LEMON BROTHERS

From previous posts, one can understand that there are banks, good banks, new good banks and lemon banks. The latter are undergoing a stress test:



After the test, we may discover that in the lemon banking market we have some Lemon Brothers, that is institutions that are operating in the market for lemons.



Who are they? Some are too big to bail or even to be nationalized. The market understands the position the lemon banks are in and their price is reflecting that without the need of further test. Unless we have a sound "good bank" proposal the problem to resume lending will last and maybe get worse as the global economy will suffer. Fix the banks to fix the economy.

Stress test and testing new lows: are we or banks under test, stress or stress test?

Geithner's "Stress Test" for Banks is a Stress Test for America. The debate is hot here and here. Lemon banks (read previous posts for this definition) are undergoing stress test according to Gethneir's plan just to buy them time against the backdrop of nationalization (NO THANKS! and/or creation of good banks. Somebody likes to "remember that there is nothing like this in Geithner’s Financial Stability Plan, so it is unlikely to happen". I would like to add that with sufficient thrust, pigs fly just fine. Are good banks like pigs now or the battle of lemons versus lemons should continue?




In the meantime, stock markets are testing November 20th bear market lows and Japan and US start really to look like, not only for the past and ongoing depression and banking crisis, to draw lessons from, but also in their respective stock markets index as Dow Jones and Nikkei have the same quotes. I thought you might be interested in this chart. I found it on Yahoo! Finance today.


Do you feel stressed now and would like to get your stress test like banks?

The picture posted here has 2 identical dolphins in it. It was used in a case study on stress levels at Loma Linda Medical Center.
Look at both dolphins jumping out of the water. The dolphins are identical. A closely monitored, scientific study of a group revealed that in spite of the fact that the dolphins are identical, a person under stress would find differences in the two dolphins. The number of differences observed matches closely to the amount of stress the observer is experiencing.
Look at the photograph and if you find more than one or two differences you may be experiencing stress...

I simply conclude with a say from Verona, Italy in dialect "quando i mussi i volerà" or “when donkeys fly” or "when pigs fly"...the GOOD BANKS get going.

When bad money drives out good

There is a very simple law in the financial markets, particularly lemons, which is called Gresham's law, stating that: "Bad money drives out good." This is to say that in order to resume lending by restoring competition to the banking industry and confidence in the credit markets, we need to weed out lemon banks and their toxic products. In order to lower the level of "toxicity" in the banking system it makes sense to start breaking up the largest banks and selling off individual operations to the public sector. This is also a way and a process to create GOOD BANKS and avoid strictu sensu nationalization.
By doing this we will have avoided that Gresham's Law prevails and have revamped Darwin's Law to rule the banking sector.

Nationalization of banks? NO THANKS!

I do not think that nationalization of banks is either necessary or inevitable. The debate on nationalization is somehow misleading. Nationalization means "the act of taking an industry or assets into the public ownership of a national government or state". Now pay more attention to the words public ownership. In fact this may refer as well to common (full-community) non-state ownership. This is to say that, in my proposal of "GOOD BANKS", there might be a public ownership in the sense that taxpayers, whose money is largely being used for recapitalization of banks, will possibly own the new good banks (private-public partnerships?). There could be an initial mechanism of subscription and lock-in of shares allotted to public (taxpayers) but in principle these shares will be tradeable from day x. In conclusion the financial case for nationalization is not compelling (particularly for those who do not like the word) and it is misleading as there could be a non-state ownership and a full-community approach to banking to save the credit system not bankers and bad banks.

Manamanah is GOOD BANK: a compelling case

The question is: what is GOOD BANK? The question is who cares? She cares at naked capitalism: We Talk to CNNMoney About Geithner Plan, Bank Nationalization

GOOD BANKS, YES WE CAN, he says.

PS: the song was written by an Italian, born in Florence like me, Piero Umiliani. The song Manamanah (now renamed, for the purpose of this post, Good Bank) first appeared in the movie "Sweden Heaven and Hell" (now renamed, for the purpose of this post, Sweden model nationalization) nah
appeared first on this record, in 1968..appeared first on this record, in 1968...

BANK STRESS TESTING: Lemon brother’s collapses after stress test

Which lemon bank is passing the stress test?
How to squeeze the juice from a lemon?

From bank stress testing to lemon bank squeeze:

Paid for by lemon growers and bankers to foster lemon banking awareness (and disclosures, transparency, etc.).

"History repeats itself, first as tragedy, second as farce": Karl Marx (1818–1883)

The plan said: "THESE BANKS ARE LEMONS"

Here it is the Geithner financial rescue plan. It's dealing with "The market of lemons"

I'm posting some self-explanotary images, the way I see it:







I am impressed by this point:
Increased Transparency and Disclosure: Increased transparency will facilitate a more effective use of market discipline in financial markets. The Treasury Department will work with bank supervisors and the Securities and Exchange Commission and accounting standard setters in their efforts to improve public disclosure by banks. This effort will include measures to improve the disclosure of the exposures on bank balance sheets. In conducting these exercises, supervisors recognize the need not to adopt an overly conservative posture or take steps that could inappropriately constrain lending.

In fact, On October 13th, 2008 on the blog sphere Massimo GIANNINI said:

If some unidentified potentially insolvent banks created a severe “lemons problem”, that is a situation of asymmetric information which causes money market failure and confidence crisis in inter-banking, interventions must address the causes not the effects. Again during these days interventions addressed only some effects and never the causes. Before doing something we should invite banks, particularly those in favor of which any intervention is made, to publicly disclose their positions and make their balance sheets fully transparent, thus addressing the lemon problem. There is no point in recapitalizing and restarting inter-banks lending, forcing or guaranteeing confidence, if no disclosure is made of mutual positions and off balance sheets operations which are causing money market failure. How can we expect confidence to be back if nobody starts to tell the true story and make an effort to admit mistakes? I think this is what markets and people are expecting before confidence is restored and thus liquidity and solvability problems.

LEMON BANKING PART III: Major announcement from Treasury Secretary, Tim Geithner

I hope the dreamed announcement will be that we are going to have

"GOOD BANKS".

I am afraid we are going to have lemon juice by squeezing lemon banks and products

LEMON BANKING SQUEEZE




(Read previous posts for lemon banking theory).

LEMON BANKING Part II

My previous comments on the blog sphere and previous posts are inspiring some articles here and there. Along with an American tradition of "THINK BIG" some economists continue to suggest to "make it bigger" (it was the case for the fiscal stimulus) or "needs to be big" (it is now the case for the bad bank solution). I cannot agree with this approach.
Concerning the lemon banking problem, the solution cannot be a "buy-it-all strategy" nor any "analogy with lemon" used cars markets would suggest that a "bad bank should be big".
If you have a lemon banking market or lemon products (toxic assets) like used cars, you need to correct uncertainty, quality heterogeneity and the asymmetric information first (that is full disclosure, transparency, fix the accounting, new regulations, etc.) otherwise there is no way that toxic assets will be priced in equilibrium, let alone fairly. The market for toxic assets collapses when there is asymmetric information. That's why setting up "good banks" should also be the preferred option otherwise "The cost of dishonesty, therefore, lies not only in the amount by which the purchaser is cheated; the cost also must include the loss incurred from driving legitimate business out of existence". In fact financial markets crisis made it virtually impossible for even a “good bank” to raise capital through traditional means and make loans safely.

LEMON BANKING

Let’s start to talk about lemon banking. You know what a lemon is in economic terms… I will not use the trade name lemon bank as this appears to be a real bank name in Brazil…
Lemon banking is TARP and any bad bank solution. That’s the wrong bank model: if you have lemon banks there is no point in insuring them or try to buy or price their assets with taxpayers money and guarantees (no cash for trash). The Market for Lemons, Quality Uncertainty and the Market Mechanism, applies. Therefore lemon banking laws should also be enacted.
Gresham’s law also applies: “Bad money drives out good.” Bad banks and good banks cannot exist together. As toxic assets are "lemon" products who is going to buy a lemon? Why support to lemons and deals with lemons? Too much asymmetry in information not to say little information on these assets...Under these circumstances any deal is doomed to fail. That’s why the only solution is the good bank model. Let the bad banks fail in peace…

When the going gets tough, the GOOD BANK gets going

I am glad that my previous proposals, dated October 2008, for a "good bank" model and solution are getting some more attention, debate and hopefully implementation.

The ‘Good Bank’ Solution by Prof. W. Buiter

Bank insolvency: tips & tricks on Interfluidity

In Davos Soros urges U.S. to create "good bank" as aggregator

Create Parallel Banking System; Take Away Bad Banks' Banking Licenses on Infectious Greed

A right PRAT on RebelEconomist

Obama: Start a New (Good) Bank on MyDD

'Bad Bank' Model Is Disastrous - This Approach Is Needed on Seekingalpha.com

Bank Nationalization - The Max Holmes Proposal on Seekingalpha.com

Good Bank, Bad Bank; Good Plan, Better Plan on The New York Times

More here and here and here

to be continued.