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November 14, 2008

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I am on board with what has been done by the feds to shore up the banking system by injecting capital in the form of preferred stock. I am not on board for the government being on the hook for bad loans, thus supportive of Paulson's change of direction. I think the argument that makes sense is to strengthen their balance sheets so that the institutions are in a position to take the hits themselves in their mortgage and other CLO portfolios. Eventually, I believe that nearly all of the preferred stock will be redeemed by the institutions and that the government will take only a modest loss on the preferred stock it owns. If this is correct, the impact on the deficit and national debt will be deminimus.

I also support the AIG rescue package--another financial institution with tentacles throughout the financial markets. They have trillions in credit default swaps and other derivatives. They, like Citibank, BofA, Wells, and others are just too big to fail because there would in fact be a domino effect. Just the fear of that has caused the markets to seize up. Only now are they beginning to loosen up. Interbank lending is up, LIBOR is down, the commercial paper markets are beginning to display liquidity.

I find the squealing from the left about the banks sitting on the capital injections and not making loans ludicrous. Bank lending is up. They are just not making stupid loans anymore. Likewise as a result of the fears in the market, they are restricting credit and only loaning money to people who have a demonstrated capability to repay--what a concept.

I am conflicted regarding a rescue of the auto companies. On the one hand they absolutely deserve what has happened to them. They made stupid strategic as well as tactical decisions. They caved in to ridiculous union demands and as a result have huge legacy costs. They deserve to go bankrupt. The only problem with that is we can't let them take down the entire US economy with them. So, some sort of support is required for the good of the country. Before anyone starts ranting about the shareholders being the ones who should pay for the follies of their companies, look at the stock price--the shareholds have been wiped out. Their shares are bordering on worthless.

I think a resonable proposition for the big three is for them to do a prepackaged bankruptcy--like the airlines did. Through that, they can rid themselves of the onerous union contracts and the legacy costs. (Retiree medical costs GM something like $1500 to $2000 per car.) This is where the government comes in. I think the government rescue package should be limited to protecting the pensions and the retiree medical benefits of the auto workers. The protection should take the form of very long term preferred stock so that if these companies survive and yes, even prosper, the government and us taxpayers can get our money back. At the same time, I think the auto workers should take some form of haircut on the pension and medical benefits because they are well above the norm.

Honest depiction and depressing. Like Obama's current advisors and hope that the entitlement programs will not add another layer to our national debt. As a small business guy, I am suffering. No TARP bailouts for me...I keep my bills paid. Alas...that seems to be the problem.

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