Monday, March 09, 2009

Bank Nationalisation? - purge them of Toxins first

Just a word on nationalisation of the banks.

It looks like a no-brainer. We own huge chunks of them already, we're going to buy more, the banksters are sucking their thumbs and playing with their bonuses instead of lending money, so why not go the whole hog and nationalise the damn things, so they are under our control?

Before we do, we need to know what it is we are nationalising.

RBS bought ABN Amro, then found ABN Amro was a corpse riddled with wriggling maggots of derivative debt. Lloyds bought HBOS, a child bride after which Lloyds had lusted for many months, only to discover that it had bought a festering heap of billions of pounds worth of derivative debt.

Do we, the taxpayer, want to be the next in line to find this reeking heap of putridity in our beds? I think you will find the answer to that question is no.

Do we on the other hand, want to leave it all to market forces, and let the financial system die the death? It is tempting to say yes to that, but when you consider the Depression of the 1930s and its knock on effects, it is clear that the only people who would say yes are the free market fundamentalists, who are blind to all external reality, because their gaze is fixed only on the shrine of their free market ideology.

So, no, anyone who does not want a Depression does not want to see the banking system crash big time.

Should we be insuring the banking system? Again, no, because of the ticking time bomb of toxic assets that they contain. We stand to lose every penny of the - what was it? £250 billion - that Darling has put behind the banks to insure them against losses.

So, do not buy banks, do not leave them to fail, do not insure them.

What then is to be done?

The answer is that the Toxic Assets must be controlled, accounted for, and neutralised. Their poison must be extracted from the body of the banking system.

This is not going to be easy, but it is going to be a damn sight easier than just letting them run to maturity.

These are the steps that can be taken:
  1. Pass a law to require all derivatives holdings to be registered at a central agency.
  2. Examine all holdings for signs of fraud (using the characteristics of the Madoff and Stanford frauds as indicators)
  3. Examine all holdings for signs of Ponzi schemes that only work if the market is expanding. Invalidate all Ponzi debts
  4. Find how much of the Toxics can legally be ascribed to negligent decisions of the chief executives of companies. Make said CEOs responsible for their mistakes, by bringing the debts back to the executives who decided to buy them. Said executives go bankrupt, and the toxic assets are neutralised by their bankruptcy.
  5. If you do not like this plan, think up a better way of neutralising the Toxic Assets, bearing in mind that their "value" is about 10 times greater than the gloobal GDP of the whole planet.
So if you want to nationalise the banks, go ahead by all means, but just make sure you are not nationalising an astronomical debt.


Jim Jay said...

I thought this was veyr useful - thanks

DocRichard said...

Thanks Jim - I'm honoured and pleased