How it SHOULD work


Fixing toxic assets without government help
Forbes takes a hard look at The Banker Who Said No.

Andy Beal, a 56-year-old, poker-playing college dropout, is a one-man toxic-asset eater--without a shred of government assistance. Beal plays his cards patiently. For three long years, from 2004 to 2007, he virtually stopped making or buying loans. While the credit markets were roaring and lenders were raking in billions, Beal shrank his bank's assets because he thought the loans were going to blow up. He cut his staff in half and killed time playing backgammon or racing cars. He took long lunches with friends, carping to them about "stupid loans." His odd behavior puzzled regulators, credit agencies and even his own board. They wondered why he was seemingly shutting the bank down, resisting the huge profits the nation's big banks were making. One director asked him: "Are we a dinosaur?"

Now, while many of those banks struggle to dig out from under a mountain of bad debt, Beal is acquiring assets. He is buying bonds backed by commercial planes, IOUs to power plants in the South, a mortgage on an office building in Ohio, debt backed by a Houston refinery and home loans from Alaska to Florida. In the last 15 months Beal has put $5 billion to work, tripling Beal Bank's assets to $7 billion, while such banks as Citigroup ( C - news - people ) and Morgan Stanley ( MS - news - people ) shrink and gobble up billions in taxpayer bailouts.

That, ladies and gentlemen, is exactly how a free market recovers. And without government intervention propping up prices and supporting failed companies, that is how it would work.

This is vitally important.

Everything that the Federal government has done since the Bush bailout has been exactly wrong. And we'll deal with that in the next entry.

— NeoWayland

Posted: Mon - October 5, 2009 at 01:30 PM  Tag


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