Overpaying is exactly what the bailout bill would do. The banks were assured of this:
http://www.filesavr.com/sifma

The former CEO of Securum (the Swedish entity in charge of their rescue) stated recently it was an INTEGRAL part of the Swedish plan to actively manage and improve the assets they required.

For example, as part of their acquisitions they became owners of the British embassy in Burma and a US ski lodge. The Swedes actively and affirmatively made improvements to those properties before reselling them. They were active asset managers. For some reason current commentary excludes this critical point.

A core group of toxic assets in the current crisis is based on residential real estate. A growing portion of that residential real estate has been abandoned and falling into disrepair and continuing to decline in value.

My judgment is that it will take thousands of managers and workers if we are to copy this critical aspect of the Swedish plan. That would require a focused national effort on our part. Can we do so?

Let’s hope so. It may be necessary.

Additionally, I would point out that “recapitalization” of the banks is a rapidly moving target. As was pointed out in an Atlanta Federal Reserve article from 1988, there is an enormous quantity of standby letters of credit (SLCs) issued by banks that are off balance sheet.

With the crisis and lockups in the commercial paper markets, there is now a decisive trend developing where companies are utilizing their standby letters of credit as a last financing resort in lieu of commercial paper and other vehicles. Witness the behaviour of GM and Firestone last week in this regard. That trend is surging.

So it is likely that hundreds of billions (perhaps more) more will move on to bank balance sheets within the next two years for this and other reasons. That huge additional shortfall will need to be addressed in any recapitalization scenario.

Perhaps we should begin to examine Janet Tavakoli’s plan, the outlines of which she recently presented as an alternative to the Swedish plan.

Janet wrote the most widely used textbooks on structured finance and securitization and has done consulting work for the Federal Reserve on securitization topics including embedded leverage.

Matt Dubuque
mdubuque@yahoo.com

The simple answer is they don’t have the money, if you pull back the curtain the wizard loses their power. GS’s 10% deal with Buffet is fine because it constitutes a small portion of liabilities. The US financial system will not be able to generate in excess of 10% returns before the debt strangles them. Allowing payment in kind would discourage new capital and delay recognition of default, the same way SWFs have now avoided new injections.

The last time there were these movements were Dec 31 2007, Early January 2008. Response was emergency 50bp cut, followed by regular meeting 25bp cut within 30 days of the disruption. I see a 1.25% Fed Funds Rate being probable by Oct 31 — the ISM and auto sales reports only encourage my expectation.