The Urgent Financial Crisis Facing Obama

Washington's grandees clearly had better things to do this past weekend than orchestrate another bank bailout. Which is bad news for Ken Lewis: Bank of America is down 17% in early trade, at less than $6 a share -- the bank has now joined Citigroup in trading on option value alone. This is not a sustainable state of affairs -- as Tyler Cowen says, "banks don't function well at low levels of capitalization".

Tyler asks "whether government ownership will succeed in building up a greater capital cushion for the banks": the answer, surely, is yes -- or, at least, government will be better at that than if the bank stayed in the private sector. For one thing, government won't feel the need to draw any dividends, and for another, a nationalized bank's cost of funds falls sharply, and it becomes, overnight, the most trusted counterparty in the banking system. But the biggest reason is that the government doesn't need to privatize the bank in exactly the same form as it was nationalized.

In any case, Tyler's questions about the number of years of profits needed to create the cushion of capital which is required for re-privatization are, let's say, not urgent. The imploding UK banking system and currency? That's urgent, not that the US government can do much about it. But it does seem that bank failures are washing around the world in much the same way as currency failures did in 1998 -- and the more banks that collapse overseas, the more that US banks are going to have to take multi-billion-dollar writedowns they simply can't afford. And remember too that what used to be Lehman Brothers is now Barclays, whose ADRs are down more than 40% this morning.

Posting is going to be light today: I'm going to be off trying my best to be hopeful while watching and celebrating the inauguration of Barack Obama. But the financial crisis facing him on day one is enormous, and it does rather worry me that we don't actually have a Treasury secretary right now, and won't for a while yet. There is a large number of very important decisions to be made, and the decision-makers have to be put in place now. Delay can only cause harm, at this point.

Update: It turns out we do actually have a Treasury secretary: his name is Stuart Levey. But he's not an Obama appointee, or part of the Obama economic team.