Burned on big bank bailouts

Marketplace Staff Oct 29, 2007


Scott Jagow: There’s a good chance the CEO of Merrill Lynch will resign this morning — or be fired. Stan O’Neal would become the highest-ranking job casualty of this Wall Street credit mess.

Last week, Merrill Lynch turned in its biggest quarterly loss of its 93-year history, thanks to bad investments in mortgage-backed securities called SIVs. Three other Wall Street banks and the Treasury have proposed a superfund to buy up these SIVs..

We’re joined by Allan Sloan of Fortune Magazine. Allan, do we really know how deep the problems run with these bad investments?

Allan Sloan: I don’t think anybody knows how deep these troubles run, including the banks themselves. And the reason for that is, the securities, all of them are different, all of them are complicated. And analyzing them is such a problem that actually analysis is one of the factors, we found out last week, behind this bailout attempt of the superfund.

Jagow: Well, how do we get to the bottom of this, then?

Sloan: I mean, if I had my druthers — and we weren’t worried about the collapse of the financial system, which I think we are — I would just say let’s let the market rule. If you have these SIVs that need to sell securities because they can’t really borrow money anymore and have to liquidate their assets, let them sell for whatever someone’s willing to pay, and let’s get on with our lives. If you have investment banks like Merrill Lynch that has stuff in its portfolio that at the end of September, it says involves a $5 billion loss, and when it announces its earnings two weeks later, it’s an $8 billion loss, I say let them all sell it and let’s be done with it. And if they live, they live, and if they die, well that’s the way capitalism is supposed to be.

Jagow: The one thing that strikes me here is these banks took pretty big risks with these SIVs. You know, when you or I take a shot at some kind of investment and we lose, we lose. In this situation, it seems like the banks might not end up losing, with this superfund in tact.

Sloan: No, I agree. And that’s my problem with it. You and I make a bet and we lose, well, that’s our problem. Citigroup makes a bet and it loses, and it goes whining to the Treasury, saying the markets aren’t fair. I just don’t think that’s how it’s supposed to work.

Jagow: All right. Allan Sloan from Fortune Magazine. Thanks for being with us.

Sloan: You’re welcome, Scott.

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