Show Saving the Banks The most im important steps of the the adminis administrations administration's rations ration's recovery plan are still to come The Washington Post The following editorial appeared in Sundays Sunday's Washington Post PostAs As last weeks week's dreadful new unemployment report showed the US U.S. economy is still in free fall But important as it is the fiscal stimulus plan upon which President and Congress have spent most of their efforts so faris far faris faris is at most only part of the solution The economy cant can't recover as long as the nations nation's financial system remains in suspended animation Through episodic bailouts the Bush administration prevented a total meltdown which was necessary but far from sufficient As it prepares to unveil its plans for the second half of the billion Troubled Assets Relief Program TARP the administration has a chance to dispel the confusion and uncertainty that still cripple the banks and by extension the entire economy The basic basie problem is this Americas America's financial institutions remain burdened with toxic assets ie i.e. instruments often of mind-blowing mind complexity for which the market has collapsed Goldman Sachs says that about 1 trillion in illiquid securities st still ll haunts the banks' banks balance sheets The resulting paper losses are eating away at the banks' banks capital and without a stable capital cushion banks do not dare lend money even to quite I 1 creditworthy customers As long as the toxic assets remain private capital will shun the banks and government capital will get eaten up by more and more losses One way or another this corrosive uncertainty must end Broadly speaking the administration has three options each of which has been tried in similar crises in other countries First it can nationalize insolvent banks take their then bad assets directly onto the governments government's balance sheet and try to manage them at a minimum cost to the taxpayer This has the advantage of decisiveness but the huge disadvantage of involving political authorities in inthe inthe inthe the banking business indefinitely tel y A second approach would be for the government to use TARP money to capitalize one or more bad banks which would buy and with the help of experts recruited from the private sector manage toxic assets thus freeing the remaining good banks to resume normal operations This is ismore ismore ismore more promising since it includes an exit strategy for the government and might start jump-start a private market for the assets But there is a huge risk that the government would badly overpay in the first place Finally the government could agree to pick up the tab for any losses above a certain level in return for a fee from the banks It has already done this with and Bank America of With this guarantee the banks could more safely hold the securities to maturity or sell them to private investors who would be secure in the knowledge that Uncle Sams Sam's got their back This Tills proposal probably has a much lower cost than either nationalization nationalization or a bad bank The downside downside is that it perpetuates ambiguity about the ultimate valuation of the assets Whatever approach or combination of of I approaches he chooses Mr must level with the public about I the costs and benefits One misconception he should dispel is the expectation unfortunately being encouraged by some members of Congress that the banks must immediately use whatever aid they get to restore lending to pre-crisis pre levels Easy credit is part of what got us into this mess and even without the toxic assets problem there would be less lending ina ina in ina a recession No its it's not fair that banks that helped create the crisis might get geta a fresh start subsidized by taxpayers But unless we want a like Japan-like lost decade there is no alternative What's crucial is to set a strategy that thatis is coherent decisive and nd transparent and then stick to it fi a |