BAILING OUT AMERICAN BANKS

Bailing out the banks will be remembered in history as the Mother of all Bailouts.

As America grapple with the enormity of the problem brought about by the global economic crisis, US have to acknowledge that if the banking system is not settle soon enough, the consequences will be hardship and pain beyond the imagination of anyone in this world.
Since the demise of Bear Stern and Lehman Brothers, I have been closely following the financial news. From the various news I have read, I understand US banks potentially faced up to $1 trillion in losses with only half realised so far. Goldman Sachs analyst estimates that banks are holding on to $5 trillion dollars of ‘trouble asset’ on their books. It is estimated that US government may need up to $2 trillion to recapitalise the banks.

US Treasury has been mulling over the idea of creating a “bad Bank”. Its role is to buy up all the toxic assets, allowing bank to be healthy again. But the challenge is how to price these assets. Banks won’t sell if it is too low and Congress won’t buy if it cost taxpayers too high. Besides the publicly listed banks, there are also many private banks. The problem is for those private banks that own toxic assets and how much does it get for the bad assets. The risk is especially high as the real estates’ prices are still plunging.

Setting up this ‘bad bank’ could be the big step to repair and save the banking system and get credit moving again. Unless the banks start to lend again, nobody can afford to buy a house, car or start a business, then the economy will not recover from recession. But just where US will get the $2 trillion funding to comprehensively bailout the banks, is really a tough question. No matter what Obama do, it won’t be easy and it won’t be painless.

If the US has no more options, then banks will failed. The world cannot afford to see the banking system disintegrate. It lubricates and keeps the world economy humming. In the present economy, the banking system is akin to the heart of a living human being. When the heart stops, man drops dead. The severity of the financial problem was compounded because it is worldwide and as the world is now so globalised, no country will be spared. For example, if CitiBank were to fail, can you imagine the queues from South American to Europe lining up to withdraw the fund? And all the banks that lend money to Citibank will also collapse in its wake. It’s a nightmare scenario no governments wish to see.

Many analysts believe that the economy will not recover until the properties market stabilised and bottom up. But then if the banking system is not fixed, there will be no loans to spur the properties market. Not only that, mortgages asset carried by the bank will continue to be stress and lead banks to more write downs. In my opinion, the US government has to pay any price to fix the banking system before any meaningful recovery of the housing market. That’s about the only way to kick-start the economy.

The entire Europe too is facing the same banking problem. The bailouts will continue in Europe. In particular, Britain’s banking system is in a big mess too. Britain has already nationalised 2 banks and RBS is sitting on trillion of pound of toxic assets.

If after all the bailouts have failed, US is only left with the unthinkable. That is, nationalisation. This will be my next topic for my blog.




---------------Living to see the world-------------------------FRA