Let’s Talk About A Bank Holiday
by **Karl Denninger **
Let us pre-suppose that Obama grows a sack this afternoon and today after the market closes announces it.
What does it mean?
A few things happen:
All banks are closed as of the close of business and will not re-open unless they’re certified clean and solvent. No mergers, no take-unders, you either live or die.
ATMs, Checks and ordinary “course of business” payment streams are honored. Account transfers and anything that looks like one is refused. The point here is to prevent runs on solvent institutions, which would otherwise result. Since nobody knows at this point who’s solvent or not, you lock the system for other than ordinary course-of-business actions. The Fed does what it is supposed to do - intermediation of the payment system. There is already a contingency plan and process for this - they know how to do it, and both can and will - they just need to be ordered to do so by the Administration.
Bank examiners swarm into the banks, starting with the big ones. The 10 largest ones are all examined over the weekend. MBS and other instruments, including HELOCs, are all marked to the market at today’s prices.
The CDS related to these institutions are frozen. All CDS holders are brought “into the room” and ordered to net out their exposure and post cash margin against any underwater positions. Those who refuse or are unable have their CDS declared void as fraudulent in the inducement, as there was never an intent or ability to perform. Yes, this is an abrogation of contract in theory, but in fact you can’t contract to do an impossible thing (e.g. I can’t contract with you to jump over the Empire State Building, since I can’t perform.) Let the aggrieved parties litigate it out over time - for now, the beast’s fangs have been pulled, and suing a bankrupt entity (in the case of a “resolved” bank) is a waste of time anyway - there’s nothing to get.
All banks that are insolvent are immediately resolved. For those that are large national institutions the deposit-bearing parts are broken off into one for each Federal Reserve region. The securities and other business units are left naked; if they die, they die. Bondholders are crammed down into equity as required to fill the holes in the balance sheet; the common equity is wiped out. If - and only if - that is insufficient the FDIC steps in and makes the depositors whole. Any insolvent bank has its officers and directors ejected and barred for life from any national bank-privileged institution. The forensic auditors will stay on for months, examining for control frauds and referring all they find to prosecutors.
The solvent banks (and resolved banks) re-open over the space of the next two weeks, starting with the largest institutions.
Now what happens to everyone and their positions?
FDR did much of this during his ‘first 100 days’, in office, so there is precedent.
It is also what should have happened here in the first 100 days after the guarantee. For those in doubt, the minister has pretty much the authority in the guarantee act to do it with just an enabling act required. Of course, that would have required the guarantee not covering existing bonds… shame that was the case, really, wasn’t it?