[Post Summary]I opened for my beloved, but my beloved was gone.
—Song of Solomon
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Appearing on CNBC today, Senator Charles Schumer (D-NY) gave his endorsement to a financial rescue plan that likely will do little more than extend discussion over unworkable alternatives, all of which attempt to maintain the viability of structured securities presently burdening the banking system. At best, this exercise might buy time for wiser observers to batten down the hatches.
The Senator believes trillions in securities that haven't caught a bid in over a year can be:
- given a floor under which their value will be guaranteed, and
- secured by a fee-based arrangement paid for by banks.
One naturally wonders if too much damage already has been done for Senator Schumer's proposal to be successful. It certainly seems this attempt likely is destined to leave taxpayers holding the bag. Hearing Senator Schumer's fear of wide-reaching bankruptcies leaves little doubt the Senator believes the cost of rescuing burdensome financial claims cannot be too much.
One then wonders if, first, coming up with an honest rating system covering all securities involved will be necessary. How else can a floor under securities and a fee structure on guarantees be established? This, itself, should provide a good opportunity for President Obama to honor his commitment to raising the standard of government accountability.
Look at it this way. Any piece of legislation reaching the President's desk — no matter what solution is being attempted — had better be founded upon an honest rating of the various derivative securities covered by the Act if anticipated results are to be achieved in the rejuvenated private marketplace for these securities.
There are so many complexities here — made all the more difficult by matters involving time to maturity and generally accepted accounting principles. Yet the greatest challenge in affecting a fix is arresting appearances the problem simply is being pushed off into the future. Complicating this effort is the fact we are attempting to restore an out-of-control machine whose engine is frozen, and in the process risking the U.S. Treasury's AAA credit rating.
Given the reality of the situation, then, some form of nationalization appears absolutely critical if the taxpayer, secondarily, and the Treasury, primarily, are to be protected. The Senator, the Congress, the President and the financial industry simply must move toward this arrangement if the least disruptive, most believable solution is desired. It is that simple.
But herein lies a rub.
There are financial industry players who see opportunity in chaos. They recognize how great strides in power and control are to be gained picking up the pieces for pennies on the dollar. Just ask Barclays. This more or less summarizes why the financial industry opposes nationalization of the banking system.
Contrary to Senator Schumer's nonsensical take on why nationalization will not work — claiming a risk of political conflicts-of-interest, as well as a need to reconstitute a large part of functional personnel involved in day to day operations — I would submit some form of nationalization is the only means by which moral hazard might be reintroduced into private sector financial operations. Industry self-regulation and discipline would begin moving in a positive direction once it is understood the People are willing to provide floors and guarantees at a price rivaling what Warren Buffett has been receiving for his largess of late (if you can call it that).
Surely, too, if Warren Buffett can determine whether his investment is likely to return a profit, likewise ought the government be able. Absent such assurance being possible, then the best course remaining would be our presently insolvent financial system's reorganization in bankruptcy.
—Tom Chechatka
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