It has become a national embarrassment.
The bank bailout plan was ill conceived and poorly executed. Trillions were thrown at them before Uncle Sam had any idea as to how much debt was actually on the books. What were once considered decent holdings were eventually revealed to be highly toxic assets.
Recapitalizing the banks is a huge priority.
But after the first round of trillions were given away to the banks, the public was disgusted. The politicians lost their appetite for overt bailouts. But the banks were still under-capitalized, their balance sheets were still laden with junk. A direct transfer of taxpayer monies was out of the question.
An easy backdoor was found: Arbitrage the Fed and Treasury. Zero interest rates and QE allowed giant Wall Street banks to borrow at no cost from the Fed, and then turn around and lend this same zero cost money back to the Treasury at 3% or so. Do this for another 10 years or so, and the banks would be recapitalized. By then, maybe there might even be a market for all those REOs. Sure, that would mire the nation in a decade long Japanese-like slump. Hey, at least the bonuses would be paid on time.
The motto of the bank bailouts: To hell with the banking system, save the banks!
The results should not be surprising. The banks remain in a weakened condition, perilously at risk for additional problems in RE. Despite the massive liquidity, Credit still remains tight. If financing is the fuel that drives the economy, the US is running on fumes.
Wall Street has returned to business as usual. The Street is nothing if not savvy. Just as a shark detects blood in the water, the Street can smell weakness and exploit it like no other industry. Once they figured how to play chicken — mutual assured destruction – with the entire global economy, there would be no restraining them.
Compare the differences between the banks and GM/Chrysler, and will see the full folly of how we rescued the financial sector.
Instead of letting insolvent banks fail, we turned over the keys to the castle. We could have fired the incompetent management that caused the problems — but most of these execs are still in the same highly placed positions in their firms. In terms of senior personnel, the industry is literally unchanged.
Still on the books.
Sufficient capital? Many years away.
Business model? The same highly leveraged reckless strategy that got them into trouble in the first place
Regulatory Oversight? A modest improvement which the newly elected, bought and paid for Congress, seems hellbent on overturning.
If you want to understand why we should never have bailed out the banks, just look at the differences between the Auto and Banking industries. One is healthy, with a likely cost of near zero. The other remains a debacle, whose costs are incalculable are likely to be an economic drag for years if not decades.
Too bad the minds behind the bank bailouts did not have the foresight to appreciate the full advantages of prepackaged bankruptcy for the sector . . .
"The Big Picture"
Looking at the 1980 Chrysler Bailout
Why Are Banks So Different From Autos?
Why Bankruptcy For Autos But Not Banks?
Banking Sector Remains (literally) Unchanged
Barry Ritholtz is the author of Bailout Nation: How Greed and Easy Money Corrupted Wall Street and Shook the World Economy, and writes the blog, The Big Picture. You can reach him at TheBigPicture@Optonline.netThis article was reproduced with permission of author. All rights reserved.