The Bankwatch

Tracking the consumer evolution of financial services

“Hold your nose, however. Mr Geithner’s proposal is worth a try” | Geithner

This weeks leader in the Economist sums up my perspective well.  Its not great that taxpayers have to include those pesky Wall Street types in the scheme to sort out the Banks, but its better than all the alternatives of  flat out bankruptcy, flat out nationalisation, or doing nothing.  Each of those three alternatives have significant knee jerk ramifications for US and the world economies.

Banks, and particularly US banks are perceived to be over-valued on their assets, and no amount of debate can cure that impression now.  With asset values down by 60% (Equities) to 30% (real estate) its a safe bet there are some bad loans out there.

The Geithner approach will flush those out, and coupled with the stress testing under way right now, will bring back some elusive certainty to bank valuations, ergo the financial system.

Saving America’s banks | Economist

Hold your nose, however. Mr Geithner’s proposal is worth a try, not least because, as any leader at the Group of 20 summit in London next week will tell you, fixing American banks is one of America’s—and hence the world’s—most urgent economic priorities. However unpalatable it is to shower public largesse on big vulture funds, one of the few ways to see if there is any residual value in all the toxic waste left on the banks’ books is to induce someone to buy it. Without a subsidy, there are many reasons for private investors to hold back. Above all, they do not have the same information advantages as the seller, which is only too keen to offload the worst assets on its balance-sheet while hanging on to the good stuff. The trouble is, the proposal barely has a hope unless banks agree to sell assets, and therein lies Mr Geithner’s unfinished task: arm-twisting them to do so. Many banks value their assets well above the prices they would fetch in an open (albeit illiquid) market. They have incentives to keep them there: the lower the price, the more capital they need to raise; in these capital-constrained times, that means the closer banks are to insolvency.

Written by Colin Henderson

April 1, 2009 at 23:04

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