The administration's new banking rescue plan was officially released this morning after the details of it had been leaked over the weekend.  It sure didn't take long but pretty much every economist and financial blogger not connected with Wall Street has already ripped it to shreds calling it everything from a massive tax payer fraud, another big bank hand out and a massive government sponsored confidence game.  Economist and former Nobel prize winner Paul Krugman spent no less than 3 posts since Saturday blasting it.  While Mike Shedlock (Mish) went so far as to proclaim Treasury Secretary, Tim Geithner the architect of this plan (and of many of the bank bailouts and AIG bailout fame/shame), "the most dangerous man in America"

Actually it was pretty easy to rip apart quickly as it's basically a repackaged version of former treasury secretary Hank Paulson's proposed plan which was also blasted to smithereens.  Of course it's unfair to blast a plan without providing your own for saving the banking system, so here goes...

Unlike the administration, FED and Treasury department I do NOT believe solving the banking crisis will solve the our economic or housing problems, but we still need to solve it or it will contribute to things getting much worse.  Surprisingly we already have a good solution to the banking crisis, one that was born out of previous banking crisis', and that has been battle tested and has worked great for over 70 years in dealing with thousands of banks.  It's called FDIC receivership, and it was notably used recently for dealing with several large institutions including Washington Mutual and IndyMac.

Banks are legally mandated to carry a certain amount of cash reserves relative to their loans and other assets and liabilities to ensure they can safely pay depositors that want to withdraw funds.  If they fall below this threshold the FDIC and OTS is required to come in and seize the institution taking it into receivership to protect both depositors and tax payers.  This is one of the things you submit to when operating a bank in the US and to be able to have your deposits FDIC insured. 

In FDIC receivership, the bank is essentially cleaned up to be return to private operation as quickly as possible.  Incompetent management is given the boot, the books are combed over looking for fraud, liabilities are zero'd out with stock holders and then bond holders taking the first loss while depositors are protected.  The now clean in unencumbered bank is then sold off to another bank either in whole or in pieces whatever, is more workable.  It's different from the concept of nationalization as the whole goal is to return the bank to private operation in short order.  In fact receivership often only lasts days and appears near instantaneous to the public.

Now the crisis in our banking system, is that a huge number of banks including several or the very largest in the US would prove to be below reserve requirements if they were to use proper accounting, write down their bad loans and assets.  Falling below these reserves would mean the FDIC would legally required to take these banks into receivership to protect depositors and tax payers.   The Treasury rescue plans all revolve around trying to keep the banks above reserve requirements by pumping cash into them and making accounting/regulatory changes so they don't have to properly account for losses.  Why?  

While, FDIC receivership is a very effective and well tested for dealing with these sorts of banking crisis', it also has a high political cost.  The incompetent bank executives that have been lining the politicians pockets for years would almost certainly find themselves out of a job, and many on Wall Street would eat substantial losses on stock and bond holdings in these banks.  There is also the fact that people don't want to admit some of the banks that have been mainstays of the US banking system for decades may in fact be failures. I guess it just comes down to the fact there isn't the political will in Washington to actually solve the crisis.