Can the bailout work? Fat chance
Can the bailout work? Fat chance
At best, Congress voted to approve a quick fix that's bound to fail in the long run.
But don't blame Wall Street vacillation for the jumpiness. It should be seen in the context of a decisive, coordinated effort by governments worldwide to manipulate stock markets higher by every means possible without regard to such niceties as fundamentals, the rights of shareholders or the laws of financial gravity.
....... Virtually every respected authority in the world of real capital believes the bailout bill approved by lawmakers won't solve our banks' problems. Yet the nation's political leadership pressed to pass it with the breezy confidence of the captain of the Titanic.
...... the financial bankruptcies we've seen in the past six months have come in order of their gross leverage, or the ratio of total assets to shareholder equity. The more leveraged -- Bear Stearns, Lehman Bros. (LEHMQ, news, msgs), Washington Mutual (WAMUQ, news, msgs), I'm talking to you -- the more vulnerable they were.
The reason is that as loans of a financial company lose value because of underpayment, company executives must write down the asset side of their balance sheets and at the same time reduce their shareholder equity on the liability side. Banks are allowed to lend only in proportion to their shareholder equity, so as the equity becomes thinner, banks are less able to lend money to make a profit.
Sophisticated customers then see that the banks are in precarious condition and make withdrawals. And so to satisfy those requests for withdrawals, banks are forced to liquidate more assets at distressed prices, prompting further reduction in shareholder equity. Yow! This process is then repeated in a vicious cycle until shareholder equity goes to zero and the company becomes insolvent. So long, banko.
Got that? What the government now proposes to do is to buy the questionable assets to protect the institutions against failure. So far, so good. Yet just taking the assets out of the mix would do nothing to provide additional bank capital, so the balance sheets would be just as fragile and prone to bankruptcy. At best, Hussman adds, you'd be allowing banks to liquidate their bad loans more easily to meet the demands of customer withdrawals.
...... have the government provide capital directly via a high-interest "superbond." It would be counted as capital, yet in the event of a bankruptcy, it would have a senior claim above stockholders and senior bondholders. That would protect the financial system, Hussman says, while also protecting customers and taxpayers. Bond interest would be deferred until a bank met a certain level of profitability.
This is essentially the route that Warren Buffett has taken with his investments in Goldman Sachs (GS, news, msgs) and General Electric (GE, news, msgs) over the past two weeks: provide capital in return for a financially viable security that is senior to shareholders' stakes, accrues at a high rate of interest and can be called early, as soon as the bank can secure cheaper financing.
...... And now we'll just have to see whether their efforts will work out for more than a couple of months and we can all go back to our regularly scheduled lattes, or whether it's time to start figuring out how to sell pencils. Place your bets. :D
http://articles.moneycentral.msn.com/Investing/SuperModels/can-the-bailout-work-fat-chance.aspx
