Whitney: What Are They Waiting For?
Meredith Whitney’s Financial Times Comment yesterday offers another reason for more dramatic government action: management’s unwillingness to accept reality. Whitney tries to make an analogy between the over-extended taxpayer holding a yard sale and the banks’ clinging to their assets. That doesn’t really have much impact. But if you combine her argument with the growing calls for nationalization, you begin to see a rationale for the government’s breaking up any existing banks that cannot survive. Talk about creative destruction:
The fact is that there is money on the sidelines looking for opportunities to invest. One constant question I get from investors, who need somewhere to put their money, is: if I had to own something, what would it be? I am not very helpful to them at the moment as my answer is that I would own nothing. I do tell them that I believe that later in the year there will be fabulous opportunities to invest in new combinations of businesses that are currently “off the menu” to individuals. What I mean by this is that the system will eventually force disposals of assets: here I am just arguing that we need to get to it sooner rather than later. [Emphasis added]
Funding is the critical challenge to outsiders’ ability to bid more aggressively for assets. Many of these potential investors have clean balance sheets and, if provided with the appropriate funding concession (guarantees of long-term, low-cost capital from the government), could also more ably lubricate the financial system by making actual loans. These investors could be private-equity firms or existing public companies. The key here is government providing a funding concession and the banks being forced to sell assets that could raise capital and provide some tax relief to taxpayers.
No one doubts that losses will go higher, so asset sales are certain to be heavily discounted just as initial bids for collateralised debt obligations and retail mortgage-backed securities were. However, in retrospect, those “discounts” were far less than the writedowns companies took just months later.
Source:
America’s Banks Need to Hold a Yard Sale
MEREDITH WHITNEY
Financial Times; January 21, 2009
http://www.ft.com/cms/s/0/d742ba70-e7da-11dd-b2a5-0000779fd2ac.html
January 22nd, 2009 at 9:59 am
Ok…the unadjust initial claims is 768k today, and with last week’s 950k you are looking at unadjusted numbers of 1,718,000 or so initial claims for the last 2 weeks. The adjusted numbers for the same time period would be 524k and 589k or1113k total. Only a 600k difference…
http://www.dol.gov/opa/media/press/eta/ui/eta20090066.htm
A recent thread asked if this was as bad as 1982…well, now we are right on the edge of that time, and getting worse rapidly as anyone with 4 brain cells and half an eye can tell…
http://www.newsdaily.com/stories/tre50l36c-us-usa-economy-jobs/
“was the highest level of initial claims since a matching reading in the week of December 20. The last time claims were higher was in 1982, when they notched a weekly rise of 612,000. Analysts polled by Reuters had forecast 540,000 new claims versus a previously reported count of 524,000 the week before.”
Now back to my off-topic troll cave…
January 22nd, 2009 at 11:43 am
More anecdotal support that we are in a depression:
1) The coffee cart vendor that I visit in the morning was bitching again: today it was about how quiet Manhattan is in the morning.
2) Last night I took a taxi cab: he was telling me that “nobody is taking cabs anymore.” He said that between 8pm-10pm is when taxi drivers usually make most of their money (generally short trips, so the % of tip to fare is high) but that business is down substantially even during those hours.
January 22nd, 2009 at 5:28 pm
Whitney is right in that the banks need to hold a ‘Yard Sale” and/or be liquidated through bankruptcy. However; having government provide guarantees, or cheap liquidity to the buyers, would cause the assets to be overvalued on those balance sheets as buyers would now bid more money for them than they would if their funding were not guaranteed or provided by governments. There would also be the same moral hazard problem with the ‘clean balanced” sheet buyers, why not pay more to ensure you receive the assets, and if you over bid, don’t worry the governments will guarantee the loans. Funds will flood into firms that recieve the backing, increasing the prices these firms will pay to acquire assets.As such, the fire sale should take place in a free market without “guarantees or concessions”