Doug writes:
>
> On Sep 30, 2008, at 2:45 PM, Michael Pollak wrote:
>
>> Unfortunately this is wrong, because the first sentence is wrong. None
>> of the banks runs we've experienced so far have anything to with deposit
>> funding. They are a problem of investment funding. And that's not
>> covered by the FDIC and can't be.
>
> No. In a database of 124 systemic banking crises assembled by two IMF
> economists, about half the countries had deposit insurance. Deposit
> insurance is not enough to cure a crisis. Curing a crisis requires an
> expensive recapitalization of the banking system. If it's done through
> the FDIC, fine, but there's no way to avoid spending serious amounts of
> money.
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True, but isn't it a matter of how the money is spent and on whom? Only
seven of the cases in the IMF study centrally involved the purchase of
assets rather than recapitalization in exchange for an equity stake or a
takeover.
And the Paulson plan goes well beyond a rescue of shaky or insolvent banks. It also proposes to pay above market prices for the next to worthless securities of the stronger banks like B of A, JPM Chase, and Citi whose shareholders can absorb the losses. They seem to be the trio the Treasury is banking on (no pun intended) to jump start the credit markets.
In effect, the Treasury is proposing, with congressional assent, to transfer to the taxpayer what the industry initially declined to do on it's own when it rejected Paulson's idea of a super-SIV funded by the leading Wall Street banks. Citigroup, which has had the most exposure to these securities, stands to benefit most. From here, the plan lis shaping up less like a bailout of the industry than the greatest corporate welfare scheme in history.