Via NakedCapitalism:
Financial Times' Martin Wolf: Team Obama "Too Politically Frightened" to Admit US Banks Insolvent

as depositors begin to realize US banks are insolvent? Countries proposing huge stimulus budgets are meant to ally depositors from withdrawing their money and stuffing it into mattresses.

The good news is that apparently the Kadima Party is going to edge the Likud Party by about three seats, and thus Kadima might form the next government (although that's up in the air, naturally). However, Labor got thoroughly trounced; instead the #3 party is a batch of ruthless racist mo-fos, many of them surly Russians, led by Avigdor Lieberman (who is indeed related to Joe Lieberman, peripherally). Not a good day for the Israelis and Palestinians, but could be worse I guess.

(which has a lot to do with future wastes of money for militarism - possibly less wasted than was previously possible!)
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Hongpong.com

and "whose ox will get gored?" considerations. TARP and "bad banks" a non-starter, and Willem Buiter and others have another solution:

Good Bank/New Bank vs. Bad Bank: a rare example of a no-brainer
The truth of a proposition is independent of how many people believe it to be correct. The merits of a proposal are likewise not enhanced by the number of people supporting it or making similar proposals. Still, humans, like other pack animals, thrive on companionship. It is therefore comforting that the logic behind my proposal (January 29, 2009) for one or more new ‘good banks’ to be established, capitalised with public money and with additional financial support from the state for new lending and new funding, while the toxic assets of the old banks are left with the owners and creditors of the ‘legacy banks’, is being echoed in proposals from Joseph Stiglitz (February 2, 2009), George Soros (February 4, 2009) and Paul Romer (February 6, 2009), to name but a few. I claim no authorship or originality for the ‘good bank’ proposal. The idea is obvious and no doubt was floating around the blogosphere and elsewhere as soon as the magnitude of the insolvency disaster in the banking sector became apparent.

The various proposals differ in detail. Romer’s proposal is essentially the same as my own. Stiglitz argues, according to the British Daily Telegraph that “the government should allow every distressed bank to go bankrupt and set up a fresh banking system under temporary state control rather than cripple the country by propping up a corrupt edifice”.

Soros proposes not to remove the toxic assets from the banks’ balance sheets (which would require them to be valued, which is not possible) but instead put them into a “side pocket”. The necessary amount of capital - equity and unsecured debentures - would be sequestered in the side pocket. Soros’ ‘side pocket’ is effectively the same as my ‘legacy bad banks’. Soros notes that about $1.5 trillion is likely to be required to recapitalise the existing banks properly. This money could be leveraged a lot more effectively if most of it were injected into the new good banks, unencumbered with the toxic waste of the existing banks.

Under the Soros proposal, some additional capital might have to be injected into the ‘side pockets’, presumably by the state. Under my new good banks proposal, the new good banks would take on the (guaranteed or insured) deposits of the legacy bad banks (which would lose their banking licenses) and would buy the good assets of the legacy banks. Should deposits exceed good assets, the state would have to make up the difference initially with government debt on the balance sheet of the new good banks. Should deposits be less than good assets, the new good banks would be able to borrow from the sovereign to finance the acquisition of the good assets from the legacy bad banks. This would cleanse bank balance sheets and transform them into good banks but leave them undercapitalized. Soros suggests that $1 trillion of the estimated $1.5 trillion required to recapitalise the existing banking system should be directed to the cleansed banks. Soros believes or hopes that some of the money required to capitalise the new, cleansed banks could come from the private sector. Under my proposal, and that of Stiglitz, the state would initially capitalise the new banks on its own.

The logic is simple. Many (probably most, possibly all but a handful) high-profile, large border-crossing universal banks in the north Atlantic region are dead banks walking - zombie banks kept from formal insolvency only through past, present and anticipated future injections of public money. They have indeterminate but possibly large remaining stocks of toxic - hard or impossible to value - assets on their balance sheets which they cannot or will not come clean on.

This overhang of toxic assets acts like a tax on new lending. Banks are required, by regulators or by market pressures, to hoard capital and liquidity rather than engaging in new lending to the real economy. The public financial support offered in the form of capital injections (in the US mainly through preference shares and other non-voting equity), guarantees for assets and for liabilities (old and new), insurance of toxic assets (as provided to Citigroup by the US sovereign) and possibly in the future through direct purchases by the state of toxic assets (using TARP money in the US) and the creation of one or more publicly owned ‘bad banks’ has been a complete failure.
...
(more...)

http://tinyurl.com/dcgqf2

(comments which follow Buiter's piece are worth a read as well)

A provocative idea, but as the man said, what's currently on offer from Tim and Barack is a non-starter, as it always comes down to valuation of "toxic assets", for which there are no markets. Buiter concludes:

"By focusing scarce fiscal resources on supporting flows of new lending and new funding to support new lending, rather than on supporting stocks of existing bad assets and/or toxic assets assets and on guaranteeing or insuring stocks of existing liabilities, the state meets its three key objectives. First, its short-run economic stabilisation and crisis-fighting objective; second, its medium and long-term banking sector incentive-enhancing, moral-hazard-minimising objective; and third, its fairness objectives: the polluter pays or, you break it, you own it."

"The Geithner non-plan TARP 2 plan is now (mostly) out, and it is about as complex, dubious, over-engineered and sketchy as expected. The non-plan plan -- Tim G. calls it a framework, which is offensive to frameworks -- involves enough moving parts to be an economist full-employment act. It is a druidic mixture of regulatory capture, cute economics grad-school theorizing, and look-ma-no-socialism-here contortions to avoid temporarily nationalizing insolvent banks.

Steve said it best: Real capitalists nationalize.

http://tinyurl.com/atlcln

"The Geithner non-plan TARP 2 plan is now (mostly) out, and it is about as complex, dubious, over-engineered and sketchy as expected. The non-plan plan -- Tim G. calls it a framework, which is offensive to frameworks -- involves enough moving parts to be an economist full-employment act. It is a druidic mixture of regulatory capture, cute economics grad-school theorizing, and look-ma-no-socialism-here contortions to avoid temporarily nationalizing insolvent banks.

Steve said it best: Real capitalists nationalize.

http://tinyurl.com/atlcln

And my sense that Team Obama is making this up as they go was confirmed by an e-mail from Robert Radano:

Treasury briefed the Senate Banking Committee tonight regarding Geithner’s plan to be announced, tomorrow…Tuesday.

There is no plan.

The Senate received no briefing, no documents. Press reports, leaks mostly, are as accurate as anything the Admin. has discussed with the Hill.

There are only two conclusions to draw from this. Either Treasury has not yet decided on a plan. Or for some unknown reason has decided not to confide in the Senate Banking Committee.

The markets have anticipated both a stimulus bill and a comprehensive TARP 2. Instead, markets will get a stimulus bill with marginal value and a muddled TARP.

As one astute reader commented yesterday:

At least Paulson announced his plans. Not that he ever did anything he announced, but that's a small technicality. These guys can't even make an announcement.

Let us not forget that Paulson did manage to dispense the better part of $350 billion in a blinding show of Mussolini-styled corporatism. The new Treasury secretary exhibits similar Italian fascist tendencies, with even less ability to make the trains run on time.

http://tinyurl.com/bv8b6h

OT--Anyone know what's going on with Stirling? He was posting up a storm, now nothing. Curious and concerned. Thnx!

This is Japanification: don't make the screwed-up bank own up and die, just keep them on life support forever so the owners don't lose their shirts.

Thus my new signature.

"Turning Japanese I think I'm Turning Japanese I really think so da-da-da det det det det" - The Vapors

Finally, someone in the Financial community who's seeing it like I do. In a deflationary environment, for god's sake, just print money. You don't have to be haunted by the spectres of Weimar or Zimbabwe when your foreign debt is denominated in your own currency and therefore goes down with your currency. The famous instances of hyperinflation were countries who had foreign debts that had to pay off in foreign currency or in gold, so currency devaluation just increased their nominal debt in their own currency. I think the Bernacle sees this too, but wants all the printed money to go to the private sector, so that the government can't use any of it for spending. I glad to see central bank independence is already being questioned - not just by Kucinich, but now by Frank too, which makes it mainsteam.