Dan Alpert's Two Cents

Dense Smoke on the Horizon

Let’s take a step back. We are all becoming so focused on the individual policy “trees” of the continuing crisis that its time to take a broader look at the forest.  The forest, regretably, is burning – and localized, helicopter-ed water drops aren’t sufficient and are taking too long to get to the source of the flames.  Its no one’s fault, particulary, that the financial fire is still uncontrolled – this is an inferno of unprecedented strength and speed.

We need the world’s financial fire departments, its central banks and fiscal ministries, to immediately coordinate in a massive effort to douse the flames tearing up decades of growth and prosperity in worldwide banking and commerce.  Unfortunately, it may be time to put aside the elegant solutions – TAF, TSLF, and even the protective and yet undeployed TARP – in favor of direct re-capitalization of systemically critical banking institutions.  Institutions that need to get back into the business of lending to each other and to the broader commercial world.  Don’t get us wrong, we love many of the brilliant ideas that have come out of Treasury and the Fed.  They represent the years of scholorship and experience of the men and women leading those venerable departments of government – all of whom are thinking actively “outside the box” in and attempt to get ahead of the crisis.  It would be fantastic if the TARP was the shelter that calmed the markets.  Its double duty as a reliquifier and asset resolver, if done right, would be a solid concept.  But pitching this TARP may take too long, and a tarp is great protection from the rain. But if it is an inflagration we are fighting, maybe the tools need to be more blunt and less beautiful.

By the end of the week, leading regional central banks and the finance ministers of developed nations, may need to seriously consider massive recapitalization of major banks with equity.  What may be called for at this point is direct investment (which will, alas, massively dilute existing ownership – as the market anticipated today) to dramatically increase the equity capital of these institutions, the presence of central bankers of bank boards and top investment committees, and a commitment to settle out and monetize troubled assets as rapidly and efficiently as possible.  Not just take them off the market and hide them somewhere – but settle them and take the losses that settling them will engender.

We believe that the $700 billion proferred by the US taxpayer last week should be more or less adequate to recapitalize the top dozen or so domestic banks and major domestic institutions that are vital to the US financial system.  The UK and, individually, countries of the EU (the EU has no meaningful central budget), and to a lesser extent Japan and other pacific rim nations, need to pony up with respect to their own institutions as well.  Placing the hands of many governments on the tillers of our banks is distasteful to many, ourselves included, but it may be the only coordinated action that can be put in place before we are all consumed in flame:

  •                Yes, we confess that this is tantemount to the notion of “to each [bank] in accordance with its needs” but it may be the only practical solution left (other than the really to-be-dreaded bank holiday, which accomplishes nothing more that stopping the music for a few days while people try to sort through matters).


  •      Yes, it is equally discomfiting to admit that the debtholders and preferred shareholders of critically important banks will be potentially undeserving beneficiaries of such a move (for fear of worsening the crisis if bank debt and preferred losses result in further collateral damage to the system).
  •                Yes, the triage of ailing smaller institutions that will be gobbled up by the survivors or escorted to their graves by the FDIC will not be pretty (or, particularly fair).

 Nevertheless, it is apparent to us that banks should truly and decisively be recapitalized, in accordance with their real needs, and at the depressed common share prices prevailing on the eve of such a policy move.  In the case of US banks these investments should be on no worse terms than Warren Buffet would require. Some will suffer more dilution to get the capital they need to convince markets to do business with them (and to be able to do business themselves) and others will suffer less so.  Such it is with the consequences of questionable business decisions.  It is apparent that private capital is not inclined to do what governments must now consider – but there IS a logical tipping point, still eluding us, where private capital will flow again into recapitalized institutions.

And we so desperately need to find that point soon. 

3 Responses to “Dense Smoke on the Horizon”

AnonymousOctober 10th, 2008 at 4:50 pm

Freedom’s just another word for nothing left to lose,Nothing don’t mean nothing honey if it ain’t free, now now.—Janis Joplin

TooBigToFailOctober 10th, 2008 at 8:55 pm

I’m just wondering sho the banks are going to lend to. I mean it makes sense in theory, but, in actuality the US consumer is tapped. We have 7% unemployment here in California if you believe these numbers. The State is broke. The automakers are broke. GE is most likely broke. To me it just seems like rearranging the deck chairs on the Titanic. There are still waves of bad mortgage debt to follow, option arms were sold through 2007 and will reset in 2010. I don’t know what the answer is but I don’t think this is going to work. Plus it is only a partial takeover of the banks. Who is to say they will even lend to each other especially with the FED paying interest. Seems like we are in no man’s land here. I am no economist, but, it don’t take a weatherman to know which way the wind blows.