“I’ve found that credit losses could peak at a level of $3.6 trillion for U.S. institutions, half of them by banks and broker dealers,” Roubini said at a conference in Dubai today. “If that’s true, it means the U.S. banking system is effectively insolvent because it starts with a capital of $1.4 trillion. This is a systemic banking crisis.”
Roubini is one of the few people who were right about the severity of the current crisis. Why is the government not acknowledging that our banking system is insolvent?
The dirty secret since what was then called the subprime crisis began (those quaint days when our fearless leaders informed us that the crisis was contained to evil poor people defaulting and not mass idiocy by the nation’s bankers) is that our banking system is insolvent. The occasional nationalization here and there (welcome to the fold, Fannie and Freddie!) and the drabs of money given out in the TARP program (which has generally been squandered on things like paying dividends to shareholders and one last round of bonuses) have done nothing to change the fact that the banking system in the US is, by and large, insolvent.
A quick glance at the Balance Sheets of companies like Bank of America, Citibank, or Morgan Stanley reveal a startling fact: these companies have trillions of dollars in assets. Many of those assets were acquired during the boom using a lot of leverage. A review of the value of your house or stock portfolio will give you a general idea as to how much those assets should be written down. I trust Roubini to do the math on this one and he says $1.8 trillion in losses (half of $3.6 trillion) vs. $1.4 trillion in capital. Since banks need a capital base to lend against, one should probably assume that the entire $1.8 trillion is needed just to get us back to a functioning and solvent banking industry.
Why don’t we require the banking industry to write down the value of their assets to true market values followed by an orderly liquidation of insolvent banks? Is this not precicesly what the FDIC is set up to do? Is it not possible for stock and bond holders to take a little bit of responsibility for bad investment decisions?
It appears that the government believes that zombie banks and stagnation is better than the, gasp, idea of a few more banks failures. The government must believe that the American people are not adult enough to calmly handle a mass restructuring of the banking system and instead would riot in the streets. Either that or there are too many well connected bankers who have conned Washington into believing that the banking system must be protected at all costs.
Certainly the banks are not being saved to maintain a functioning banking system. The one thing most parties agree on right now is that the banking system is not functioning. If that is the case, why keep this set of banks around? The market today continued to wonder the same thing.
