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Whadyamean It Won't Work?

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October 18, 2008 – Comments (2)

I was struck by a newswire story that the current effort to buy an equity stake in banks and injecting cold, hard cash, in the words of a bank CEO, will not un-lock the credit markets. My initial reaction was: GUH??

In a way, I feel sorry for Paulson. He was the CEO of the biggest investment bank. If there is anyone on the face of this planet in this continuum who genuinely understands how hi-finance markets work, surely it is Paulson. He has thrown everything but the kitchen sink at the problem, but yet, the credit markets are still frozen solid. Buying MBS' that are worthless, guaranteeing interbank lending, buying equity stakes and injecting cold, hard cash, opening the Fed credit window to both banks and large corporations.

Question: has anyone bothered to ask the bank executives who have the authority to allow or prohibit interbank lending? Has anyone asked these key people what must happen to unlock interbank lending? There is something really screwy going on here, and I want to know what.

2 Comments – Post Your Own

#1) On October 18, 2008 at 7:46 AM, MikeMark (29.47) wrote:

You can't patch a busted dam with water.

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#2) On October 19, 2008 at 2:40 AM, StockSpreadsheet (72.83) wrote:

I also think it comes down to trust.  The bank CEO knows he is lying through his teeth about the value of his Tier 3 assets and thus knows that his capital ratio is much lower than he states.  He thus correctly surmises that all the other CEOs are probably lying through their teeth also about the value of their Tier 3 assets, among other things.  The bank CEO also knows that he is playing every financial game that he can think of to make his finances look better.  (For instance, changing his criteria for a non-performing loan from 60 days delinquent to 120 days delinquent so that he can show fewer non-performing loans on his balance sheet.)  He assumes that the other CEOs are playing the same financial games, (which they are).  Since he knows he is lying at every chance he gets, he assumes, (probably correctly), that all the other CEOs are also.

Regarding your comment about Paulson being from an investment bank and therefore knowing about how the finance markets work, you should realize that the investment banks are some of the biggest liars of all.  In addition, banks are regulated to a maximum leverage, (supposedly), of about 10:1 whereas the investment banks, (where Paulson is from), were leveraged 30:1 or more.  He knows I'm sure all about lying on your balance sheet and every other way you can to make your company look good.  That doesn't help him too much to instill confidence between other lying CEOs.

I think that what would be the fastest way to return liquidity to the market would be to pass a law/regulation that would force all off-balance-sheet items onto the balance sheets and force all assets to be marked-to-market.  Once you figure out how badly off everyone truely is, you could inject any needed capital to bring their balance sheets up to where they are truely adequately capitalized.  Until something like that happens, or the housing market turns around, (which would allow the non-performing loans to become performing loans and the marketed-to-fantasy assets to be marked-to-market without huge write-offs), then the CEOs are going to continue to assume everyone is lying through their teeth just as much as they are and won't trust anyone else's ability to pay them back for any loans the banks make, thus keeping the credit markets relatively frozen.

That is my opinion anyway.

Craig 

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