What Is Obama’s Plan For The Banks?

What is the Obama administration up to with the banks? That’s been the question flying around the Web the last two days. Naturally, there’s no shortage of answers.

Henry Blodgett at Clusterstock suggests that they may be paralyzed with fear of causing another Lehman type meltdown or more disturbingly that they are in the back pocket of the industry. That was the conclusion of Jonathan Weil in his opinion piece at Blooomberg yesterday. Though to be fair to Weil he also suggested that it could be a fear of causing a panic or even a lack of manpower that is holding the administration back. 

In either case, both Blodgett and Weill feel that the administration has to do something or it risks losing control of public opinion. Today’s reports that the government has essentially ordered the banks undergoing the stress tests to not talk about the results only adds to the intrigue.

In fact, the stress tests may turn out to have been one of the dumber political moves of the crisis. Any credibility they may have had was mostly lost when the standards were revealed to be much too moderate and then eventually destroyed when it was announced that no bank would fail and that no details would be released. It may have made sense at some midnight meeting of a bunch of technocrats but anyone with a scintilla of political sense could forecast the disaster it’s growing into.

The Obama people didn’t get where they are by being politically tone deaf and they aren’t stupid. They also know that the longer they let this drag on the more it becomes their problem, if it isn’t already. So why are they dragging their feet? Realistically, there are only three or four giant financial institutions that at the worst have to be dealt with. If any of the big regionals are unable to muddle through, their insolvency would be difficult but not overwhelming. Below them the problems are manageable for the FDIC. 

Assuming that the administration isn’t delusional or a captive of Wall Street a couple of other possibilities occur to me.

One, is a derivative of the paralyzed by fear theory. In this scenario, the losses are so big and the required resources to solve the problem so overwhelming that the administration cannot bring itself to admit to the situation. The sheer magnitude of the resources that need to be brought to bear on the problem is overwhelming them. In effect, the fix eats up all the money that can prudently be tapped from the economy.

The second is that the complexity of taking over several of the large institutions is so daunting that the administration is still trying to figure it out. In this case, they may have decided to keep some on life support while they write the playbook with, say a Citi restructuring. Something along the lines of Weill’s manpower argument.

There is always the chance that everyone, including me, is just borrowing trouble. The situation may be not nearly so dire as many think and indeed muddling through not only the best policy but workable as well. Let’s hope that is the case.

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