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The article I linked to in my previous post quotes two people at the American Enterprise Institute (!) as writing this:

A better model for a fair solution to the incipient solvency problem is the Reconstruction Finance Corporation, or RFC, of the 1930s. This was one of the most powerful and effective of the agencies created to cope with the greatest U.S. financial crisis ever. When financial losses have been so great as to run through bank capital, when waiting and hoping have not succeeded, when uncertainty is extreme and risk premia therefore elevated, what the firms involved need is not more debt, but more equity capital."

The article describes the RFC thus:

Consider two models for government assistance. The first is the Resolution Trust Corporation ("RTC") model of the 1980s, which was used to buy up bad assets following the S&L crisis of the 1980s. The older model comes from the 1930s and the Reconstruction Finance Corporation ("RFC"), the most authoritarian federal agency that has ever existed in the United States. Directed by Jesse R. Jones, the RFC used its vast legal powers to test the solvency of banks and commercial companies and, when those institutions were proven solvent, they were allowed to re-open. Those financial institutions that were determined not to be solvent were closed by the FDIC and either sold whole or in pieces to other institutions.

Below are two very simplified numerical illustrations to highlight the failings of the current plan in Washington by way of a comparison between (1) the RTC/Paulson model and (2) the 1930s RFC model, which is conveniently illustrated by the purchase of WaMu by JPMorgan Chase (NYSE:JPM). Of note, in the WaMu resolution, equity and bond holders of the parent holding company were effectively wiped out - a significant landmark for bank investors that probably kills the private market for bank equity for the foreseeable future.

A bomb, H bomb, Minuteman / The names get more attractive / The decisions are made by NATO / The press call it British opinion -- The Three Johns
by Alexander on Sun Sep 28th, 2008 at 02:39:42 PM EST
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