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Part II: U.S. Too "Politically Frightened" to Admit Truth About Banks, FT's Wolf Says

Posted Feb 09, 2009 05:29pm EST by Aaron Task in Investing, Newsmakers, Recession, Banking
Related: XLF, SKF, FAZ, C, BAC, JPM, WFC

Why the U.S. government is seemingly too afraid to declare bad banks insolvent was the subject of part one of this discussion with Martin Wolf, chief economics commentator for The Financial Times.

The Obama administration is "really frightened" of nationalizing banks and being tarred as having taken an "extremely left, liberal action," Wolf continues here, in part two.

But the bottom line is somebody is going to have to take the loss – whether it's taxpayers or individuals and institutions that own bank shares and debt, says the author of Fixing Global Finance. "We are poorer than we thought we were."

Regarding the financial ramifications of an insolvency of a major U.S. bank, i.e. Citigroup or Bank of America, Wolf says:

  • It would affect every other banking institutions worldwide, and their shareholders who would rightly fear a similar fate.
  • "Very serious repercussions" for the global bond market, potentially creating a new set of financial institutions needing government relief, namely bond funds, pension funds and insurance companies that are big holders of bank debt.

The good news is Wolf does not believe the credit market would freeze, as occurred in mid-September after Lehman Brothers was allowed to go bankrupt.  

Editor's note: Check out these other segments with Wolf from earlier today:

Economy at a Crossroads: We'll Be Lucky If Downturn Only as Bad as Japan's

"Terrible Year Baked In:" Govt. Stimulus Needed, But Not This Bill

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