One of the things that will inevitably happen is that a competitor who has more stability buys them out-- not unlike the puchase of WaMu by JP Morgan yesterday. Another example is that the failing company is broken up and business units are sold off separately from the company as a whole-- Berkshire Hathoway (to use a large, well-known example) is known for this. Aside from those two (of many) ways, there are also smaller banks with not as much capital as the giants but good enough credit to step in and take over business units or, through mergers, whole companies-- large entities like AIG or Washington Mutual would be like winning a prize to many of these companies, having loads of infrastructure already in place and saving lots of time and investment.
To an extent this can, and is happening. But there are probably not enough Warren Buffets, still-healthy-enough JPMChases or Lloyds TSBs or Bank of Americas, nor Abu Dhabi Investment Authorities or China Investment Corporations to step in and take over the business.
Now, of course this does mean a likely period of recession as things realign and the market surrounding the acquisitions stabilizes. However, as I've been repeating in other posts, if there are already indications that we're in a recession now or that we're heading to one already, then it makes more sense to prepare the market for the period of instability and slowed investment, not contributing to the instability by purchasing all the toxic securities and hoping they stop plummeting in value.
That depends on what the market-driven workout of "toxic securities" would do to exacerbate the economic downturn doesn't it? Some recessions are worse than others. The one that the US had in 1991 was quite mild really. The one from 1929-39 was a different kettle of fish. Moreover the fiscal burden (the eventual drain on the taxpayer) is much
worse if it is applied
too late. The TARP package is a quite colossal 5.8% of US GDP (including AIG and Bear Stearns). But the fiscal cost to Japan for eventually turning around its failing banking sector and deflating economy in the 1990s was a truly whopping 24% of Japanese GDP (Source: The Economist). And
not acting early, if the threat turns out to be serious, would do far
more to exacerbate the instability on main street USA (and world). The truth is that more of (developed world economic) history is decorated with credit/financial crises that were dealt with
too late and too feebly--with results that were more dreadful all round--than with events on which a large rescue was undertaken quickly and later did not seem to be needed, or in which the rescue intensified the agony by promoting bad behaviour.
No, of course not. However, wouldn't you agree that it's still not quite clear that the figurative symptoms are severe enough to kill the patient (patient = economy)? The picture I get currently from the market as a whole is that no one is going to be able to accurately predict what's going to happen, and that conclusive predictions should be looked at skeptically. Are you getting a different picture?
No you're broadly right about that. But I would have to say that the outcomes are so asymmetric that it would likely be futile to await things becoming "quite clear". A lot of this might depend on your opinion of Bernanke and Paulson since they are the ones claiming the authority. Personally I think that they both evince supreme competence and I would rather have Bernanke than Trichet running the ECB and rather have Paulson than Alistair Darling running the UK Treasury. Bear in mind also that companies are not going to disclose information that they are in dire straits until they absolutely need to hit the panic button. No CEO wants his/her share price in the drain so quickly that failure is a foregone conclusion.
Frankly, I don't think the US Congress, the Fed, or the US Treasury are equipped to decide who stays and who goes, and I get the impression that this proposal is another step in trying to take that authority on themselves. Who is equipped?
Well, yes who is equipped? You may think that the answer is "the market" and that it will sort itself out without any unnecessary damage, but that brings us back to the (unproven but believable) hypothesis that the market left to its own devices may kill off economic activity indiscriminately and in doing to inflict huge avoidable costs on the public interest.
I'm not claiming that I do, I'm questioning the fact that Paulson is claiming that he does. My entire point is that no one can be so sure, and to expect the kind of investment his bailout proposal requires pretty much hinges on how sure he claims he is. The fact that he's claiming certainty in an uncertain period is precisely why I'm so critical.
I understand your sceptical unease about that. No he is not certain. But if he thinks it is an actionable probability, that's when politcs takes over. He needs to scare congress and not appear to be a crackpot. But he needs to shoot from the hip, and exhibit leadership on the fly, which is an unenviable task. Nobody at the table has experienced a similar situation before.
Oh baloney. The US is not behaving like some knight in shining armor for the Euro banks. The reason the European governments aren't taking part in this is because they currently see no need to. You're assigning motivations-- continuing to call this "free-riding" on the part of the European governments-- where no proof of such a motivation exists.
I know there isn't proof, but you seem to rule it out and, to be honest, rather complacently conclude that European banks don't do the same irresponsible stuff as American ones and that that is the reason why they will not need this kind of help. I don't know where you get this idea, myself spending plenty of time in investment banks in both regions. Why do you think that the US package should bail out UBS and Deutsche Bank and not the Swiss and the Germans?
why do you posit the European governments are volunteering billions of Euros to assist in the crisis? I am saying that the answer to such a question is important in understanding why I don't think it's a good idea for the US to rush into such a move.
Do you mean why are they
not volunteering? Your answer occurred to me too, but I tend to think my answer features more. If they just thought it was not necessary, I don't see why they would be "fully supporting" / "urging" the US government to agree its plan.
I don't know for certain that any European government doesn't hold to such reasoning, but like I've already pointed out considering the number of regulatory and accountability measures European governments (and the EU) have taken on since the Parmalat debacle it's pretty safe to assume that they don't feel such action is warranted. If you are saying the reasons for why the European governments don't think it's warranted is an important factor to examine, then I'd say that I pretty much agree-- let's find out, shall we?
Which post-Parmalat regulations impact what the investment banking arms of European Banks can do? This is a sincere question, but I am not aware of any.
Does that position really sound unreasonable to you? The same as you, I understand the reasoning being put forth by the Fed and Treasury in the proposal. I simply find that reasoning to be faulty and/or insufficient (for reasons partially touched on above).
No, and yours is a good post. But on several counts, the wisdom in your thoughts may be misplaced.
