R. Richard Schweitzer

Secretary Paulson Does the Right Thing, Again

Consider: If Treasury [T] were to buy (through some complex "auction" system - with its delays and snags) from a bank 100 mil of unpriceable assets (paper), the T would then have the entire risk of further loss on that paper. If the paper is left in the bank and T becomes an equity participant, then the risk of further loss (or write down/off) will be spread over the entire equity base of which T's share is only part, not entire.

Also, a $ of added equity, will have more effect on viable credit extensions by a bank (subject to further reductions in assets values by write down/off) than a $ of bad asset removal.

What was the rationale for removing "toxic" assets and replace them with auction derived prices. To increase the viable equity, of course. Direct investment does that.

The next step in "pricing" consumer debt, will provide a benchmark (really a surveyor's monument) for valuing a major segment of bank and financial organizations' holdings. Consider how "credit card balances" have come to equal the "demand deposits" (checking accounts) in monetary measurements. Checking accounts are now largely used as "clearing accounts" for credit transactions and settlements, not for holding "money" balances. People no longer hold cash balances to the previous extents.