If This Too Fails, Bring Out The 'Mega-Bank"

September 25, 2008 5:56 PM EDT

On the eve of a possible deal for the financial bailout, let's take a look at Federal Reserve Chairman Ben Bernanke's and U.S. Treasury Secretary Henry Paulson's past plans to deal with the massive credit contraction and how they worked out. All the plans have failed so far and now we have the very aggressive $700 billion plan. What if this fails too? I propose the "Mega-Bank!"

Plan A (Mid-2006-Thru Mid-2007): Do Nothing. The first sign of major trouble started with problem sub-prime loans and the collapse of two Bear Stearns hedge funds. The Fed took a do nothing approach, saying the market can take care of itself. FAILED

Plan B (August 2007): Cut Interest Rates. The Fed started cutting the fed funds rate in August 2007, eventually bringing the rates down to 2%. FAILED

Plan C (December 2007): Term Auction Facility (TAF). The Fed started the TAFs in December 2007 to increase liquidity. FAILED

Plan D (March 2008) : Bear Stearns. The fed brokered a deal for JPMorgan (NYSE: JPM) to buy failing investment bank Bear Stearn. The fed gave a guarantee for $29B in Bear debt. They figured a bankruptcy of Bear would create systemic risk. The Fed also open the Fed discount window to investment banks. FAILED

Plan E (July 2008): Back-up Fannie Mae and Freddie Mac.  The Treasury announced an increase in the line of credit to the GSEs (NYSE: FNM) (NYSE: FRE), give temporary authority for Treasury to purchase equity in either of the two GSEs "if needed", and give the Federal Reserve a consultative role in the new GSE regulator's process for setting capital requirements and other prudential standards. FAILED

Plan F (September 7th) : Place Fannie and Freddie into conservatorship. FAILED

Plan G (September 15th): Lehman Bankrupt. The Fed tried to broker a sale of troubled investment bank Lehman Brothers, but would not provide loan guarantees. No deal could be reached and Lehman filed bankruptcy. The Fed and Treasury said the markets had enough time to adjust to the possibility of a failure. During the same weekend, Merrill Lynch (NYSE: MER) agreed to a fire sale with BofA (NYSE: BA). The remaining two large investment banks, Goldman Sachs (NYSE: GS) and Morgan Stanley (NYSE: MS), are forced to become bank holdings companies due to the credit market dislocation. In addition, a money market funds that held Lehman debt 'broke the buck'. FAILED

Plan H (September 16th): AIG Bailout. The Fed agreed to give AIG (NYSE: AIG) an $85 billion loan, taking 80% ownership. They said an AIG failure posed too much systemic risk. FAILED

Plan I (September 18th) : $700 Billion Bailout Plan. The Fed announced a plan to buy the mortgage backed securities on bank's books. The fed will pay a price near 'paid-to-maturity' for the assets, versus the market 'fire-sale' price. They belive this will free the banks up to loan again. UKNOWN

What if Plan I fails? Where do they go? Do they have a back-up plan in place?

What if Plan J is the 'Mega-Bank'? Because debt markets will mostly be frozen, there could be one or two 'Mega-Banks' with relatively clean balance sheets that can handle everything; all car loans, all business loans, all credit cards, etc. One of the 'Mega-Banks' could be Goldman Sachs (NYSE: GS), which recently became a bank holding company, raised $10 billion in fresh capital, has the backing of Warren Buffett and of course has ties to Hank Paulson. The other could be Banc of America (NYSE: BAC), which is already a mini-Mega Bank. This may sound like a crazy idea I know, but these are crazy times.

UPDATE: Okay Three Mega-Banks.  JPMorgan (NYSE: JPM) could be the third, after taking over WaMu's deposits and other assets.  It's happening.

Related Categories

Insiders' Blog
Trader Talk

Stocks Mentioned

Related Entities

• Warren Buffett
• JPMorgan
• Goldman Sachs
• Henry Paulson
• Ben S. Bernanke
• Morgan Stanley
• Bear Stearns
• Merrill Lynch
• Lehman Brothers
• Banc of America
• Hedge Funds

Add Your Comment

Name

Subject

Body

Verification can't see the text?
click here to refresh the image.
what's this?