The $700 billion banking system bailout being worked out in Congress is not the right solution for the current crisis, said Christopher Whalen, managing director of Institutional Risk Analytics, on CNBC Monday morning.
[On the $700B bailout] “It’s just not focused in the right areas," Whalen said on CNBC's "Squawk Box." "We wrote a comment about this yesterday, showing the difference between buying a security from a bank, where you’re giving them a little bit of their capital back, but mostly you’re refinancing deposits and debt, which they use to finance loans. We need to put all capital into these banks - instead of 10 percent, we need to give them 100 percent fresh capital so they can absorb losses and re-lever their balance sheet and start lending people money.”
(See Whalen's full comments in the video)
“We don’t have to have the government end up owning all these assets outright. If we put our money to work in an intelligent way, we can re-lever these banks’ balance sheets and start making leverage our friend instead of our enemy.”
“They can wait as long as they like, but one way or another the government is going to end up owning a big chunk of the banking system in the U.S.”
“We started out with a bubble in assets in terms of overvaluation, but what we’re looking at coming at us, a much bigger wave, is realized losses on loans - old fashioned losses, and that’s where the government has to get involved.”
“The only party that can play here right now is the U.S. government, and if we can bridge between where we are now and to the point where we have a better idea what the real loss rates are going to be for these institutions, you’re going to find a crowd of private investors waiting to get involved.”
"They have to let the FDIC get proactive, because they can't wait, and I think you're going to see a lot more closures between now and the end of the year, but that's the good news, because in almost every case those banks are going to be acquired by another bank. Both the insured depositors and the uninsured depositors are going to be assumed, like WaMu, and we can clean this up."
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