Banking industry expert Bert Ely has a stellar track record in predicting crises and calling false alarms. Now he says that the banking industry does not need subsidies and can recover fully without government help.
"I have run the numbers looking at the capacity of the industry to pay the tab," Ely said during an interview at Institutional Risk Analytics.
"It's not going to be cheap, but the banks can handle it and clean up their own mess. The losses will feed back through the industry to depositors and borrowers in the form of lower rates on deposits and higher cost of loans."
Ely opposes the idea of the government putting preferred equity into solvent but troubled banks that cannot raise capital on reasonable terms.
"There is absolutely no need for the Treasury to have the authority to inject capital into solvent banks that are temporarily unable to raise new capital," Ely asserts.
"If a bank truly is solvent, it can raise additional capital or sell itself, if its present owners are realistic about what their bank is worth."
The reason solvent banks' problems prevent them from taking either of these measures is that they set their price too high, Ely says, pointing to AIG as an example.
"I am glad to see AIG's shareholders getting whacked by the warrants associated with the Fed's taxpayer's loan to AIG," Ely says.
"There is absolutely no need for the taxpayer to subsidize banks so they can stay independent, provided no barriers are erected to prevent new entrants into banking or specific banking markets."
Ely wants to see restrictions lifted that limit investors from taking significant positions in banks. Indeed, he'd like to see "ruthless investors" get inside troubled banks to clean up some assets and sell others.
"That's what should have happened at AIG, but unfortunately did not," Ely said.
"We have a very necessary correction process underway. We have to clean up the mess and take the pain in order to get the economy back into balance. Japan tried to muddle through, and they had a lost decade. I hope we are not going to do that."
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