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Friday, September 19, 2008



details of the RTC/RFC plan are still to be settled in washington. but calculated risk was the first to point this out, to my knowledge, about the plan's current incarnation. he follows up here.

... [B]uying the assets isn't enough. These asset sales will lead to substantial write-downs, and that will reduce the regulatory capital at the banks.

So how do the banks recapitalize?

The hope is that by making the assets transparent, and selling off the toxic waste, that will rebuild confidence with investors. Maybe. But the U.S. Government might also have to help recapitalize the banks to keep them lending (like the Reconstruction Finance Corporation (RFC) did during the Depression). Either way, it appears the current shareholders face massive dilution.

the trillion-dollar pricetag being bandied about (a figure hank paulson implies but won't touch for its psychological volatility) is very likely just the first part of the plan (though the government will theoretically reclaim residual value either by a later sale or holding to maturity). buying off a trillion or more dollars of bad debts would serve mostly to open the gates for a badly-needed and more expensive recapitalization.

as ever, take the government admission of cost and multiply by three or five. this is going to hurt.

as tim duy writes:

Try as policymakers might, they cannot forever ignore the fact that we are not Japan; we do not have excess domestic savings to fund such a program. Eventually that fact will come home to roost. Perhaps it already has, as pressure from the Chinese appears had some role in the Freddie/Fannie bailout. And Americans may have to recognize that the remaining storied investment banks, names that drove American capitalism for generations, may soon be substantially owned by China. Indeed if the Bank of China continues to be a dominant financer of US excess, they have found a way to dominate the US in a way that could never have been achieved militarily. They will have effectively exploited a gaping hole in the international financial architecture opened increasingly wider by US policymakers over the last 28 years. But, US citizens all get cheap flat screen TVs, so who cares?

And China is just one of the nations financing the US. We remain lucky that these counterparties have yet to ask for the restructuring program the US Treasury demanded during the Asian Financial Crisis.

What is the alternative? A tax increase? Tell Americans six weeks before an election that they need to accept a lower standard of living? I don’t see that happening. It won’t happen until the foreign credit is turned off. Otherwise, policymakers will continue to behave as if deficits don’t matter.

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