Garrison Keillor's fictional Minnesota town --"where all the women are strong, all the men are good looking, and all the children are above average" - has been reincarnated in American finance. There's a new rule in Washington: All the banks are important, and (almost) all are worthy of being saved.
Insolvent? No problem. Step right up to the Bailout Buffet and help yourself to a billion or twenty. Competence is not a requirement. Bankers with slovenly lending habits are welcome, provided they dress in sackcloth and leave their private jets back in the hangar. In fact, the most incompetent - that would be you, Citigroup - will be given the most.
One need not be a threat to the global financial system or be "too big to fail" in order to qualify for a handout. Just ask the lucky management of Flagstar Bancorp of Michigan, who, by sheer ineptitude in real estate deals, drove their company to the brink of collapse and their stock price down 97 per cent, and who were rewarded the other day with a $267-million (U.S.) cheque from Uncle Sam.
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There's plenty more where that came from. Today, the new U.S. Treasury Secretary, Timothy Geithner, will reveal the details of the new Obama bank rescue plan. It will be complicated, ambitious and expensive. It's expected to include even more money for capital injections for U.S. banks, and a proposal for government and private money to team up to create a "bad bank" that would buy and remove toxic assets from the system.
It might work, it might not. But the plan is almost certain to fail unless it also allows, paradoxically, for failure - if it scraps the rescue-them-all policy and allows insolvent, so-called "zombie banks" to die or be nationalized.
Don't take our word for it. Listen to the man who headed the bad bank the U.S. government set up to mop up the mess from the savings-and-loan fiasco in the 1980s. Bill Seidman was the chairman of the U.S. Federal Deposit Insurance Corp. during that period. In 1989, as the S&L crisis began careening out of control, U.S. Congress set up Resolution Trust Corp. (RTC) to handle the billions in stinky loans from failed institutions, and he ran it.
Mr. Seidman was brought onto a private conference call for investors recently by Deutsche Bank. What, he was asked, did he make of the Geithner bad bank idea? "Fundamentally, they've taken a different approach than we took last time," he said.
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The S&L bailout was based on the notion of tough love: "We said we will not help the bank unless we take it over." No propping up of lenders with taxpayer cash and pretending they were still solvent, private corporations; if an institution couldn't make it on its own, it went under government control.
The bad assets, like tumours, were removed and shuffled off into RTC, "then we sold the clean bank back into the system," Mr. Seidman said. New investors or existing, healthy banks could buy what the government was selling. "It usually took us about two or three months. It really is kind of like short-term nationalization." The original shareholders in the failed banks were wiped out, as they should have been. But it was quick, harsh, and effective. Over time, the bad assets were also sold off, at big losses to the taxpayers, but not in a panicked market.
This time? "Well, I think the way they're doing it is, instead of [the government]running it, they're putting in their money and someone else is running it." In other words, the same people who blew through their shareholders' capital are now handling the government's capital. That, Mr. Seidman said, is a pretty bad way to save the financial system. "We've already seen some very poor managements and some very poor banking. What they're doing now is ensuring that the bad bankers stay in business. So I don't like the idea. I think it's bad for the industry. The worst thing to do is to compete against people who don't know what they're doing."
What would he do to fix it? "Well, I would simply say, 'If you want money from the government, then the government will take you over and [fix]you and put you back into the system.' "
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But won't a series of bank failures cause more chaos of the kind that erupted after Lehman Brothers' failure in September? Nope - that was a bankruptcy. This is government ownership. The depositors and creditors are protected. "Everything ... operates as it did before," said Mr. Seidman, "so you're not causing a great disturbance in the economy until you start getting the banks to operate on a sound basis, and that'll help it."
Freed from battling for market share with the zombie banks, solvent, well-run banks like Wells Fargo will thrive, grow, and eventually bring the U.S. out of recession. The success of Mr. Geithner's new plan may ultimately ride on whether he breaks with his previous course and adopts the tough-love approach.