Plan A:
700 bn rescue

Plan C:
Geithner's plan

Sverige Plan A:
Garantier och aktiekapital



Moral Hazard

Rolf Englund:
- There is no such thing as rational expectations.

Warren Buffett

John McCain:
"Wall Street has betrayed us.

New figures coming out of the US economy confirms that in almost every respect it is doing significantly better than expected.
It is impressive.
Carl Bildt blog 6/12 2005

Banks' capital-to-asset ratios are under 5 per cent.
Tim Congdon

When the music stops, in terms of liquidity, things will get complicated. But as long as the music is playing, you've got to get up and dance
Citigroup chief executive Chuck Prince

And here

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Plan B:
Government-owned preference shares

Never mind Plan B. Let's look at C, D and E
Anatole Kaletsky, The Times, December 15, 2008

President George W Bush has announced that the US government is
to buy stakes in the country's largest banks. (Historical video)
Click here for BBC

I don't say this to pat myself on the back, but to offer specific examples that these problems were knowable well ahead of time.
So if the problems were knowable to so many people -- including me, a regular guy here in San Diego with no letters behind his name or anything -- then how is it that the people in charge of running the world's largest economy were absolutely blindsided by them?
Rich Toscano, Voice of San Diego, 12/10 2008
Rolf Englund: I could not agree more

The problems we are facing have been coming down the pike for a long time. Many, many people saw them coming. Here at, I wrote about the risks posed by credit default swaps (one of the latest credit crisis bogeymen) in January 2007 and collateralized debt obligations (which were at the heart of the subprime crisis) in June of that year. I wrote about the possibility of widespread mortgage defaults as far back as February of 2006 (my second month of writing for Voice) and I have been writing about the risks of the speculative housing bubble at my own website since mid-2004.
I don't say this to pat myself on the back, but to offer specific examples that these problems were knowable well ahead of time. (This is a necessity, sadly, given the constant historical revisionism practiced by many financial commentators). But it wasn't just me -- a few minutes of Googling will show that many, many analysts identified these problems ahead of time.
So if the problems were knowable to so many people -- including me, a regular guy here in San Diego with no letters behind his name or anything -- then how is it that the people in charge of running the world's largest economy were absolutely blindsided by them?

Given the statements by Paulson and Bernanke, there are only two possibilities: they are incompetent or they are liars. I tend not to think they were lying, because if they really knew what was going on they would have been a lot more non-committal rather than making statements like those above that could later be proven to have been hugely wrong. So that leaves incompetence as the most likely explanation.

I single out Bernanke and Paulson, by the way, because they are spearheading the bailout efforts and because these two unelected men wield phenomenal power over our financial future. But they are absolutely not alone in having had no idea what was underway -- they are joined in this honor by the Administration and, as far as I can tell most of Congress and the financial regulatory structure.

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Rolf Englund: My best articles in english

It's like an avalanche.
A snowball of tumbling share prices began in Europe yesterday afternoon, picked up momentum on Wall Street - where the important S&P 500 index suffered its biggest loss in 21 years - and has been battering Asia overnight.
And that in spite of the £2 trillion pounds of taxpayers' precious money committed by governments to bank rescue plans all over the world.
What's more - and probably more worrying for the authorities - is that interest rates charged by banks for lending to each other for three months remain at disturbingly high levels
BBC's Robert Peston 16 Oct 08, 08:24 AM

Informed observers suggest an additional $1,500bn in capital might be needed. So double this and assume it all comes from the state: it would still “only” be 10 per cent of US and European GDP
Martin Wolf, Financial Times October 14 2008

In its new Global Financial Stability Report, the International Monetary Fund re-estimates losses on US loans at $425bn and mark-to-market losses on US mortgage, consumer and corporate debt at $980bn, for a total $1,405bn, up from $945bn last April (see chart). How much of this will be realised is unknown. It could be substantially less. If the economy went into a deep recession, however, it could be considerably more. But, at this point, this is “only” 10 per cent of US gross domestic product.

Against this, four concerns must be registered:
first, additional losses are likely on already contracted domestic European mortgage debt and as a result of the economic slowdown under way;
second, countries with exceptionally large banking systems and exceptionally high domestic indebtedness may find fiscal burdens far heavier;
third, the banking sector also needs extra capital, to offset the collapse of the so-called “shadow” banking sector; and,
finally, the sector also needs to be substantially better capitalised.

Now that Hank Paulson has recognised that the troubled asset relief programme is best used to recapitalise the banking system, it is important to spell out exactly how it should be done.
Since it was not part of the Treasury secretary’s original approach, there is a real danger that the scheme will not be properly structured and will not achieve its objective.
George Soros, Financial Times, October 12 2008

The preferred shares would carry a low coupon, say 5 per cent, so as not to impair banks’ profitability. The new issues would dilute existing shareholders but they would be given preferential rights to subscribe on the same terms as Tarp and if they were willing and able to put up additional capital they would not be diluted. The rights would be transferable and if the terms were set right, other investors would take them up.

The success of the bank recapitalisation programme could be undermined by a downward overshoot in housing prices. A separate set of measures is needed to keep foreclosures to a minimum and to fundamentally restructure the deeply flawed US system of mortgage finance.

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George Soros

Dividends: The banks will pay Treasury quarterly dividends of 5% for the next five years on the cash-infusion shares. After that, the dividend jumps to 9%. The banks have to pay Treasury the dividends before they pay dividends to any other preferred or common stockholders.
Wall Street Journal 15/10 2008

Warren Buffett’s relatively straightforward investment in Goldman Sachs: the Oracle of Omaha will buy $5 billion of perpetual preferred stock with a dividend of 10%, along with warrants to buy $5 billion of common stock at $115 a share over the next five years.

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The US Treasury is being more generous to banks and shareholders than its UK counterpart
The preference shares being bought in the US pay a 5 per cent dividend, rising to 9 per cent after five years.
In the UK, these shares will pay at 12 per cent
Financial Times editorial October 14 2008

Unlike his UK counterparts, however, Mr Paulson will probably win little praise for this action.
In some measure, this is his own fault. He was slow in bringing forward a coherent plan and the proposals he did release – a $700bn toxic asset dump – were incomplete.
Indeed, Mr Paulson only has the powers he is now exercising because Democratic legislators – notably Senator Chris Dodd and Representative Barney Frank – insisted he should.

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Dr. Doom: US Bailout Plan Will Probably Fail
"What I object to in all the bailout plans in the Western world is (that) they do not address the fundamental problem. And the fundamental problem is overleveraging,”
Marc Faber, editor & publisher of the Gloom, Boom and Doom Report, CNBC 14/10 2008

“The U.S. economy’s debt to GDP has grown from 130 percent in 1980, to 350 percent at the present time,” notes Faber. "The leverage has been under the supervision of the Federal Reserve and the Treasury and everybody encouraged it."

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New Bailout Package Helps, But More May Be Needed
"This is second or third variation of what [Treasury Secretary Henry] Paulson's expected he'd have to do," says William Niskanan,
chairman emeritus of the Cato Institute and a former White House economist.
“I wish we had taken today's steps three weeks ago,” says former FDIC Chairman William Isaac.
CNBC 14/10 2008

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USAs helomvändning om banksocialisering
Den amerikanska regeringen, och alla andra, har gjort en häpnadsväckande helomvändning om sättet att rädda, eller snarare återuppväcka från det döda, det internationella finanssystemet.
Rolf Englund blog 2008-10-14

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Bank of America says it plans to repay its $45bn US government bailout
BBC 2 December 2009

It received the loans during the credit crisis last year and after the purchase of Merrill Lynch this year.

The move would allow Bank of America to free itself from government restrictions on executive pay that were a stipulation of granting the funds.

Bank of America said it would use $26.2bn in available cash and also sell $18.8bn in securities to pay the debt.

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Central Bank Injection

The U.S. government is expected to take stakes in nine of the nation's top financial institutions
the government is set to buy preferred equity stakes in Goldman Sachs Group Inc., Morgan Stanley, J.P. Morgan Chase & Co., Bank of America Corp. -- including the soon-to-be acquired Merrill Lynch -- Citigroup Inc., Wells Fargo & Co., Bank of New York Mellon and State Street Corp.
Wall Street Journal October 14, 2008

The government's new focus is raising questions about why it didn't adopt such an approach sooner. Mr. Paulson actively opposed the idea of investing in banks because he worried about picking winners and losers, though Fed Chairman Ben Bernanke was an early advocate. Mr. Paulson was also concerned banks wouldn't participate because of the perceived stigma and the potential for the government to meddle in their affairs, according to people familiar with the matter.

Senior executives and advisers to some of the nation's leading banks pitched such a plan at various points earlier this summer but were rebuffed by officials at Treasury and the Fed, according to people familiar with the matter. Instead, Treasury initially marched ahead with a plan to buy distressed assets directly from banks.

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Now that governments across Europe have stepped in with bold plans to bail out their banking systems,
they are facing a new challenge: How to pay for it all.

Wall Street Journal October 14, 2008

So far, the U.K. and Germany have put forth the most ambitious bailout plans. The U.K. is planning to issue some £37 billion ($63.1 billion) in new government debt to pay for purchases of the common and preferred shares of three banks: Royal Bank of Scotland Group PLC and the soon-to-be-merged Lloyds TSB Group and HBOS PLC.

Germany plans to borrow as much as €80 billion ($107.3 billion) to buy stakes in banks and provide an additional €400 billion in debt guarantees. The government didn't identify any targets for capital injections, but people familiar with the matter said officials have concerns about several of the country's state-sector Landesbanken, or regional lenders.

The French government said it would inject as much as €40 billion into its banks and guarantee a total of €320 billion in bank debt. The government's first move will be to inject €1 billion into Dexia SA, the municipal lender that the French and Belgian governments have agreed to bail out.

Meanwhile, the Spanish government approved plans to guarantee as much as €100 billion in bank debt in 2008 and set up a mechanism to inject fresh capital into Spanish banks, though it said none needed the facility at present. Italy also announced an unlimited plan to guarantee bank debt, but a finance ministry spokeswoman said the government doesn't expect any banks to tap it in the near future.

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Den tyska regeringen godkände på måndagen ett räddningspaket för det finansiella systemet
på 500 miljarder euro, motsvarande 4.825 miljarder kronor.

Dagens Industri 2008-10-13

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World May Be Lucky to Get Worst Recession Since 1983
Rich Miller, Oct. 13 (Bloomberg)

The world may be heading for its worst recession in a quarter of a century -- if it's lucky.
A steep slump looks likely as the credit squeeze crunches economies from the U.S. to Singapore and panic engulfs global financial markets.

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ECB policy rates are now at 3.75%, and it was not even the most important decision the ECB took yesterday.
That was to make unlimited funds available to the banking system at the new repo rate.
In terms of liquidity policy, this is the nuclear option.
The ECB is now providing banks with unlimited funds of 3.75%.

Illiquidity can no longer be a reason for a bank to get into difficulty. Whatever problems we are seeing now, they will be do to insolvency.
Eurointelligence 9.10.2008

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Some of the U.K.'s largest banks are expected to detail early Monday their participation in a bailout plan
The capital raising will be for four of the U.K.'s largest banks: Royal Bank of Scotland Group PLC, Barclays PLC, HBOS PLC, and Lloyds TSB Group PLC.
Wall Street Journal 11/10 2008

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The world financial system is teetering on the "brink of systemic meltdown",
the head of the International Monetary Fund (IMF)Dominique Strauss-Kahn has warned
BBC 12 October 2008

When Mr. Paulson announced his plan for a huge bailout, there was a temporary surge of optimism. But it soon became clear that the plan suffered from a fatal lack of intellectual clarity.
Mr. Paulson proposed buying $700 billion worth of “troubled assets” — toxic mortgage-related securities — from banks,
but he was never able to explain why this would resolve the crisis.
Paul Krugman, New York Times 9/10 2008

What he should have proposed instead, many economists agree, was direct injection of capital into financial firms: The U.S. government would provide financial institutions with the capital they need to do business, thereby halting the downward spiral, in return for partial ownership. When Congress modified the Paulson plan, it introduced provisions that made such a capital injection possible, but not mandatory. And until two days ago, Mr. Paulson remained resolutely opposed to doing the right thing.

But on Wednesday the British government, showing the kind of clear thinking that has been all too scarce on this side of the pond, announced a plan to provide banks with £50 billion in new capital — the equivalent, relative to the size of the economy, of a $500 billion program here — together with extensive guarantees for financial transactions between banks. And U.S. Treasury officials now say that they plan to do something similar, using the authority they didn’t want but Congress gave them anyway.

What should be done? The United States and Europe should just say “Yes, prime minister.” The British plan isn’t perfect, but there’s widespread agreement among economists that it offers by far the best available template for a broader rescue effort.

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Hank Paulson, the US Treasury secretary, was a man with a plan.
He argued passionately for his proposals for rescuing the US financial system.
Now he wants something different, closer to the UK plan for bank rescues.
Financial Times editorial, October 9 2008

Mr Paulson’s original plan was for a $700bn fund. The scheme would not, however, deal with issues of funding or solvency.

/In the US/ it is not only less obvious which institutions need to be saved, but which are really viable. And if Mr Paulson only guarantees one slice of the system, this could exacerbate funding problems for the rest of the banks.

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No more bazookas. This time Hank and Ben need to roll out the tanks.
Recapitalization is needed. And the government needs to call the shots on this, whether banks like it or not.
Wall Street Journal, October 11, 2008

Consider that $700 billion, the size of the recent Troubled Asset Relief Program, is equal to only about 6% of U.S. commercial-bank assets. That isn't going to make much of a dent.
That same $700 billion is equal to 58% of the total equity in the country's commercial banks.

Iit will take time for any solution to work. And even if the financial system stabilizes, the world still faces recession.
That promises to be deep and protracted because consumers and banks both need to cut their reliance on borrowed money.

Assets at U.S. commercial banks have soared over the past decade and are now equal to about 79% of gross domestic product.
That is the highest level in 20 years.

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Treasury Secretary Henry Paulson said Congress should be glad it gave him a bazooka to take over Fannie Mae and Freddie Mac. "You all can be darn glad you gave us the bazooka because we needed it,"
Paulson said in testimony to the Senate Banking panel

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As John Maynard Keynes is alleged to have said: “When the facts change, I change my mind. What do you do, sir?”
It took me a while – arguably, too long – to realise the full dangers.
Maybe it was errors at the US Treasury, particularly the decision to let Lehman fail, that triggered today’s panic.
Martin Wolf, FT, October 7 2008

I have changed my mind, as the panic has grown. Investors and lenders have moved from trusting anybody to trusting nobody. The fear driving today’s breakdown in financial markets is as exaggerated as the greed that drove the opposite behaviour a little while ago. But unjustified panic also causes devastation. It must be halted, not next week, but right now.

First of all, the panic must be dealt with. This has already persuaded some governments to provide full or partial guarantees of liabilities.

Recapitalisation is essential if institutions are to be deemed creditworthy after the guarantees are withdrawn. Governments should insist on a level of capitalisation that allows for further write-offs. They should then either underwrite a rights issue or purchase preference shares. Either way, governments should expect to make a profit on their investments when these institutions return to health, as they should do.

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Martin Wolf

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Is it either necessary or wise to follow the Irish government in guaranteeing the liabilities of the banking system as a whole?
The answer is: no.
Martin Wolf, FT, October 2 2008