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When Banks are “Too Big to Fail” – Lessons from the Past – FDIC and RTC

Posted on Mar 5, 2009 in Uncategorized

The USA had a banking crisis in the 1980s.  I lived through it.  I helped banks deal with it.  At that time, over 2000 banks and savings and loan associations failed.  Chaos ruled.  We got through it.  Back in 2002, I presented a paper to the Asian Institute of International Finance in Hong Kong about the United States’ experience during those years.  In 2002,  we were thinking about how China could deal with privatizing its State Owned Enterprises.  Today, we need to figure out how we will “reprivatize” our soon-to-be State Owned Banks.  We’ll be posting that paper here at Lakelaw under “Resources.”

In case you haven’t noticed, FDIC is back in gear.  It is running IndyMac and WaMu. Bridge banks are happening again. 

We were talking about systemic insolvency in 2002.  It has happened before and it will happen again.  The point here is that systemic insolvency can’t be resolved without massive governmental intervention.  We all hate to hear that but it’s true.  Without private capital, it’s up to all of us to clean up the mess.  And it’s up to all of us to sacrifice to clean up the mess.  

Sooner or later, there must be a separation of the “bad assets” from the “good assets.”  The “bad assets” must be marked to market and cleared.  Only then will a new market be established and growth be possible.

I have heard it said that the economy is frozen.  I think of my computer when it has frozen.  You have to reboot.  To carry the analogy one step further, the motherboard might be OK but we certainly need an upgrade in the CPU.  And we do need to reboot.  Paralysis is not an option.


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