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Mon 6 Apr, 2009 03:30 am
There are two main components to the recovery of the financial system:
1. The Net Capital Rule
2. The Balance Sheet of the Wall Street Banks that the Mortgaged-based Certificates that had been assessed as Assets but which were really Liabilities. They were eventually recognized as such so the banks are under capitalized. The derivatives’ value is estimated to be in the 45 " 53 trillion dollars.
To bring Net Capital Rule to 15:1 from 33:1 a doubling of the capital is needed or half of the loans could be withdrawn. The loans are estimated to be $53 trillion so divided by 33 would be $1.6 trillion the required capital. The banks have $0.8 trillion or $800 billion capital from the previous 15:1 Net Capital Rule. So the $750 billion bailout was sufficient to satisfy the Net Capital Rule requirement.
The TARPs are related, as they are the bad mortgage-based certificates. $1.6 trillion divided 15 would be $0.107 trillion or $107 billion. If the total TARPSs value is less $100 billion the banks should be able to absorb the loss as bad loans.
The problem is the executive bonuses, which could hurt the capital of the banks. The executives do not deserve the bonuses as they did not check on the true value of certificates but instead loaded their banks with these toxic certificates. They passed on the risk to the insurance companies. AIG, the biggest insurance company, probably insured most of the TARPs.
The next problem was the Credit Rating companies that were responsible for evaluating the Certificates in question. How were their critical judgment compromised by passing the Certificates as reliable investment.
If the taxes on bank savings and checking accounts are limited to $40,000 or $100,000 then the banks could build up their deposits faster as people are limiting their savings because of the taxes. The deposits form the capital on which banks provide loans to businesses and individuals.
@talk72000,
Oops,
The banks had $1.6 trillion and by adding $750 billion (bailout) the total would be $2.15 trillion. The adjusted Net Capital rule would be 53/2.15 = 24.65:1 ratio. This is an improvement. It would be too muchto ask Congress for another $800 billion to bring the Net capital rule tothe safer 15:1 ratio.
The return to the 15:1 ratio normal Net Capital Rule will be gradual as the banks reel in the profits from the loans. The loans are assets to the banks as they get money from the companies on the higher interest and maturation of the loans. The deposits of the customers are liabilities as the banks must pay interest on them such as savings accounts. As the banks' capital increases they will make more loans and recovery will be on the way.
The profitable companies will cut costs to pay off the loans. Interest rates will go down as the banks increase their capital. Loans are their source of income and having huge deposits sitting on their vaults is not good business sense.
There will bean initial shrinkage as banks either call in or cancel loans to fulfil the Net Capital Rule. Companies will cut staff to get rid of their inventory. Once the banks return to normal expansion will occur as the surviving companies will have the market allto themselves with fewer competitors.
The stimulus plan should help keep up the demand to avoid excessive shrinkage of the economy.
The US certainly needs better financial regulations of it's banking sector. To continue with the free market fundamentalism of the repub's would see America reduced to just two banks. The blood bank and the sperm bank. The existence of gunga and his ilk suggests you've got more than enough bloody wankers already!
The people who pushed this deregulation and privatization began with novelist Ayn Rand, Milton (Milton's Inferno) Friedman, George Shultz (former Treasury Secretary under Reagan), Ronald Reagan, Margaret Thatcher, Conrad Black (in jail for fraud and theft of Hollinger International property), Rupert Murdoch, George Bushes, Dick Cheney, Henry Paulson, Alan Greenspan (follower/devotee of Ayn Rand) - an unholy crowd.
The financial situation also is exacerbated with the perennial annual government deficits which gives the government emergency powers to bypass accounting standards i.e. fund created for specific purposes can be raided and put into general revenue. For example, the Social Security Fund had been raided for defense to support an illegal war in Iraq. Government taxing of personal savings accounts forces private citizens into an unstable stock market full of swindlers, sharks, Gekkos, corporate raiders, fraud artists, junk bond operators with hedge funds, inside traders, etc. The under regulated stock market makes it an unsafe haven for investing one's money. Leaving the savings accounts alone actually helps the banksto build up their capital in deposits that are then lent out.
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