening as they sought to ensure rapid Congressional approval of President Barack Obama’s $825 billion stimulus package.
Vice President Joe Biden told the CBS program “Face the Nation” that “it’s worse, quite frankly, than everyone thought it was.” Larry Summers, Obama’s top economic adviser, said the economy faces “very difficult” months, speaking today on NBC’s “Meet the Press.”…
Yves here. Everyone? Please. “Everyone” clearly is limited to those within the Beltway. He is obviously omitting Nouriel Roubini and George Soros (people like Nassim Nicholas Taleb, Benoit Mandelbrot, Marc Faber, and Jim Rogers don’t even register in Summer’s universe). Back to the piece:
“It’s getting worse every day,” Biden said today. “There’s been no good news, and there’s no good news on the immediate horizon.”….
“The next few months are, no question, going to be very, very difficult and it may be longer than that,” said Summers..