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Ailing Banks May Require More Aid to Keep Solvent

Source: NYT (2-12-09)

Some of the nation’s large banks, according to economists and other finance experts, are like dead men walking.

A sober assessment of the growing mountain of losses from bad bets, measured in today’s marketplace, would overwhelm the value of the banks’ assets, they say. The banks, in their view, are insolvent....

The Treasury program leans heavily on a sketchy public-private investment fund to buy up the troubled mortgage-backed securities held by the banks. Instead, the experts say, the government needs to plunge in, weed out the weakest banks, pour capital into the surviving banks and sell off the bad assets.

It is the basic blueprint that has proved successful, they say, in resolving major financial crises in recent years.

Japan endured a lost decade of economic stagnation in the 1990s before it adopted such measures from 2001 to 2003.

The Swedish government took tough steps in 1992 and Washington did so in 1987 to 1989 to overcome the savings and loan crisis.

“The historical record shows that you have to do it eventually,” said Adam S. Posen, a senior fellow at the Peterson Institute for International Economics. “Putting it off only brings more troubles and higher costs in the long run.”