I was concerned that the TARP plan would do little to free up credit. It does little to cleanse banks of their most toxic assets. Banks will not lend to other banks for (rightfully) fear that they may not be repaid. Investors will not buy non-GSE MBS due to the same fear. Now Treasury Secretary Paulson is revisiting an idea he had earlier discounted.
Mr. Paulson is considering making equity investments into troubled banks. This would have the immediate benefit of providing sorely needed Tier-1 capital. However, if it is similar to the treasury's handling of the GSEs, shareholders, common and preferred (non-cum preferred equity)may have cause for concern.
Many banks, including some of considerable size, are in trouble. Something must be done do head of massive failures. European governments have taken steps to make investments in banks or have seized them outright.
I do not see any positive developments for the equity or credit markets. Losses will need to be accounted for and the cleansing of balance sheets must occur to re-instill bank and investor confidence. This probably will not head off a recession.
The next casualties after banks may be the automakers. The Detroit Three (especially GM) may be too far gone to save. Do not be surprised if GM files for CH. XI protection soon.
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