C.M.O. 2.24.2009

Credit Market Overview
February 24 2009

I read somewhere recently that people in government don’t spend much, if any, time gathering information from the media as the information they do process comes from more selective sources through established channels. I can only interpret that to mean that they get rid of those that don’t agree with their theories and then listen to the one’s left; but then watching the markets since the politicians took over the financial reigns can make you pretty cynical.

The real shame in all of this is that there are some pretty heavy weight characters being published in the op/ed columns these days and while they are out to make a point in many cases the arguments they proffer are cogent and concise.

This past weekend no less than Dr. Doom himself, Nouriel Roubini and Willem H. Buite were in print. The former is a household name at this point if from nowhere else but reading this piece. The latter, WHB, is a professor of European political economy at the London School of Economics and Political Science so there is some gravitas there as well.

Mr. Roubini is pushing a ‘90’s Swedish encore. “You take the banks over, you clean them up, and you sell them in rapid order to the private sector--it’s clear that it’s temporary. No one’s in favor of a permanent government takeover of the financial system. (Can someone tell Sen. Frank that please?)

Professor Buiter’s approach is slightly different in that he would prefer to create brand new institutions with the $1.4BN that is being bandied about as the amount of tax payer money it would take to restore the U.S. banking sector to its fall 2008 level.

The advantages here would be brand new management, with a new focus in a growth oriented environment. Since these new banks would be fresh ventures with no warehouse of toxic assets the possibility of attracting private capital would also be much greater than asking the capitalists to put their dead Presidents into a bank where the probability of losing most if not all of their investment is exceedingly high at the moment.

The “legacy banks” as Mr. Buiter calls them would not be allowed to make any new investments or loans and would simply manage the dross on their books. If things don’t go well Willem says, the secured creditors would be there to fight over the remains.

The market on Friday fell on news that some banks might be nationalized. It fell yesterday because nationalization was thrown out as an option although after contributing $45BN of taxpayer money already, the possibility of the government owning up to 40% and a $2 stock price if Citi isn’t nationalized I’m not sure what else to call it.

Being a “free-market” advocate I get what Nouriel and Willem are saying. Given how many of our Treasury bonds foreigners hold and are expected to buy in the near future I’m not so sure telling them that the common and preferred stock they were nice enough to buy from some of our premier financial institutions is now worth zero and we don’t care.

Enjoy the week.

Jim Delaney