'Aggregator Bank' Talk begins

A: Here we go! Im off to upstate NY for MLK weekend, so I hope everyone has a enjoyable and safe 3-day weekend!

I have discussed that an RTC-like vehicle is very likely since we got wind that TARP was being used to recapitalize banks, and not to buy distressed assets. The toxicity is way too deep for 700Bln to cover. Hard to imagine isn't it?

Bloomberg reports, "Paulson, Bair Raise ‘Aggregator Bank’ to Remove Toxic Assets":

The heads of the U.S. Treasury and Federal Deposit Insurance Corp. gave further momentum to the idea of a new government-backed bank to remove toxic assets from lenders’ balance sheets.

Today’s remarks come days before President-elect Barack Obama takes office, and signal a readiness among regulators to undertake what’s likely to be the most radical effort yet to unfreeze lending. Fed Chairman Ben S. Bernanke earlier this week urged a “comprehensive plan” to address illiquid assets, floating the idea of a “bad bank.”

An RTC like vehicle was one of my 2009 predictions under 'THE FED' category:

I really wonder whether a very big bank will have to be nationalized or not; Citigroup being the biggest question mark. For 2009, here is what I expect:

1) Second round of TARP will be used like the first, most going to inject capital directly into the major banks. The remainder, say $75Bln-$100Bln, may be saved to help other sectors, smaller banks, big developers, autos, homebuilders, and whoever else they decide to be worthy of taxpayer rescue.

2) Obama's fiscal stimulus will be near $1Trln, and will focus on jobs, infrastructure, homeowner relief, foreclosure relief, some pork, and who else knows what sector they feel like including. As with most gov't packages, we must question how efficiently funds are applied, used, and when the goals of the program are actually achieved. Will it take 6 months, 12, 18? In the meantime, how deep does the recession get?

3) TARP II or RTC like program to directly take on distressed assets from the big banks? As the first $700Bln goes to recapitalize, and the next phase has the fed focused on getting the system interested in taking on riskier assets by driving up treasuries, the final phase may be to rid the balance sheets of the spreading toxic assets. Lets be real, as the problem spreads to alt-a, prime, helocs, credit cards, auto loans, lbos, option arms, etc.., more and more assets are becoming toxic as deflation continues. The final phase may be to just transfer these toxic assets from the banks to an RTC like vehicle. I'm not for gov't intervention, just telling you what I think is possible. Maybe this program is another $700Bln, who knows.

I just dont see any other way. The strategy of RECAPITALIZE ---> SETTING SYSTEM UP TO TAKE ON RISKIER ASSETS ---> RID BALANCE SHEET OF TOXIC ASSETS, seems to be the most logical considering the situation. I am not in favor of this solution, this mess, more government interventions, more rescues, etc.., just talking out loud on what I think will happen. Without something like this, we will have multiple quarters ahead of us with more writedowns and more assets becoming toxic as the economic slowdown accelerates. Maybe that is what we need? I give up at this point even thinking about at what point the balance sheets will be cleansed of all the excess that was taken on.