Banks should hold a yard sale, argues Oppenheimer & Co. analyst Meredith Whitney in a Financial Times editorial.
Banks should sell their assets and sell them now. Instead, she charges, they're making the same mistakes all over again.
Sell and sell early has been the credit crisis lesson. Banks that did that were likely to survive, she argues. Those that didn’t went asunder.
Merrill Lynch and Citigroup lost over half their per-share capital. Lehman Brothers and Bear Stearns disappeared. Prices of distressed assets didn’t improve. And they’re not going to, Whitney asserts.
“Throughout 2008, hundreds of billions of dollars were raised to recapitalize U.S. financial institutions, but this money simply went to plug holes created by holding on to assets with declining values,” Whitney writes.
Overextended taxpayers are clearing out their attics and garages and selling their prized possessions, not because they want to but because they have to.
“Why should the U.S. taxpayer be forced to fund behavior that he or she would never have the luxury of indulging in?” she asks.
Vikram Pandit, Citigroup chief, recently said the banking behemoth is in no hurry to sell its assets. The company has suffered more than $51 billion in writedowns and has taken over $45 billion in taxpayer money through the Troubled Asset Relief Program.
The company seems to use a different rule book from that used by taxpayers, Whitney charges.
People have suffered from stock declines, job losses, and plummeting home values. Now state governments will be increasing taxes and cutting services. Thirty-eight states, Whitney points out, are underfunded, 36 have budget gaps of over $30 billion, and two — California and Arizona — are already begging for more than $10 billion from the federal government.
Some states will be forced to have their own yard sales, selling toll roads and airports, she predicts.
Some experts advocate a “bad bank” plan to clear bad assets from bank balance sheets.
Writing in The Wall Street Journal, David Roche, an author and consultant, urges a bad bank approach similar to one used by Sweden in its 1990s financial crisis.
A “bad” bank would buy the assets at market prices, forcing banks to take writedowns and clean up their balance sheets. Some banks would become insolvent, but that’s the tough medicine the system needs.
Other actions, such as bailouts or liquidity injections, will only prolong the crisis, he warns.
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