By JLP | November 8, 2007
From the latest issue of Fortune comes this intro to an article by Allan Sloan:
This may sound silly, but let me ask you a question. Let’s say that I maxed out my credit at Citigroup to speculate on a house whose market price is now less than what I paid. Citi wants its money, but instead I say, “Sorry, the house is selling for less than its true value. As soon as it sells for what it should, I’ll send you a check.” What do you think Citi’s reaction would be? How about “Sir, where should I send the repo man?”
Well, folks, Citi seems to have put itself in just such a fix by borrowing lots of money to buy assets that have dropped in market value. But instead of summoning the repo (as in repossession) man, some of the world’s biggest hitters are trying to set up a huge fund to buy time for Citi and some other institutions with similar problems.
Allan makes a good point.
What amazes me about this credit mess is normally banks and brokerage firms treat the general public as if they are idiots and don’t know how to manage their money. Yet, these very same banks and brokerage firms get caught up in this subprime mortgage mess. It’s kind of funny if you ask me.
What should be done?
I have no idea. Although banks will be hurt, I don’t think a taxpayer bailout is necessary. We talked about this before and almost every commenter was in agreement on the issue.
Allan’s advice is for banks that are in trouble to first cut their dividend and if that’s not enough, issue more stock. This would hurt if you are a shareholder in a bank stock. But, as Allan says (and I agree):
We small fry take chances when we borrow, and we pay the price if we’re wrong. Big fish should have to do the same.