"There Is Only One Solution To The Banking Crisis" By Karl Denninger
"I have said it before, and I will say it again - this time to President Obama.
There is exactly one way you can end this crisis: You must CRAM DOWN debt to equity in the banking system.
This is clearly illustrated by the fact that using Case-Schiller's data for home price declines all of the major national banks - Wells Fargo, Citibank, Bank America, JP Morgan and others - are insolvent (that is, bankrupt) several times over.
Nouriel Roubini has finally come to the conclusion I reached more than a year ago - he now expects banking system losses in the range of $2.5 to $3 trillion dollars (he previously said he believed they were "one trillion.")
There is exactly one way to resolve this problem - the banks must be "crammed down" through forcible reorganization, and we must stop bailing them out and handing them money.
We cannot recapitalize them through taxpayer donations, for through that path we only delay the inevitable. We do not have the ability to "manufacture" or "borrow" the three to five trillion dollars it would take to cover those losses - a full fifty percent increase in our federal debt, on which we would pay hundreds of billions of dollars a year - forever - being a permanent drag on GDP. Such a path will only lead to more insolvency as the crimp on GDP will inevitably lead to more job losses, more credit losses and more malaise, ultimately resulting in the very collapse that the proponents of this path claim to be trying to avoid.
The math demands that we take bold action. We must force a cramdown of debt to equity, which will wipe out all of the existing shareholders, including those holding preferreds while converting the bondholders into new equity holders, pushing down the capital structure however far is necessary in order to return the firm to solvency.
Many people would argue this is "illegal." It is not. These firms are already bankrupt if anyone bothers to perform a simple dispassionate balance sheet analysis. Their common and preferred stock is worthless. They continue to trade only on the premise that our government would come in and bail them out with an endless supply of taxpayer dollars, mortgaging our nation and its future in order to keep these bankers and their investors from suffering their just desserts as a consequence of their voluntary, irrational and patently unsound lending decisions.
None of these investors put their money in with their eyes wide shut - or if they did, they knew better. Nobody was forced to buy a bank stock or bond. Everyone did so expecting a return, and all took a risk. That risk has now become realized - it has gone from hypothetical to actual.
President Obama needs direct Treasury and The Fed to immediately go institution-by-institution, write down the assets to "death's door" levels, determine how far down the capital structure needs to be crammed to restore that institution to a strong capital position with double the Tier Capital ratio required by law, and then forcibly reorganize the debt into equity.
The bank involved reopens the next morning on the stock exchange with its new stockholders. The old stockholders are extinguished - they get nothing. The liabilities are greatly reduced, the capital structure reorganized, the bank has a strong capital position and is now financially sound.
Zero taxpayer dollars are involved. The losses are borne by those who intentionally invested in an asset that might (and now did) lose value, including a possible loss of all value.
Before we cry a river for these people we must realize that while a $2 trillion loss would be bad for those who bear it, the market has already lost some $10 trillion in value!
For an additional 20% in losses, all taken by those who decided to invest in these institutions, we can resolve the failed banks.
And make no mistake President Obama and readers of The Ticker - these banks have already failed. They trade on a public exchange today, and have doors open, only because of a fraud perpetrated upon the public by the previous Administration - a fraud we have all allowed to take place and now threaten to perpetuate.
Don't make that mistake - it didn't work under President Bush and Secretary Paulson because mathematically it can't work. It won't work in an Obama administration either because the math is never, ever wrong.
The path I advocate - a forced cramdown through a pseudo-bankruptcy proceeding - is the only path forward that can work, as it is the only path that actually clears the debt from the balance sheets (rather than fraudulently transferring it somewhere else) and converts it into equity where there is the potential for appreciation, leaves the banks standing and open for the business the next morning, and does not rape the taxpayer.
It is time to do the right thing, as I have advocated for over a year."
The full article is at:
There Is Only One Solution To The Banking Crisis - The Market Ticker