Why we should save the banks

I’m still not sure if the government has passed the bail out plan or not. Last i checked (from my wall street journal live feed via google reader (let me go on a rant to say google reader is absolutely terrific. You just plug in your favorite blogs / rss feed websites / etc and then when you login to your google reader page (which is very handily linked at the top of your gmail, so essentially when you check your gmail you are logged in to google reader) the reader actually queries all of these said blogs/rss feeds/ websites for new stories and delivers them to you so you dont have to navigate to all the sites, and then it puts it in a very reader friendly format. (The best part for me is that when i surf the internet at work, if exxonmobil were ever look into my history, they would see a bunch of google ip addresses and not the blogs and stuff i’m actually reading. Did i mention google reader works with espn?)), the senate had just corrected the HOR’s huge oversight and passed the bill.

Now clearly, 700 billion is A LOT of money. I just had it compared to me, if a million is one day, then a billion is like 37 years. Yes i also agree, the entire banking industry created this mess by swindling people into mortgages and signing other pieces of paper that they clearly had no business signing, and that their own greed has completely been exposed from years of record profits and bonus checks. The key thing is, who do we go after?

The reason all of these Banks are going after is due to their lack of liquidity (cash on hand). Obviously these banks carry huge amounts of debt, because thats how businesses work, they use credit for financing and then pay back over time. Its the natural way of things. Unless you’re google (or yes, maybe exxon), most corporations don’t have billions of dollars in cash, they might have it in assets, but those assets must be sold off to make to turn it into cash. So these banks had a lot of these assets (which were in fact mortgages) that completely lost their value, meaning the banks could no longer sell them off to create the cash necessary to pay back their debt. When they took a look at their long term debt versus cash versus the sudden de-evaluation of their assets, they either declared bankruptcy, or (in most every case) found a buyer and sold themselves (i.e. lehman, wamu, wachovia, merrill lynch, etc).

So what the government plan is essentially offering to do, is buy these poison assets from the banks (for the mere tidy some of 700 billion), hold on to them and then re-sell them to whoever. The plan infuses capital into the banking system, and will give the government a major foot in the door to create regulations and institute reform for the US financial system. Clearly, the system is broken and needs reform, and yes i’m pro-capitalistic economy, but if the financial system crumbles then that will effect everybody, as getting a line of credit would become near impossible among other fall outs.

The fear most people have with this bail out plan, is that they think this 700 billion will be paid for the by the US taxpayers (true, but not to the extent that most people are worried about) and that we will pass this debt on to our kids’ kids’ kids. Here’s the thing, these are ASSET backed securities, meaning there is a tangible thing (accounting textbooks would use the term widget, i will use the term “house and land”) that the government is buying. In a worst of all cases scenario, and each house is burned to the ground by some random fire the engulfs the country ( or some careless smoker in houston, which all of this piling of dry brush on the side of the road seems like the biggest fire hazard ever) and all that is left is the land, then still the government has value it can sell. That’s the worst that can happen, in a REALLY bad scenario, that is to say these houses are valued at 1/2 of what we thought they were, the debt is only 350 billion! That’s nothing! But here is the more likely scenario, the government holds on to these things, helps out the banks, slowly but surely over the years the financial stability (and credibility is the new thing that needs to be restored) and these assets actually begin to gain value (remember like all things (including oil), the housing market is in fact cyclical and will go up again) and they sell these things for a trillion dollars! That’d be pretty good profit i’d say.

Maybe my scenario won’t happen, but I still say letting the market run things (aka run the banks into the ground) is the worst thing right now. Actually, a best case scenario is to actually create a new currency. The dollar has lost so much steam, and while i understand the necessity of saving the banks, i am wholly against pumping more money into the economy and making my next trip to europe at a 3 to 1 exchange in the negative.