Clean Out the System

More details of the government's new improved bank bailout plan were released today.  As with the previous versions, what this version has in vision and ideas, it lacks in details and transparency.  The plan will not clean out the system, it delays taking losses and prolongs the recovery period.

Obama Seeks to ‘Clean Out the System’ With Bank Test

President Barack Obama aims to dispel the cloud over U.S. banks that has driven their shares to a two- decade low by subjecting them to rigorous reviews and reviving the market for their toxic assets.

Officials will begin so-called stress tests of about 20 of the nation’s largest banks tomorrow with the aim of ensuring they have sufficient capital to withstand the toughest of economic times. Institutions that aren’t able to raise needed capital privately will get taxpayer money, regulators said yesterday.

Good news, these 20 institutions that are 'too big not to bailout' will undergo rigorous testing!  If the bank is determined to not be able to withstand the continuing economic downturn, we will just give them more money and everything will be fine in the long run.  At least with this test we will get a good picture of what the banks are holding on their books.  Nope:

While U.S. regulators don’t intend to publish the details of their stress tests, the results will effectively become known once it is determined how much capital each bank is required to raise, either from investors or the government. The more capital needed, the worse off the bank.

“These examiners begin the stress test with already a deep understanding of the institution” because they are in effect residents at the firms they oversee, said Bob Bench, a former deputy comptroller of the currency.

“In the normal course of business, bank regulators tend not to look over the horizon,” said Bench, a senior fellow at the Morin Center for Banking and Financial Law at Boston University. The new reviews will do so, he said.

Great, now the regulators who, with their deep understanding of the institutions, saw many of these problems coming will now properly identify future risks.  Sounds good.

One part of the plan I like is the private/public partnership idea of having private capital come in to purchase the troubled assets from the banks with the government providing the financing at a certain leverage ratio.

By putting a market-determined price on the assets, Treasury Secretary Timothy Geithner hopes to address doubts about what the assets are worth and, in the process, provide investors with a clearer picture of banks’ balance sheets.

A better plan is to let the bad banks fail/take over insolvent institutions, clean up them up and sell them off to the private market; just like the FDIC already does for smaller financial institutions every week.  Why are we unable to admit that these institutions are too big and carry to much risk that they cannot manage properly?  The longer we delay, the longer we wait for the recovery.