Politico Arena

I will occassionally participate in Politico’s Arena. Today’s question was “In the wake of the stress tests, are you more or less distressed about American’s banks?”. I responded

If I were a shareholder in a large bank, I would be considerably less distressed today. If nothing else, the whole process reassures private investors that the Treasury and Fed are committed to handling the bank solvency issue in a way that is favorable to equity and bondholders. As a taxpayer, I remain concerned that their approach may not be the least costly or efficient alternative. In particular, I worry that if the banks do not succeed in raising the needed capital privately, we will have just substituted one form of nationalization (FDIC-style restructuring) with a worse one (the government as majority shareholder).

Although the results of the stress tests were as inflated as Ivy League grades, I am confident that that the process was very informing to regulators about the risks that remain. So I hope at least the Fed and Treasury will have a better idea about what steps will be necessary if the economy deteriorates significantly more than the rather mild “worst-case” scenarios used in the evaluation.

For the rest of the discussion, go to www.politico.com/arena.


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