Venture

Robert Trigaux

As big banks disintegrate, time for a new plan

21

January

Bonfire Wake up and good morning. That crackling sound you hear ever louder is the bonfire consuming our largest banking companies. Yesterday's stock market debacle, in which many of the biggest banks most prominent in Florida lost close to one quarter of their market value in a single day, is just the latest broadcast that the banking industry -- an industry built on public confidence -- is rapidly losing the faith of its investors and, yes, its citizens. Here's how the major Florida banks fared Tuesday.

Will we be forced to nationalize the big U.S. banks? That means wiping out the shareholders. It's a growing theme in the major financial press, including today's Wall Street Journal story (subscription required). The debate -- to nationalize or not -- is accelerating with notable commentary here and James Surowiecki of The New Yorker here and New York Times columnist Paul Krugman's take on "zombie banks" here.

We knew Citigroup was a basket case long before its stock closed Tuesday at $2.80. $2.80! That price gives Citigroup, once considered one of the world's best companies and a model of global capitalism, a market value of about $15-billion. Not long ago it was more than $100-billion. So some $85-billion in value has evaporated at the same time the federal government has poured tens of billions in TARP bailout funds into the company. The government has taken preferred stock in these banks but preferred stock in nothing is still nothing.

The same can be said for Bank of America, whose plummeting stock trades at about $5 at the moment. A few months ago, BofA was the industry and nation's savior by agreeing (though now some say -- check out this WSJ video report -- it was pushed by the feds) to purchase struggling Merrill Lynch. Now it is Merrill Lynch, with its recent quarterly loss of more than $15-billion and a shotgun wedding that's fraying already, that may be BofA's undoing.

Even Wells Fargo, the California giant that quietly avoided the firestorm in the fall, is starting to get dragged down. Shares traded over $24 a week ago. Now they are near $14 -- about a 40-percent drop in five trading days and a loss of market value of tens of billions of dollars. In a week. You wonder if they wish they had never pursued their Wachovia deal.

All of this despite the U.S. Treasury practically firehosing big banks with new money. It all seems to end up in some black hole, raising a key question. Why throw U.S. taxpayer funds at the big banks if the practical effect is to watch the stock market destroy that value in a matter of days?

Now this fiasco officially has landed in the hands of the new Obama administration -- one that, for all the promises, seems unready to act quickly. They have several hard choices:

1- The blunt force strategy -- Keeping  throwing hundreds of billions of dollars at banks until the industry stabilizes or we run out of money. Which will come first?

2- Go back to the idea so easily dismissed at the start -- Create a federal bank, and do it quickly now, and move the bad assets (subprime mortgages, for example) into it from the nation's banks. That was the plan at the start. And it's similar to the Resolution Trust Corp. concept in the 1980s that eventually stabilized the savings and loan mess. Why were we so quick (and smug) to skip this approach?

3- Nationalize the big banks -- It's not the government that's driving U.S. banks to become nationalized. It's the stock markets. So why keep flushing tax dollars down the bailout toilet? Nationalize and be done with it. Down the road, hopefully, what's left of the big banks could be spun off by the government and back to the private sector.

Dang, I hate even writing such stuff, but something's gotta give. More of the same will not work and other parts of the U.S. economy will be held captive and suffering until the banks are, somehow, fixed.

-- Robert Trigaux, Times Business Columnist

[Last modified: Tuesday, June 1, 2010 12:23pm]

    

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