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TARP truth: banks busted

At Grist, Tom Philpott reports that bank lobbyists praised Geithner’s New TARP; investors less so.  He cites Martin Wolf of the Financial Times’s argument that “the U.S. banking system appears to be insolvent, sunk under the weight of bad investments. According to Wolf, the Obama team is too ‘politically frightened’ to tell the public and investors that our banking system has essentially failed.”

Philpott: “What’s weighing the system down is bad real estate bets. Essentially, our bank execs — decorated with fancy b-school degrees and robustly compensated for their trouble — bet heavily U.S. real estate prices would rise indefinitely. Now that prices have plunged, they’re left with reams of essentially worthless mortgage-backed paper. And as the economy continues to unravel, real estate prices look set to continue falling — which means still more of the assets held by the banks will become ‘toxic,’ i.e., worthless.

“And here’s where we get to the trouble with the Geithner plan: He seems to be assuming that private investors can be convinced, by government guarantees and financing, to buy assets that are essentially worth nothing. But where’s the upside in buying worthless assets in the first place?

“One of two outcomes now look likely: (1) a wholesale nationalization of the U.S. banks (an extremely dicey proposition for a Democratic president); (2) or the the descent into bancruptcy of a vast and iconic bank like Citigroup — with who knows what consequences.”

I think “nationalize” is the wrong word.  No one’s suggesting the federal government operate banks on a permanent basis.  A better word is “takeover” — even “temporary takeover” — what the FDIC did when IndyMac failed.  The goal is to straighten out the books, get rid of the crooks, and get the operation back to private and hopefully responsible (how about well-regulated?) ownership.

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Category: economy


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