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Strategies & Market Trends : The coming US dollar crisis -- Ignore unavailable to you. Want to Upgrade?

To: RockyBalboa who wrote (20363)	5/17/2009 2:23:27 PM
From: Giordano Bruno	Read Replies (1) \| Respond to of 71442

stockcharts.com Bad Banks, Bad Plan Berlin's deep-freeze of toxic assets won't unfreeze credit markets.\| From today's Wall Street Journal Europe. Having dithered for months over how to handle those toxic assets, Berlin decided Wednesday to deep-freeze them by allowing banks to transfer their waste to "bad banks" for 20 years. The hope is that when it's time to thaw the dead bodies, they'll smell fresher than before. Good luck with that. By delaying the day of reckoning, the German government would prevent the sort of accounting that could actually pave the way for recapitalizing the banks and jumpstarting the financial system -- which ought to be the plan's main objective. According to the draft law approved Wednesday, financial institutions will be able to park their toxic assets at 90% of their book value in individual bad banks. This 10% haircut is perhaps the best part of the plan, making sure the banks take the first hit for their bad investments. These off-balance-sheet structures would then issue state-guaranteed bonds with a 20-year maturity to plug the hole in the banks' books. This would allow the banks to avoid taking big losses now in the hope that either the bad assets will recover their value or, at a minimum, the banks will have some time to earn their way out of trouble. This may be good for banks but it's bad for the system; putting off the problem of bad assets is not solving it. The goal in any rescue plan should be to provide clarity about the extent of the losses and to quickly remove insolvent banks from the system. This allows new capital to replace old capital and gets the money flowing again. Germany's plan, by contrast, seems designed to keep even weak banks afloat in the hope that they will earn their way out of trouble. History has not been kind to this temptation. As Japan showed in the 1990s, zombie banks are very expensive in the long run anyway, especially in the stagnation and forgone growth they generate. Better to wipe out shareholders and give haircuts to creditors, as needed, sooner than later. Then, take the remaining assets and put them back in private hands as soon as possible, before government completes the work of destroying whatever value is left. Berlin may argue that, under its plan, there will be a day of reckoning. As part of the deal, independent auditors will calculate a "fundamental" value for the toxic assets. Banks would then over the course of 20 years pay annual charges out of dividends to offset the difference between the book value and this theoretical value. This "fundamental" value will likely be as credible as the recent U.S. bank stress test. No doubt, the German auditors will be under tremendous pressure to overvalue the assets in order to make the banks' annual payments as small as possible. But let's assume that the auditors put a realistic price tag on the assets. As fraught with difficulties as these calculations would be given the nature of the assets, it would give the government a baseline for deciding who needs capital and how much and who may be beyond saving. That would be a better way to proceed than to obscure everything again by putting the assets in a tank. Berlin may fear the cost of fixing the problem now, but the taxpayers are already on the hook for much of the future losses. Take the formerly private Hypo Real Estate, which according to a leaked list by the German banking regulator, holds the single biggest chunk in bad assets -- €268 billion. Hypo Re is on government life support, having received about €100 billion in state guarantees and loans. Berlin already holds about 45% of the shares and will likely acquire the remaining shares next month. Another bad bank candidate is Commerzbank, which recently acquired Dresdner and reportedly holds €101 billion in bad assets. It received €18 billion in government assistance, for which Berlin got a 25% stake in the bank. Future bad bank participants also include the Landesbanken, which are owned by Germany's states. Of the €816 billion in bad assets the regulator believes are hidden in German banks, the seven Landesbanken are said to hold €355 billion. The government likes the bad bank scheme because it doesn't have to pay any money up front. Spending billions on recapitalizing banks wouldn't be a winning strategy five months before general elections. But the cost of keeping zombie banks alive will continue to hamper credit flows and drag down the economy for years to come. The deep-freeze may in the end be more expensive for taxpayers than eating those losses now.