This can lead, for instance, to borrowers in temporary difficulties being forced to accept harsher terms, which in turn can result in payments being suspended. It entails a risk of creating an exaggerated perception of the magnitude of the problems, for instance if real estate that has been taken over at unduly cautiously estimated values in a market that is temporarily depressed. Provided the authorities and the banks make it credible that no additional problems have been concealed, this procedure also promotes confidence. This clarifies the extent of the problems and the support that is required. With the other method, an open account of all expected losses and writedowns is presented at an early stage.
The handling of problems among savings and loan institution in the United States in the 1980s is a case in point. A serious disadvantage is that the method presupposes that the bank problems can be resolved relatively quickly otherwise the difficulties compound, leading to much greater problems when they ultimately materialise. One advantage of this method is that it helps to avoid the bank being forced to massive sales of assets at prices below long run market values. The first method involves deferring the reporting of losses for as long as is legally possible and using the bank's current income for a gradual write-down of the loss making assets. Governor Urban Bäckström, 8/29/97 "The Swedish Bank Support Authority had to choose between two alternative strategies. Why Obama’s new Tarp will fail to rescue the banks This is not the time for hesitation," Strauss-Kahn said." But you know very well that the costs of banking crises increase if problems are not addressed quickly. They will also be expensive for governments. “ Even with these measures, it will take time to restore credit growth. "The United States and Western Europe could learn from the previous experience of countries like Korea, Malaysia, Thailand, and also Sweden, which set up public resolution agencies, and often recovered a lot of public money. IMF Outlines Dire Consequences if World Fails to Act on Banks Many developing countries also built up large reserves and are in a better position to meet this crisis than they were a decade ago." They realized the risks of excessive leverage, excessive dependance on real estate lending and so they took much more prudent actions. "I think many governments of emerging nations actually have a much better central banking system than the United States. Nationalized Banks Are "Only Answer," Economist Stiglitz Says Margins would narrow as a result of competition, but by then the banking system would be revitalized and nationalization avoided." In the current environment, a good bank would enjoy exceptionally good margins. "Although the amount needed to recapitalize the banks would be more than $1 trillion, it would be possible to mobilize a significant portion of the required total amount from the private sector. Bond-holders may have to accept either a debt-for-equity swap or a 20 per cent "haircut" (a reduction in the value of their bonds) - a disappointment, no doubt, but nothing compared with the losses when Lehman went under." Government will take control in return for a substantial recapitalisation after losses have meaningfully been written down.
Too bad they should have kept a more vigilant eye on the people running their banks. Existing shareholders will have to face that they have lost their money. First, banks that are de facto insolvent need to be restructured - a word that is preferable to the old-fashioned "nationalization". Here are their recommendations, with the underlined titles as links to the original articles:īeyond the age of leverage: new banks must arise
Since we here at Market Folly have Recommended Reading Lists (books) and "What We're Reading" posts (articles), we thought it would be interesting to post up what Passport is suggesting. If you're unfamiliar with Passport, their investment process "uses a combination of macroeconomic analyses to develop major themes and rigorous fundamental research on individual companies to create global portfolios" (as per their website). Recently, in an email to investors, John Burbank's $2 billion investment firm Passport Capital sent out a few links of suggested reading.