Pretty good summary of the situation many banks find themselves in, and an interesting conclusion regarding resistance to full nationalization by the Nobel prize-winner in today’s New York Times:
January 19, 2009
Wall Street Voodoo
By PAUL KRUGMAN
New York Times
Old-fashioned voodoo economics–the belief in tax-cut magic–has been banished from civilized discourse. The supply-side cult has shrunk to the point that it contains only cranks, charlatans, and Republicans.
But recent news reports suggest that many influential people, including Federal Reserve officials, bank regulators, and, possibly, members of the incoming Obama administration, have become devotees of a new kind of voodoo: the belief that by performing elaborate financial rituals we can keep dead banks walking.
To explain the issue, let me describe the position of a hypothetical bank that I’ll call Gothamgroup, or Gotham for short.
On paper, Gotham has $2 trillion in assets and $1.9 trillion in liabilities, so that it has a net worth of $100 billion. But a substantial fraction of its assets–say, $400 billion worth–are mortgage-backed securities and other toxic waste. If the bank tried to sell these assets, it would get no more than $200 billion.
So Gotham is a zombie bank: it’s still operating, but the reality is that it has already gone bust. Its stock isn’t totally worthless–it still has a market capitalization of $20 billion–but that value is entirely based on the hope that shareholders will be rescued by a government bailout.