A Word About the Banks

If we hadn't allowed the big banks to get as big as they are, we would have probably seen an FDIC raid on the biggest of the banks already. But as we have so painfully watched over the last couple months, the government doesn't have that option. The big banks are so interconnected that we simply can't allow them to fail. Most of us know that part already.

The question is, where do we go from here? I have heard two excellent-sounding ideas from people much smarter than I am.

First, let me be clear. I am a trader. I get paid for managing risk and taking profits. I don't get paid for dreaming up ideas of how to save the world. There are other people that take care of that.

One of those smart people is Meredith Whitney. If you are not familiar with her work, she has done probably the most accurate analysis on the banks complete inability to reign in the children running them. Her suggestion is to do a non-punative capital injection into some of the smaller banks who stayed away from the mortgage garbage. These smaller banks would be able to leverage their stronger balance sheets and use the capital in an appropriate way (lending) like a real bank should. This would be different than giving it to a big bank like Bank of America so they can pretend to be solvent. Simple solutions are brilliant.

The other excellent idea is to take care of the Level 3 assets on the books of the big banks. The current problem is that the banks refuse to sell them. It is not because there isn't a buyer. If the banks sold the Level 3 assets on their books, there would be a real price for them and the ig banks would get exposed for how truly insolvent they are. In this case, the government would buy the assets at par. They would hold them until maturity and when the true value is known years from now, the banks reimburse the government for the difference between par and the ultimate cash flow value of the asset at maturity.

Neither of these are my ideas, however I think they are pretty intelligent. Of course, nothing like this will truly happen in any TARP, or stimulus or any of the other government measures coming down the road. Don't think there's more coming? You're crazy. No government will waste a good crisis like this. This is a great time to take more power and money from the constituents right from under our nose. Keep this in mind in the market this coming week. Until next time, stay low risk..