A troubling wrinkle about how the Treasury’s plan to buy toxic asset from banks could cause huge losses and the need for more capital comes from premier bank analyst Richard Bove at Richard Bove. According to the FT, he wrote  “[The plan] will not happen because it would destroy bank capital. It might cause a bank to fail the new stress tests under way. Banks will not take this risk.”

His premise is simple. If private equity will only buy assets at prices well below the value that banks have assigned to them on their balance sheets, the financial firms will have to write-off the difference.

Douglas A. McIntyre