FacebookTwitterGoogle+RedditEmail

How to Fix the Banks

by PETER MORICI

For every new president, campaign promises and inaugural idealism must give way to the hard choices that measure the mettle of their leadership.

Now Barack Obama must act pragmatically to fix the banks or the economy will sink under their weight.

Banks continue to suffer losses on bonds backed by failing mortgages, credit cards and auto loans, and questionable corporate debt. To assist, the Treasury has used TARP funds to purchase capital in healthy and deeply troubled banks alike; however, no one can calibrate how high bank losses will go, because no one knows how far housing prices will drop and how many loans will ultimately fail.

The Obama Treasury could put a floor under bank losses, through government guarantees on their bonds, or by creating an aggregator bank that purchases those securities from banks altogether.

Guarantees would give the banks profits on bonds whose underlying loans are mostly repaid, and shift to taxpayers losses from those bonds whose loans are mostly not repaid. That would require additional large subsidies from taxpayer to the banks.

An aggregator bank, however, could turn a profit. It could purchase all the commercial banks’ potentially questionable securities, at their current mark to market values, with its own common stock and funds provided by the TARP. Then the aggregator bank could balance profits on those securities whose loans pan out against losses on securities whose loans fail.

An aggregator bank could perform triage on mortgages. It could work out those whose homeowners can be saved with some adjustments in their loan balances, interest rates and repayment periods; foreclose on mortgages whose homeowners could not meet payments with reasonably concessions; and leave other loans alone.

Commercial banks acting alone cannot accomplish triage as effectively, because individually they can have little effect on how much housing values will fall. In contrast an aggregator bank, holding so many mortgages and working in cooperation with Fannie Mae and Freddie Mac, could have a salutary impact on housing values. It could put some breaks on falling home prices.

Beyond toxic securities, policymakers need to fix what got banks into this mess. The 1999 repeal of Glass-Steagall permitted the creation of financial supermarkets, like Citigroup, that combined commercial banks with investment banks, brokerages, and the bizarre universe of hedge and private equity funds.

Those nonbank financial firms are run by salesmen and financial engineers that don’t understand long-term commitments as bankers to borrowers with solid incomes and sound business plans. Investment bankers, securities dealers and fund managers, essentially, get paid commissions on sales and for betting other peoples’ money on arbitrage opportunities. They put together people that have money with those that need money, and those people that can’t bear risk with those that can.

In contrast, commercial bankers, historically, had skin in the game—bank capital and a fiduciary responsibility to depositors. They were paid salaries, not commissions on the volume of loans they wrote or bought from mortgage brokers to package into bonds. They expected to be fired if their loans prove imprudent.

To investment bankers and securities dealers, it does not matter how risky a loan is, because they can always bundle it into a bond to sell it off or insure it with a swap. That’s nonsense, as we have learned. Adopting that thinking commercial banks got stuck with too many loan-backed bonds and buying swaps that were not backed by adequate assets.

Commercial banks need to be separate and more highly regulated. The ongoing process of breaking up Citigroup and placing its banking activities into a separate entity should be replicated at other Wall Street and large regional banks.

Freed from toxic assets and the complications of affiliations with financial institutions having other agendas, commercial banks could raise new private capital and make new prudent loans as President Obama’s stimulus package lifts consumer spending and business prospects.

Such approaches would disappoint those who champion unbridled free markets but Wall Street’s financiers have abused the opportunities offered them by deregulation to the peril of the nation.

President Obama needs to craft solutions that address the world as he finds it not as intellectuals tell him it should be.

PETER MORICI is a professor at the University of Maryland School of Business and former Chief Economist at the U.S. International Trade Commission.

 

 

 

More articles by:

PETER MORICI is a professor at the Smith School of Business, University of Maryland School, and the former Chief Economist at the U.S. International Trade Commission.

CounterPunch Magazine

minimag-edit

bernie-the-sandernistas-cover-344x550

zen economics

June 22, 2017
Jason Hirthler
Invisible Empire Beneath the Radar, Above Suspicion
Ken Levy
Sorry, But It’s Entirely the Right’s Fault
John Laforge
Fukushima’s Radiation Will Poison Food “for Decades,” Study Finds
Ann Garrison
Jeremy Corbyn, the Labour Party, and the UK’s Socialist Surge
Phillip Doe
Big Oil in the Rocky Mountain State: the Overwhelming Tawdriness of Government in Colorado
Howard Lisnoff
The Spiritual Death of Ongoing War
Stephen Cooper
Civilized, Constitution-Loving Californians Will Continue Capital Punishment Fight
Bruno Rodríguez Parrilla
Cuba Will Not Bow to Trump’s Threats
Ramzy Baroud
Israel vs. the United Nations: The Nikki Haley Doctrine
Tyler Wilch
The Political Theology of US Drone Warfare
Colin Todhunter
A Grain of Truth: RCEP and the Corporate Hijack of Indian Agriculture
Robert Koehler
When the Detainee is American…
Jeff Berg
Our No Trump Contract
Faiza Shaheen
London Fire Fuels Movement to Challenge Inequality in UK
Rob Seimetz
Sorry I Am Not Sorry: A Letter From Millennials to Baby Boomers
June 21, 2017
Jim Kavanagh
Resist This: the United States is at War With Syria
James Ridgeway
Good Agent, Bad Agent: Robert Mueller and 9-11
Diana Johnstone
The Single Party French State … as the Majority of Voters Abstain
Ted Rall
Democrats Want to Lose the 2020 Election
Kathy Kelly
“Would You Like a Drink of Water?” Please Ask a Yemeni Child
Russell Mokhiber
Sen. Joe Manchin Says “No” to Single-Payer, While Lindsay Graham Floats Single-Payer for Sick People
Ralph Nader
Closing Democracy’s Doors Until the People Open Them
Binoy Kampmark
Barclays in Hot Water: The Qatar Connection
Jesse Jackson
Trump Ratchets Up the Use of Guns, Bombs, Troops, and Insults
N.D. Jayaprakash
No More Con Games: Abolish Nuclear Weapons Now! (Part Four)
David Busch
The Kingdom of Pence–and His League of Flaming Demons–is Upon Us
Stephen Cooper
How John Steinbeck’s “In Dubious Battle” Helps Us Navigate Social Discord
Madis Senner
The Roots of America’s Identity and Our Political Divide are Buried Deep in the Land
June 20, 2017
Ajamu Baraka
The Body Count Rises in the U.S. War Against Black People
Gary Leupp
Russia’s Calm, But Firm, Response to the US Shooting Down a Syrian Fighter Jet
Maxim Nikolenko
Beating Oliver Stone: the Media’s Spin on the Putin Interviews
Michael J. Sainato
Philando Castile and the Self Righteous Cloak of White Privilege
John W. Whitehead
The Militarized Police State Opens Fire
Peter Crowley
The Groundhog Days of Terrorism
Norman Solomon
Behind the Media Surge Against Bernie Sanders
Pauline Murphy
Friedrich Engels: a Tourist In Ireland
David Swanson
The Unifying Force of War Abolition
Louisa Willcox
Senators Bernie Sanders, Cory Booker, Tom Udall Back Tribes in Grizzly Fight
John Stanton
Mass Incarceration, Prison Labor in the United States
Robert Fisk
Did Trump Denounce Qatar Over Failed Business Deals?
Medea Benjamin
America Will Regret Helping Saudi Arabia Bomb Yemen
Brian Addison
Los Angeles County Data Shows Startling Surge in Youth, Latino Homelessness
Native News Online
Betraying Indian Country: How Grizzly Delisting Exposes Trump and Zinke’s Assault on Tribal Sovereignty and Treaty Rights
Stephen Martin
A Tragic Inferno in London Reflects the Terrorism of the Global Free Market
Debadityo Sinha
Think Like a River
FacebookTwitterGoogle+RedditEmail