Table Stakes In The Banking Crisis

"You gotta know when to hold ‘em, know when to fold ‘em," too bad there aren't more Kenny Rodgers fans on Wall Street. The old gambler's advice could come in handy right about now. Paying the table stakes for keeping the big banks old capital stock simmering in the pot seems to be a losing proposition all around. It is outrageous with the current management continuing to run their series of bad news hands at taxpayers' expense.

Using moral suasion with the James gang was not notably successful. Nor are the guys who pulled off the biggest bank heists in history about to change their pinstripes any time soon. It is past time to replace management and while we are at it wipe out the stock that has no real capital value behind it.

Yes we need to recapitalize the banks and prevent their failure. There are few useful assets left in these banks except the infrastructure and organization of people going to work every day. These bank workers are the essential ingredient of our economy that we must preserve. We do not need the clowns in pinstripes at the top of that heap of composting assets and capital stock. Rewarding managers and shareholders for failure is folly.

Trying to maintain the illusion that the paper assets traded during that bank heist are still worth much of anything is futile. Any value disappeared in the last pot of the years when real estate prices were rising. Trying to maintain that the prior stock issued by these banks is worth anything now is even worse. If we do not erase that stock from the piles of chips being played in this game the outcome will be monumentally unjust.

The taxpayers are being told, not asked, to take the risks. Meanwhile other investors can stand pat and gain at their expense by trading stock that should have been removed from the table. This is delaying the private investment in these banks that would occur after a bankruptcy; even if initial recapitalization by the taxpayer was required.

When you decouple a market from the reality of the values traded in it you get the mess we are in today. How is it that we are going to fix the banks by decoupling their capital stock from the reality of their fiscal condition? How can we make that work? When I see people buying stock in these banks today I know they are betting on the next hand dealt by the government. They are not buying value but speculating on the pain threshold of the taxpayer.

The banks are still illiquid, with no capital base or value other than the ongoing infusions coming from the treasury's boodle in a tarp. When liabilities exceed assets by as much as they do in these banks you are running a company that is in a state of chronic disaster. The truth is that preserving any value for the current capital stock could not be done in any market without the new money coming from the taxpayer.

The only reason these un-capitalized stock values are as high as they are is the full faith and taxing power of the US Treasury is holding them up. They are extraordinarily low by any historic standards simply because the assets behind them are worthless. Some people involved are now making the bet that our government will never dare to nationalize these banks. They are buying the un-capitalized stock. The new stock purchased with new money from the new investors, (taxpayers) should be trading and the rest should be eliminated in a bankruptcy or seizure.

It is a truth that markets are a snare and delusion when they are prevented from carrying out the necessary business of distributing losses and gains appropriately. When markets work they work because they punish ignorance and failure and reward success and clarity of purpose. We would have a hard time coming up with a more perverted market structure than the one in which these bank stocks are trading today. The prices being paid are still far too high to reflect the real value of these companies' assets. The speculators are not buying assets but are buying a protected security that will only rise when recovery happens at the taxpayer's expense.

The unstated consequence is that their potential gains will massively reduce the return to the real investor that is bearing the cost and risk of recapitalizing these banks. That, my friend, is you and me, those of us who pay the taxes in this nation. If we sit quietly by and tolerate this injustice and perversion of market economics it will be only one of the many things we regret at the end of this long and disastrous game.