Bear Mountain Bull

A good description of what has happened, and what needs to be done to get out of it, from Barry at The Big Picture this morning – go read the whole thing:

So what would solve it? The first step to accomplish this is triage. Identify the banks that cannot survive, and like Old Yeller, gently put them down. Euthanize the bad ones so the good ones can survive. Nationalize ’em, sell their accounts to strong banks, and prevent further liabilities to the FDIC (which insures all accounts up to $250,000).

Next, recapitalize the banks that can survive by buying preferred stock. That is what Warren Buffett did with General Electric and Goldman Sachs when he made his investments. The Treasury should announce a matching program, where any private investment into a Bank is matched by the government, dollar for dollar, and on the same terms. This fixes not merely a balance sheet issue (like TARP does) but the actual capital structure at the root of the current crisis. And it does so on terms that are good for the taxpayers too.

As this process eliminates the bad banks and recapitalizes the good banks, normal lending will resume. Defaults and insolvency will no longer paralyze the financial industry. This is how Sweden resolved its financial crisis in the nineties, and how England just started to address their problem this past week.

The good news is that the US is that there are signs the US is starting to move towards the Swedish / British / Buffett model. The bad news is that it has taken this long to even begin contemplating this.

We are a year late, a few trillion dollars short. And, its too late for firms that could have been saved had there been clear eyed leadership in Washington, instead of mindless cheerleading. As recently as a few months ago, we were being told thast the economy was sound, the problem was contained, the dangers minimal. Instead, a parade of firms such as Bear Stearns and Lehman Brothers and AIG and Fannie Mae and Washington Mutual and Freddie Mac and Wachovia and Merrill Lynch are now lost. That is going to have lasting repercussions for the national economy, and it is going to be felt especially hard in places like New York City, Connecticut and California.