Do We Need A National Bank? Part II

Back in November, we floated the idea of a national retail bank to help solve some of the financial problems the U.S. faces. Since then, there have been a few discussions in the media about some of the topics we highlighted, including the idea of a "clean" or "good" bank, but nothing that addresses it directly. So today we are updating some thoughts on the idea.

The basis of our plan suggests that the government take the remaining $350 billion from the TARP and start its own bank, that competes directly with the leftover 'insolvent' banks, like Bank of America (NYSE: BAC), Wells Fargo (NYSE: WFC) and Citigroup (NYSE: C). We are calling the new bank "Big Brother Bank" or BBB for short. BBB will have a clean balance sheet and will be able to effectively use leverage, which will add billions, if not trillions, in liquidity to the system.

It is our view that one of the main problems that is not being adequately address is that - if the insolvent banks don't start lending, the assets on their books will fall further, and the economy will worsen. The banks can actually help stabilize assets prices on their books by lending, but they're not - at least not to the extent they need to.

Because the "shadow banking system", or the system that consists of non-bank financial institutions, is DEAD, the "real banks" need to step-up to fill this void. But the sad fact is that they aren't, even after getting billions in government money. Not even close. Even though there has been massive consolidation in the sector, loan volume is lower. Some of this is due to lower loan demand, but most of it is not. Let's take for example JP Morgan (NYSE: JPM), which has taken over Bear Stearns and Washington Mutual in the past year. JP Morgan's Jamie Dimon has been out in the media insisting that they've been lending, but if you look at one key thing from their fourth quarter report "mortgage loans" you will see that they aren't. In fact, due to the WaMu acquisition, average total deposits at JPMorgan grew 63% to $339.8 billion, including $126.3 billion attributable to WaMu, yet mortgage loan originations were $28.1 billion, down 30% from the prior year and down 25% from the prior quarter.

Why aren't they lending? It is one thing - FEAR! These banks were burnt and burnt bad in the credit bubble and now they are only lending to "qualified" individuals and businesses. These same banks were "dancing in the street" and lending like crazy to anyone with a pulse at the top of the private equity and credit bubble and now when assets prices, including those on their own books are plunging, they are tighter than ever. It is absurd. I'm not suggesting we go back to the easy-money days, but banks are supposed to lend - that's what they do.

So how does a national bank help?

1. A national bank will add immediate, much-needed liquidity to the market.

2. By actually lending, a national bank will help support assets prices. This will not only help the economy recover but will also help the marks on the 'insolvent' banks books.

3. A national bank will force the 'insolvent' banks to lend as not to lose market share.

The national bank could be in part privately held. Half of the equity could be sold off to the public. Private investors would likely flood to a new, clean bank. Later, all of the bank could be sold to the public.

These are our thoughts. Any additional thoughts are appreciated.

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