Whitney: What Are They Waiting For?

Meredith Whitney’s Financial Times Comment yesterday offers another reason for more dramatic government action: management’s unwillingness to accept reality. Whitney tries to make an analogy between the over-extended taxpayer holding a yard sale and the banks’ clinging to their assets. That doesn’t really have much impact. But if you combine her argument with the growing calls for nationalization, you begin to see a rationale for the government’s breaking up any existing banks that cannot survive. Talk about creative destruction:

The fact is that there is money on the sidelines looking for opportunities to invest. One constant question I get from investors, who need somewhere to put their money, is: if I had to own something, what would it be? I am not very helpful to them at the moment as my answer is that I would own nothing. I do tell them that I believe that later in the year there will be fabulous opportunities to invest in new combinations of businesses that are currently “off the menu” to individuals. What I mean by this is that the system will eventually force disposals of assets: here I am just arguing that we need to get to it sooner rather than later. [Emphasis added]

Funding is the critical challenge to outsiders’ ability to bid more aggressively for assets. Many of these potential investors have clean balance sheets and, if provided with the appropriate funding concession (guarantees of long-term, low-cost capital from the government), could also more ably lubricate the financial system by making actual loans. These investors could be private-equity firms or existing public companies. The key here is government providing a funding concession and the banks being forced to sell assets that could raise capital and provide some tax relief to taxpayers.

No one doubts that losses will go higher, so asset sales are certain to be heavily discounted just as initial bids for collateralised debt obligations and retail mortgage-backed securities were. However, in retrospect, those “discounts” were far less than the write­downs companies took just months later.


America’s Banks Need to Hold a Yard Sale
Financial Times; January 21, 2009

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