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BAC Bank of America Corp
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BAC Bank of America Corp

  #41 (permalink)
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I think this is most interesting. Those that stand on the side of libertarianism and those that stand for regulation. Now you have a TBTF bank and what is the point of having corporations that are too big to fail if everything gets wiped out in-between?

If you stand for completely free markets, how can certain entities not end up TBTF? If Microsoft wouldn't have been stopped, they would own yahoo, google, facebook and every other possible tech company at one point. Is that fair etc..

Interesting argument.

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bluemele View Post
I think this is most interesting. Those that stand on the side of libertarianism and those that stand for regulation. Now you have a TBTF bank and what is the point of having corporations that are too big to fail if everything gets wiped out in-between?

If you stand for completely free markets, how can certain entities not end up TBTF? If Microsoft wouldn't have been stopped, they would own yahoo, google, facebook and every other possible tech company at one point. Is that fair etc..

Interesting argument.

I think the TBTF concept is very interesting. I agree with the thought of Microsoft. I guess the underlying issue is how are these companies earning their revenues and what is the impact on the economy as a whole. Obviously the point with Microsoft is their revenues are comprised mainly from the products they make. The leverage used to makes these products is probably non-existent (correct me if I'm wrong there) whereas with a financial institution, their revenues are derived from transacting in money with the use of high leverage while being closely intertwined with other financial firms. From a risk to the economy stand point, which of these institutions would have a higher likely hood of getting into trouble and bring the house down eventually?

So what I'm referring to here is if a large tech company were to go out of business what would be the economic impact on the country(ies)? Loss of jobs, tax revenues, technology products, revenues for other firms that work with this tech company, shareholder equity? There could even be a disruption in the stock market for a short period of time if the firm's stock is listed in a major index, etc. It could also bring in concerns about other closely related companies for a short period of time.

If a TBTF bank were to go down the impact would be more devastating to the economy because of all the leverage and cross exposure with the other banks. So the impact would be loss of jobs, tax revenues, financial products, FDIC deposit fund being wiped out, shareholder/bondholder loss, global stock market disruption, risk of bringing other banks down with derivative exposure to this bank, certain derivatives markets go bid-less, disruptions/freezing in the credit markets, disruptions in the currency markets, disruptions in global payments/clearing and so on.

To me, it seems the banks are just too much of a risk to the global economy at this point vs. other non-financial firms. I think something needs to be done ASAP to reduce their size and power.


Last edited by Private Banker; October 23rd, 2011 at 01:15 PM. Reason: Typo
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Private Banker View Post
To me, it seems the banks are just too much of a risk to the global economy at this point vs. other non-financial firms. I think something needs to be done ASAP to reduce their size and power.

Just curious what the next few paragraphs would look like --- what specifically can be done, something that is realistic? The banks aren't going to agree to become smaller on their own.

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Big Mike View Post
Just curious what the next few paragraphs would look like --- what specifically can be done, something that is realistic? The banks aren't going to agree to become smaller on their own.

Mike

They would be a lot smaller if the if the sub-prime mess had been allowed to play itself out...

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Lornz View Post
They would've been if the if the sub-prime mess had been allowed to play itself out...

So your solution is basically wait for the next bubble to collapse and they will fix themselves? I am not so confident, I think BAC failing will lead to many other failures. I can't see a solution that doesn't involve some sort of bail out, even though I strongly oppose a bail out.

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So your solution is basically wait for the next bubble to collapse and they will fix themselves? I am not so confident, I think BAC failing will lead to many other failures. I can't see a solution that doesn't involve some sort of bail out, even though I strongly oppose a bail out.

Mike

There are many solutions aside fron giving banks money to cover their losses.

Nationalizing the assets, sorting them out and auctioning them, e.g. The banks were insolvent; There are no valid reasons to artificially inflate private corporation, but the whole system doesn't have to collapse either. We did it here in Scandinavia 20 years ago, and "we" avoided most of this crisis.

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Lornz View Post
There are many solutions aside fron giving banks money to cover their losses.

Nationalizing the assets, sorting them out and auctioning them, e.g. The banks were insolvent; There are no valid reasons to artificially inflate private corporation, but the whole system doesn't have to collapse either. We did it here in Scandinavia 20 years ago, and "we" avoided most of this crisis.

Yes, that would be an interesting proposition. It would be great if a Republican got elected and then had to nationalize the banks. I would be laughing till I was 50.

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Big Mike View Post
Just curious what the next few paragraphs would look like --- what specifically can be done, something that is realistic? The banks aren't going to agree to become smaller on their own.

Mike

I would imagine there are a few things that could be done but like Lornz mentioned, following some sort of Scandinavian style work out makes sense. Sweden broke down the large banks via pre-packaged BK and created good banks/bad banks. Taking all the good assets and placing them with the good banks and the bad with the bad. The bad banks assets were auctioned off or just sat there while the good banks were able to recover and create a healthy base again. I believe Norway nationalized their banks while Sweden just sort of mandated what the banks were to do. Maybe Lornz can confirm that.

The thing is BAC will probably not have the option of saying yes or no. I would think they get to the point where they are on the verge of failure and that's when they should be broken up ASAP if not sooner. The issue is what are their underlying assets? There's been a huge uproar about the amount of derivatives they have. But I'm almost certain not all of the derivatives are just the CDO/CLN/CDS type. Don't get me wrong, I'm sure they have way more of that than they should have which will be their demise but a lot of bank's derivatives are also in FX Swaps which aren't the toxic type we're concerned with. Unfortunately, BAC has hid all of this from us so it's hard to decipher. But my point is, there should be a bad bank set up that can "swallow" the bad assets and attempt to unwind whatever they can and auction off whatever will get a bid which will be pennies on the dollar of course. The bad bank would be more or less a private fund vs a traditional bank. Then the good assets could be used to create a new bank that is far smaller and less complex as far as underlying assets and liabilities. Just a thought of course and Bernanke will inherently do the wrong thing but you'd think the guy learned by now.

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And who pays for the bad bank?

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Big Mike View Post
And who pays for the bad bank?

Mike

Without getting extremely complicated, the bad bank could be funded/paid for from the original bank from an equity raise or debt sale with the equity in and supporting collateral being the good bank. The bad bank would then purchase the bad assets (for pennies on the dollar) from the good bank and look to unwind and/or sell them to the highest bidder. It's obviously a big process that would take place but that's the gist of it.

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