Wednesday, October 15, 2008

Saving the Banks: 3 actions

1- Buy stricken commodities (TARP original) and set a price in the markets. This price will trigger systemic trust in valuations. This will help restart the credit markets.

2- Equity Injection (TARP extended). Take preferred participation alongside private interest to ensure arm's length dealing and recapitalize the banking system with up to $250B. This will translate, if properly enforced at banks, into 2.5T liquidity available for lending. This will help restart the credit markets.

3- Guarantee debts in the credit markets. To make sure step one and step two restart the credit markets, guarantee the debt taken on by the banks and reduce counter-party risk.

These are all coordinated move. The US and EU are following suit to the brave if puny Bank of England. Smart boys leading the way. Hopefully this is enough to stun the shadow banking beast and stop it in its track if only temporarily. Already the markets have stabilized. At least we bought time. Time is expensive. Time is money.


Anonymous said...

Step 4 -- Pretend like artificial prices are real and can actually engender trust in valuations.

Step 5 -- Realize that there will be no $2.5 trillion in new lending, but rather $2.5 trillion in already loaned money that was previously under-capitalized, but now actually (gasp!) capitalized.

Step 6 -- Watch about a million unintended bad loans bloom where bankers can now lend to anyone without worrying about risk, because the govt is guaranteeing everything. Who needs that risk management stuff (that we're no good at) when there's no risk!

As you stated... we're just buying time.

But look on the bright side... all those baby boomers in the US that were about to retire... you know, the ones that were going to create a generational demographic nightmare by retiring in mass... well, now many fewer of them will be able to retire and we'll keep them in the work force being productive and helping us pay off all that government debt we keep creating...

Juha Lindfors said...

#2 "if properly enforced..." looks like a dream, see Paulson's lack of leverage in Bloomberg today, also Eve's comments on it.

Marcf said...

4/ The mark to Paulson will be as real as it gets, but point taken

5/ yes, probably not all of it will find its way to new liquidity

6/ Do they mean ALL loans? I thought we are talking interbank, so short term stuff. Money markets.

cynical, very cynical. You know I trace a lot of the problems back to boomers and their demographics. They needed big houses and second homes and bla bla bla. There is just no people to fill those houses :( I truly believe that the baby boomer impact is being felt right now.

Marcf said...

By "properly enforced" you have realized I had no real plan in mind. Sorry to see Paulson called out like this. There is an unruly mob that needs to be put to the sound of financial marshal law. Downward spirals are not broken just with incentives and carrots. Throw in a big stick and use it. THOUS SHALL LEND, MOTHERFUCKERS! BAM! BAM!

will banks get it right said...

the world should be asking will banks iii shot at this crisis end it because the entire international finance market is struggling. baby boomers will be working til they die. will banks iii attempt at solving this help the working class out thats the question... that 2.5 trillion is something to gasp at.

Marcf said...

This is a good point. I always think that it is the guy that is buying and holding in his 401k that is bearing the brunt of the haircuts. As you put your money in, the money players short you.