Good Afternoon Everyone!
I hope everybody is having a great weekend. I must say its a sad day when I see socialism as the only way to save our financial system.
A nationalization of our banking system is the only way to get out of this mess IMO.. After watching Goldman Sachs and Morgan Stanley tumble on Friday. I came to the conclusion that if they aren't propped up with direct capital, they will follow the path taken by Lehman Brothers. If we allow this to happen, I believe the financial system is toast.
Drastic steps must be taken in order to prevent this from happening. I see nationalization as the only solution. Buying bad assets doesn't solve the problem because you will be left with zombie banks that still don't want to lend.
There was a great article in Bloomberg today on this.
"Oct. 11 (Bloomberg) -- Morgan Stanley and Goldman Sachs Group Inc., the biggest independent U.S. investment banks, may reap cash infusions as part of Treasury Secretary Henry Paulson's plan to buy stakes in financial institutions, investors said.
Paulson, in a statement yesterday, said the U.S. will purchase equity in a ``broad array'' of banks and other financial firms to restore market stability and ensure economic growth. The Treasury is working on a ``standardized program that is open to a broad array of financial institutions,'' he said.
Morgan Stanley Chief Executive Officer John Mack, 63, and Goldman Sachs CEO Lloyd Blankfein, 54, failed to regain investor confidence by converting their firms into bank holding companies last month and raising new capital from private investors. Morgan Stanley's stock dropped almost 60 percent this week, while Goldman's fell 29 percent."
Its obvious from the article that even the pigmen are beginning to understand that this is the only solution:
``Based on the fact that they're allegedly commercial banks now and are moving that way, I think they're likely to get protection,'' said Benjamin Wallace, an analyst at Grimes & Co. at Westborough, Massachusetts, which manages about $700 million. ``Whatever solution they come up with for the banking industry as a whole will apply to them, because they're no longer special.''
``The government can go a long way by buying a stake in Morgan Stanley,'' said David Killian, a portfolio manager at Valley Forge Advisors LLC, which oversees $650 million, including Morgan Stanley shares and bonds. ``Paulson has to follow through on his promises; he and Bernanke went to Congress and said `we need this TARP facility to protect against ongoing systemic risk' and here we go, put your money where your mouth is.''
Egan-Jones Ratings Co. said Morgan Stanley probably needs to raise $60 billion in new equity to reassure customers and investors. The investment bank has about $900 billion of assets and an equity market value of $10 billion. Mark Lake, a Morgan Stanley spokesman, declined to comment.
``The analogy is a snowball rolling down a mountain; the mass needed to stop that negative momentum increases as that snowball picks up speed and size,'' Egan-Jones's Sean Egan said in a phone interview yesterday. ``Perception trumps reality. They need a massive injection to stop the slide.''
The government can't allow financial companies to continue collapsing, Paul Krugman, an economics professor at Princeton University, said in an Oct. 9 interview.
``It's really hard to put humpty-dumpty back together again after those things fail,'' Krugman said. ``The failure to rescue Lehman it turns out was a really big mistake.''
I don't see any other way out of this crisis. Unlike our counterparts in Europe, The New York Times reported today that the short term debt of the US banks is only 15% of GDP. This makes it doable if the government can talk the banks into being nationalized.
Some of the European countries have bank debt that totals 3.5 x total GDP. Mathmatically, this is much less doable for Europe's banks. IMO Europe's crisis is much worse than ours. What makes nationalization here even more critical is the fact that if the European banks fail, they most likely take our banks down as well. This makes it even more imperative for the US to take ownership in the banks. We need to make our banking system as liquid as possible to make it through this mess.
Now are their risks here? Of course! Inflation will rise dramaticallyas the government spends like a rock star. The government may realize they don't have the resources to do anything. Even worse, the USA may end up defaulting on its own debt in the process as we head into a severe US recession which will most assuredly pummel the banks with another round of severe losses.
On the positive side, if you regulate all the banks to a standardized 12-1 capital ratio, the $700 billion bailout turns into a heck of a lot more money if you directly inject it into the banks.
Banks could lend out 12 times the capital they received which would result in more than $8 trillion of additional lending capacity if the Treasury spent the bailout on capital injections. That's a lot of money folks. Does it solve all of our problems? No, but its a nice start. It would go a long way towards loosening up the credit market lockup.
Banks would be much more likely to lend if they have huge injections in capital along with the backing of the US government.
Now, getting the pigmen to agree to be nationalized will be a battle. The bankers will be extremely reluctant to accept terms that include watching their stock price go to zero and being forced to share profits with the US government.
However, if they care anything at all about this country, they will do the right thing and accept the terms. After all, they created this mess!
I don't see any other solution folks. I am also not sure if this will work, but its the only shot we have in my opinion. After seeing the huge losses in the auction of CDS Lehman swaps last week, its apparent to me that some of these banks are too big to fail.
I am ready to roll the dice and give it a shot. If it worked for Sweden, why can't it work for us?