My Bank Needs a Bailout

23 Mar

My Bank Needs a BailoutSo I own a bank.  It is worth $10.  I put in $2, and I have an investor, Bill, who put $8 into his savings account.  $2 + $8 = $10 = my bank’s worth.  I give Bill 2% interest on his $8, so he is making a little money.  Thankfully, Danny (our community’s rich man) wanted a new plant, so he took out a loan for $10.  He pays me 4% interest, so all in all, I’m making 2% per year.

The problem is that Danny quit paying his monthly payment.  Danny lost his job, and doesn’t really care about paying his bills, so I’m not getting my money back.  That wouldn’t be a problem unless Bill decides to withdraw his money from savings.  Unfortunately, Bill is scared my bank is going under, so he asks for $5 of his $8 back.  The other $3 is guaranteed by the government.  I can’t pay it, because I gave all my money to Danny.  For lack of a better word, I’m screwed.

I guess I could really use a government bailout.  What some people don’t seem to understand is that if the government gives me another $5, I’m not just going to lend it out, because I need it to back Bill’s investment.  If I lend it out, I risk being back in the same place I am right now.  People in Congress are pissed because they gave me all this money and I’m not willing to lend it out, but I’d be stupid to lend it out.  This isn’t working.

So what else could we do?  Well, I guess we could follow the conservative viewpoint and let my business just go under.  That, however, isn’t good for Bill, because then he will never get his money back.  So my bank wants one of two things.  Ether private/public investors buy up all of my ‘toxic assets’, or a temporary government take over.  I know that more government spending is a big no no for many, but I really think it is our only option.

What the Obama Administration laid out today, would be more or less private and public investors bidding on many of the bad assets the banks currently own.  This could work, because really those ‘toxic assets’ are only toxic while the market is bad.  If they were refinanced, and the housing (or plant in my situation) market began to grow (no pun intended), many of those assets would be worth quite a bit.  The biggest issue I see with this plan is finding the balance between paying too much for the assets and paying too little.  If they pay what the assets are actually worth today, the banks will take far to big of a hit, and never be able to recover. If they pay too much, the government will be losing too much tax-payer money, and private investors will never join in.  If we can’t get the private investors, the government would be wasting its time and money.

The other option is for the Feds to just buy my bank, buy out all of the ‘toxic assets’, make the appropriate changes, and sell it back to me within a very short amount of time.  They would only need to own the back long enough to deal with Danny’s bad loan, which if organized properly, would be done in about 24-48 hours.  Here is where I see this plan getting complicated.  The government can’t buy my bank one day, and the other bank the next.  Once they buy mine, everyone will get scared and pull all the money out of the other banks.  They need to buy them all, at the same time, and all without anyone knowing it is going to happen.  If people knew that it was coming, they would rush the banks.

I think that everyone agrees the failure of all the major banks would be detrimental.  The key is how to prevent that from happening.  The Obama administration now has a plan, I guess we will just have to wait and see if it works.

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One Response to “My Bank Needs a Bailout”

  1. Justin March 23, 2009 at 9:55 am #

    Solid micro-level analysis…not as profound as your “feril kittens” piece – a piercing and insightful work that transcends time and space and from which I am still recovering – but well-written.

    My only qualm (probably b/c I am uninformed) about the Obama plan is that it depends – in the words of the Treasury Secretary – on banks “doing the right thing socially.” Geitner (sp?) admits that the only reason banks will participate in this is becuase they “should for the social good.” I’m not convinced.

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