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A better way to fix the banks
Here’s a plan that could solve the toxic-asset pricing problem voluntarily—without requiring Uncle Sam to nationalize the whole industry—and make (pretty much) everyone a winner.

FEBRUARY 2009 • Lowell Bryan and Toos Daruvala

Source: Financial Services Practice
Financial Services, Banking Article, bank bailout government plan
In This Article

* About the authors
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This short essay is a Conversation Starter, one in a series of opinions on topical issues. Read what the authors have to say, then let us know what you think.

In recent speeches, President Obama and Fed Chairman Ben Bernanke have said clearly that the United States will provide whatever capital is needed to keep US banks solvent and that they do not plan to nationalize even deeply troubled banks. This is good news, because economic recovery requires a healthy, profit-motivated US banking system.

However, there has largely been silence from the administration on taking any action to remove bad loans from bank balance sheets. Until the hundreds of billions of dollars of impaired assets that currently weigh down bank balance sheets are removed, credit flows will be restricted. If we wait for the banks to absorb the losses from these loans (net of recoveries), we will wait a long time, and the economic turnaround will be very slow in coming.

To date, plans to remove these bad assets have foundered on precisely how to do so—specifically, on how best to value the assets. Details matter. The Treasury has launched a program to use “stress tests” to identify, proactively, the bad assets on bank balance sheets, using financial models to project future loan values and loss rates under different economic scenarios. The intent is to get better answers about the extent of future losses and to better understand which banks are healthy. But what happens next? Which valuation method will be used to buy the bad assets? If prices are set too low, banks won’t sell the assets unless forced to do so. If pr

Bancos

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Las acciones de los bancos se cotizan a un céntimo de su valor de hace un año. Y por eso la estatización de toda la banca estadounidense resulta inminente. Hasta Alan Greenspan, quien reconoció haber adoptado la doctrina monetarista como una verdad revelada, y aceptó públicamente su error al confiar en la autorregulación de los mercados, ha dicho que este plan de rescate es necesario. En la U. de Chicago borraron el graffity que decía “Adam Smith es Dios, y Milton Friedman su profeta”, y esa casa de estudios busca erradicar el mal estigma que le han dado al mundo entero las ideas del neoliberalismo económico que de allí emergieron.

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in list: Economía

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