Sunday, February 22, 2009

Final Exams for America's Ailing MegaBanks

America's major banks - including CitiBank and Bank of America - are being scrutinized this week by Washington regulators to determine if they're beyond saving. From the New York Times:

These reviews of the banks’ books, known as “stress tests,” are heightening a dilemma for Obama aides about how candid they should be about the health of banks like Citigroup and Bank of America. The tests are expected to take several weeks.

Bank shares were pummeled last week, partly because of rumors that the government might
nationalize some of the banks. Officials consider many of the top 20 banks “too big to fail.”

Still, the big banks say they remain relatively healthy and that, with time and support from the government, they will regain their footing. But many economists, Wall Street analysts and even some bank executives contend that some of the banks are already effectively insolvent.

NYT columnist Paul Krugman says the Obama administration needs to find the courage to nationalize the big banks, what he calls "zombie banks" unable to provide credit to the US economy.

The case for nationalization rests on three observations.

First, some major banks are dangerously close to the edge — in fact, they would have failed already if investors didn’t expect the government to rescue them if necessary.

Second, banks must be rescued. The collapse of Lehman Brothers almost destroyed the world financial system, and we can’t risk letting much bigger institutions like Citigroup or Bank of America implode.

Third, while banks must be rescued, the U.S. government can’t afford, fiscally or politically, to bestow huge gifts on bank shareholders.
Let’s be concrete here. There’s a reasonable chance — not a certainty — that Citi and BofA, together, will lose hundreds of billions over the next few years. And their capital, the excess of their assets over their liabilities, isn’t remotely large enough to cover those potential losses.

...But here’s the thing: the funds needed to bring these banks fully back to life would greatly exceed what they’re currently worth. Citi and BofA have a combined market value of less than $30 billion, and even that value is mainly if not entirely based on the hope that stockholders will get a piece of a government handout. And if it’s basically putting up all the money, the government should get ownership in return.

http://www.nytimes.com/2009/02/23/business/23bank.html?hp
http://www.nytimes.com/2009/02/23/opinion/23krugman.html?_r=1

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