Michael Gracie

Jeffrey Miron opines that instead of accepting a bailout, banks facing failure should opt for bankruptcy filing instead:

Bankruptcy does not mean the company disappears; it is just owned by someone new (as has occurred with several airlines). Bankruptcy punishes those who took excessive risks while preserving those aspects of a businesses that remain profitable.

Further, Chapter 11 passes restructuring risk to willing participants - those motivated and capable of adding new value to the business, whether it be capital, brainpower, or in most cases both. As banks go, I am not sure who understands the credit derivatives transaction chain well enough to take on such contingencies (but I’m am certain they exist), and court-supervised reorganization does allow for due diligence time if the entity can hold out (often assuming debtor-in-possession financing is available too, which could be questionable in this credit environment).

Outside of the banking crisis, Forbes notes it is never a bad idea to be prepared:

If you feel your business may be facing financial distress, meet with a work-out attorney now, before it is too late and your business becomes another statistic.

What Forbes doesn’t tell you is that once in Chapter 11, you’ll be faced with a myriad of financial and operational decisions that can become, to put it mildly, emotionally overwhelming. Add that in a reorganization you will be required to prove the business is worth more alive than dead, meaning get ready for a ton of strategy shifting and number crunching.

Editor’s Note: If you need someone who can stay alert during the trauma, priming objective decision making and spreadsheet mashing during trying times, contact me. I’m not only capable - I actually enjoy the stress. And I have plenty of references, both professional and personal, that can attest to the effectiveness of my candor and elbow grease.

Because bankers are people too

• Due to the weekend, you get Friday’s bank failure today. Note that is the fourth this year.

And in the new blood and (probable) golden parachutes category:

• Washington Mutual loses its chairman.
• And Wachovia’s CEO is out.

Sadly, the cynical one covered his banking shorts a couple of weeks back, assuming the Fed’s next move would be to allow US citizens to print their own money.

Derivative headline for a derivative world.

Was discussing the same idea with a colleague just this morning…

And if another investment bank were to fall like Bear Stearns, there are no more J.P. Morgans to pick up the pieces. In addition, counting on foreign countries’ investment funds may be problematic, as many politicians balk at the fact that all but one sovereign wealth funds are from countries without a democratic system.

For the better part of a year there’s been play with banking shorts. Now there seems to be a lot of money sitting on the sidelines, persistent chatter that the bottom has been reached, and yet continued resistance towards the upside. Uncertainty is the prevailing wind.

The take over here is there are still a lot of writedowns left to go, and even more balance sheet games which will eventually exacerbate the situation. The Fed and the Treasury seem to have “blown their wads” too early. More obvious taxpayer funded/direct bailouts could create downright insurrection (or at least there are going to be a lot of pissed off renters rioting in the streets). The WSJ is correct in their assumption - there just aren’t many J.P. Morgans left to do the bailing. Then there is the offshore money. Politics aside, you have to wonder how much of it will be willing to chase financial assets of a dollar denominated nature - said assets may look cheap to them now, but may get a hell of a lot cheaper in the year to come too.

At the very least I suspect it is going to be an interesting summer.

It looks good on paper.

The Fed lowered rates 75 bips, and as you might guess the banking stocks rallied soon thereafter. It makes perfect sense - they’re getting cheaper money, which is supposed to help margins.

Hours later there’s another move afoot - “emergency” prime rate reductions. Both M & T and National City have cut their prime lending rate by the same 75 basis points (and they are making good use of the PR channels in the effort as well).

Will consumers just start borrowing again in droves? Likely not. But, as a gargantuan pile of mortages ready to reset this spring, banks might just stave off an ever-increasing wave of foreclosures. Of course, the circumstances may add more fuel to the fire: banks are charging greater-than-nominal fees to renegotiate loans, and many of them are tacking those fees onto loans; they’re doing a whole lot of “driveby” appraisals too, meaning they’re throwing darts when determining the value of their collateral. And don’t forget - they are coughing up the free money they just received from the Fed while they’re doing it.

It’s a precarious fix, but it may just work. At least for a quarter or two.

There is a bit of chatter about all the data thefts in 2005, and how/why the government has done so little about it. I have my suspicions on the matter.

Nonetheless, is seems the Feds might just be starting to listen, as they are now asking banks to put their security policies in writing. You can bet a lot of bank executives are running out to their D&O insurer for more coverage about now.