Seeking Alpha
15 Notes on the Global Economy
Written by David Merkel
February 20, 2009
4) Financial accounting rules can work one of two ways: best estimate (fair value), or book value with adjustments for impairment. Either system can work but they have to be applied fairly, estimating the value/amount of future cash flows. Management discretion should play a small role.
5) Regarding Barry’s post on Bank Nationalization: I don’t like the term “nationalization.” It’s too broad, as others have pointed out. I am in favor of triage, which is what insurance departments (and banking regulators are supposed to) do every year. Separate the living from the wounded from the dead.
The dead are seized and sold off, with the guaranty fund taking a hit, as well as any investors in the operating company getting wiped out. The wounded file plans for recovery, and the domiciliary states monitor them. The living buy up the pieces of the dead that are attractive, and kick money into the guaranty fund. NO MONEY from the public is used.
We have made so many errors in our “nationalization” (bailout) that it isn’t funny. We give money to them, rather than taking them through insolvency. Worse, we give money to the holding companies, which does nothing for the solvency of operating banks. We don’t require plans for recovery to be filed. Further, we let non-experts interfere in the process (the politicians). Better that the regulators get fired for not having done their jobs, and a new set put in by the politicians, than that the politicians add to the confusion through their pushing of unrelated goals like increasing lending, and management compensation.
The concept of the “stress test” is crucial here. It could be set really low (almost all banks pass) or really high (almost all banks fail — akin to forcible nationalization). Clearly, something in-between is warranted, but the rumors are that the test will be set low, ensuring that few banks get reconciled, and the crisis continues for a while more.
I’m in favor of the bank regulators doing their jobs, and the FDIC guiding the rationalization of bad banks, with an RTC 2 to aid them. Beyond that, there isn’t that much to do, and there shouldn’t be that much money thrown at the situation. We have wasted enough money already with too little in results.
One final comment — for years, many claimed that the banks were better regulated than the insurers. Who will claim that now?
6) Equity Private rides again at Finem Respice (”look to the end”). A good first post on how this all will not end well.
7) Whatever one thinks about mortgage cramdowns (I can see both sides), they will have a negative effect on bank solvency, and the solvency of those who hold non-Fannie and Freddie mortgage backed-securities.
8 ) What has happened to Saab is what should happen to insolvent automakers here in the US. The companies will survive in a smaller form, with the old owners wiped out, and new owners recapitalizing them.
10) How do you eat an elephant? One bite at a time. How well did Japan do in working through its leverage problem in the 90s and 2000s? Reasonably well, though it took a while. Deleveraging takes time when many balance sheets are constrained, and asset values are falling back to psuedo-equilibrium levels. One person’s liability is another person’s asset; when a large fraction of parties are significantly levered, the reconciliation of bad debts can cascade, like a child playing with dominoes.
15 Notes on the Global Economy
Written by David Merkel
February 20, 2009
4) Financial accounting rules can work one of two ways: best estimate (fair value), or book value with adjustments for impairment. Either system can work but they have to be applied fairly, estimating the value/amount of future cash flows. Management discretion should play a small role.
5) Regarding Barry’s post on Bank Nationalization: I don’t like the term “nationalization.” It’s too broad, as others have pointed out. I am in favor of triage, which is what insurance departments (and banking regulators are supposed to) do every year. Separate the living from the wounded from the dead.
The dead are seized and sold off, with the guaranty fund taking a hit, as well as any investors in the operating company getting wiped out. The wounded file plans for recovery, and the domiciliary states monitor them. The living buy up the pieces of the dead that are attractive, and kick money into the guaranty fund. NO MONEY from the public is used.
We have made so many errors in our “nationalization” (bailout) that it isn’t funny. We give money to them, rather than taking them through insolvency. Worse, we give money to the holding companies, which does nothing for the solvency of operating banks. We don’t require plans for recovery to be filed. Further, we let non-experts interfere in the process (the politicians). Better that the regulators get fired for not having done their jobs, and a new set put in by the politicians, than that the politicians add to the confusion through their pushing of unrelated goals like increasing lending, and management compensation.
The concept of the “stress test” is crucial here. It could be set really low (almost all banks pass) or really high (almost all banks fail — akin to forcible nationalization). Clearly, something in-between is warranted, but the rumors are that the test will be set low, ensuring that few banks get reconciled, and the crisis continues for a while more.
I’m in favor of the bank regulators doing their jobs, and the FDIC guiding the rationalization of bad banks, with an RTC 2 to aid them. Beyond that, there isn’t that much to do, and there shouldn’t be that much money thrown at the situation. We have wasted enough money already with too little in results.
One final comment — for years, many claimed that the banks were better regulated than the insurers. Who will claim that now?
6) Equity Private rides again at Finem Respice (”look to the end”). A good first post on how this all will not end well.
7) Whatever one thinks about mortgage cramdowns (I can see both sides), they will have a negative effect on bank solvency, and the solvency of those who hold non-Fannie and Freddie mortgage backed-securities.
8 ) What has happened to Saab is what should happen to insolvent automakers here in the US. The companies will survive in a smaller form, with the old owners wiped out, and new owners recapitalizing them.
10) How do you eat an elephant? One bite at a time. How well did Japan do in working through its leverage problem in the 90s and 2000s? Reasonably well, though it took a while. Deleveraging takes time when many balance sheets are constrained, and asset values are falling back to psuedo-equilibrium levels. One person’s liability is another person’s asset; when a large fraction of parties are significantly levered, the reconciliation of bad debts can cascade, like a child playing with dominoes.
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