RebelCapitalist: Financial Information for the Rest of Us | Hit the Reset Button on the Banking System

Hit the Reset Button on the Banking System

Feb 09, 2009 | By: Mr_Blue | Comments | Permalink | Tags: wall street bailout, economic crisis, banking system

I am not going to criticize the specific bailout plan proposed by President Obama since it has not been officially released but I will say that based on press leaks that it seems like we are postponing the inevitable – declaring most of the banking system insolvent. Insolvent basically means assets are less than liabilities. Several prominent economists, including Joseph Stiglitz and Nouriel Roubini have indicated that they believe that most of the banking system is insolvent. However, tax money continues to be put at risk with capital injections, purchase of toxic assets and guarantee of toxic assets with little in return. We are at a point where shareholders’ interests are outweighing the interests of taxpayers.

If banks are insolvent then they must be liquidated regardless of size. Force these banks to write down the toxic assets immediately and based on this system-wide write down regulators should determine what institutions are not insolvent. If not insolvent but close to it then any taxpayer capital injection must be for a meaningful ownership stake in the surviving institution. No money must be left on the table like it was done by former Treasurer Secretary Henry Paulson.

If we continue to ignore the insolvency of institutions we will only prolong this economic crisis. These toxic assets must be dealt with on the balance sheets of those institutions that invested/created them and not transferred to taxpayers. A clearer picture or better understanding of true financial condition of these financial institutions will help to restore confidence in the market.