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Author: PeterRabit Big funky green star, 20000 posts Top Recommended Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 1961182  
Subject: Bailout Done Right Date: 9/25/2008 11:12 PM
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OK, I've really come down to being 100% against the Paulson Plan or any modification that involves buying toxic debt.

So what would I have them do?

In short: Follow Warren Buffett's lead

In return for $5 billion in cash (12% of his horde) Buffett got $5 billion in GS preferred stock PLUS warrants for another $5 B of common stock at $115 within five years. (That option is roughly valued at $2 B.)

He received zero toxic debt.

The US should offer a similar deal to any company that wants to step up.

The entire Paulson-Bernanke concept is fundamentally flawed. They are trying to apply an RTC model where it makes no sense at all.

In the Savings & Loan crisis, the US took over failed thrifts. The taxpayer wound up owning a lot of very strange assets. Not because we wanted this toxic debt but because that was the automatic effect of the federal insurance that covered these S&Ls.
http://en.wikipedia.org/wiki/Savings_and_Loan_crisis

No one owned this crap other than the US govt. A trustee (the RTC) was needed to dispose of the assets in an orderly way. Just like when someone dies.

So, yeah, in that situation the RTC made sense.

But P&B are talking about taking the wierd assets BEFORE the banks die. Why would anyone in the right mind want this stuff?

Bernanke is afraid that if we don't take the crap away from the banks, they will hang on to it for decades the way the Japanese banks did. Very simply: he doesn't trust the private market to do the right thing and he thinks he can do better.

The Paulson-Bernanke Plan is fundamatally flawed. Ditch it now and offer to buy equity.

Peter
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