The stimulus package is a very good bill, and it should pass. It will not, by itself, deal with the economic crisis that we're in. I think we should be very clear about that. Expectations for an early turnaround should not be — you know, should not be very high. A clear — a major problem that we face is that the stimulus package is sized so that it will work only if the revival of credit, which is part of the plan that the Treasury is announcing today, also works. And the problem is that that plan is still, I think, not well designed and is not likely to succeed....I think it's very important to understand that this spending package is really geared to the success of this other piece, and this other piece is much more problematic than the spending package is.

....The crucial question is, on what terms does the Treasury plan to guarantee or to repurchase or to otherwise deal with the bad assets that the banks have? These assets are mortgage-backed securities. They are securities derived from subprime loans that were made in an atmosphere of regulatory laxness and complicity and fraud, basically, during the Bush administration, which came to take over the system of housing finance and to infect it with assets which nobody trusts, which nobody can value. And nobody really knows what's in the files, what's on the loan tapes of those—that underlie those securities. So the question that I think we need to ask is, before we issue a public guarantee, does the Treasury of the United States plan to conduct a meticulous audit of the assets that underlie the securities that they're expecting to take off the banks' books, so that we, the taxpayer, can have an idea of what, if anything, these securities are worth?

And the problem is that when you — the little bit of checking that has been done appears to reveal that a very large fraction of these securities contain, on the face of it, misrepresentation or fraud in the files. And so, we are looking at an asset which nobody, no outside investor doing due diligence on behalf of a client for whom they have some responsibility, would touch. And that is the issue. That's the problem. If that is indeed the case, then I think it's fair to conclude that the large banks, which the Treasury is trying very hard to protect, cannot in fact be protected, that they are in fact insolvent....

And the sooner that you get to that and the sooner that you take these steps, which every administration, including the Bush administration, actually took in certain cases — replacing the management, making the risk capital take the first loss, reorganizing the institution, guaranteeing the deposits so that there isn't a run, reopening the bank under new management so that it can begin to function again as it should have all along as a normal bank — the sooner you get to that, the more quickly you'll work through the crisis.

The more you delay and the more you try to essentially prop up an institution whose books have already been poisoned, in effect, by this — the practices of the past few years, the longer it will take before the credit markets begin to function again. And as I said before, the functioning of the credit markets is absolutely essential to the success of the larger package, of the stimulus package and everything else, in beginning to revive the economy....

...When you're dealing with a bank which has already basically rendered itself insolvent by virtue of its complicity — it's basically seeking for easy money, for big profits, out of mortgage originations and underwriting fees in the last part of this decade — then you're dealing with a bank which is already underwater. The risk capital is already worth nothing. It's being held up only by the expectation of a federal bailout. The management is — the problem with leaving the management in place is that you cannot rely on the existing management to give you a full and fair accounting of what is in the books of the bank and what the practices of the bank are. That is why you need to bring in a new team. You need to bring in a team which is nominated by the FDIC, which has as its first objective coming clean, going through the books of the bank and separating the good assets from the bad assets, the assets which are—which have a reasonable chance of continuing to earn income from the assets which need to be written down or written off. Then you can make an assessment of just how big the losses are and what has to be done, whether the bank itself should be closed, which is sometimes the case; whether it can find a merger partner, which is sometimes the case; or whether what you do is reorganize it, isolate the bad assets from the good assets and relaunch the good assets as part of a new bank. One thing or another has to be done. And when it's done, you can begin to basically grow the economy on the basis of these new newly reconstructed credit institutions.

But so long as you're dealing with the old management and so long as you're dealing with the old practices and so long as you don't have a clean audit of the books, the chances are that the bank is going to behave in ways which are not constructive, which do not contribute to the growth of the economy, and which leave all kinds of suspicions present in the system about the integrity of the institution and of the regulatory process. And that's the problem the Treasury Department seems to be determined not to face.

posted by speakingcorpse : 2/12/2009 08:52:00 AM