Great News: The banking system still at risk for another meltdown

Rick Moran
It's fallen below the radar because on the surface, things appear to be getting marginally better. Or perhaps it's more accurate to say that they are getting bad at a slower pace than the free fall we experienced earlier in the year.

But lest we forget, there are still trillions of dollars in bad debt lurking on the ledgers of America's banks. This bad paper is still left over from the mortgage securities debacle of last year - a problem that was supposed to be addressed - we were promised would be addressed - by the $700 billion TARP program.

Of course, first Bush and then Obama used that TARP money not to take the bad assets off the books of major banks, but to bailout the auto industry, take over AIG, and grant short term relief to banks who were swimming in red ink.

As a result, those banks short term prospects improved but the bail outs did nothing to address the underlying cause of the meltdown.

Nobel Prize winning economist Joseph Stiglitz, interviewed by Mark Deen and David Tweed in Bloomberg , notes that the danger has only grown:

"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."

Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.'s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn't force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

The financial industry has resisted any notion of a "TARP II" that Treasury Secretary Tim Geithner was pushing last spring. The plan called for private equity firms to purchase the bad debt at a guaranteed price.

But the idea that the purchase price would probably be less than the paper value of the securities made the big banks very reluctant. They are hoping that as the recovery proceeds, housing prices will rise and the value of their mortgage securities will rebound.

In short, the banks are playing a game of chicken with the government. At bottom, they want the federal government to buy their bad debt at face value. The government can't afford it. But because they are "too big to fail," if  there ever is another meltdown, they will be assured that the government will bail them out again, probably solving their debt problem in the process.

For the administration to allow this situation to fester while seeing the big banks get even bigger is beyond stupid. And we're liable to pay for it somewhere down the road.




It's fallen below the radar because on the surface, things appear to be getting marginally better. Or perhaps it's more accurate to say that they are getting bad at a slower pace than the free fall we experienced earlier in the year.

But lest we forget, there are still trillions of dollars in bad debt lurking on the ledgers of America's banks. This bad paper is still left over from the mortgage securities debacle of last year - a problem that was supposed to be addressed - we were promised would be addressed - by the $700 billion TARP program.

Of course, first Bush and then Obama used that TARP money not to take the bad assets off the books of major banks, but to bailout the auto industry, take over AIG, and grant short term relief to banks who were swimming in red ink.

As a result, those banks short term prospects improved but the bail outs did nothing to address the underlying cause of the meltdown.

Nobel Prize winning economist Joseph Stiglitz, interviewed by Mark Deen and David Tweed in Bloomberg , notes that the danger has only grown:

"In the U.S. and many other countries, the too-big-to-fail banks have become even bigger," Stiglitz said in an interview today in Paris. "The problems are worse than they were in 2007 before the crisis."

Stiglitz's views echo those of former Federal Reserve Chairman Paul Volcker, who has advised President Barack Obama's administration to curtail the size of banks, and Bank of Israel Governor Stanley Fischer, who suggested last month that governments may want to discourage financial institutions from growing "excessively."

A year after the demise of Lehman forced the Treasury Department to spend billions to shore up the financial system, Bank of America Corp.'s assets have grown and Citigroup Inc. remains intact. In the U.K., Lloyds Banking Group Plc, 43 percent owned by the government, has taken over the activities of HBOS Plc, and in France BNP Paribas SA now owns the Belgian and Luxembourg banking assets of insurer Fortis.

While Obama wants to name some banks as "systemically important" and subject them to stricter oversight, his plan wouldn't force them to shrink or simplify their structure.

Stiglitz said the U.S. government is wary of challenging the financial industry because it is politically difficult, and that he hopes the Group of 20 leaders will cajole the U.S. into tougher action.

The financial industry has resisted any notion of a "TARP II" that Treasury Secretary Tim Geithner was pushing last spring. The plan called for private equity firms to purchase the bad debt at a guaranteed price.

But the idea that the purchase price would probably be less than the paper value of the securities made the big banks very reluctant. They are hoping that as the recovery proceeds, housing prices will rise and the value of their mortgage securities will rebound.

In short, the banks are playing a game of chicken with the government. At bottom, they want the federal government to buy their bad debt at face value. The government can't afford it. But because they are "too big to fail," if  there ever is another meltdown, they will be assured that the government will bail them out again, probably solving their debt problem in the process.

For the administration to allow this situation to fester while seeing the big banks get even bigger is beyond stupid. And we're liable to pay for it somewhere down the road.