A simple primer on the banking crisis

The more I learn about the $750 billion bailout of derivatives, tranches and collateralized debt obligations, the more I think about drunks. The true drunk will do anything to keep drinking. Cheat. Steal. Betray. No one is above his treachery. He will destroy his family to get the next drink. On a binge, he will spend the wealth it took his family generations to accumulate, right down to the treasured mementos. He can be clever, fun, charismatic. Behind this mask he is a monster. At his most destructive, he wraps his addiction in layers of complexity and opacity, which non-drunks would simply call lies.

Substitute "banker" for "drunk" and I think we have a better understanding of the mess we're in. Consider State Street Bank. Its shares plunged 59 percent Tuesday as it revealed previously "unrealized losses." That's the drunk telling his wife he's wiped out the family savings. Citigroup and Bank of America shares are cheaper than value meals at McDonald's — territory we saw with the late Washington Mutual on the way to failure. That's the drunk in the gutter. The difference is they don't know they've hit bottom and must fundamentally change. They just want another drink.

They call it capital, and the last bar open is the federal Treasury.

Pawn shops operate by higher standards, so the bankers can't go there to get drinking money in exchange for a derivative of the family silver. Not so the Treasury and Fed, which are the equivalent of AA has been run by other actively boozing drunks. Outgoing Treasury Secretary Henry Paulson led Goldman, Sachs, one of the biggest and most influential Wall Street players. No wonder the hundreds of billions of "rescue" dollars and perhaps trillions in secret "lending facilities" by the Federal Reserve have failed to sober up the system. Banks aren't lending. Credit is stuck. Bankruptcies and foreclosures are hitting record after record. These experts tell us the bailout "stabilized" the system. But the drunk is clever. He lies. If the "bleeding has been stopped," why is the financial system still in crisis? True, another drink momentarily stabilizes the drunk.

Some things are clear. For example, a vast amount of national wealth is simply gone. Along with the declines in housing and 401(k) values, this will leave us a poorer country. The taxpayers will likely never get back the "investment" made on their behalf into the banks. Now plans are being floated to sink tax money into buying convertible securities to shore up these phantom balance sheets. The drunk bargains — anything to get the next drink. These securities would be converted into common stock — so the taxpayers, as unwitting common shareholders, would be screwed when the banks finally failed.

Today the tax-dodging Treasury Secretary-designate Timothy Geithner is urging "fundamental reform" to the TARP program as he tries to gain Senate confirmation. Nevermind that he was one of the TARP architects as president of the New York Fed. “Many people believe the program has allowed too much upside for
financial institutions," he said, "while doing too little for small business
owners, families who are struggling to keep their jobs and make ends
meet, and innocent homeowners. We have to
fundamentally reform this program to ensure that there is enough credit
available to support recovery.”

The high-functioning drunk is an especially effective bargainer, a master manipulator. "I've changed, babe." "I'm doing this for us!"

The shattering reality is that the financial system was allowed to become a vast Ponzi scheme over many years. In addition to being allowed to create assorted swindles and the housing bubble, it consolidated itself into "institutions that are too big to fail." Now it has a gun to our heads. Nobody really knows how to fix it, either because they are creatures of the business-school orthodoxy that made the mess, or because the pain of real reform would be too great. Much of what these troubled balance sheets represent is worthless — many of the exotic "investment vehicles" such as derivatives — or worth less. Far less. The banks stuck with tract houses in Maricopa want taxpayers to buy them for the inflated "value" on the books, instead of what they're really worth in the marketplace (not much, baby).

Real reform might established a controlled, structured bankruptcy process for the giant banks. The real shareholders are wiped out, and maybe next time we'll get corporate governance with integrity and serious regulatory oversight. Depositors will be protected; the bank part of these "banking corporations" will operate as before. Other business will continue, as with any corporation in Chapter 11. Then a reorganization will occur, shearing off the trillions in worthless swindles, so that real banks can emerge. And I mean banks — never again would such large institutions be allowed. Good community banks could take over some real assets and operations; others could be spun off. The giants would be broken up. Some top executives would go to prison. But we will all suffer.

This is the kind of real pain that will be necessary, one way or another, to get past this. The damage done to the American economy by these MBA criminals is real. We have only begun to pay the piper. And so far, the drunks are still desperately hiding bottles, talking of redemption, kiting checks, promising to do better.