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CNBC Guest Blog
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Over the weekend, the UK government indicated another plan to shore up troubled banks.
The latest is to allow banks to insure against steep losses and guarantee their debt.
According to Reuters, "The plan raises the government's stake in Royal Bank of Scotland, which said it lost over 20 billion pounds last year, and also lays the framework for the Bank of England to boost money supply.
Barclays, whose shares fell 25 percent on Friday, confirmed it expected to report full-year profit above the consensus estimate." Note, the UK government had already taken majority ownership in RBS with little improvement to the credit situation and no increases in lending.
Spherically, the UK government is going to offer guarantees on consumer loans, outline a plan to section off "toxic" assets on the bank's balance sheets, and refinance the preferred shares for RBS and HBOS.
The hope is to clear the assets that are forcing banks to continue to increase capital thereby allowing them to begin to lend "freely" again. Remember with this structure, the risk is that government officials begin to decide how to allocate the capital they inject in the banks.
Simultaneously, there are reports out suggesting that the US Treasury Secretary-designate Tim Geithner is working on a plan to do something similar.
In the US, the plan is to create a "Bad Bank" or "Aggregator Bank" to send the toxic assets to for disposal. The WSJ carries an interview with FDIC's Bair discussing movement from the theoretical to actual plan.
"The idea would be to set up a facility, it could be structured as a bank, to capitalize it with some portion of the TARP funds.
Financial institutions that wanted to sell assets into the bank could also perhaps take part of their payment as an equity interest in the aggregator bank to provide an additional cushion.
If you sold $1 of assets into the bank, you would get 80 cents in cash and you would get 20 cents in an equity interest in the bank.
So that would be an additional cushion against loss....With a combination of private equity contributions plus TARP capital, I think you could leverage that into some fairly significant volume to purchase assets.”
The key here would be that the US does not take control of the banks nor does it get into the business of dictating where the banks should lend. They simply remove the problem that is causing the credit condition and get out of the way.
However, there is a remaining issue. By taking over the negative component to the banking system, the solution doesn't address the management of the banks.
I'm not suggesting that the US take over decision making or be involved in running these financial institutions.
However, the system now exists in a netherworld between common stock shareholders who have lost so much money they have little modification to force change to the US government buying preferred shares with no mandate to change management's structure.
In other words, the owners of the company aren't doing what owners do when the stock of company falls dramatically.
If the US government wants to clean up these balance sheets, then they need to do so quickly and get out of the way by allowing the scrubbed up financial entities to sink or swim on their own.
Is Financial Crisis Growing Worse—Or Is It Just Us?
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