The clearest thinking that I have read on this subject comes from John P. Hussman, President, Hussman Investment Trust.

He states:

"This shortfall of protection on the liability side of the balance sheet is what causes a run on the institution, because once shareholder equity is gone, the only way to get at the debt to bondholders is for the company to declare bankruptcy. The concern has been that continuing bankruptcies would throw the whole financial system into disarray, especially for investment banks having lots of counterparty relationships with other institutions. But the reality is that for nearly all of these institutions, the cushion of debt to bondholders has always been more than sufficient to protect customers from losses even in the event of bankruptcy. "

"What the financial system has needed most has been for Congress to streamline the bankruptcy process for investment banks, so that in the event of failure, the “good bank” (assets and liabilities, ex the debt to bondholders) could be cut away quickly and liquidated to an acquirer, leaving the proceeds as a residual for the bondholders. Indeed, that's exactly how it works for regulated banks. What investors overlooked in last week's panic was that we actually saw the largest bank failure in history – Washington Mutual – with absolutely no losses to customers or the U.S. government, precisely because the good bank was seamlessly cut away and sold to J.P. Morgan, wiping out shareholder equity, preferred equity, and subordinated debt, with partial repayment to the bondholders. Snap – just like that."

For a more complete explanation, click on the link below:

http://www.hussmanfunds.com/wmc/wmc080929.htm

Regards,

Lew

 

I think that politicians can debate forever, and never come up with a perfect plan.  Right now they are just posturing for the public.  Congress needs to be proactive, rather that reactive.  A few people are making billions manipulating the markets while Main Street gets the shaft.  It's time to get with the program, and quit playing politics.  Let's stop pointing fingers and take action to stabilize the economy.  When is Congress going to do what is best for the Country?  Come on Democrats.  You control both the House and the Senate.  How about taking some responsibilty for the mess we are in?

I hear professors on TV disagreeing with Bill Gross et al. Certainly President Bush has been wrong or lied to us so frequently that I have no faith in his judgment and not much more in Barney Frank's. Henry Paulson helped create the problem and certainly is not to be trusted with my tax dollars.

 Citigroup, BofA and Chase all seem to have money. Last week I finalized a very substantial line of credit with Compass, another well-run bank. So well-run companies DO have money.

I guess I'd like to hear from Warren Buffett (who also has money) or someone else who I could trust to judge things properly and tell the truth.

To say the Democrats made the problem is not only simplistic, but wrong and counterproductive.

Hmm.. it was the worst idea ever, really glad it failed?

One: If the govt takes any toxic assets from banks, shareholder equity has to be wiped out completely first.  The money the govt pays for the toxic assets and recapitalizes the bank in exchange for new shares.  Not sure what to do about bondholders in this scenario, but I would like to see them absorb some of the losses if the total stockholder equity is not enough.  Possibly, the deal is that they get paid at maturity a value somewhat less than par based on how many defaults were in the underlying mortgage pool.  This results in (a) recapitalized banks than can lend, and (b) stockholders, then bondholders, take all of the losses, and taxpayers take none of the losses.  The recapitalized banks should have a lot more stringent capital requirements and lower permitted leverage. 

Two:  Bill King, "An Alternative Plan for Fixing Credit & Housing".

If you listen to CNBC our economy should be down the drain already.  It obviously is not.  So, you can stop listening to the pundits.  We know that whatever Congress does is partisan politics, from both sides. Why else would Pelosi say what she did prior to the vote?  And the Republicans response was childish.  So, time for term limits.

I can go out and get credit today.  It is available.  The business I work for has a line of credit which they use when necessary, and they apparantly has no problems.  It stands to reason that the credit problems are with either a) not creditworthy companies/people and b) not an immediate problem.  So there is more talk than action going on and the media is good at selling advertising.

Why did the stock market drop 777 points?  It is the end of the quarter and many Hedge funds are going to have to pay back redemptions.  If they don't have cash, they have to liquidate.  If there are a lot of Hedge funds doing this, guess what, the market goes down.  While I was looking for stocks to buy last night, I noticed that most of the stocks I was looking at didn't drop precipitously, actually a number of them went up yesterday.  What does that say?  I can only guess, but I'm guessing that there is a herd mentallity amoungst the Hedge funds and many own the same stuff; and are selling the same stuff.  There are companies that also borrow a lot of money and probably aren't amoungst the good credit risks.  I believe they are the ones that took the dive yesterday.

So should I believe the politicians who I hold in LOW esteem?  Should I believe the press who has their own agenda?    Or should I rely on my own reason and gut feelings about how things may ultimately shake out?  (You have to remember I AM willing to work and AM willing to make sure my financial house is in order.  I AM willing to take responsibility for my actions as well.)  I think I will pay off the credit card and add a little to my savings account.

As an added note; the market is up over 300 points today.  Gold is down.  It feels like the crisis was much ato do about...........?

the market is up 350 points yaaaaaaaaaaay !! The main street should feel happy that we didnt bail out the wall street banks no.

btw, anyone watching LIBOR spreads over short term TBILL creeping up !! thats one key indicator of interbank lending !!

I would say thats a good thing. The banks have lent money to deadbeats for too long. its time to stop the flow of credit !! its painful, but necessary!

To the writer who says: "Come on Democrats.  You control both the House and the Senate.  How about taking some responsibilty for the mess we are in?" I have the following to say:  It was the Republicans that failed to pass the bill.  Nancy P. delivered two thirds of her members -- Boehner only one third.  Talk about taking responsibility!!! You should try taking some of your own medicine.

Now, as to the Bill:  The country and the world needs the Bill.   It should be passed ASAP.  There were only 23 votes between its passage, or not.  Maybe it would have passed had it contained some of the following:

It needs to have ACTUAL provisions for putting people back to work at a living wage, e.g., the infrastructure in this country is in a deplorable state.  Quit with the decades of deferred maintenance on our roads, bridges, dams, levies, sewers, etc.  How about some of the $700b being set aside for infrastructure improvement projects.

It needs to ACTUALLY commit to going after the CEO's who have fleeced America. All of them in every industry, not just the financial sector. Prosecute and fine 'em and jail 'em -- big time so that it hurts really, really badly.  The money extracted should be put in the $700b pot to help defray a fraction of the cost.  And most of all, expose on national TV these villains so no-one else hires them.  They miss a million here or there, or lose a house they just live someplace else (like McCain aka Mr. deRegulation) -- we lose our life's savings, or our pensions, or our houses, or must choose between medicine and food -- while they speculate with our money.  These silly, pretty, frilly little housemaids' caps on CEO pay are totally inadequate and a sop to our intelligence.

The Oil and Gas industries should help to pay the freight by coughing up some of their enormous (and possibly ill-gotten) windfall profits.

The Bill should have some real teeth to enforce regulation, regulation, regulation.

The Bill should include education provisions that educate ordinary Americans in ordinary financial literacy, so that we don't get fleeced again.

None of these solutions a