To Bail or Not Bail?

From MSNBC.com


Experts say one big problem is it hasn't addressed the root cause of the trouble: the mortgages and other bad assets sitting on the banks' books.

When the government announced the bailout three months ago, the plan was to buy those bad assets so banks could start lending again. But that approach was quickly scrapped, partly over concerns it would take too long to work.

Plan B, injecting banks with cash, hasn't worked as Wall Street had hoped.
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The government has so far provided $192.3 billion to 257 large and small financial institutions in 42 states and Puerto Rico. But banks are mainly sitting on the money, not ramping up lending.

"The capital injections haven't worked," said Edward Yardeni, an independent market analyst. "It's been like giving blood thinner to a patient who needs to have their wounds clotted. The bleeding hasn't stopped."

Some lawmakers want to force banks to boost lending if they accept taxpayer money, but none of the leading plans being debated on Capitol Hill include such requirements.

If Washington decides to give banks more money, the question is how much.

Bert Ely, an independent banking analyst in Alexandria, Virginia, has estimated the price could swell to as much as $1.5 trillion. "There's no reason why it couldn't go that high," Ely said.

But many on Wall Street are uncomfortable with the government's giving banks more money, believing it would amount to a federal takeover of the U.S. banking system that could wipe out shareholders.

"What we're heading for is the dirty word of de facto nationalization of U.S. banks if we continue on the current path," Chuck Gabriel, managing director of Capital Alpha Partners in Washington. "How are you going to attract private capital to the banking system? That's the question they haven't come close to answering."

One alternative to giving banks more cash is setting up a government-run bank to buy banks' bad assets. The idea is that by removing the assets weighing down the banks, they'll stop hoarding cash and start lending again.

Gabriel said that could assure nervous investors that Obama's team is pursuing a new course of action.

"They need to come out and do something that's a departure" from only capital infusions, he said. "You could spend another $700 billion and some folks might think that's not enough."

Experts say there's no option guaranteed to spur more lending.

For one thing, banks have tightened lending standards, shrinking the pool of qualified borrowers. That makes it much harder for the government to "force-feed credit into the economy," Ely said.

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So what if the government decides not to give the banks more money? Experts say the consequences could be dire.

In a report last week, Goldman Sachs estimated that financial institutions and investors worldwide will ultimately absorb $2 trillion in losses on U.S. loans — but have recognized only half those losses so far.

Unless the banking sector has a way to offset those losses, troubled banks could fall — possibly triggering a panic.

"You could see a total erosion of confidence among the government's ability to stave off another crisis," said Richard Sparks, senior equities analyst at Schaeffer's Investment Research in Cincinnati. "I can't conceive of the government not doing anything."


My Personal Commentary:
We have bailed the banks already and other institutions all to little avail yet, to the tune of well over $700 BILLION. I wonder if it is time to stop the "income redistributions" (giveaways) and let them float as they will and eliminate the weak/inefficient ones. What we are really doing is positing a terrible financial future for the younger generations here.

Go Placidly,
Dan Miller