Powell Predicts

The third bullet point in Chair Powell’s comments to the House Financial Services Committee earlier this month reminded me of my days at American Savings and Loan in the 1980s when I was running the REO Department. “You’ve got to have enough capital, enough liquidity and a plan to, you know, take the losses that you’re probably going to take — and so that’s what we’re doing,” Powell said. At American, we took the losses, had enough capital (early on), and had (limited) liquidity. But as the distressed loan and foreclosed property problems at American continued and the write-downs occurred more frequently, the capital eventually dried up and ‘liquidity’ was referred to in the past tense. Once American realized a negative net worth (liabilities exceeded assets), the RTC (Resolution Trust Corporation, a federal agency) came in and shut us down. We got no help from the Fed. If the Fed can a lend a partial hand in addressing challenges (provide some cash or guaranties to stabilize balance sheets), then many banks won’t fail. If not…
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