It Can be Done

By any measure Paulson and Co have made two significant policy mistakes in confronting the banking and soon to be economic crises. Paulson let Lehman fall putting a premium on moral hazard and underestimating the interconnectedness of this investment bank and then addressed a solvency problem with a liquidity plan called TARP. The question now is whether the policy missteps are fatal. In my humble opinion the mistakes are not fatal. As it turns out TARP allows the injection of capital (public funds) directly into banks va the purchasing of equity stakes – likely preferred shares a la Warren Buffet. Politically turning a ship sailing to liquidity horizon (reverse auctions in heterogeneous ABS) is difficult to turn to the solvency horizon (buying equity stakes or nationalizing). But it is inevitable and we may get that message... [read full story]