Banks 2.0: Build, Not Bail?

My friend (and Money:Tech-er) David Leinweber has a up a provocative post over on the O’Reilly website about hacking the banking system. The root idea: Why not stop trying to bail out the current banking system, and simply build a new one instead?

Here is the nut para:

$700 billion is a huge amount of money–more than the equity book values of Goldman Sachs, Morgan Stanley, JP Morgan, Citigroup, Washington Mutual, Bank of America and Wachovia combined. This money should be used to capitalize new banks throughout the country. To be operational as quickly as possible and to preserve valuable human and operational capital, these banks will buy good operational assets from insolvent banks in FDIC receivership. To avoid a concentration of risk, the capital should be distributed amongst at least 20 new institutions. To avoid the hazards of government ownership or sponsorship, the shares of these institutions should be distributed to the American people (each bank can have 300m shares; one for every American man, woman, or child).
Rather than using taxpayer money to cushion losses of previous, bad investments, this will allow all of the capital to facilitate lending to the real economy where it will prevent the current recession from becoming a depression and expedite the recovery which would otherwise be many years away. This plan is akin to preserving the body of banks while replacing their old brains (senior management and risk management policies) and their old hearts (balance sheets).

David (and co-author Sal Khan) deal ably in the paper with some of the more obvious criticisms, so I won’t raise those. Read the paper to see how they respond on CDS unwinding, etc.

My take on this wild-eyed idea? It is intriguing, and a fresh perspective on the problem. I suspect the real issues are social, however, not technical, so the likely problems are likely to be in recreating functioning organizations in a reasonable amount of time, etc. Nevertheless, this fever dream is is definitely worth mulling.

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  2. Bear’s Beatdown: A Run on the Non-Banks?
  3. I-Banks: Asian Investment Scorecard
  4. Chanos: Banks vs. Banks
  5. We Realize You Have a Choice of Subprime-Struck Banks ….