Title: TWIB: The future of banking

" More sobering economic news capped off an important week for the presidency of Barack Obama. The nation's GDP shrank at a staggering rate of some six point 2% in the fourth quarter. That's the worst showing in 26 years. President Obama told congress in the nation that America will emerge stronger than ever from the current economic crisis. And he outlined a vision for how that would happen. Two days later he unveiled its first federal budget and in between he demanded tougher regulations. To keep financial institutions in -- Joining us to discuss some of these development professor mark Williams from Boston university school of management are welcome. Thank you what a weekend what a month than what our last year this has been but let's first start with the framework. Of the revision of GDP this last quarter. How dramatic has this."

" Downturn beyond what's been staggering I mean clearly it's it's been a week as you say we're really need to put seatbelt on. The GDP itself if it is a measurement of our strength in the economy and it's it's waning and as a result our banks are also suffering and showing us. So it's is significant we have to stop the hemorrhaging. And that's where Washington's coming in now talking about more regulation more stimulus more plants. Fundamental. To this economic recovery. Is going to be the health of the banks I mean it's easy to poke fun at bankers these days. But it isn't the banking system in many ways the critical linchpin. In order to really jump start the economy. Absolutely that that's a very important point you are raising because the banks themselves -- the lifeblood of our economy that is if capital doesn't flow we're all realizing that now. In the whole economy slows down when we look at our economy the GDP figure that you mentioned. Two thirds of that is driven by consumers so -- consumers stop opening up their wallets and spending GDP declines what that means is. There -- economic stability -- declines that we don't have stability in our banking system. That we don't have stability in our economy so as a result we've got to fix the banking problem we have to do it quickly. Now a week ago the new Treasury Secretary Geithner came out always supposed to come out with the definitive plan and for whatever reasons I've heard many different stories what he ended up announcing was a framework. But an essential part of that framework are these so called stress tests on banks. What the heck is a stress test for back I don't know it is for me but what's the stress test for the bank absolutely it's stress testing itself well first it stresses me to think that the government know stressed that the right. For that for the US government to now be able to stress test banks like questioned. Really there their ability in the quality of the -- just let us put down a stress test itself. Is really going -- looking at a bank's balance sheet and looking at its income stream. In assuming certain sets of scenarios such as for example unemployment figures will increase by -- you know half or 9% the next six months of the year. They're also looking GDP -- GDP will continue to drop. It also should include a stress test of saying that mortgages whether they're commercial residential. The default probabilities who often increase now we do that stress test that won't get a sense of a picture of the future. Of what banks are going to be what we consider to be strong which ones are going to be weak and and which ones are going to be ugly. In and that is the stress test. The concern I have about the stress test is what with the US government to the treasury the Federal Reserve the FDIC once they have this information right. So what kind of common sense approach the kind of thing you do like that for your health take in your car in this case we're taking in the thanks -- the the other question though related to this. Is this question of nationalizing. The banks it's some thing that has the markets scared. This past week both Ben Bernanke and Geithner both seem to indicate fairly strongly. That wasn't the direction that they were headed or preferred what's your view on so called nationalization. 13 late in fourth -- two things number one nationalization. Should not happen. Because. Because banks themselves need to take risk shareholders need to take risks and east -- each bank needs to stand on its own feet. But the reality yes the nationalization is happening it's happening because he's banks have taken excessive risk. And now needs to be fixed unfortunately there's no other players out there that is investors to go and -- up these banks. So that's what we're seeing this week the city group looks like now probably 36. To 40% of Citigroup's going to be her -- owned by the US government. That's nationalization. In May not be -- minority or majority ownership but with that reflects its nationalization. The Syria obviously is very very complicated I mean it's this is perhaps tonight statement that we have some smart people. We're looking at this and they're still trying to. Mend their -- through this. And one of the issues is how to deal with toxic waste how to deal with the bad assets how do you value. These so called toxic assets absolutely wouldn't you look at these banks or the main driving forces of a bank's strength or weakness is their loan portfolio. Now we know these banks have lots of bad assets the question is what should we pay -- value of these assets that on one side we have tax payers. And if we pay too much -- were actually short changing tax -- but we don't pay enough for short changing banks and their shareholders that the delicate balance it. It's very difficult if and when you don't have a market or market that is functioning in a rational way. How do you determine value in a dysfunctional. Market exactly and that's where now the government needs to step in it looks like. Where we're going to be heading with this is going to be injection directly into the balance sheet. Converting preferred shares to common shares that'll be good for the banks and stability but bad for bank shareholders and we're seeing that now with dilution of earnings. Meanwhile as we try to fix the banking system as we see these economic numbers none of which are very good. The issue of confidence becomes very important issue of confidence both of them markets. And the issue of confidence of consumers and businesses what what's the relationship. Yes it's it's quite fascinating in the sense that we do know better business relationship you do business with folks that you trust and you feel that they're going to respond. And perform on their contract in the banking industry to simple -- you give loans to people that you feel -- companies if you will pay you back. When that confidence is broken and that basic arrangement between lender and borrower what happens then is that there's a shut down in the flow of money. So what we have to do is rebuild that basic sense of trust what we know as it takes years to develop trust take moments to lose it. It's going to take us awhile again to get back in -- you'll see at the national level of Obama's speech this week in particular folk to focus on hope. Our confidence rebuilding of confidence that the market has investors have in the marketplace. So in the sense we're going to have to work has to be step by step to regain accomplished so lenders and borrowers who once again trust each other we can go forward and go to our economy the other part of this equation. Our our international. Colleagues international companies. International government. What do you think the review is of the US as they see us struggling through this period. Well unfortunately what happened was what how -- US. They US -- shaking their fingers and they're saying. Not only do we mismanaged. What happened on Wall Street but Wall Street -- main street into this financial crisis and now -- global economy into this financial crisis. So I think they say -- to the US they say you have to basically. -- up and figure out how to improve your economy and and in particular as you mentioned earlier our economy is so tied to a bank's. A strong bank means a strong economy we thank Yankee system is a weak economy that's critical fix that we can't fix that link. -- Iraq or solve our problem. Two things I know one this recession will land and who we won't fix this banking system the question is when bit on that note. Mark Williams thank you very much for joining us thank you."