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Tuesday, February 10, 2009

Can you bail out a ship with more water?

Treasury Secretary Geithner is expected to unveil the new and improved federal bailout package, but it sounds very much like the old and disproved bailout package.

Yet another 250-500 billion will be set aside to specifically deal with toxic assets.  In an effort to further diversify the risk matrix of the financial community, private investors will be encouraged to lever up and buy assets.  Keep in mind, these assets are for sale now.  Private investors could buy them for cents on the dollar as it stands now.  Due diligence on the sale of these assets to sophisticated private investors is likely to have the unintended effect of further exposing mismanagement at banks.

There is discussion of using FDIC insurance and low financing terms as incentives for the private sector to buy the bad loans.  FDIC insurance of toxic assets is the most morally corrupt mandate misuse yet.  The FDIC is supposed to protect deposits – cash money in the bank.  Using the same entity to provide insurance for toxic assets puts deposits at risk.  It is incorrect both morally and mathematically to put hard savings in the same pool of risk as toxic assets and will likely degrade confidence in the trustworthiness of the banking system, not shore it up as they intend to do.

Another component will expand a 200 billion dollar Federal Reserve program to 1/2 – 1 trillion to unfreeze commercial, student, auto and credit card loans.  These markets are frozen because consumers are overleveraged and losing their jobs.  Aren’t these effectively no doc loans for the masses with federal backing and a lower than market rate coupon?  Isn’t that how we got here in the first place but worse?

Capital levels at banks will be reviewed.  Uhm.  That’s a good idea.  Are you kidding me?  You’ve thrown hundreds of billions into these loss factories.  No one has reviewed them?  Where are the risk controls here?  Do these people have any idea what they’re doing at all?  Answer:  no, that’s why they want the private sector to sort it out and why they’re leaving the existing managements in place at the banks.  They really don’t have any idea at all and they’d rather defer to the group of experts that so expertly screwed this up.

$50 billion will be set aside to avert imminent foreclosures.  This is the wrong kind of fix.  These people should have to right-size their lifestyle with their economic reality, not have their economic reality altered to suit their lifestyle.  Sometimes we make mistakes and have to live with the consequences.  It’s sad that people may lose their houses but if they’re really locked into a financial arrangement that they can’t ever afford, they’re probably in the wrong house.

When a ship takes on too much water, it needs to be bailed out.  When that ship has a breach in the hull, the hull must be repaired while the bailing occurs.  When one tries to bail out a ship by pouring more water into it without plugging the leaky hull, the ship will sink to the bottom.

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