Well, I was being sarcastic here, but guess what, the situation is so delirious that Cramer claims that some of that may be happening:

http://lolfed.com/2008/09/18/cramer-silly-market-shorting-is-for-terrorists/
http://housingpanic.blogspot.com/2008/09/and-then-jim-cramer-spread-ugly-rumor.html

To be more blunt: the Fed currently is a hedge fund that owns a few off-the-balance-sheet SIVs, the mothers of all SIVs, for the USA Treasury.

Just like with Enron SIVs, one of the keys is to retain enough of a third party stake that technically it is not a part of the controlling entity. So GSEs and AIG must remain public/private partnerships, and must remain listed on the NYSE.

Again, Enron at least had the decency of hiding their SIVs, the USA treasury is far more brazen…

Ahhhhh and I thought that you were cynical enough.

There are very good *formal* reasons to do that. It has been done with AIG too.

Note that in both cases the “nationalization” was done in the same way: the Fed/USA were issued free stock in exchange for something else, like making a loan.

Formally this means two things:

* Both are still listed companies, just majority owned by the USA/Fed.

* In both case *no money* has been spent by the USA/Fed. Just a loan.

* In both cases the 80% threshold has not been quite reached. I think that is significant for listed companies.

Basically, smoke and mirrors, shysterisms tricked by clever securities/government lawyers to work around some pesky legal details like section 8 of the USA constitution that vests in Congress the power to appropriate funds.

The end result is that the Fed, ends up selling mortages and insurance policies, and the FDIC guarantees the trading losses of investment banks.

What next? Perhaps the SEC and the Fed will get the power to wiretap without warrant communications among short selling “financial terrorists”, and the Fed will start snatching those “financial terrorist” short sellers from the street for rendition to Guantanamo or friendly countries that practice enhanced interrogation.

But again, it is in the interests of our major foreign lendors, who will in time have significant participation in recapitalizing the US banking system, directly or indirectly, to get us up and running again. They will need to see a real plan, which is going to involve asset markdowns, and in many cases asset strip outs, and the kind of comprehensive regulatory oversight we sadly lack, all of which will take time. Doing bitty preferred raises only delays said markdowns, stripouts, runoffs, and re-regs. The only way we could get an orderly as opposed to a disorderly de-lev would be if the public authorities had the stautory authority to seize fail-ing banks or bank like firms and put them down—which said authorities do not have as you’ve discussed even moe than most in the blogosphere. So we will have a bumpy ride down, but there seems to be little alternative. Bitty chocks of preferreds only delay reaching a stable lower plateau where we can start a bank recovery. Or so it seems to me. If there’s a different and better way, I’m all ears.

The money that was in financial institution preferreds, or considering getting in, will want to get back in when they have sound banks to buy into; this is where the money is after all. So I would like said investors to stop wasting their dough on spoiled banks, and to demand the reforms necessary to put potentially profitable banks back in action. Instead of acting like vultures trying to snap up blue chips with Federal guarantees or at least with sweetheart rates and eight-figure unlimited repos.

http://www.riksbank.se/templates/speech.aspx?id=1752

Here’s why we probably cannot pull it off (from Section 5, point 5 of the address):

“On top of this—and perhaps the most important factor— there was political consensus. The government sought and received backing from the main opposition party. That party was also allowed to appoint Board members of the Bank Support Authority so that it could be continuously informed and influence decisions. That was important both for political legitimacy at home and for credibility abroad—investors could be sure that the system we had created would be upheld even if there were a change in government.”

We are simply too politically and culturally undeveloped. Considere whether we could agree as desecribed below (quoting again, Section 4, point 3):

“A common framework of measures was constructed for support of the banking system. A strategy for deciding which banks to reconstruct and which to liquidate was developed and explained to the general public. The measures were designed to minimise costs for the Government and the risk of moral hazard. Consequently, shareholders were not covered by the government guarantee and would lose their equity investments to the same degree as the Government had to provide support for their banks. This provided an incentive to the owners to avoid applying for state support unless it was absolutely necessary, to minimise the amount of support and to reduce the time-period of receiving support. We used a very simple, but clear and easy-to-explain, method of identifying banks which should be given support in order to survive and those which should be liquidated or merged. First you write-down the bank’s bad loans. Then you test the bank in a micro- and macroeconomic model. If the model indicates that the bank will be adequately profitable again in the medium-term future it should be given support to survive. But if the model indicates that the bank will never be profitable again the bank will not be of economic benefit to the society and should thus be closed or merged in an orderly manner.”

From my reading of the range of comments at NakedCapitalism and other blogs I link to from here, I just really doubt it. My point is not to dismiss her suggestion – I think she’s more right than anyone else whose ideas I encounter. But I’m too much like the protagonist in “There Will Be Blood” – I mostly see the worst in people, especially when it comes to money matters …. Course, I’d not complain if everyone proved me wrong.

The ONLY example of an advanced economy coming out of a crisis of this magnitude is Sweden. They let banks fail but also immediately recapitalized them (as in pumped in public funds sufficient to cover the hole in their balance sheets with losses written down to the expected maximum level. The Japanese strongly urged us to do that, in public, a shockingly blunt move for them.

Sweden is socialistic and accepted the necessity of that action. Japan is virtually a socialist nation, yet it took nine years to reach consensus to recapitalize the banking system. Pray tell, how long would it take in the US to get there? If it took Japan nearly a decade, would we ever get there?

And we are really talking about being bailed out by foreigners anyhow. Japan had a high savings rate and could resolve its problems internally, in theory. Even if any recapitalization were nominally to come from the public purse, it would be funded by Treasury debt. Preferred gives a more diversified menu of financing options that appeal to different types of investors than Treasuries.

The Fed and Treasury are not doing that or anything even close to that, Freddie and Fannie, which are banks of sorts, are on life support. They should either be shrunk or properly recapitalized. Ditto other banks, Instead, the powers that be are pursuing the worst of all worlds, letting institutions fail in a disorderly manner, and providing facilities to keep the debt party going. As Tim Duy pointed out, this merely shuffles debt around without actually bringing real resolution any closer:

A solvency crisis can only be addressed by eliminating the bad assets (since analogies to Japan are all the rage, note that the unwillingness to eliminate nonperforming assets helped prolong that banking crisis). Moving the assets onto the Fed’s balance sheet via temporary repo operations does not eliminate the problem, it just moves it around.

If there was a mistake, it was Treasury asking banks to buy GSE preferred stock in the first place. If banks weren’t buying such stock in the first place, it was because in a strictly free market, capitalist sense, it wasn’t a good buy.

These banks aren’t in the social do-gooding business. They didn’t magically buy those preferreds because they suddenly became patriotic Americans concerned about the common welfare. If Treasury convinced them to buy preferreds, it was by implying (sotto voce, and away from prying Congresspeople and journalists) a government guarantee that they would be protected in the very real event of the GSEs’ failure. That was the first mistake that pledged public funds to bail out private investors.

What Dizzard is essentially implying is that by bailing out the GSE preferreds, Treasury could have hoodwinked other guys into thinking other banks’ preferred stock would also be bailed out, get them to put up some of their capital, then throw them under the bus at a later date. Exactly like the poker hustler who lets you win the first game in the hope that you’re fooled into making a bigger bet later on.

Treasury shouldn’t be a hustler. They shouldn’t be in the business of implying govt bailouts or govt protection for certain classes of private investors, because those implications have a strange way of becoming ironclad guarantees.

And if Dizzard isn’t saying Treasury should play the hustler, then he’s implying that once Treasury protects GSE preferreds, they’d be obligated to protect every bank’s preferreds, which is certainly not in the national interest.

While you and Dizzard are correct that in the medium term (i.e. in the next year or so), bailing out the GSE preferreds would have brought some new capital into the market, that capital would only come in with the expectation of being made whole by the government. So in the long term, when those banks inevitably fail, all that “private” capital would be replaced by government money anyway.

I guess what I’m trying to say is that while Dizzard accuses Treasury of extreme short-sightedness, he’s prey to the same criticism (albeit somewhat less shortsighted than Treasury). The fact is that much of the U.S. banking system is insolvent. Anyone with real skin in the game (i.e. without a govt guarantee) knows this and is staying away from these failing institutions, whether they get “preferred” or “senior preferred” or “super duper gold-star awesome CEO-will-wash-your-car” shares. The ultimate solution is to let the insolvent institutions fail, as painful as that is, and set the stage for the recovery.

Dizzard’s horizon is only slightly less myopic than Treasury, and in the long term his solution is still the wrong solution. I’m actually glad that thanks to the Treasury essentially saying there will be no further bailouts of banks, that Lehman, Merrill, WaMu and others who have been limping along all year, are finally keeling over. Better now than 10 years from now after expensive govt life support.

What we need is A Plan. Yes, this may well involve nationalization as you know and has come up in comments, and public financial backing. —And the public should get something solid out of standing behind the financial system in the process in terms of the shape and functioning of said system. Once we have a plan, we'll be able to sell preferreds. But what we've had under Paulson & Co. is spin. All that has done is lose vulture speculators money. Sure, the wiping of preferreds at the GSEs is a bungle. These guys aren't capable of a non-bungle, so much is clear. The upside is that we may now be forced to come up with a real plan.

Think about it: Why now? Why are LEH, WaMu, and AIG going down, with Merrill crawling under the nightgown of BoA? Cause with preferred buyers out it's GAME OVER. And about time. The longer we wait to end the sham and face up to the need for _a real Plan_ and with it realistic planners, the more money will be lost on non-solutions rather than solutions. That's a harsh view, but a larger one. Personally, I _want_ those capital holders who had been thinking of buying preferreds at dying institutions to sit on their wallets: We will need their dough soon enough once we are smart enough to stop losing it for them and stop them losing it for themselves.

We can't resolve losses until we acknowledge that they exist. Paulson's bungle at the GSEs may have the unintended _good_ consequence of dragging the corpse into the living room.