Robert Stein 1924-2014

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Thursday, April 09, 2009

Backseating-Driving the Banks

After its vaunted stress tests, the Obama Administration is telling us, through unnamed officials, that banks are "in better shape than many people think" but will "probably need to be bailed out again, either by private investors or, more likely, the federal government." After billions of taxpayer bailout, some still need more capital.

The picture of Treasury hovering over American banks with constant questioning and advice, like a backseat driver, is not reassuring. It recalls a time when I had to explain to a lifelong politician turned company president why Time Magazine had called him an "amateur":

If a division head is doing well, the president should support him; if not, replace him. Anything else is like having people sitting next to the coach during a game whispering advice into his ear. That looks amateur.

The banks these days need supervision, especially over the use of taxpayer money, but, according to the New York Times, "it is becoming increasingly clear, industry insiders say, that the government will use its findings to press certain banks to sell troubled assets. The hope is that by cleansing their balance sheets, banks will be able to lure private capital, stabilizing the entire industry.

"In some cases, however, the investments of existing shareholders could be severely diluted by large sales of new stock.

"Some of the banks could also face more stringent restrictions on employee compensation or be ordered to change their boards or management. In extreme instances, the government could wind up taking larger, perhaps even controlling, stakes."

From the cheap seats, this kind of piecemeal supervision by pressure and without public disclosure looks amateur--nationalization by slow drip--and creates a no-win situation for taxpayers, blaming government interference for failures, no matter how badly individual banks are managed.

Within the limits of not creating public panic, the bank bailout could use a lot more Obama transparency and less of the traditional "trust us" secrecy by the Treasury, Federal Reserve and FDIC.

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