I think the Paulson plan is still essential. It will unclog the banking system and reopen the door to Main Street loans that are necessary to grow the economy. And taxpayers will wind up turning a profit since they will own the assets purchased by the Treasury, the roughly 10 percent yield on those assets and the profits from the eventual Treasury sale of the bonds. And all these revenues will be used to pay down the national debt. But if there is no Paulson plan, the FDIC can carry the ball alone -- certainly through year end and until a new government comes into power.
Incidentally, as the FDIC crafts its pre-emptive takeovers of distressed banks, doing so before the banks crash, it is in effect injecting public capital to bolster sagging private bank capital. Former Reagan FDIC commissioner William Isaac suggests the agency can put even more capital into banks through a net-worth certificate program used in the 1980s for the troubled savings bank industry.
In addition, both presidential candidates are supporting at least a doubling of the FDIC's deposit insurance program for banks. And this provision will likely be added to a new Paulson plan coming up in a day or two.
Hopefully, if there is a plan-B vote on the Paulson program, it will include a suspension of the so-called mark-to-market "fair value" accounting of assets, and replace that either with a net-operating-loss (NOL) carry-back or carry-forward, or at least a five- to seven-year amortization of loan losses incurred by banks that are selling their distressed assets.
NOL is used in many heavy industries where current losses can be offset by past or future profits for both tax and accounting purposes in order to smooth the profit cycle. Without this accounting relief, banks selling loans to the Treasury at a deep discount will further impair their already weak capital positions if they have to immediately post the losses. Rep. Paul Ryan had this provision in the House version of the first Paulson plan, but it was apparently taken out by Rep. Barney Frank. Former FDIC man Bill Isaac also supports this.
Tuesday's stock market comeback -- with the Dow up nearly 500 points following Monday's unbelievable plunge -- suggests that investors believe the politicians will deliver some relief. But my message to the investor class is this: If Paulson strikes out again, Sheila Bair is the ultimate backstop.