Why Don't You Just Make The Check Blank
It really has been comical to see the leaks of the stress tests trickle out, first with full confidence in the strength of the banks, then less, then less, and now a situation where Bank of America needs $34 billion dollars. Their total market capitalization right now is only $70 billion. The word "insolvent" comes to mind.
The government has told Bank of America it needs $33.9 billion in capital to withstand any worsening of the economic downturn, according to an executive at the bank.
If the bank is unable to raise the capital cushion by selling assets or stock, it would have to rely on the government, which has provided $45 billion in capital through the Troubled Asset Relief Program.
It could satisfy regulators’ demands simply by converting non-voting preferred shares it gave the government in return for the capital, into common stock.
But that would make the government one of the bank’s largest shareholders.
The company has certain assets they could sell, if anyone's in the market for a bank right now. But the most likely scenario makes the US government a near-controlling interest in Bank of America. Citigroup, which already has converted government preferred shares to common stock, needs an additional $10 billion or so, according to this report. It's not all that reassuring to hear BofA spokesmen claim that they'll be able to make $30 billion a year in income once the recession clears, which I think is more than Exxon.
Unfortunately, this is a fight that's already lost, Obama dinners with Paul Krugman aside. The banks will not be nationalized, and most likely they will be propped up until the crisis lifts. Geithner and Summers have their reasons for this, and the Administration doesn't see Congress playing along with anything that might damage the banksters too heavily (see cramdown) or allocating the money that would be needed for a restructuring. Mike Lux offers a couple post-TARP solutions that I think make sense:
The first is to really invest in long-term organizing and institutional building on the finance issue. While it is disappointing that Obama hasn't used this economic crisis and the populist anger it invoked to more fundamentally change the system that brought us to this pass, it's not like finance issues are going away or recede in importance in years to come. Now is the time to build institutions with the grassroots, political, and intellectual firepower to battle the banks in the years to come. We clearly have a stable of economists and business people who get what is going on, including George Soros, Joseph Stiglitz, Paul Krugman, Dean Baker, Rob Johnson, Simon Johnson, Leo Hindery, and others. What we need is long term institutional political power to build the constituency that will fight this fight effectively.
Just as importantly, we need to work constructively with the Obama administration to be prepared with a plan B if what they are doing begins to show significant weaknesses. If, as we restructuring advocates fear, the Geithner/Summers plan does not work to rebuild the economy, and/or the plan is gamed by the big banks to create other AIG bonus style scandals, Obama will be forced to turn to a plan B. If that happens, as I wrote a few weeks ago, progressives should avoid going into I-told-you-so mode, and instead be ready with a strong progressive plan that they can push with the administration. The economic thinkers listed above ought to be working together right now to come up with a strong plan B option. If we can keep a constructive dialogue going with the White House, and mobilize our friends in Congress and in the media, such a plan has a chance of being adopted.
I'll begin this new constructive arrangement by saying that I really like one aspect of the government's new plan - the idea that banks who want to return TARP money must cut themselves off from all the rest of the government largesse they receive to keep them afloat.
Banks that want to return Troubled Asset Relief Program funds will have to demonstrate their ability to wean themselves off another major federal program, according to senior government officials, making it less attractive for some banks to return the money.
The other program, a guarantee of debt issuance offered by the Federal Deposit Insurance Corp., allows firms to borrow money relatively inexpensively. Banks have $332.5 billion of debt outstanding under this program, which began last fall.
If you don't need assistance, prove it. Either you stay on the government dole or leap off. And either way, the government will regulate you in the future so you can't borrow using 30-1 leverage and take up half the national economy. If this is the result, I can basically live with it. But of course, this only applies to those few banks healthy enough to weather the storm. The Bank of Americas of the world? We're going to need a Plan B for them.