I love this guy.

Bravo, Sir. These are the ideas and guidelines the new administration should follow.

I do like the idea of buying bank shares with the money. They should be preferred, high dividend paying super-voting shares though that put the banks that take the money at the service of the public at large. Then a government committee could say, direct the bank to stop foreclosures because they're hurting America. Heck, that same committee could even bring ATM fees down.

If we're going to recapitalize them, let's pretty much nationalize them.

Dear Mr. Reich. Since credit is the issue why not establish a national bank. That bank could lend to financial institutions and individuals.

I'm beginning to think the whole world of finance is set up to operate like a ponzi scheme.

Moving on, from yesterday's Squawk Box or whatever it's called came the 'revelation' that as a matter of fact, it's not that lending institutions aren't lending - in fact would gladly lend - it's that nobody is applying for loans.

My goodness, we're not applying for loans, we're not consuming sufficiently, we're slacking off on house purchasing...beginning to sound like this whole financial tsunami is (my) our fault.

So we don't know what happened to the first half of TARP, huh? Those of us who watched this clusterf*** unfold in the fall KNEW this would happen. It was baked in, as soon as Paulson said "Give us the money and don't ask questions." Why would this be a surprise.

And yes, finance is a big ponzi scheme and it requires all of us to spend 110 percent of our incomes indefinitely. When we start to behave rationally, it collapses. Welcome to the Great American Financial Enema of 2009 (and 2010).

Asking where the money went is a nonsensical question. Treasury did not deliver small marked bills to the banks, and money is the ultimate in fungible commodities.

So if a bank with a trillion in assets received $25 billion, you might just as well assume that TARP accounted for 2.5% of every payment the bank has made since then. Or possibly and more realistically, if the bank had $100 billion in Tier 1 capital, you could assume that the TARP money accounted for 20% of every subsequent payment by the bank.

The effect of TARP money has actually been to replace the money that had been lost by the banks due to making bad loans/mortgages and making bad bets in the derivatives markets. This preserved them as going concerns. The Lehman collapse was bad enough. Had Citi, Merrill, or especially JPM gone under, it would have brought down the whole $500+ trillion edifice of unregulated derivative trades, and resulted in a swift, disorderly collapse of the global financial system (instead of the slower, more orderly collapse we are now enjoying).

Most likely, the other $350 billion of TARP II will also be needed to shore up the banking system. This is exclusive of the roughly $1 trillion to be spent on stimulating the economy.

Spending the stimulation package on the residential housing problem is a poor choice, since the problem was due to over consumption and over speculation in housing, especially in California, Arizona, Nevada, and Florida. Attempting to blow this bubble up again will be particularly hard because the "boomers" will be retiring soon. Instead of heading down I-95 and I-75 to enjoy their retirement in condos and golf course McMansions, they will find that they need to move in with the kids in the Northeast and Midwest. The flow of retirees well-heeled by union pensions and hefty retirement plans will dry up, considering the state of the unions and the 401Ks (aside from public-employee unions, e.g. NYC teachers).

The stimulation plan should be spent on investments - things that will result in an economic benefit in future years. It should not be spent on stimulating more consumption or on giving tax breaks to the rich.

A few notes on this:

1. Some of the riskier securities are in fact worthless, and won't find buyers anywhere (In the old days, when such things were issued on pretty paper, they might have gone to collectors). There are leveraged instruments that are deep into margin-call territory, lower tranches of MBS issues where the AAA tranche has already seen hits to capital, and so forth.

2. Even just making mortgage terms alterable in bankruptcy will hell non-bankrupt homeowners, because a) the threat is there and b) mortgage holders will get used to the idea that stupid terms are renegotiable.

3. The "money is fungible" argument only gets used by people who want to avoid accounting for what they did with someone's money. If (and yes, that's a big "if") the banks know where all of their income and capital was being spent (or could legally be spent) before the bailout, then it is perfectly reasonable to attribute any incremental post-bailout expenditures to the bailout money. (The banks were, after all, making optimal allocations of existing resources.)

Some of thesw "strings" make sense, but this TARP money is not going to save the economy no matter what happens to it. It is not a big enough amount, for one thing. More importantly, interest rates are not actually "high", except relative to potential profits from investments. The focus should be on correcting the structural problems of the economy (overdependence on oil, consumer junk-goods, financial bubbles, real estate, urban sprawl, and debt). More or cheaper loans won't fix that. The government should invest in education, not pavement, in reducing not increasing carbon consumption, in support of basic science and technology, not in propping up irresponsible over-consumption, over-borrowing, be rewarding basic saving and investing, not reckless financeering, and helping working citizens, not real estate speculators.

Unfortunately, a Chapter 11 would not result in the firing of the banksters (rhymes with gangster) who have mismanaged their banks into insolvency.

In Chapter 11, the company is run by the "Debtor in Possession." That is, management stays on.

Not only that, but they get paid a bonus if they are successful in having a Chapter 11 plan confirmed by the Court.

The Court COULD limit the amounts paid to management. I rather like "Will's Law" (George Will) which states that any company receiving government money does not exceed the amounts paid to the highest paid government employee -- that is we limit them to a GS13 level of pay.

The sale of assets in Chapter 11 would not be a fire sale, as in Chapter 7. In fact, these mortgage backed securities have some value, it's just that no one knows what it is. Not all of the mortgages are in default -- in fact it is a rather small fraction. Moreover, the banks are secured, and the security does have some value. So we are not talking about Confederate money.

It's just that the banksters have been utter morons in dealing with this problem. Why in the world would someone sell a house worth $200,000 for half of that in a fire sale? That's nuts! Wouldn't it just make more sense to hang onto these properties until the market recovers? After all, it was not all that overbuilt. I don't know why anyone thought these morons were worth the exorbitant salaries they were paid.

The underlying problem is that a lot of fraud permeated the system. The people who made the loans were indifferent to whether the borrowers could actually afford the loans. They probably figured that they would be long gone by the time the odoriferous material hit the fan.

There are legal remedies for fraud, and maybe it would behoove some of the geniuses who created the mess to try to recoup some of the losses from the fraudsters. That is, the banks who end up selling these securities for less than their face value have a claim for damages against the mortgage brokers who created these loans.

This is a sizable amount of money, and I am sure that many attorneys would be interested in trying to recoup the losses from the brokers -- even on a contingent fee. In fact, I wonder why the trustees who are so gung-ho to foreclose on properties are not pursuing this.

Great article, great comments. This from 'Merrill' is a gem::

The Lehman collapse was bad enough. Had Citi, Merrill, or especially JPM gone under, it would have brought down the whole $500+ trillion edifice of unregulated derivative trades, and resulted in a swift, disorderly collapse of the global financial system (instead of the slower, more orderly collapse we are now enjoying).

You may judge these conditions harsh. I think them prudent. They may force a number of big banks to go into chapter 11 bankruptcy, which would not be the end of the world but perhaps the beginning.

So thanks for that.