Monday, October 06, 2008

What is Paulson’s Plan B, sorry X (by now?)

Quoting Newsweek

“In the best-case scenario for Paulson's plan, there is real, unrecognized value in the mortgage-backed securities sitting on financial institutions' balance sheets. He hopes that the government, by serving as a committed buyer, will be able to jump-start trading in those securities. Once it's clear to the marketplace that the disdained securities have considerable value, Paulson hopes, the uncertainty over financial institutions' net worth will be dispelled and they will be able to raise capital privately and resume normal lending.

If instead the Treasury purchase plan reveals that the securities really are as worthless as many fear, Paulson and Bernanke will need an urgent Plan B (or are we up to Plan X by now?). Super-low sales prices will force financial institutions to acknowledge they have been carrying assets on their books for more than they're worth. They'll have to write them down, which could leave many undercapitalized. At that point, the government will be forced to take them over and then close them or merge them into healthier institutions.”



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