Baccardax: Bad Banks Are Good, Aren't They?

An Open Letter to the World Economic Forum

From Alix (10 years old)

Dear Important People,

My Dad's been watching a lot of TV this week and it's making me angry. He says the leaders of all the banks and countries and Universities are having a special meeting in Switzerland to try and solve a financial crisis. He says he needs to hear what they're saying. All I know is that I can't watch SpongeBob and Dora the Explorer.

Martin Baccardax
CNBC Economics
Editor

I feel sorry for my Dad. He used to work in a big bank. But not anymore. Mom says he's a victim of the Credit Crunch. I haven't eaten that cereal before, so I don't really know. But he's home a lot more these days, and I like that, even though he looks kind of sad.

Anyway, I'm missing my cartoons, so I need you guys to solve this financial crisis crunch as quick as you can. Dad says it's been going on for more than a year and a half now. That's a long time. Dad says loads of people have lost their jobs and loads of money as well. Why haven't you solved it already?

Dad says too many people aren't saving enough money and that they borrowed too much and they can't pay it back. This means the banks can't lend to each other anymore. And they don't trust even big, giant companies anymore, either, and there's not more money anymore. This is where I get confused, though. Why can't the banks trust each other? I mean, they can pay back their money, can't they? Don't they just make more?

Dad thinks it's because the banks own all kinds of "toxics assets". That sounds a bit rude, but Dad says it's not. He says it's just another word for the promise you made to pay for your house. He says the banks own trillions of these toxic promises. Lots of those promises were baked together and sliced, like a cake, Dad says. The cakes were called CeeDeeOs (I think that's right). And every three months, Dad says, the banks have to tell each other what the promises are worth. Even though no one wants to buy them. Especially the cake slices.

I don't get it. If no one will buy my bike, or my Barbie doll or my tennis racket, how do I know what they're worth? Dad says he's sick-and-tired of " … this ridiculous focus on market-to-market writedowns on illiquid assets and perpetual capital injections". At least that's what I think he said. I'm not sure I understand that, either. But lots of my friend's Dads are home a lot, too. And Mom says there will be more if you guys don't fix all this.

Dad says the best idea so far is for the Government to make its own bank and buy all the toxic stuff. That way, the real banks will only have good stuff inside them. Since the President is the boss, he doesn't have to tell anyone what they're worth, even if no one wants to buy them. Dad says the President doesn't have to sell them until I'm in University. By then, he says, he'll be back at work and so will my friends' Dads. And people will pay back what they promised if they have jobs, so the Government might sell them and make more money. That's good, isn't it?

Dad says some important people in Switzerland don't like this idea. I watched TV this morning and heard them say it "…creates moral hazard, requires deep capitalization and risks overpaying for underperforming mortgage assets, putting a potential burden on the taxpayer." I didn't understand that, though.

Dad's been home for two months now. I just want my cartoons back. So please, Davos people, tell the President to make his own bank and buy the toxic stuff. And then tell the other Presidents, Prime Ministers and Kings.

After all, a year and a half is a long time for a financial crisis credit something-or-other, isn't it? Even if this isn't the best idea, it's still a pretty good idea.

Isn't it?

Yours Very Truly

Alix

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