Pelosi And Summers: More Money Needed For The Banks

Lawrence Summers and Nancy Pelosi delivered the bad news this morning. The remaining $350 billion of TARP money is going to be insufficient to take care of the banking system.

The Sunday morning news shows are a good way for politicians to ladle out bad news gently. Here is what Summers and Pelosi had to say this morning.

“We can make important progress and get started with the support that has been provided,” Summers said on NBC’s “Meet the Press” when asked whether taxpayers should expect another request for funding to shore up the financial system. 

“What ultimately will be necessary is something that will play out over time.” 

House of Representatives Speaker Nancy Pelosi said earlier that “some increased investment” may be needed beyond the $700 billion approved last fall.

Essentially, they are beginning to say what everyone has suspected for some time. The volume of bad assets that have to be sucked out of the banking system in one form or another are massively larger than the funds so far appropriated for the task. Nouriel Roubini is estimating that world wide that banks need to write-off up to $3.6 trillion of assets. He breaks that number down into $1.6 trillion of loan losses and $2 trillion in securities mark-to-markets. Roubini estimates that U.S. banks’ share of that is $1.1 trillion in loan losses and $700 billion in marks. So the U.S. needs $1.8 trillion to shore up the sector.

The math from here is pretty simple. If all of the $750 billion of TARP money goes to the banks, it is still $1.1 trillion short according to Roubini’s calculations. You can quibble with Roubini’s numbers and maybe they are too high. But even if you discount them substantially, the reality is that a lot more money is needed. And, unfortunately, Roubini has had a habit of being right lately.

How all of this gets worked out is the million dollar (remember when that sounded like a lot of money) question. It’s probably going to be some form of aggregator or bad bank concept. Obama no more than Bush wants to go down in history as having been the president who nationalized the U.S. banking system. Despite all the back and forth about what price you pay for the banks’ assets, the simple truth is that it will have to be above market. Any price approximating current market would leave them insolvent and necessitate more money for recapitalization.

Any way you slice this, it’s going to end up putting a lot of assets in the hands of the government with the potential for significant abuse. Bank shareholders are going to be bailed out at the expense of taxpayers and President Obama’s prediction of trillion dollar deficits for years to come is probably going to be a reality.

Enjoy the rest of the day.

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