Wednesday, January 28, 2009

Soros: $1.5 Trillion Needed To Save The Banks (or is it $4 Trillion?)

First up ClusterStock:
George Soros just wrapped up his presentation at Davos, where he said that the current crisis has the potential to be worse than the 30s and that the banking system still needs $1.5 trillion to be rescued. How will government come up with this cash? Money creation. In other words, some degree of significant inflation is the price to pay to prevent a total banking system collapse.

It sounds like Soros is in favor of the gigantic good bank/bad bank model that's been floated, and he noted that he personally would prefer to invest in the good bank. Really.

Wire reports should be hitting quickly, but David Schlesinger, editor-in-chief at Reuters live-Twittered the presentation and got the basic details....MORE

From Fortune:

Bank bailout could cost $4 trillion

Banks don't have enough capital to fix their problems, which means the Obama administration may need a lot more money to clean up the financial mess.

The cost of the bank bailout is likely to be much higher than $700 billion.

While the Obama administration hasn't asked Congress for more money yet, some experts warn that government spending on support for struggling financial services companies will ultimately reach into the trillions of dollars.

The first half of the controversial $700 billion program to help banks has already been spent -- mostly on buying up preferred shares of troubled banks.

Part of the remaining $350 billion may be used to purchase troubled assets from bank balance sheets and place them in what Federal Deposit Insurance Corp. chief Sheila Bair has dubbed an "aggregator bank."

And while taxpayers will surely recover some of that sum eventually, more money is likely to be needed in order for the bank rescue to work.

"The amount of working capital you'd expect the government to take into this would be around $3 trillion to $4 trillion," said Simon Johnson, a senior fellow at the Peterson Institute for International Economics and author of its Baseline Scenario financial crisis blog.

Johnson, who until last year was the chief economist at the International Monetary Fund, said that banks will need more rounds of capital from the government because their cushion against losses is too thin. He also said that there is a need to get rid of some of the toxic assets weighing on financial institutions before they can recover.

With that in mind, he thinks that the net cost to U.S. taxpayers for a broadened bailout would be about $1 trillion to $2 trillion, or between 5% and 10% of U.S. gross domestic product....MORE