Selling what you can, maybe not what you want

Meredith Whitney, Managing Director, Oppenheimer spoke these words this morning in an interview regarding toxic assets, mispricing, and the bad bank idea. "... average people, when we need money, we don't get a bailout, we sell the good stuff, unfortunately ...". It might not be what we like to do, but after years of mispricing loans and assets, its time.

What struck me about this interview is the fact that one of the more respected advisors in the financial world, talking cram downs and bad asset quarrantine, says she doesn't really understand. Once bad assets are off the balance sheets, and recapitalization is supposed to occur, she is not convinced that the criteria for capital flow are met. Namely, the bad bank, bad asset without adequate reserve, is not a growth entity, which is fundamental to equity captial flow. Where is the banking sector headed? Meredith says an older model will redevelop, one where funding is not beyond deposits, loans are not beyond deposits. A more durable system in her words.

Nationalisation of the banking system is not a good idea. Meredith goes as far as saying it is very dangerous path to pursue. Why? The government does not have the captial to support such a circumstances. What needs to be done? She outlines a typical de/re-engineering process of looking forward and working backward. What should the banking sector look like in 3 years, and this is how we get there. Now its only crisis management, random and with marginal effectiveness.

Where are we now? Half way, says Meredith. Big institutions will remain on life support. Liquidity is still being taken off the table. Those entities with "... junk in the trunk ..." will remain at risk. There are trillions still to go - gosh isn't it amazing how easy we say a trillion, that's a 1,000 billion! or a 1,000,000 million. When liquidity stops coming off the table, the trend will reverse. We're on a 2006 revenue model, when reality is probably more like 1998-99 revenue model and downsizing of expense structures is a necessity.

The interview is long but worth the time (full interview).