In short, the government cannot save the banks by improving liquidity or changing mark to market rules because the problem isn't illiquidity or accounting. The problem is that highly leveraged financial firms own assets that are worth far less than they thought they would be, and the firms are insolvent as a result. This is why the latest bailout plans secretly give huge subsidies to banks--because the only way to keep the insolvent zombies afloat is to transfer billions of dollars to banks, bank stockholders, and bank creditors.This caught my attention. Umrai Gill's rejoinder to Santelli did too.
Thursday, April 9, 2009
CNBC's Rick Santelli Fires off on the Solvency/Liquidity Issue
A good moment yesterday morning for the Great Santelli on CNBC's Squawkbox. Here it is. At 1:40 of the segment, which opens with Carl Quintanilla interviewing Umrai Gill, Santelli waves a paper and says he wants to take note of a recent white paper written by Harvard and
Princeton economists Joshua Coval, Jakub Jurek and Erik Stafford. The conclusion he reads, however, is not from the Coval/Jurek/Stafford paper. It's from an article about the paper by John Carney of Business Insider. Carney writes (and Rick reads, revising the last sentence):