There are more punts in the dialogue about US bank reconstruction than in a football game tied at a field goal in the 4th quarter. Currently, with the common equity of BAC & C being sold toward $0, nationalization is the preferred punting angle.

I’ve blogged that the 4 horsemen that have accumulated over half of US deposits and loans through shotgun arrangements – C, BAC, JPM & WFC – cannot survive in their current state. Not from failure but from deconstruction. That amount of risk concentration in 4 banks is forbidden in any monetary model that doesn’t want true and lasting insolvency as its end. Banking reform will unwind them. Otherwise, they become de facto Federal Reserve Banks.

The US cannot nationalize banking and expect to improve its lot or secure the monetary system. There is not enough public money (i.e. issuable treasuries) to fund it. A diet of US Treasuries alone could not provide a fraction of the capital needed for US banks to lend and distribute liquidity to solvent, competent borrowers in the volume that sustainably grows our GDP. That requires funding from the full spectrum of global liquidity pools (private & public).

Seen from a better lens, the US treasury can intervene as a disposable bridge between the rubble of “now” and a forward reconstruction of our depository institutions. One that does not wipe out equity holders but carries their value to the shores of the next gen financial framework.

Leadership must simultaneously create and enact a fierce and rudimentary set of rules for how financial institutions, and any other layer that wants to “touch” the money supply, conduct the business of financial stewardship. A simpler and lighter regulatory framework is best. Rather than fool with a maze of rules piled on top of each other ending in a Frankenstein, structure a tight regulatory code to establish who and what qualifies and out with the rest.

The glaring time bomb of any fool with a pile of cash and a banker to give him leverage against it is no longer in play. Banking reform must demonstrate an understanding that genuine value is made by business and individuals that borrow sums they can repay and deploy the funds smartly to earn return on the execution of their models and underlying assets. Value is not created by engineers that construct equations to cycle cash through a rigged web of cheap, pseudo-government lenders (i.e. FNM, FME) to drunken borrowers (ARM loan securitization-centric banks = the Countrywides, pensions & endowments desperate to meet unreachable plan return promises etcetera!), for the sake of parabolic fee income paid out through lavish bonus structures to incompetent leadership.