KeithHennessey.com

The President’s new message is: No second stimulus. This one will work. Ride it out and be patient.

Yesterday we created a simple example of Large Bank, which made some bad loans and now has two problems:

It doesn’t have enough capital.
It has downside risk on its balance sheet due to the uncertain value of these bad loans.  That downside risk makes the firm’s value uncertain and scares away investors.

Today we examine “TARP I,” [...]

The big banks (and some large non-banks like AIG, Fannie Mae, and Freddie Mac) have two problems, not one:

They don’t have enough capital.
They have on their balance sheet downside risk that is creating uncertainty about how much the firm is worth and is scaring away investors.

I will use a simple example constructed by former [...]