Thursday, February 19, 2009

Take A Pill

My friend, patent attorney Bob Beck mailed me a very interesting essay-like post on the bank lending crisis from John Hempton of Bronte Capital. It comes to much the same conclusion we came to in our recent post, "Fail--Nationalize--Renew," but he comes at it from a completely different discipline and experience, namely that of a former banker himself. It's good reading.

The point that stood out to me was his characterization of the root of the crisis being "a crisis of confidence." The banks are illiquid because of a lack of trust. They can't become liquid by selling assets. However, the reason is not the avowed one, namely that there isn't a market for the assets. The reason, Hempton says, is that the banks don't want to have "price discovery," because they know that their GAAP yield to maturity prices are way above market prices. Marking to market would mean that banks are marginally insolvent as a whole. Anything to deny reality, which is as American as apple pie.

Finally, there is the question of leadership, which is an important element of confidence in any investment, whether in credit markets or equity markets. With the current ad-hoc system of arbitrary and ineffective plans, the boards and managements of these horrifically managed enterprises are virtually unchanged. A nationalization would bring about some wholesale changes, which could be extremely beneficial to the post-crisis renewal period.

The Obama mortgage plan is a leftover Mulligan stew that won't really keep 7-9 million people in their homes as advertised, but perhaps 1 million, as Mark Zandi estimates. More sweeteners will have to be doled out to servicers. It's not clear whether after all is said and done, consumers will owe more than they do now, but they may get some modest reduction in their monthly payments. All this for $275 billion plus additional subsidy amounts. Take a pill and go to bed. This was not worth staying up for.

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