Crisis Solved: Give Money to Healthy Banks, Let FDIC's Bair Handle the Dying

Why can't Congress just force these banks to write down their bad debt then recapitalize them?

Why doesn't the government create a bank that does not have toxic assets and will fill the void of much needed loans to businesses who need them?

"Lack of political courage [and] ignorance of finance" in Congress are the answers to these and related questions, according to Chris Whalen, managing director and co-founder of Institutional Risk Analytics. "Our friends in Washington who've been receiving a lot of money from Wall Street don't want to put these people out of work."

Whalen, who warned of the crisis long before it was obvious to most, says politicians and policymakers will ultimately be forced to come around to the reality that some of the nation's largest financial institutions are, indeed, insolvent and beyond rescue.

"The numbers will dictate our actions," say Whalen, who recommends the following:

Force banks to write-down bad debts: This will align their asset with their liabilities and prevent those who emerge solvent from hording government monies. "We want a healthy, growing economy, and need new banks providing credit and [help] clean up the mess," he says.

Allow FDIC chair Sheila Bair to do her job: Historically, the FDIC puts insolvent banks into receivership, put their assets into a new corporation which is "clean" (no legacy liabilities) and sells it to a stronger bank. JPMorgan's purchase of Washington Mutual followed this script, for example; Bank of America's purchase of both Countrywide and Merrill did not, which is why Ken Lewis is now stuck with "two rancid, hideous cancers," Whalen says.

Give money to healthy banks: "Give 'em capital on good terms," Whalen says. "But they have to eat all of Sheila [Bair's] cooking; they've got to take [insolvent] banks they can't sell to other investors."

Stop the Fed's support of the OTC credit default swaps market: "When are we going to realize leverage in over-the-counter market is driving most of this crisis," he wonders. Yet they refuse to deal with it because the Fed has been a sponsor of the OTC market in the first place."

The good news is Whalen thinks the crisis could be resolved within a year if politicians find the courage to take these steps. The bad news...well, I don't have to say it, do I?