Credit markets: Lift antitrust and let 1000 “superconduits bloom”
Talk about the blind leading the blind! Superbank Citigroup Inc. was supposed to be a big player in Treasury Secretary Hank Paulson’s “superconduit” to provide liquidity for the securitized debt instruments that had their valuation in question because of an unknown number of bad mortgages and other loans.
But with an analyst report downgrading Citi to “sector underperform,” as well as predicting it will have to raise about $30 billion by slashing its dividend and/or selling off its assets, other financial institutions will now be even more reluctant to follow Citi off a cliff of unspecified height.
Let me pull back a minute, lest I sound like a doomsayer. This blog post is about the flaws of Paulson’s concept of a superconduit, not really about Citi. These projections are two analysts’ opinions, not an official company report. Apparently, the analysts aren’t particularly prominent, but then again the prominent ones missed the credit issues.
For what it’s worth (and today’s market shows much of the Street doesn’t think it’s worth much), the company as well as other analysts dispute these projections, according to CNBC. And it is true that with public companies, unlike in politics, an estimate of a billion here and a billion there isn’t necessarily “real money.” In the Sarbanes-Oxley era (see our YouTube Sarbox tattoo entrepreneur video) of CYA overcaution, companies and analysts may be making value estimates of losses from the high range to protect themselves.
The wishy-washyness of my “on-the-one-hand” caveats in the last paragraph underscores the problems inherent in a government-directed financial rescue plan, even if it’s not technically a taxpayer bailout. In a time of market uncertainty, a big centrally directed scheme will do little to calm those fears. As financial blogger Eric J. Fry writes, the superconduit “advances the cause of obfuscation, while preventing the price discovery that would enable the [credit] market to recover, and bring an end to the crisis.”
What’s needed actually are many superconduits. Financial institutions should be allowed to cooperate as they wish to pool their resources and share the risks and rewards of the loan packages. As the morgage foreclosure rate has increased but is actually less than 1 percent, spreading the risk means there’s less of a chance to get burned. But financial players would have the choice of the best conduit to join to suit their needs.
The problem now is any combination by several banks could run the risk of being prosecuted as “collusion” under antitrust law. So here is the executive action the Bush admnistration should take. Issue a statement that, by itself, banks combining their resources for the purpose of acquiring debt instruments is not a violation of antitrust law. This is a reasonable interpretation of the law, given its vagueness about “anticompetitive” behavior. Allowing the freedom for businesses to work together would accelerate the process of repricing in the credit market better than any centrally planned scheme ever could