Posted by Jim Lindgren:
America needs to hold a yard sale.
http://volokh.com/archives/archive_2009_01_18-2009_01_24.shtml#1232678849
Investment Guru Meredith Whitney has an article [1]arguing that the
banks need to sell off their assets:
America�s banks need to hold a yard sale
A clear lesson learnt from this credit crisis has been to sell and
sell early. However, it appears as if US banks are setting out to
make some of the same mistakes of the past 18 months all over
again. In many instances, those mistakes determined who survived
and who did not.
Throughout 2007 and 2008, when I asked managements why they were
not more aggressive in disposing of assets, the common answer I
received was that they believed current prices were too distressed
and did not reflect the true underlying value. Unfortunately, the
longer they waited, the less these assets were in fact worth. Such
a strategy cost Merrill Lynch and Citigroup more than half of their
per share capital. In the case of Lehman Brothers and Bear Stearns,
capital all but vaporised. These are just some examples but in
reality this applies to too many financial institutions.
Throughout 2008, hundreds of billions of dollars were raised to
recapitalise US financial institutions, but this money simply went
to plug holes created by holding on to assets with declining
values. Until the fourth quarter, monies were raised from willing
investors. However, beginning in the fourth quarter with troubled
asset relief programme capital created to recapitalise these
institutions, US taxpayers became the default investors.
Now, when the average taxpayer finds him or herself overextended,
he or she is forced to backtrack and, in situations of duress, sell
stuff (otherwise known as a yard sale). In these cases, selling a
set of snow skis for $15 or a prized record collection for $10 is
not desirable but is necessary. Why should the US taxpayer be
forced to fund behaviour that he or she would never have the luxury
of indulging in?
Citigroup provides a prime illustration to support this argument.
Last Friday, Vikram Pandit, Citigroup�s chief executive, stated:
�We are not in a rush to sell assets.� This comes from a company
that has incurred more than $51bn (��39bn, £36bn) in writedowns
and has called upon more than $45bn in Tarp money from the
taxpayer. At a minimum, this seems like a company currently
operating under a different rule book from that used by taxpayers.
. . .
While it is never pleasant to sell one�s �crown jewels�, the strain
of this credit crisis and the overextension of many bank balance
sheets will require that they sell what they can and perhaps not
what they would like. After all, that is what the average taxpayer
would be forced to do.
I think that the US government should have a yard sale too, starting a
multi-decade process of selling off public land, perhaps selling a
tenth or a hundredth of a percent of holdings every year for a
century.
After all, the federal government [2]owns over half of five Western
states and over 40% of nine states:
1. 1. Nevada 84.5% 2. Alaska 69.1% 3. Utah 57.4% 4. Oregon 53.1% 5.
Idaho 50.2% 6. Arizona 48.1% 7. California 45.3% 8. Wyoming 42.3%
9. New Mexico 41.8% 10. Colorado 36.6%
It�s time for America to start an annual yard sale of stuff for which
the government has little use. This has the ancillary positive effect
of reducing excessive government power over its citizens and
resources. Does the government really need to own 45% of the state of
California?
References
1.
http://www.ft.com/cms/s/0/d742ba70-e7da-11dd-b2a5-0000779fd2ac.html?nclick_check=1
2. http://volokh.com/archives/archive_2008_12_07-2008_12_13.shtml#1228979110
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