Posted by Joseph Y. Calhoun, III

The Obama administration is considering a number of new plans for recapitalizing the banking system. The market reacted quite negatively yesterday to the new British plan which is very dilutive to existing shareholders. That fear may be unfounded (the British banks are in even worse shape than ours), but that didn’t matter yesterday. What will the new plan be? Via the WSJ:

The hours-old administration of President Barack Obama is expected to move swiftly to try to stabilize the financial system by pumping more capital into weakened banks and buying bad assets. Nationalization appears to be a last resort, but other options on the table move the U.S. in that direction. In one idea under consideration, the government could buy convertible securities from financial institutions, an approach that could ultimately leave the government owning large chunks of many firms’ common shares.

Whatever the Obama administration is going to do, it needs to do it soon. It is uncertainty that first took us down in October/November and it has returned with a vengence. Every bank, good and bad, was hit hard yesterday. Larry Summers recently said that private capital needed to replace public capital as soon as possible, but as long as there is the chance that the government will come in and dilute private capital, that won’t happen. That’s one of the reasons I have been against all the bailouts. Private capital is available and being put to use in the financial sector, but it isn’t primarily going to the banks that the government has stakes in. Wilbur Ross recently bought a small Florida bank and is rumored to be considering an investment in BankUnited:

Jan. 16 (Bloomberg) — Wilbur L. Ross, the investor who made billions turning around distressed steel and textile companies, will buy a majority stake in First Bank and Trust Co., giving him a platform to purchase more banking assets.

The agreement allows Ross, who previously said he was targeting regional lenders, to acquire 68.1 percent of the shares in the Indiantown, Florida-based community bank, subject to regulatory approval, Ross said today in a statement.

The bank has “good opportunities” to expand, Ross said in a Bloomberg Television interview today. “We view the whole financial services sector as a very interesting one.”

Ross joins J. Christopher Flowers, founder of private-equity firm J.C. Flowers & Co., in purchasing lenders personally, rather than through their firms. Buyout funds are wary of becoming bank holding companies, a status that may trigger restrictions on non- banking activities and the amount of debt they can take on.

Via Palm Beach Post:

Ross also is said to be part of a group buying troubled BankUnited of Coral Gables. The American Banker, a trade publication, reported Thursday that Vanquish Capital Group of Delray Beach, Ross’ W.L. Ross & Co. and Cerberus Capital Management have agreed to invest $500 million in BankUnited, the largest financial institution based in Florida.

If the government hadn’t gotten into the bailout business to begin with, this capital would have been used to buy the assets of failed institutions such as Bear Stearns. The Lehman bankruptcy, while destabilizing in the short term, proved that bankruptcy is the best option. Most of the assets were sold quickly and the liabilities are being sorted out in court. If we had taken this path from the beginning, we would likely be near the end of this saga rather than still wondering what the hell to do.