Is It Too Early for the Toxic Asset Plan?

Includes: IYF, KBE, XLF
by: Markham Lee

Ignoring (for a second) my previously stated objections to the Toxic Asset plan, I have to wonder: is it too early to deploy the plan in the first place?

I ask this question because the stress tests on the bank's balance sheets have yet to be completed, therefore the exact magnitude of future capital infusions, reserves for future loan losses, etc, have yet to be identified. Furthermore, there is a significant risk that the Treasury's toxic asset plan will cause additional problems for the banks, thus identifying the need to determine what the impact will be on our nation's most troubled banks prior to moving forward.

It seems to me that the best way to approach broadband bank rescue is to first complete the stress tests on the banks' balance sheets, followed by running simulations to determine how certain banks will be affected by the Treasury's toxic asset purchase plan. In truth the aforementioned activities are probably just the tip of the iceberg, as it stands to reason that a rather extension round of analysis on the nation's banks is required in order identify what's needed to save our banking system.

My view is that instead of deploying patchwork quilt of reactionary solutions that are primarily focused on singular symptoms, we need to first gather requirements and build a holistic plan that deals with regulatory issues, capital needs, leverage, etc, etc.

Now I know that this isn't the quick "confidence injecting" answer that the markets, congress and the general public wants right now, but it's a significantly more effective approach that is actually capable of delivering the results the banking sector and the economy needs.

Disclosure: at the time of publishing the author didn't own a position in any of the companies mentioned in this article; the ideas expressed are solely the opinions of the author and shouldn't be viewed as financial or investment advice.

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