RBS: The First Domino?

The Times is reporting that the Royal Bank of Scotland is going to be restructured via the good bank/bad bank route. The details are evidently still being sketched out but the article does have some pretty good information. One thing it mentions is that several hundred billion dollars worth of assets are going to be put up for sale.

The part about selling assets got my attention. Could it be that after all the dithering and talking about how you treat the toxic assets on the banks’ balance sheets that a move like this one forces the issue. Sooner or later someone, maybe RBS of UBS or Wells or someone is going to either willingly or under duress put this stuff up for sale just to get rid of it. When that happens, all hell is going to break loose.

Once someone comes out of the closet and lets the market establish a value for this stuff the game is up. At that point the regulators are going to have to either, one admit that banks a, b and c are insolvent under any fair measure and, two they are going to have to deal forthrightly with the problem. That doesn’t necessarily mean they nationalize the banks, they can always opt for forbearance but the subterfuge will end.

The game that Geithner and his fellow central bankers have been playing seemed to be slowly coming undone over the past few weeks. One had the sense that events were running faster than their capacity to adapt their plans. So it shouldn’t be a surprise when something comes out of left field and upsets completely their ability to hold the patchwork system together.

RBS may be that proverbial canary or it might not. If not there is probably another one just around the corner.

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