Thursday, January 22, 2009

Designated Driver (aka: Bridge Banking)

Andrew Jackson (the 7thPresident) closed down the Second Bank of the US in 1836 and aptly justified his actions with the following quote: "Gentlemen, I had men watching you for a long time and I am convinced that you have used the funds of the bank to speculate in the breadstuffs of the country. When you won, you divided the profits amongst you, and when you lost, you charged it to the bank. You tell me that if I take the deposits from the bank and annul its charter, I shall ruin ten thousand families. That may be true, gentlemen, but that is your sin! Should I let you go on, you will ruin fifty thousand families, and that would be my sin! You are a den of vipers and thieves."

I bring this up due to the increasing chatter about the possible nationalization of some of our more troubled banks. While this is something I am terrified of experiencing (due to the far reaching power the Government would be assuming and the dramatic change in global banking that this would cause,) I understand that we might be fast approaching the point in which we might not have a choice.

I fear our appointed leaders will again mismanage this process by acting too hastily and with a God-like conviction in peoples desire to be each others keeper. However, how much longer are we going to accept the idea of continually propping up banks with guarantees and capital as a viable course of action? And how much longer are we going to allow the boards and management of these entities to look us in the face, apologize and/or claim ignorance while extending their hands out for help? Worse, I wonder how many banks we will decide to nationalize before falling back on the idea of creating a central clearing bank to bid on non performing assets.

Personally, if forced into a situation were I had to step in to avoid irreparable financial damage to this country and our respective communities, I would assume control of the largest and sickest bank in which I am most invested in (ie: Citi Group.) I would begin by guaranteeing all existing depositors and then replacing its' senior staff with competent, prudent adults. Next I would handover the remaining $350B that are left in the TARP. My instructions would be very simple: "Lever up this capital gradually by purchasing (at a "reasonable price") a significant amount of the "non performing" viable assets at other national banks which pose a systemic risk to our capital and commercial markets, while continually accounting to Congress and the US Tax Payer how each dollar is spent.

Consider this last call! And unfortunately as usual the tax payer is the desiganted driver. The time for half measures and meager patch work must end here and now. As much as I want to avoid this outcome, it reminds me of my childhood and the drastic measures my parents appropriately took whenever I wandered too far off the reservation.

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