Banks and the Fed

"Top [Fed] officials said Tuesday that the incoming Obama administration must pump more money into ailing financial institutions and might need to take bad assets off the hands of the banks, a stance that injected the central bank into a tense political debate. ... Fed Chairman Ben Bernanke made a push Tuesday for a new effort to help banks get bad loans off their balance sheets, the TARP's original purpose. ... 'This disparate treatment, unappealing as it is, appears unavoidable.' Mr. Bernanke said repairing financial institutions is critical because the economy is dependent on the credit they provide. ... Donald Kohn, the Fed's vice chairman, delivered a similar message in testimony before the House Financial Services Committee Tuesday. Both men also talked about the need to aid homeowners, but their emphasis was on securing the workings of the banking system. ... A Goldman Sachs report released in December estimated that investors and financial institutions could lose $1.8 trillion on bad loans, but that only half of those losses have been realized", Greg Hitt and Jon Hilsenrath at the WSJ, 14 January 2009.

"The U.S. government, recognizing that the banking crisis is far larger than originally thought, is laying the groundwork for a second phse of its rescue attempt, with plans to purge assets that are paralyzing the financial system. Officials at the Treasury, [Fed] and the [FDIC], in consultation with the incoming Obama administration, are discussing a plan that would create a government bank that would buy up the bad investments and loans that are behind the huge losses that U.S. banks continue to report, say government officials. Another plan under discussion is an additional and giant government guarantee of banks' assets against further losses. ... The new government proposals are aimed at attracting private capital back to the banking system, efforts that have until now largely failed. ... Goldman Sachs economists estimate that financial insititutions and investors world-wide will ultimately realize $2 trillion in losses on bad U.S. loans, but have recognized only half those losses so far. ... Regulators say they worry that the only remaining source of capital for banks is the government. ... In the U.S., [Fed] officals are advocating aggressive action to take assets such as mortgage-backed securities off the balance sheets of financial firms. ... [Sheila] Bair said the assets could be purchased at fair value, the figure the banks use to value thier own assets. Such a move would remove the challenge of placing a price on assets that rarely trade. That would allow banks to avoid selling those assets for a low price, which would force them to take additonal write-offs", my emphasis, Deborah Solomon, John Hilsenrath and Damian Paletts (SH&P) at the WSJ, 17 January 2009.

Here we go again. Super MLEC returns in some guise or other. I disagree with Zimbabwe Ben and Kohn. It's more than time we let banks fail. All of them if need be. From "TBTF" Citibank on down.

More incompetant WSJ reporting. How do SH&P know what Uncle Sam "originally thought"? If Unc concluded 18 months ago the losses would be $2 trillion, would he have said it, or given us the "dribble" we've seen? MLEC is back! Private capital may go into the banking system, just not to existing banks! Why capitalize insolvent banks? Are most large banks insolvent? Yes. Where were the Big 87654 when we needed them? Purchased "at fair value"? Who is Bair kidding?