Monday, February 16, 2009

$500 Billion Sinkhole

Paul Krugman jumps on the nationalization train (similar thinking as my post The Case for Nationalization). First he takes a look at expected future losses, which according to Dealbook adds another $520 billion in estimated losses from just six banks:

The future losses for some banks are staggering by CreditSights’ estimates: Wells Fargo, $119 billion; BofA, $99 billion; JPMorgan, $124 billion; Citi, $101 billion; Goldman Sachs: $47 billion; Morgan Stanley, $34 billion.

Then Paul jumps into his argument:
Given these numbers, it’s extremely hard to rescue these banks without either (a) giving a HUGE handout to current stockholders or (b) effectively taking ownership on the part of we, the people. Of these, (a) would be politically unacceptable as well as bad policy — but the Obama administration isn’t ready to go for (b), because it’s not in our “culture”.

Hence the perplexity of policy. Our best hope right now is that the “stress test” will make (b) inevitable — that Treasury will declare itself shocked, shocked to find that the banks are in such bad financial shape, leaving government receivership unavoidable.
Paul focuses just on the big four "money centers" (leaving off Goldman and Morgan Stanley). I would argue these "formerly known as Investment Bank" entities have a similar need for capital. As Yves points out in a post at Naked Capitalism:
Now that Goldman and Morgan Stanley are bank holding companies, they are wildly out of compliance with regulatory capital requirements (investment bank, under SEC jurisdiction, were permitted much higher levels of gearing).


  1. Another great post.

    Don the libertarian Democrat

  2. I bet the government will apply to Goldman Sux option "(a)- giving a HUGE handout to current stockholders" .
    One has to wonder what to make of the fact that so many of our former and current high-level public officials are also ex- Goldman-Sachs officials.

    And what a mistake was Obama's choice for a treasury sec!!!
    According to wikipedia- "Geithner believes, along with Henry Paulson, that the United States Department of the Treasury needs new authority to experiment with responses to the financial crisis of 2008". Paulson has described Geithner as " very unusually talented young man...[who] understands government and understands markets.

    Yeah no kidding - todays government swines treat the economy as one freaking big experiment, that for sure is going to end with a big freakin FAIL!!!