The $700B plan to restore confidence to the US financial system collapsed Monday, as the House of Representatives rejected the proposal by a vote of 228 to 205. The financial system is in jeopardy. The world needs to restore solidity to financial capitalism, and time is of the essence.
It’s essential that partisans on both sides of the political spectrum set aside their “principles” and come to agreement on Paulson’s plan. Banks’ balance sheets are crammed with toxic assets, credit is severely constrained, and the health of the entire financial system is at stake. Think I’m exaggerating? Think again. Just this past week, Washington Mutual (WM) was sold to JPMorgan (JPM) in a bankruptcy fire-sale, and Wachovia (WB) was acquired in an emergency deal brokered by the Fed. The best way to stop the rot is to approve Paulson’s $700B bailout, and as quickly as possible.
Regardless of whether or not you agree with Paulson and Bernanke’s means to thwart a US recession, their travails remain focused on a specific end: shoring up the American financial institution. The $700B proposal is not a “bailout” of Wall Street; it is a bailout for the US financial enterprise and, ultimately, for the American Citizen. This claim is not over-reaching.
In today’s financial marketplace, Wall Street and Main Street are heavily intertwined. Complex derivative securities linked to the fledging US housing market may seem foreign to the majority of US households, but they are in fact directly linked to the soundness of the financial sector. If finance ceases to function, the US economy will be eviscerated, and America will enter a world of hurt.
If approved, Paulson’s plan will enable the Treasury to purchase vast amounts of contaminated securities, thereby helping to simultaneously restore much-needed liquidity to the financial system and solidity to banks' balance sheets . A more in-depth analysis of the plan's feasibility is outlined in this past week's Economist. Though this proposal gives reason for hope, it won't come without risk. Foremost, the Treasury may end up paying far too much for assets, thereby sending the Federal deficit into the stratosphere and defenestrating the dollar.
Sure, a $700B burden on the American taxpayer is tough for any self-respecting capitalist to swallow, but should the plan be declined, the ultimate cost on America could be far greater. Although Paulson’s plan does not ensure the resolve of the financial sector, if not approved, a complete financial collapse is likely, and far less palatable.
Disclosure: Author is long UYG, short SPY and VGK.
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This article has 8 comments:
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debtacid
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116 Comments
Oct 01 08:32 PM-
User 270430
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58 Comments
Oct 01 08:36 PMI'll give you a pass, maybe your youth makes you particularly susceptible to the great propaganda machine about the great free market system of the USA. Or maybe you hope to join the ranks of the corrupt and now exposed to be incompetent Wall Street "fat cat" bankers responsible for the fiasco which is the financial crisis.
You are defending a bankrupt, or soon to be bankrupt economic philosophy based on corporate welfarism masquerading behind a free-market ideology.... Socialism for the billionaires, capitalism for the rest of us. Enough said....
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2009 is more of the same 2008
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51 Comments
Oct 01 08:46 PM-
hardball22
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25 Comments
Oct 01 09:54 PMThe problem is fear. Credit markets/interbank/over... are frozen because of counterparty risk and the lingering "run-on-the-bank&... potential. Mass deposit exodus occurs when depositors fear the loss of their uninsured assets. Murmurs of insolvency & undercapitalization trigger it all.
The Treasury should first make banks gather Tier 1 organically:
1) Scrap common stock dividends
2) Convert debt to equity
Squeeze shareholders--the literal owners of these banks, who really shouldn't be receiving dividends given negative trailing and forward earnings--not taxpayers.
Then, give a smaller sliver of our budget [deficit] to Paulson/RTC II to buy that toxic crap. In a perfect world, Paulson's purchases could chip away at Bush's deficit.
That's my outline, I'd love to elaborate.
btw, I'm currently long XLF.
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raising4daughters
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110 Comments
My Website
Oct 01 09:55 PMHere's a much better and less expensive plan. www.daveramsey.com/etc.../
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michange
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2 Comments
Oct 01 09:57 PMGiven that US authorities will probably be responsible for both execution of all AIG CDS (through the takeover of AIG), and (de)valuation of most CDOs (through the TARP aka. "Paulson Plan"), what is the most interesting option in the following :
1° TARP at low CDO value
(entails : low TARP costs but high CDS default premium for the State, weaker banks)
2° TARP at high CDO value
(entails : high TARP costs but low CDS default premium for the State, stronger banks)
3° TARP at original CDO value
(entails : highest TARP costs but no CDS default premium for the State, healthiest banks)
In an otherwise sane banking world, I'd say solution 3 makes the most sense, but...
Also, what will happen with the 300bn in CDS bought by European banks(*)(**) from AIG as guarantee on the numerous CDOs they bought on WallStreet?
In particular, what happens to the smaller banks that definitely have CDOs and CDS but have not access to the Paulson Plan? One imagines (***)they immediately will go bankrupt and be takebn over by UBS, DB, Lloyd, Santander and the like.
This hypothesis leads to a new specific consequence of the TARP : a massive conslidation of deposit banks in Europe, trigerred by US authorities...
(*) référence Financial Times Alphaville :
ftalphaville.ft.com/bl...
(**) référence Fortune :
money.cnn.com/2008/09/.../
(***) référence Economist:
www.economist.com/fina...
see also :
www.lacrisepourlesnuls...
lacrisepourlesnuls.blo...
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Market Insight
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11 Comments
Oct 01 10:21 PMI have worked on Wall Street for 21 years and know CDOs like the back of my hand. However, I have the integrity to stand up and say that Wall Street is screwing America and this bail out will lead to serious inflation and take our country down in a big big way.
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Klorenz
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4 Comments
Oct 01 10:37 PM