Toxic Assets:

The current problem centers about the value of loans that very large banks have made. These banks are hesitant to state the true value of the loans they have made. There are reasons why this is so but most of those reasons come down to the fact that these loans have a “true value” of between 18 and 30 cents on the dollar. To say that another way these recorded transactions are worth only a fraction of the amount which they are being carried on the books.

America and the banks of America are in denial. How could this have happened is the question they ask over and over. Like the victim of a horrific traffic accident they are in a state of shock. The shock is causing them to react in a strange manner. Strangest of all is their stubborn refusal to admit the facts and take action to correct the situation as it exists.

So long as the book value of a bank or indeed any business does not reflect the true worth of that business then investors are going to elect to not become involved with that bank or business. When a business appreciates in value everyone quickly knows about that and people respond by buying up some of the outstanding shares of stock in that company. This causes the value of all shares of the company to go up. Stockholders are happy and company managers are happy. Everyone stands to make a profit and that is after all what capitalism strives to do.

However when the owners of a company lie about the value of that company and get caught in that lie as the managers of Enron did the value of the stock plunges and stockholders lose money. If the lies told are big enough the entire company may go into receivership, to say this another way this company is bankrupt. At this point any remaining assets are seized and divided amongst the people to whom this business owed money. In this case almost everyone loses with stockholders and company officers loosing the most. This is the dark side of capitalism and frankly many in America have forgotten this side. The last time we saw this ugly side of capitalism was in the years 1929 to 1933.

There were lessons learned when America went through this last great depression. Those lessons were expensive and the solutions found were expensive. What the current administration is attempting to do is apply the same solutions to this current financial crisis. Will these solutions work this time? If they do not work we will simply modify them and try again. Sitting by and wringing our hands in a state of denial will not solve the problem. Of that I am sure.