Monday, April 20, 2009

Brother can you spare a billion?

The White House has made a significant shift in approach to the banking fiasco over the weekend. I call it the Turducken Policy. Rather than speaking the name that should not be uttered, the administration has taken a, walks like a duck, quacks like a duck, must be a turkey, approach to bank nationalization.

By converting taxpayer bailout money to the major troubled banks into equity Citigroup and the other merry banksters will have their capital ratios raised, have the U.S. government as the largest owner, turn loans into capital, and keep out of the Congressional theater. The stomach for additional government aid for wall street is modest if not nonexistent.

I find it ironic that when Carl Icahn announces he has a 5% share of a company, things start to change. Heads roll, management groans and boards wince. When the US government owns effectively all of AIG and will own 30+ percent of the major troubled banking institutions, it seems business as usual. Even independent trustees of AIG work under a pall of apparent secrecy. They are neither company nor government, neither fish nor fowl.

It seems likely that the bank stress tests, which assume an economic worst case scenario (which we are already exceeding) will not be able to issue an all clear without some serious rejiggering of balance sheets. This closet nationalization continues to skirt the issue of the protected debt holders where the solution really exists. Rather than making use of the structures in place to default on bond holders and restructure in an orderly way, we continue to give the losses to the public and protect the private investors who should have known return on investment always entails risk in a capitalist system.

This continues to be crony capitalism and continues a saga of "responsibility" without consequence. As a social liberal and a fiscal conservative, I find the current path the worst possible. If policies would remove moral hazard and the increasingly oligopolistic system in place the entire world could breathe easier.

John Barnyak