Worthy Opinions » Downtime: Banking on the Future

©2009 by David Haggith

We’ve all heard the plan for saving the nation. Create a “Bad Bank.” Deposit all the bad loans in the nation into the bad bank, and flush them away. The bad bank will buy these loans with money that is minty fresh. This magic money will come from the next generation. Our legacy to them will be the world’s worst bank. The beauty of it is, they feel our pain, and we don’t. Their pain, our gain.

WHERE IS THE LYNCH MOB?

The government solution to our over-credited economy is to correct the problem by preventing the correction. Roll it all up for the future so that banks will go back to doing what they were doing — letting out an easy flow of credit from their arteries. After all the billions pumped into them from the government’s donors, U.S. banks still remain effectively insolvent. The federal government could have accomplished more by building 45,000 million-dollar yachts and giving them away as bonuses to all the nation’s bankers. That would, at least, have put a lot of boat builders to work.

In December, Merrill Lynch dispensed $4 Billion in bonuses to its top execs … after receiving bailout money. Bank of America, which acquired Lynch, then became aware that Lynch’s loss of blood was equal to a head injury from falling off its corporate tower. So, it asked the federal government for another twenty-billion-dollar transfusion. If the bonuses had not happened, BofA could have asked for a quart less (or about $16 Billion). While BofA claimed they had no idea that Lynch would have twenty billion in fourth-quarter losses, they certainly knew about the four billion of it that their own people created at the last minute on the way to their Christmas parties. Yet, the government didn’t even blink and handed over the full twenty-billion request. This is the revised theory of trickle-down economics in action. Bail out millionaires, and they will spend their new mint-green money on cars that will put middle-class automakers to work. Or yachts.

So far, the government has transfused its liquid gold into the banks’ main arteries with not much more than a wish and a prayer for recovery. So much money flowing so freely is a situation ripe for abuse. In fact, obtaining interest-free billions in these financially pinched times (if you’re a millionaire) has been easier than getting a small-business loan from the government in plush times. In essence, Bank of America bought Merrill Lynch on loan, and then the government paid off the guaranteed loan with taxpayer money. The bank was supposed to take $45 Billion and use it to make more loans to stimulate the economy. It did not do that at all. Instead, it bought Merrill Lynch. Future tax payers got absolutely nothing for the money we borrowed from them.

Instead of saving BofA with that $45 billion over the last few months, the government could have just bought 45 million thousand-dollar mattresses for us all to hide our money under. We’d, at least, sleep better.

AN INDECENT PROPOSAL

With all the money poured into existing bad banks, the banks still have ice in their veins. The almost free money did not “unthaw the thaw,” as George Bush wanted. Since the old bailout plan accomplished nothing, except easing the landing for millionaires, the new federal government is creating a new monster to solve our problems. It will establish a new bad bank owned by taxpayers to pay real money. It hopes to pump the monster to life with all the bad loans that emerge. Just keep buying them into this gaping black hole, which is a wormhole that comes out somewhere in the future. It’s like putting our diseased loans into a cryogenic tank for the future to figure out how to cure them. Maybe some miracle will be developed by then. If not, that’s the future’s problem. I’m sure they will thank us for this cryogenic pot of festering sores.

The plan, however, has this much going for it: if there is anything the government is likely to do well, it’s to create a really, really BAD bank. They’ve got all the right people in place to badly manage it. So, I have no doubt that it will succeed in being bad in more ways than the scriptwriters of The International could imagine. I hesitate to compare to them, however, as their plot about bad banks was, at least, entertaining, and cost me only $9.50.

Of course, no sinister plot can gain broad acceptance without a palatable rationale. The rationalization for the Bad Bank is that, by handing all the bad debts to the future in a single pot of toxic waste, we will resurrect a debt-based economy that is so strong that the next generation will have no problem paying off the debt we hand to them. I think that’s a plot drafted in hell that’s going to exact more than a pound of flesh rom each person in the next generation. In fact, I don’t think it will take even a generation before the bad bank becomes the black hole that eats any recovery it temporarily created.

A DECENT PROPOSAL

Instead of creating one monstrosity of a bad bank, create many little bad banks. Get away from the old theory that gigantism is the ultimate goal in everything. Instead, take all the existing bad banks, and separate out their worst parts, splitting those corporations into the part that may survive and everything that is sure to die. Then transplant all the current CEOs who got the big bonuses in charge into the little leper corporations so the diseased corporations that hold all the bad debt get all the diseased minds that created it. Flush the CEOs out along with the bad debts, and let the little corporations wander off to die. In other words, save what’s worth saving of the mega corporations by downsizing, and let the rest of the mess die on its own — not as a bundled gift to the future. Pay our own pain now. Let the market correct itself, but minimize the harm by by bundling the best parts of each corporation into smaller entities that can survive on their own without any government help. Break down the too-big-to-fails. We have a phrase for this procedure — “structured bankruptcy” or “reorganization.” Face the pain, and stop concocting twilight plans for banking monstrosities deep in the laboratories of the U.S. Treasury.

So far, the government’s inept stumbling around for any plan but the obvious one has only created confusion that has caused investors to pummel companies at the first sign of distress because no one knows what the government will do next as it invents unheard-of pain killers, instead of amputates gangrene. Now, it’s finally ready to amputate the gangrenous members, but only if it can send them down a drive-up vacuum tube to the future.

Why all this madness? No one wants to admit the problem is not lack of credit; it’s abundance of debt from too much credit.