Here are points made by the CEO of a healthy bank in the Southeast arguing against the Paulson plan.

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

Again “affordable housing.” I’m now starting to think the federal affordable housing policies which mandated banks make sub-prime loans were an important piece of the problem.

2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post ” rescue” punish the poorly run institutions and not punish the well run companies.

The physician’s mandate is to “do no harm.” If the Paulson plan would hurt healthy companies, we’ve got a huge problem.

6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The government should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

My position is that this crisis is caused by dramatically falling housing values and the crisis won’t start to improve until housing prices start to bottom out. Once house prices start to bottom out, then even a government program couldn’t stop the housing industry from improving.

7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, ” out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.

8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bailout insurance companies, investment banks, hedge funds and foreign companies.

Good points.

9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?

This is a great point I hadn’t thought of!

13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.

So the Paulson plan is a Wall Street bailout that may create a Main Street problem.