Smart, gracefully-written and elegiac piece by Frank Partnoy in the weekend Financial Times wherein he rightly points out that it’s long past time to bury most of the major U.S. banks.
The bottom line is that, given declining assets and increasing liabilities, many – perhaps most – big banks are essentially insolvent and have been for a long time. It is incredible that they lost so much money on derivatives but even more amazing that they stayed alive for so long afterwards.
The banks’ fate was sealed in early 2007, when the value of derivatives linked to subprime mortgages collapsed. A year ago, the crucial triple B rated mortgage instruments that were the surgical focus of the banks’ bad bets had already declined by three-quarters. At that time, some hedge fund managers concluded that the banks were insolvent and took short positions. The smart money said the banks already were dead, or at least close.
Although sophisticated investors recognised early on that this crisis was about solvency, not liquidity, and that the liquidity crunch arose from fear that banks could not repay their obligations, others came to this view more slowly. The last, as usual, were the credit rating agencies. On Friday, they finally rose to the pulpit to give Citigroup and Bank of America an overdue eulogy, cutting their ratings. Just as their last-minute downgrades of Enron nailed its coffin, these also might be the end, at least for Citigroup.
…Government intervention, like modern healthcare, can prolong the inevitable, but only for so long. Soon we will bury more banks. Their children will survive but they will not. The massive government intervention of recent months merely provides a financial hospice, to give us time to say goodbye.
Originally published at Paul Kedrosky’s blog and reproduced here with the author’s permission.