Keyword Caution
Has the administration done its homework?
The first go around of the bank bailout has had mixed results. Things didn’t get much better, but they didn’t get much worse either for the most part. So it can be considered both a success and a failure, depending on who you ask. Instead of taking a seat and crunching who needed what, they forced the big banks to take a check, then handed out funds to the others who requested them.
Now we are in phase 2. The calamity that surrounded the first bailout has diminished – however relative – and everyone has more time to think and act. This time, the government is going to use a “stress test” on the banks to figure out who needs what and how badly. These tests are supposed to see if the banks can handle not only what the government expects will happen, but will also test to see if they can stand on the “worst case” scenario: 10% unemployment and another 20% drop in home prices.
Some thoughts on this whole bailout mess. I supported the first bailout. I knew it wasn’t perfect at the beginning, but the price for perfection was too high. America’s financial institutions were in dire straights, and needed help quickly. I was furious at the congressmen and women who were quoted as saying things like “I don’t see the need for it” or “how is this going to help main street?” Some pushed back saying that they wouldn’t support it because their constituents wouldn’t get any benefit from it. Since then we’ve learned just how much Wall Street affects main street. I’m glad it passed, I just hated it took so long. I remember just after one senator – I believe Jim Inhofe of Oklahoma (what a character) – made a comment about not seeing the need to rush things, WaMu failed and Wachovia teetered into competing suitors. These was an urgent need.
Now onto the next $350 billion. I like the concept of the stress test. Now that we have some time to breath, let’s size up the team. My only concern is the worst case scenario may be a bit optimistic. Although a number of good signs have come across throughout the markets (more in-depth studying of our recent lows find that they were not as bad as 11/20 and 11/21), there is still more than can hit the fan, and probably will. Our economy is being shaken up, and there are still more feathers to ruffle. I should hope that home prices don’t drop more than another 20%, but unemployment may hit the 10% mark. Lets hope neither happens.
After the tests, the government (and the banks) will be in a better position to judge their capital positions. If more capital is needed to maintain solvency, then that bank has 6 months to raise private capital before the government purchases preferred convertibles to boost it’s financial position. In theory, eventually these preferred convertibles will later be converted to common shares, increasing its health in the stock market and potentially giving the taxpayers a reward (maybe).
Will it work? That we’ll see. As a long term bailout program, it is much better than our original TARP program. Although I think the option to invest directly in the banks was better than asset recovery (which would’ve taken much longer), it was not designed to be an everlasting measure. I am hopeful that this administration used its time and political chips wisely on this one. It could still fail, but with careful planning and a little luck, it might just work.
