Posted on 04/29/2009 5:47:10 AM PDT by reaganaut1
The big debate about President Obama’s financial rescue plan has centered on whether he’s been right to avoid nationalizing the country’s biggest banks. But there is another, more pressing question about the plan that has received considerably less attention.
After the Federal Reserve’s stress tests identify the country’s sickest banks next week, who will bear responsibility for shoring up their balance sheets?
Will it be solely the government? Or will the government force institutions that lent money to sick banks in better times — their creditors — to take a hit by forgiving some of the loans?
Timothy F. Geithner, the Treasury secretary, and other officials are reluctant to force losses, often called haircuts, on banks. They worry that haircuts could create a cascade, in which some of the creditors that take losses become insolvent, while creditors of healthier banks begin wondering whether they will be subject to future haircuts. In the ensuing panic, financial markets could freeze up, as they did last fall.
Recently — and, I’d argue, fortunately — the Obama administration seems to have become more open to the idea of encouraging loan forgiveness in certain situations. Beyond those situations, officials hope that no others are needed.
(Excerpt) Read more at nytimes.com ...
Obama and Geither will make bank debt or equity un-investable if they are not careful.
Not everyone, some people stand to do quite well.
That would be the new ruling class.
The government should assume ownership of all the bonds, pay 50 cents on the dollar and grant ownership of the boinds to the AFL-CIO and the NEA.
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