Compare 6:05 - 6:40 to the following from my diary, which plummeted like a rock:
Final point, since its a hot button issue at the moment ... doing this means that we no longer have to keep AIG alive ... We will have an operational banking that does not need Credit Default Swaps written by AIG to paper over their insolvency.
So the last institution we can put through the process is AIG itself. And then the nonsense of "we have to pay millions of dollars in 'Performance Bonuses' to the people who brought us to the point that we are insolvent except for government assistance" goes away. Those idiots who did the idiocy as a group of mythical lemmings jumping over the same cliff, one after the other, thinking they were getting a free ride until they hit the mythical coastal rocks below ... they are "creditors" of an insolvent institution, and can get in line with the other creditors to get pennies on a dollar if that.
OK, just to be clear, I do not think that KO read my diary, because he very clearly said he was talking to someone, and he hasn't called my house.
And, indeed, since my plan is based on piecing together what Joe Stiglitz proposed and what ChrisCook wrote at the European Tribune, there's no reason to believe that the person KO was talking to had read my diary ...
... but I don't care. If more people are coming up with the same plan and getting it out there, all the better.
And finally, for people too lazy busy to click through to the original diary, here's the gist of the plan:
OK, now, suppose we do it this way. Bank examiners do "stress testing", which is to say, a real world audit instead of the fantasy audits that we have been doing in order to avoid official recognition of the depths of the problem. And banks that are in too much financial peril to be allowed to continue operating as they have been doing ... are put into receivership.
Now, the US government strips out the liabilities that we wish to protect ... the account liabilities ... and takes over the "good" assets. If that is a net plus, the government pays the original bank for the positive net assets. If that is a net minus, the government makes up the difference with the new Good Bank, and takes a compensating Senior claim in the old Bad Bank.
Then the residual of the old Bad Bank is run through ordinary Chapter 11 proceedings ... in most cases the shareholders will be zeroed out, the bondholders will become shareholders, the new shareholders are quite likely to sack the old senior executive management, and the old Bad Bank will see what they can do to recover whatever value can be had in the trash that forms their asset base.
In normal economic conditions, the government would sell this Good Bank to an existing sound bank ... but these are not normal economic conditions. And some Americans have been deeply indoctrinated in the idea that Government can't do something like banking as well as the Private Sector (presumably setting aside what the largest banks have been doing for over a decade under the category of "a few bad apples").
But there are ways to finesse that ... for example, ChrisCook at the European Tribune suggests a bank restructure on the basis of a Capital Partnership. In the context of a New Good Bank / Bad Old Bank system, a good bank could buy into a stake in the gross revenue of the Good Bank, and operate the bank for a fee as the managing partner.
