America’s Banks Need to Hold a Yard Sale

Financial Times (UK) ^ | 1/21/09 | Meredith Whitney

[marshmallow]

A clear lesson learnt from this credit crisis has been to sell and sell early. However, it appears as if US banks are setting out to make some of the same mistakes of the past 18 months all over again. In many instances, those mistakes determined who survived and who did not.

Throughout 2007 and 2008, when I asked managements why they were not more aggressive in disposing of assets, the common answer I received was that they believed current prices were too distressed and did not reflect the true underlying value. Unfor­tunately, the longer they waited, the less these assets were in fact worth. Such a strategy cost Merrill Lynch and Citigroup more than half of their per share capital. In the case of Lehman Brothers and Bear Stearns, capital all but vaporised. These are just some examples but in reality this applies to too many financial institutions.

[Secret Agent Man]

Here’s what they must do.

1. Not be forced to make sh1tty loans to people with terrible credit ratings (and especially if they defaulted on a prior loan).

2. Not be allowed to treat loans as portfolio investment vehicles.

3. Not be allowed to sell more than a certain percentage of their loans to other banks, or have a large amount of holdings concentrated in such loans.

4. Not be allowed to create instruments such as CDOs and credit default swaps (ie not play the future’s market on loans like they are stocks).