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The Great Credit Meltdown "Book": The Chapters To Come

The TARP plan is Chapter One of Part Two of the Great Credit Meltdown book. Part One was the Ad Hoc Solution Phase, which was a failure: the attempts to deal with the problem case-by-case, starting with Bear Stearns.

Part Two is the global solution part, and we still do not know the outcome.

But the next chapters are clear:

CHAPTER ONE is passing the TARP plan, which is close.

CHAPTER TWO: participation in the TARP plan. Who is going to take the government up on their deal?

There are two problems with the TARP plan in Congress:

1) executive compensation limits. This may prevent many potential participants from selling assets into the plan.

2) the government taking warrants in companies. The inability to quantify the dilution is an issue. If the level of warrants is tied to how many transactions the institution has with the TARP, then every interaction dilutes existing shareholders, so the more often a firm "goes to the well" by selling to the TARP, the more difficult the position of shareholders become.

Little-discussed is the clause that gives the SEC the ability to eliminate mark-to-market accounting. There is good news and bad news here: good news because it will slow down the rush to devalue, bad news in that if people want to really know where the balance sheet is, they will have no idea. This INCREASES OPACITY.

CHAPTER THREE: raising capital outside of the TARP. The problem is pretty clear: how do you raise capital after you see what has happened to the shareholders of Fannie Mae, Freddie Mac, Lehman, Washington Mutual, and now Wachovia Bank?

Who is going to give any but the strongest banks money?

The good news is that we are in the process of separating the strong banks (those who can raise capital) from the weak (those who will have trouble doing it, or will pay ruinous prices).

The FDIC has been proactive and has arranged two "shotgun marriages": WaMu-JP Morgan and now Citi -Wachovia.

There will be more. This may be a full-time job for the FDIC for the next few months. Now that the largest players have been taken out, the market is turning to the next phase: weeding out the weaker regional banks.

CHAPTER FOUR: the "European bailout" chapter. You think it's tough here, try Europe. It took THREE COUNTRIES to bail out Fortis today. Think they will keep doing this on an ad-hoc basis? Already there is talk for a broader solution. French President Sarkozy has called for a global summit before the end of the year.

    • House Nears Bailout Vote; Outcome Remains Unclear

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