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Analysts Say Despite Injections of Government Money, Biggest US Banks Still in Trouble


Financial analysts say the biggest US-based banks remain in bad shape despite the injection of hundreds of billions of dollars in taxpayer money. The banks have few friends currently as they are being blamed for causing the global financial crisis.

President Obama says it is shameful that New York banks awarded themselves billions of dollars in year-end bonuses at the same time they were receiving government help. The bonuses paid to Wall Street firms totaled more than $18 billion.

Several experts on the 17-month old credit crisis said this past week that the problem is still not resolved. Banks, they said, have not resumed normal lending and there are more bad loans to be accounted for.

Joshua Rosner, an authority on banks and home finance, says the problem that began in 2007 with bad mortgage loans is spreading to other credit instruments. "It's in credit cards, it's in commercial loans, it's in commercial mortgages, it's in auto loans. This is what we have to contend with."

New York-based financial analyst Barry Ritholtz, who like Rosner participated in a forum at the American Enterprise Institute. said it would be a mistake for the government to put more money in the biggest banks. "(By putting money into them) We're essentially rewarding incompetent management that has demonstrated an inability to handle risk, to handle mergers, to do anything that they're supposed to be doing. And, everybody talks (about these banks) about being too big to fail. I look at Bank America and Citibank and think they're too big to succeed. No-one has been able to handle the risk there. There are too many moving parts (components or divisions). I'm in favor of nationalizing them across the boards."

In an effort to recapitalize the banks and rescue them from bad loans, the government since September has put over $100 billion into banks. That includes over $65 billion into Bank of America and Citibank.

Rosner says despite the bailout, credit markets are not functioning properly. "The reality is that the gears of financial intermediation are non-existent, be it in the banks or in the capital market."

Another specialist, Christopher Whalen of Institutional Risk Analytics, says if the banks are unable to resume normal operations and make a profit, they should be allowed to fail. "The longer we dally with the big banks the less growth we will have (in the economy). It's a very simple trade-off. Shoot the banks fast...Break them up and sell them. There will be a crowd of people standing on the other side of receivership (bankruptcy...to buy their assets)."

The Obama administration is preparing new proposals for dealing with the bad loans of U.S.-based banks. One suggestion is creation of a special government-run entity that buy up all the bad loans. Some estimates say that measure could cost taxpayers $2 trillion.

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