Banking Law

About a year ago, Citibank CEO Vikram Pandit floated a trial balloon during Congressional testimony that turned out to be made of lead. Pandit suggested that one way to deal with toxic assets on the balance sheets of banks was to mark them to market and let the banks amortize the losses against earnings over a ten-year period, rather than take an immediate hit to capital. Having come from Pandit, who became Sheila Bair's red-headed step child, the trial balloon went nowhere fast. Instead, Congress gave us the fabulously successful TARP CPP and its progeny, which most recipients have tried to pay back as fast as they've been able, due mainly to bank-bashing by members of the same Congress that voted to give banks the money in the first place, and to Congress changing the rules of the game after the banks took the capital investments.

The only serious analysis of Pandit's idea in the blogosphere that I've read was done by Vinny Catalano at Minyanville. A year ago, Catalano set forth a proposed plan for implementing the amortization that would have used a Public/Private Investment Bank to buy "toxic assets" from banks. Obviously, such a plan had no chance of going anywhere and wouldn't have anymore of a successful chance of flying today, since no one was willing to suffer the political risk of trying to price toxic assets and let the government take the risk that whatever price they established was too high. "Bank bailouts" with tax dollars are a train that left the station a long time ago and they aren't ever coming back. On the other hand, the very last commenter to Catalano's post, Erik Sebesta, had an idea then that could work now.

Why transfer to the PPIB if the suggested amortization accounting rule gives the bank the help it needs? Better to keep the toxic assets with the bank which has the highest motivation to sell for a good price.

That makes sense to me. The banks would use existing accounting rules to do what Sheila Bair's been yapping at them to do: "get real" about establishing losses on commercial loans. Instead of having to take immediate massive write-downs to their capital, however, they'd be allowed to write down only 10% of the loss currently and amortize the remainder over the next decade. It's likely going to take them (and their borrowers) the next decade to work their way out of most of their troubled commercial loans anyway, so I'm not sure the amortization period is unsupportable. It's not the 25-to-40 year amortization period that the regulators allowed in the "supervisory goodwill" cases of several decades back.

I'm not thinking of "too-big-to-be-accountable" banks or of the radioactive CDOs or MBSs on (or barely off) their books. Instead, I'm thinking of the community banks that the FDIC has been exterminating like Kulaks in the Ukraine circa 1932, the little guys loaded up with commercial real estate and C&I loans they made to local businesses. You know, the George Baileys that Arianna Huffington wants to smother with warm kisses. How about we see if maybe instead of kicking the can down the road solely for residential loan borrowers, we try to save a few of the banks the FDIC is supposed to be watching out for and, perhaps, save some jobs while we're at it. A ten-year amortization won't save everyone, but I think that it will save many.

I haven't given this any more thought than the few moments I've been able to steal from my billable hour servitude to "The Man," and certainly little of lasting value is likely to arise from a cerebrum the size of a walnut. Nevertheless, why not have the giant intellects housed with the bank regulatory agencies explore this simple idea and see what merit it might have now that a sufficient time has elapsed to ensure that it is torn from its Vikram-like roots and now can be considered Pandit-free? Since banks are required by law to use GAAP, such a scheme may very well take a new act of Congress, and that might be difficult in light of the current bout of self-flagellation over health care reform being fought out in D.C. Again, however, unless the FDIC truly has a plan to murder two thousand or so banks in order to make its job easier to perform, what have we got to lose by at least giving this more than a passing thought?