No Escape for USA

Some people have asked for comments on the financial crisis. Well, I've audited and worked for most of the banks involved; so here goes: Simply put, the government doesn't know what it's doing. Neither do the banks, of course. Not that I know what I'm doing either: but no one is dependent upon me---luckily for them. Let's take a small example: the US Treasury set up the Troubled Asset Relief Program (TARP) because banks were undercapitalized and illiquid. The idea behind TARP was for Treasury to acquire bank's bad assets: loans; hence the name TARP. Of course, it didn't do that; instead the Treasury purchased bank preferred stock, convertible to common with warrants to purchase more bank common stock. As soon as Treasury placed some restrictions on executive compensation, the more solvent banks (J.P. Morgan Chase, Goldman Sachs and others) decided to repay immediately monies received from Treasury, plus interest. The government, being the government, announced success---TARP succeeded! The other less solvent banks will convert the government's preferred stock to bank common stock, making the government the largest shareholder. Of course, if they couldn't repay the TARP funds taken, it would mean that any non-repayer was practically insolvent so their common stock is worthless. But let's look at the institutions who do repay because their executives want their bonuses. The reason that government got involved is clear; if government didn't get involved, and as USA is a credit economy lead by financial institutions, government must fall along with all its banks. The reason government got involved was and is: its own self-survival. Reasonable enough. But the early repayment of funds actually worsens the situation. Everyone now knows which banks are truly insolvent: those that could not repay the TARP funds. Those that did, did so; so that they wouldn't be subject to compensation restriction: multi-million dollar bonus will live on. Nothing has changed. Systemic failures shall still occur because all those bad assets have not gone away.