I Hate Everything About You

Former Hedge Fund Manager, Andy Kessler, has published and excellent article in the Fberuary 10th edition if the Wall Street Journal explaining why the markets did nit like what Treasury Secretary Tim Geithner had to say (or what he didn't say). Here are some excerpts:

"The Treasury secretary seems stuck on keeping the banks we have in place. But we don't need zombie banks overstuffed with nonperforming loans -- ask the Japanese."


"Mr. Geithner wants to "stress test" banks to see which are worth saving. The market already has. Despite over a trillion in assets, Citigroup is worth a meager $18 billion, Bank of America only $28 billion. The market has already figured out that the banks and their accountants haven't fessed up to bad loans and that their shareholders are toast."

"Second, Mr. Geithner wants to use up to $1 trillion to back new car loans, home loans and student loans. That's noble, but incredibly market distorting. Who gets these loans? Will banks be forced to loan to those with bad credit? Who sets loan rates? Doesn't this just set up another credit squeeze when government guarantees are lifted?"


"The first iteration of the Troubled Asset Relief Program (TARP) last year was to buy these bad loans and derivatives. It didn't work. Nothing was bought when it became clear that paying face value was a taxpayer giveaway to banks, but paying market prices for this stuff would cause huge equity write-downs, wiping out banks which would be left with negative equity and effective insolvency."

"Mr. Geithner should instead use his "stress test" and nationalize the dead banks via the FDIC -- but only for a day or so."

"First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here's the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately."


Readers will recognize that Mr. Kessler and I are on the same page with regards to the banks and how to get out of this crisis. Readers should pay special attention to his Japan reference. With the piggy bank known as one's home empty and traditional lending standards back in force, it will be a long time before economic activity based on consumer earned income, rather than the pyramid scheme of every increasing lending via securitization, lifts the economy into some semblance of on trend growth. The next decade may very well be lost.