CNBC is discussing Crafting a Bank Plan…No ‘Lehman Weekends’

While markets appear to be waiting for the hammer of government to come crashing down on the nation’s two largest banks, several government officials in interviews with CNBC on Sunday described a process in the works that is far more deliberative.

Some details will be made available this week, but parts of the plan will take weeks, months and even more than a year to play out as the Obama administration puts together a program that they hope will return banks to long-term health.

What is clear is that they are specifically trying to avoid “Lehman Weekends,” referring to the furious efforts in September when Lehman Bros. went bankruptcy and AIG was bailed out. Officials stressed that there were no separate meetings going on surrounding Bank of America or Citigroup specifically and that the two banks would be treated under the broad plan now in the works.

Neither bank has asked for increased government assistance and one official said such assistance is not needed at this time.

Officials would not rule out increased or even outright government ownership of large banks at the end of the process, but they say their intent is to avoid that outcome and that it is anything but certain. They say the government does not want to be running these companies.

If the banks end up in government hands, officials say, the intent would be to get them into private hands quickly and do so in a way that is not much different from how the Federal Deposit Insurance Corp. currently resolves bank insolvencies, which typically take place over the weekend. The extent of government ownership, they say, will depend on the size of the losses at the banks, the access of banks to private capital and how the recession plays out.

Said one high-level official, “I think the market is missing that the whole intent of this process is to show that the banks have enough capital for even worse outcomes than we currently envision and to show there’s a program in place to give banks access to that capital if they need it.”

My Comment: What the nameless high level coward really means is: “It is obvious that the banks do not have enough capital and there’s no program in place yet to give it to them. Furthermore the amount is too large and we are scrambling like mad fools to get something in place.”

Several officials conceded that they have done a poor job in explaining the process to markets and that markets have, understandably, spun the darkest possible outcomes in the absence of information.

My comment: What they need to do is tell the truth. Here is a good statement for to kick off a truth telling campaign: “The banking system is insolvent”.

New details on the so-called bank stress test could be made available as soon as tomorrow, officials say. This process will gauge bank capital levels under worst-case economic scenarios than are currently seen. Details on those scenarios are likely to be made public on Wednesday.

Officials say there will also be some information about the “capital-access program” that will explain how banks can obtain government capital in the event of worst-case economic scenarios. Separate details of the public-private partnership will also be made available soon, but the timing is less clear.

My Comment: $400 billion has been guaranteed to Citigroup and Bank of America alone, so what’s with this “In the event of worst-case economic scenarios” nonsense?

The key misunderstanding in markets, officials believe, is how the public-private partnership will work and the way that new government capital, in the form of mandatory convertible preferred shares will become common equity.

My Comment: How the hell can there be a “misunderstanding” where then has been no announcement?

One official said the public-private partnership will be voluntary so there will not be no mandate that banks offload assets at a loss. The official added that additional government capital will go into the banks as mandatory convertible preferred. Those shares remain preferred until realized losses and capital needs trigger conversion to common. As a result, the official said, the government may end up with a large stake in a given bank over a period of time, but it won’t happen overnight.

My Comment: Voluntary for who? It sounds to me it will not be voluntary for taxpayers who will have this crammed down their throats.

Look for taxpayers to get raped in this “public-private partnership”.

Mike “Mish” Shedlock
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