Citigroup Breaks $1: 'We Need a Bolder Plan' to Fix Banks, Sonders Says

"Lifting [toxic assets] off bank balance sheets...is the most crucial thing," says Liz Ann Sonders, chief investment strategist at Charles Schwab. "I feel like we're dancing around the edges a little bit. We need a bolder plan to get at this piece."

Tim Geithner's plan, such as it is, calls for a public-private investment fund to spend $500 billion (at least) on purchasing bad bank debt and get them off bank balance sheets. This probably is the right approach, Sonders says, conceding the pricing of the assets is the crucial, and highly complex, element.

While a diehard believer in free market capitalism, she concedes a pure private solution would probably result in the assets being priced too low, which won't help the banks. Pricing toxic assets too high, of course, rewards banks and limits any potential upside, such as it is, for private investors and taxpayers alike.

As for even bolder steps: Sonders essentially agrees with Pimco's Bill Gross that full nationalization of banks would cause major upheaval and should be avoided. She also doesn't believe the "Swedish Solution" would work here because our banks are much larger and more complex than Sweden's in the early 1990's. She also notes we have a huge "shadow" banking system - GSEs, hedge funds, pension funds, insurance companies - that are likely to suffer as much as 50% of write-downs, which the IMF estimates will ultimately total $2.2 trillion while NYU's Nouriel Roubini says $3.6 trillion (at least).

As you'll see in the accompanying video, our conversation morphed into a discussion of why the government seems content to let equity holders be wiped out but is doing anything/everything to protect debt holders - at least, so far.

Sonders essentially agreed with Gross' view that to "'haircut' senior debt or even existing preferred stock [holders]...would create an instability policymakers should not want to risk."

But things are already pretty unstable and protecting debt holders seems, in a way, like trying to hold together a system that's already broken.