Friday, February 13, 2009


After waiting with bated breath for the Treasury's latest rescue plan, it's clear that we're out of ideas and have lost clarity and focus about issues and effective solutions. Today, there is much being written about Japan's "Lost Decade," and the need to learn from it.

Heizo Takenaka, who headed up the Japanese financial reform effort is quoted in the New York Times as telling Japanese banks, "Don't cover up. Don't distort principles. Follow the rules." So, let's learn from this.

Whether by enhanced Comptroller of the Currency audits or not, let's acknowledge that banks holding a large percentage of national deposits are insolvent. Wipe out the shareholders, which unfortunately are the rules of the game for owners of the residual interest. Nationalize the banks, and workout the assets. Let new banks emerge and bid for the assets. Let a new banking industry emerge, and incidentally it should be much smaller. If private equity types want to play in this field and operate banks under much tighter oversight and scrutiny, then that's preferable to the alternative.

A really bad idea that won't go away is to have government buy the distressed and toxic assets in partnership with private equity investors. A basic principle: that partnership's benefits will accrue to one and only one side, namely the private equity players. If really smart bond market investors can't value the assets properly, then certainly the government can't. The pressure to build in a rental, or subsidy, element into the prices will be irresistible on the Hill. A truly bad, bad idea.

In a related area, the legislation to require private equity vehicles to register and be subject to SEC oversight and regulation should be passed. Arthur Levitt, former Chairman of the SEC, correctly identified the 'levelling of the information playing field" to be critical for the efficient functioning of the capital markets and so it is. I wonder if we have the gumption for this, but now with the ineffective former leadership of the SEC out, perhaps we can find the fortitude.

If we believe in capitalism, then don't only focus on capital creation, because capital destruction is an integral part of the cleansing and renewal process. Take the medicine now and be done with it.

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