Financial Shock and Awe: RTC 2.0?

We have had a remarkable day today in New York and in markets around the world, and it has seemingly turned into an equally remarkable night. According to reports, senior Congressional representatives began meeting at 7pm tonight with Ben Bernanke and Hank Paulson, having decided that the initial financial shock and awe campaign hasn't been enough, and so now the five words that should scare any sane, thinking person: Congress wants to do something.

Call it RTC 2.0 if you like, but this is going to be something awfully big. Early numbers are in the hundreds of billions of dollars, and it will likely involve directly purchasing mortgages from over-stressed banks and lenders.  That is, of course, much easier said than done with mortgages collateralized and syndicated to a thin sheen across the ownership landscape.

Nevertheless, there is remarkable political will to do something, and to do it before the November elections. Granted, there are hold-outs on each side, but at this early stage I'd say we're looking at an RTC 2.0 something-or-another far earlier than most of us thought it would ever happen.

I should be happy, I suppose, but I'm mostly depressed and dismayed. While something is necessary, it's tragic that it has had to come to this, and the political and economic fallout will be gigantic and long-lasting.

More here, and as news breaks.

Comments

[freejack:]

Seems like when a company goes RTC the common stock gets wiped out or diluted. And the company places itself up as collateral. No Free Lunch!

2008 Sep 19 01:25 AM

[fineye:]

It looks very Obvious that all kind of innovative rescue plans by the Fed + Treasury + SEC are being experimented now when the survival of GS and MS are at stake. The former GS and MS men currently in various government jobs and current GS and MS men who were once in government jobs are desperately trying to save them taking their X-competitors route.

2008 Sep 19 01:53 AM

[Shiv139:]

Will more steps be needed beyond the US Congress plans for a financial fix?

A purchase of paper from solvent entities with a view to an eventual sale back to the market through an auction process is good. Read more about the Congress plans here.

An available buyer will mean (a) improved liquidity (b) higher confidence (c) arrest in accelerating mark to market losses.

This is a good first step because it will ebb the flow of insolvencies caused by liquidity & confidence crisis. One can assume that following an acquisition of distressed debt, the asset acquired will be "off market" until stability returns, otherwise it defeats the purpose. An incidental side benefit will be profitable dispositions which will significantly reduce budget deficits.

Still, this does not entirely address the solvency issue. The risk of disorderly unwinding of insolvents remains high. To prevent a disorderly unwinding it is possible that additional steps might be required. These could include:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of SWF's.
3. Combination to create a stronger entity post acquisition.
4. Active marketing of new capital requirements to SWF's and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

2008 Sep 19 02:09 AM

[Shiv139:]

Will more steps be needed beyond the US Congress plans for a financial fix?

A purchase of paper from solvent entities with a view to an eventual sale back to the market through an auction process is good.

An available buyer will mean (a) improved liquidity (b) higher confidence (c) arrest in accelerating mark to market losses.

This is a good first step because it will ebb the flow of insolvencies caused by liquidity & confidence crisis. One can assume that following an acquisition of distressed debt, the asset acquired will be "off market" until stability returns, otherwise it defeats the purpose. An incidental side benefit will be profitable dispositions which will significantly reduce budget deficits.

Still, this does not entirely address the solvency issue. The risk of disorderly unwinding of insolvents remains high. To prevent a disorderly unwinding it is possible that additional steps might be required. These could include:

1. An RTC type vehicle to hold and sell assets of failed banks.
2. Nationalization as in the case of FNM/FRE/AIG.
3. Combination to create a stronger entity post acquisition like BAC/MER.
4. Active marketing of new capital requirements to SWF's and nations with budget surplus.

Everyone has a responsibility to act; this crisis may have started out in the US, but its impact has and will continue to be felt the world over. How bad it gets depends on how early and how actively the world engages in seeking a solution.

Escalating deficits from the rescue packages will cause an elevation of inflation; this will hurt the world. In my view nations which can look at risk from a multi-decade perspective will need to engage in providing a solution.

2008 Sep 19 02:11 AM

[Eagle-Chief:]

At first I thought your title said WTC 2.0 (as in the World Trade Center). I actually think WTC 2.0 would be much more apporopriate. This IS AND WILL BE A NATIONAL DISASTER !!! This may well BE THE END OF THE U.S. DOLLAR. The U.S. is taking BILLIONS OF DOLLARS of debt onto its balance sheet. And we, the U.S. taxpayers will pay to bail out irresponsible, criminal exeutives and their companies.

Nouriel Roubini says this is welfare for the rich at the expense of the taxpayers. Jim Rogers said the U.S. in now more communist than China !! Another writer said that the U.S. IS NOW NATIONALIZING MAJOR COMPANIES / INDUSTRIES, JUST LIKE HUGO CHAVEZ HAS DONE IN VENEZUELA. And I ask, what's the difference? Our country is heading down the road to socialism/communism all at the expense of the U.S. taxpayers.

WHERE THE HELL IS CONGRESS IN PROTESTING ALL THIS? We cannot continue to allow this to happen. Let the irresponsible, financially mismanaged, corrupt companies FAIL. Bailing them out encourages them to do more of the same.

We Americans are already over-regulated and over-taxed. Let us not allow our government to lead us down the road to further enslavement and poverty.

2008 Sep 19 03:38 AM