Dirty Socks And Bad Banks (opinion, commentary)
The newest bank bailout proposed by the Obama Administration is the creation of "Bad Banks" to purchase "toxic assets" and remove them from the balance sheets of the banks. After the announcement, Citi Group stock soared 19%. Wells Fargo shot up 31%. Some analysts have estimated the cost of this "bad bank" program could reach $4 trillion. This "Bad Bank" concept is nothing short of a direct transfer of taxpayer wealth to bank shareholders and executives. This comes after years of banks lobbying to rewrite the laws in their favor and a hundred billion dollar bailout that allowed banks to pay nearly $20 billion in bonuses for 2008.
My only question: If this plan is so great, why not bail out other industries and companies with the bad bank concept? Specifically, I'm thinking of non-paying eBay bidders.
I'm going to eBay to sell my old, dirty socks. I'm pricing them at $1 million each. I know that seems like a lot, but, perhaps, some drunk guy will stumble onto the listings and make the purchase. Of course, after the hangover, he'll probably regret bidding a million for the socks.
"But, I don't have a million dollars. I live in my camper," he argues. No matter. I can sell my dirty-sock-collateralized assets to the "bad bank," which is in search of toxic assets. The U.S. taxpayer can guarantee my profit. Then, it will be the government's loss to renegotiate a reasonable price for my old socks with the winning bidder. Maybe, he'll pay fifty cents. The taxpayer will make up the difference, one million less fifty cents to me. The winning bidder will be happy. He was able to renegotiate his error. No more going onto eBay while intoxicated!
Seriously, I'm watching as the government struggles to make the transition to digital TV. This transition basically amounts to getting people who watch over-the-air broadcasts to purchase an inexpensive converter box and, possibly, upgrade their TV antenna. If the government can't manage this transition seamlessly, how can we expect them to engineer a recovery to our recession?
There's a moral hazard to this bad bank foolishness. It rewards excessively greedy and foolhardy business decision-making. Isn't that what created this financial mess in the first place? Not paying attention to the underlying value of assets? A complete failure of the regulatory system?
The government will probably bail out these banks. Many of these credit card companies and banks have solid businesses as their core. If they enter bankruptcy, that underlying business value, freed from the "toxic assets," still has value, and somebody will purchase the banks. The current shareholders will be punished for not selecting directors who paid attention to the best long-term interests of the shareholders. The executives will be removed. But the underlying businesses will remain. Bankruptcy of the banks is the fair and appropriate free-market solution to their problems. Don't worry, the bankrupt banks will still continue sending out your credit card bills promptly!
Investors might want to take a close look at the banks. If the government is going to clear them of toxic assets, they might be prime candidates for "turn around" investments. In eight to ten years, they should be doing just fine. Of course, the market at least partially recognizes this. But, what about the unrecognized value in toxic socks? The next bubble? Dirty Sock eBay Barons unite. We need a lobby.