Sunday, January 25, 2009

Brian Lenihan from Anglo Irish Bank

Listen carefully to the first 30 seconds.Will the real Brian Lenihan please stand up.encemsengihnampakgigi

Nationalization The Problem

An aggregator bank (the so-called "bad bank") is going to happen. So, for what it's worth, let me make a few suggestions. Banks that are technically insolvent and which will need to put taxpayer money at risk should just be "put down." The shareholders and bond holders need to be wiped out before taxpayer money is spent. And the banks should be put back in strong private hands as soon as feasibly possible. We do NOT want government agencies subject to political manipulation making decisions about lending. But deals should be structured which give taxpayers a real chance to get their investments back.

And please, no more deals that are not on the same terms that Warren Buffett or other private investors get. That was simply embarrassing for Paulson and team, or should have been.

In closing, let me quote two paragraphs from Bridgewater Associates that I think sum up the problem in a rather brilliant and clear way, and which I wholeheartedly agree with:

"The root problem is that debts that were incurred to finance assets at high price levels remain in place at their original amounts even though the assets that they financed are now worth far less. Debt that was incurred to finance extrapolated high incomes remains in place at its original amount even though incomes are now much lower. And, debts that were incurred to finance loans remain in place at their original values even though the loans that were made cannot be repaid. Until the debts are brought in line with the assets and the income, there is no moving forward no matter how much liquidity is provided or how eloquent the speech. And, until this happens, the self-reinforcing nature of the debt squeeze will only reduce incomes and asset values further.

"There is no easy way out of a debt restructuring. Someone will have to bear the cost of prior bad decisions. The people who should bear the cost are those who made the bad decisions to make the loans or those who financed the people who made the loans. They intended to profit and would have profited if they were right. But they were wrong, so they should lose. The government needs to allow the losers to lose and focus their actions on minimizing the knock-on effects of their failure on people who didn't do anything wrong (to minimize systemic risk). They should then take action to minimize the future exposure of the innocent to the future dumb decisions of the small minority, because no amount of regulation will ever eliminate dumb decisions, so you have to plan for them (through much lower bank leverage limits to cushion losses, bank size limits and non-bank entities playing bank-like roles to improve diversification, safety nets to prevent losers from poisoning the whole system, etc.)."

Hear, hear!
Bermuda, Baaad Banks, and Prenatal Vitamins

I have to close with a few humorous paragraphs from my friend Bill Bonner in his essay for the Daily Reckoning:

"But if the 'bad bank' idea could work, why not create a super baaaddd bank? We could use it to get rid of all our mistakes. Writers could unload their bad novels. Businessmen could sweep their errors under its broad carpet. What the heck, let people get out of bad marriages without penalty; the super baaaddd bank could pay the alimony and divorce costs.

"The hitch with the bad bank idea is so obvious even a banker could spot it. If the cost of mistakes is reduced, people might make more of them. Like the rest of us, bankers are neither good nor bad, but subject to influence. Unlike metallurgy or particle physics, banking does not have a rising learning curve. It's not science. Instead, it's more like love and gambling ... with a circular learning pattern. They learn ... and then they forget. They get carried away in the boom upswing; then they get whacked when it turns down.

"So let them have a good beating. It will give them of a lesson that will last a lifetime ... and give the next generation a solid banking sector."

I will fly to Bermuda next Wednesday for four days, where I will take a little R&R after speaking for the local CFA group on Thursday and work on the book Tiffani and I are writing. It should be fun.

And speaking of Tiffani, she came in this evening with that "look" on her face. Her best friend had a baby boy this week, and she got to be in the room for the birth. You could see it had impacted her. But I didn't realize how much.

"Dad, I started prenatal vitamins this week. I am almost 32. That is older than you when you had me. And I want at least three kids. You have a lot of kids, and look how much they mean to you and how happy they make you. I want that when I am your age. I know you want us to wait a little, but it is time. I need to get started."

Not much arguing with that. Life is going to change. Henry and Angel will have a child this summer. Amanda is getting married, and soon she will get the baby bug. With seven kids my chances for more than a few grandchildren are pretty good. I guess, at 59, being called Papa John will not age me all that much. Maybe it will even keep me younger longer!

Have a great week. And remember that even if a bank won't give you money, you can always get some love from friends and family, and that is where the real value lies.

Your can't believe how we throw the word trillion around so easily analyst,

John Mauldin

Copyright 2009 John Mauldin. All Rights Reserved

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