Doh! Another Stupid Bank Plan

No sooner do I put down my quill from opining about my fears of silly bank plans, but I read of yet another. This morning I learn from the New York Times that the administration is floating yet another absurd bank bailout plan.

This time we are being asked to believe that the capital we injected via TARP last Fall can be converted into equity and thus count as … capital. Ummm. I presumably missed the trick here. Capital we gave the banks in the form of preferred stock already counts as capital. Converting it into common equity merely moves it from one line on the balance sheet to another. There is no new capital created.

Yes I realize that the ‘tangible common equity ratio’ will now go up – aren’t we all now experts on TCE and its brethren? But ‘Tier 1 capital’ will remain that same. Why? Because both TCE and preferred stock count as part of Tier 1 capital.

So I think this goes into the ‘nice try’ category of absurd bank plans.

In the absence of new cash going to the banks they don’t get more capital. They certainly don’t get any simply from what amounts to an accounting switch.

That ‘Doh!’ coming from the Treasury Department is not Homer Simpson, it’s Tim Geithner.

Gotcha Tim!

How about another plan? One that actually fixes bank capital this time.

Addendum:

I am in pretty good company in my bafflement. Paul Krugman sees it the same way I do; as does James Kwak at the Baseline Scenario. Nice.