Posted by Karl Denninger fromThe Market Ticker:

This is an unpopular set of prescriptions.  Nonetheless, it is the only thing that will work, and either our President grows a set of clankers between his legs and forces this through one way or another or we will suffer a self-fulfilling collapse when our turn comes – and it will.

  1. ALL derivatives must be placed on an exchange and backed nightly with CASH margin.   Give everyone 30 or 60 days to do it, including de-constructing the “custom” derivatives to one or more “standard” and thus tradeable contracts.  All positions must be marked nightly to the market and cash margin posted by the underwater side – period.

     

  2. 30 or 60 days hence all derivatives not so exchange-traded with cash margin proved behind each one are deemed canceled.  End of discussion.  Argue over “sanctity of contracts” if you wish, the inability in aggregate to perform is sufficient to void them.  Yes, I know, this will produce howls.  I don’t care.  That which must be done must be done.  If the GM bondholders can take this one up the chute so can the banks on these derivatives.

     

  3. All banks and other backstopped institutions are required to sell 5% of their retained portfolios to non-bank entities and mark their portfolios to the market – no exceptions – including all off-balance sheet entities.  The “mark to fantasy”, “extend and pretend” and similar games must stop right now.  We gave the banks the right to lie for a year and demanded they recapitalize and get rid of their crap.  They laughed at the government and bonused out over $100 billion instead.  These institutions and individuals abused the “pass” we gave them – this has to end as the crisis was and is REAL!  The mark-to-market requirement must be immediate, continuing and permanent.

     

  4. All banks and other backstopped entities are required to adhere to “one dollar of capital” behind each dollar of unsecured lending at all times, plus six percent regulatory cushion, all in either cash or short-term (26-week or shorter) T-bills.  No ifs, ands, buts or exceptions.  Give the banks three months to sell off whatever they must (or to raise additional capital on whatever terms they must) to meet these requirements.

     

  5. The government must cut back spending to what it can support with current tax revenues at all levels – federal, state and local.  Yes, I know this will mean big cuts in state, local and federal jobs and budgets.  It has to happen.  Give the…
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