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http://blackpoliticalthought.blogspot.com

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I represented at the Color of Change shindig (actual CBC members showed up, y'all) and the talk was about McCain trying to wiggle out of this campaign!

I will be drinking liberally with the ROOT, Inc. crowd at Marvin's on Friday nite – it's Debate Night Party going on…and if there's not going to be a debate, I hope Obama holds a Town Hall meeting instead.

Kennedy didn't have it half as good as Obama does now!

I've been puzzling why Paulson would propose legislation which is so obviously dictatorial, extra-legal and dangerous, even with the careful orchestration of the Lehman Brothers/Reichstag Fire.

I think I've just figured out why they are doing it.

All the Fed's alphabet soup of emergency liquidity facilities innovated over the past year were structured around repurchase agreements. Toxic waste securities were used as collateral for US Treasuries and dollar credit at 85 percent of face value. But as each facility expires, it has to be rolled over and increased to keep pace with the implosion of credit in the interbank markets. Well over half the balance sheet assets of the Fed have been loaned out in this way, perhaps a critical amount in excess of this estimate. Without recapitalisation, the Fed is at risk of failure in the midst of this crisis. Its Enron-style accounting for the toxic waste makes it very vulnerable to a default by any of the repo counterparties it oversees and limits its ability to enforce any constraints as well.

The Paulson plan will provide a one off opportunity for banks to take their toxic collateral back and sell it at a Paulson-determined price for cash. He issues Treasuries to finance the plan which increases the supply available. He selectively decides winners and losers, of course in making the scheme available and pricing assets, creating arbitrage opportunities and survivor bias in the process.

In the meanwhile, the removal of the toxic waste from the Fed balance sheet and redeposit of Treasuries and cash as the repos unwind gets the Fed off the hook for having hypothecated most of its assets against worthless toxic waste at Enron-styled false valuations.

If I'm right, the Paulson Plan recapitalises the Fed without ever publicly admitting that it was dangerously overextended.

Read the rest at:http://europe.theoildrum.com/node/4563#more

courtesy of Calculated Risk:

http://www.youtube.com/watch?v=t7F1tpqFtgA