Monday, February 16, 2009

$ 9 Trillion of assets exists within the Top 4 US banks...but NYT article says FDIC struggles to manage just $ 15 billion

Combined, the two articles below make an inadvertent, but important, point. There seems to be a "scaling error" being made by many economists and other experts. Engineers have developed methods to prevent bridges from collapsing and computer systems from crashing due to scaling errors. Biology also has lessons on scale. A mouse cannot be scaled to the size of an elephant without a "re-design". The legs (even if scaled up proportionally) will collapse. Things that seem to work on a small scale do not necessarily translate when done on a larger scale.

Some economists apparently have no such methodology.

Here is the central concern: According to the second article, the 4,800 or so FDIC employees are "struggling to manage $ 15 billion worth of property left from failed banks". If this is true...how is the government going to manage the $ 9 trillion plus contained within the 4 largest banks as Roubini and others suggest? That's an instant six hundred fold increase in assets that the government would need to be ready to handle. Many of these assets are held in entities located outside the US. Where's the army for this going to come from? Does anyone doubt it would be a bit unwieldy to manage?

First article from NYT

Failed Banks Pose Test for Regulators

"...the agency, which had shrunk to a relatively tiny 4,800 employees from as many as 15,000 in the last period of bank meltdowns in the 1990s, is in the midst of a military-scale buildup as it undertakes one of the greatest fire sales of all time.
The agency is frantically calling in retirees and holding job fairs, looking to hire as many as 1,500 people. It has rented a high-rise office building in Irvine, Calif., the new headquarters for a West Coast branch of 450 employees who are wrestling with a real estate crisis in one of the hardest-hit regions. It is also budgeted to pay hundreds of millions of dollars for a small army of contractors to augment its staff."
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Second article from the Washington Post

Nationalize the Banks! We're all Swedes Now


"The government should start with the big banks that have outside debt, and it should determine which are solvent and which aren't in one fell swoop, to avoid panic. Otherwise, bringing down one big bank will start an immediate run on the equity and long-term debt of the others. It will be a rough ride, but the regulators must stay strong. Second, immediately nationalize insolvent institutions."

For a variety of reasons, I'd argue that as a result of these large scale nationalizations, the remaining US banks would also fail so even more resources would actually be required.

Adam

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