Getridofthemnow

Look What We've Had All Along: The Paulson Plan to Purchase Bank Equities

Agree. We have been through this before. We need to recapitalize the banks, as a vast amount (> 50%) are insolvent. The math is simple: on average 35% of banks total assets are in mortgages. Mortgages have declined in value by roughly -16% (note: take as an average the 2006 vintage as reported by Case-Schiller; take as average 2008 Case-Schiller; difference as % of 2006 average as proxy for decline). JPM and other estimate at least another 8% to go. This means that:

= .35*(.16+.08) = .084

That's 8.4%. Most banks are "well capitalized" at 10%. Thus, on average, 8.4% of banks capital is wiped out. This implies that there are a whole lot of "zombies" in the market right now. The only way to fix them is to recapitalize, as I have been saying since at least March-08 and the BSC bailout.

One need only read "Fifty Billion Dollars" (the book, read Chapter 2) to understand what "must" happen. Unfortunately, Paulson's plan doesn't accomplish what is needed. Moreover, as a politician and "power hungry POS" he wants to subsume the power into UST. This is stupid and inefficient. We already have the infrastructure to accommodate what's needed in terms of resolution teams in the FDIC, OCC, OTS, and FRB. Instead, he is appointing a 35 year old Neel Kashkari? Are you serious? Use the infrastructure that is ALREADY in place and be FAST.

One of the lessons of the Great Depression was that "slow" and ineffectual moves made the situation a lot worse. Sadly, Paulson's "power grab" is jeopardizing the success of the program. Rather than cooperating with Agencies ALREADY IN PLACE that can very aptly handle the problem, he is building his own "universe" in order to increase the power and clout of UST. Paulson, as has been said in NUMEROUS other forums, should be fired - YESTERDAY. UST should be solving fiscal, budget, and similar issues, not bank regulation, supervision, and market oversight. This should be vested with "others". Even the OCC should be pushed into a separately funded and "arms-length" (from gov't) entity, which I trust will be the nature of the reg reform law that is passed next year.

Immediate need:

1) FDIC handles "ABC" banks. "A" are basically sound but may need capital; "B" are in need of help, and should be immediate focus; "C" are dead and should be shut-down ASAP.

2) Asset sales of mortgage related product is coordinated, via the FDIC structure, with FNMA na dFHLMC. All "other" asset sales handled by FDIC (and their existing contract arrangements) with current loan and asset sales (i.e., workout) partners.

3) FRB handles, only as needed, systemic issues. FDIC and FRB coordinate much more closely.

4) We need to launch, as was done in 1930's, more infrastructure projects

5) We need to launch, as was done in the 1930's, direct corporate lending where it is a systemic issue (like the FRB's CPFF...good move)

6) Etc....(the list is long)