Good Times, Bad Times

In today's Wall Street Journal David Roche, president of Independent Strategy discusses how to deal with the banks toxic assets. He advocates setting up a bad bank to take on banks toxic assets. He describes what he calls a good-bad bank and a bad-bad bank. A good-bad bank would buy toxic assets at their market prices thereby punishing banks for their bad decisions, but instilling confidence among the public by creating transparency. No longer will investors and depositors worry about what lurks on balance sheets. Those weaker banks can either be recapitalized, nationalized or sold to other banks. A bad-bad bank would essentially absolve banks from their poor decision making and suspect risk management. However, either would permit the economy, asset prices and real estate prices to find a bottom. A bottom that politicians are trying to avoid, but which is necessary. As Mr. Roche states:

"As we saw in Japan in the 1990s, if the market is not allowed to clear, the financial crisis will be prolonged. Although debt deflation may be avoided, the economic recession will be longer and the recovery weaker."


This is something I have said, ad nauseum, for over a year. Politicians have chosen to ease borrowing costs to try and reignite the economy by re-leveraging. Mr. Roche is correct when he says that this could lead to more and larger bubbles. At some point, one must pay the piper.

Although banks may have to pay the piper, troubled banks may not pay dividends. The paying of dividends is how a company shares profit or revenues with its investors. This is as opposed to interest payments which must be made, whether or not a company is profitable. Although I do not believe that preferred stock dividends will be cut (unless in an extreme situation) for political reasons, I would rather own an interest-paying vehicle such as a trust preferred or, even better, a bond rather than a dividend-paying preferred stock which could have its dividend wiped out by either a lack of profits or revenues or for political reasons (the government forcing the issue due to a bank using TARP money to pay dividends).