The Geithner Approach

Calculated Risk has a great post with graphs, illustrating Tim Geithner’s plan to stabilize America’s financial system into a constellation of zombie banks and welfare queens.

The Geithner approach is to keep injecting capital into the banks to cover the losses. This is known as the “Zombie” bank approach.

In essence the balance sheet looks like this with liabilities greater than total assets. To make the zombie balance sheet “balance”, I’ve added “??????” to the assets.

These “??????” assets are either future retained earnings or additional money from the government. Although the bank is balance sheet insolvent, the bank will never be business insolvent because the government will continue to provide money to cover losses.

via Calculated Risk: Bank Balance Sheet: Liquidity and Solvency, Part II.

A “Part I” is also available,

3 thoughts on “The Geithner Approach”

  1. I call these people Hee Haw economists – nothun’ but doom and gloomin’, no luck at all, diehard pessimists on whether anything will ever get better.

    In short, they’re worthless.

    First, more capital from the congress is a nonstarter. They won’t do it. C has a deal to convert taxpayer preferred to common which should close in the next couple of weeks. That will dilute existing shares. It will also add to C’s capital. I’m not certain C is the bank that “failed” the stress test. Could be in better shape than people realize.

    Geithner could do this with other banks throughout the year if they are unable to raise private capital. If the economy shows signs of continued stabilization, then the banks will be able to raise private capital. You can sense that Goldman Sachs and JP Morgan are chomping at the bit to ride roughshod over weaker rivals.

    He could also allow some TARP recipients to repay their loans, and that would make that money available if some banks need additional capital.

    Nobody questions the silly logic behind the PPIP “put”. There are holes big enough to sail cruise ships through it.

  2. s.,

    I call these people Hee Haw economists – nothun’ but doom and gloomin’, no luck at all, diehard pessimists on whether anything will ever get better.

    If I understand you, you cannot argue with the factual case that CR presents, so therefore you insult that blog?

    First, more capital from the congress is a nonstarter.

    Congress may already be out of the loop anyway. For instance, the Chrysler bankruptcy presents a new opportunity for Treasury to launder money to the zombie institutions and welfare queens. [1]

    I’m not certain C is the bank that “failed” the stress test. Could be in better shape than people realize.

    While Geithner continues to keep the details from the public or the investment community as a whole, we know already that Citi is short of capital.

    Of course, this will not be used to zero-out Citi’s shareholders and put Citi into receivership. They are too politically powerful for that to happen.

    Geithner could do this with other banks throughout the year if they are unable to raise private capital. If the economy shows signs of continued stabilization, then the banks will be able to raise private capital. You can sense that Goldman Sachs and JP Morgan are chomping at the bit to ride roughshod over weaker rivals.

    Goldman Sachs has already received $13+ billion in no-string grants from the federal government. Unlike Citi, they managed to receive most of their bail-out money funneled through third-parties. Citi may have lobbyists, but GS had a Treasury Secretary.

    You better not criticize Goldman Sachs too much, though… [4]

    [1] http://www.freep.com/article/20090430/BUSINESS01/90430073/1118/RSS
    [2] http://www.tdaxp.com/archive/2009/04/28/more-money-to-citi-shareholders.html
    [3] http://www.tdaxp.com/archive/2009/03/29/welfare-queens.html
    [4] http://www.tdaxp.com/archive/2009/04/12/goldman-sachs-sues-critic.html

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