John Hempton’s radical view of banking

I genuinely do not know the extent of U.S. bank insolvency, but I do wish to pass along this contrary opinion:

Then he [Buffett] says the problem of American banks are not overwhelmingly toxic assets.  This is a radical view – but it is in my view correct.  The problem with the banks is that nobody will trust them and they have not been able to raise funds.  The view that this is a liquidity crisis – and not a solvency crisis – has long been a staple of the Bronte Capital blog.  It is radical though.  Krugman, Naked Capitalism and Felix Salmon think alike – asserting – seemingly without proof – that the problem is solvency.  Buffett doesn’t even think the US banks (on average) require capital – a view that most people would find startling (though again I think is correct provided appropriate regulatory forbearance is given).  

And this:

Krugman is finally coming to the view that the important technical question is whether to issue that guarantee [to bank creditors].  He is right.  Provided the guarantees can be issued at reasonable cost they should be issued.  Both Warren and I think the cost would be reasonable in the USA.  By contrast I am not sure the UK has the blanket guarantee option because the UK banks are very large relative to the UK economy and they started highly capital inadequate.  US banks by contrast started with a lot of capital.

Here is Hempton's previous radical post.  I thank William Utley for the pointer.  Perhaps I will be pilloried for posting this, but maybe the conventional wisdom can be wrong twice in a row.

If you want a ray of hope, possibly based on lies, try this article; opening line: "Stocks are rising after troubled Citigroup said it operated at a profit during the first two months of the year."


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