Funding or capital?

I don't believe this post but I think it is interesting... John Hempton maintains that the US banking system has, or at least could soon have if it retained earnings, enough capital. [My first worry is that while this might be true on aggregate, some institutions are undercapitalised, and the market does not know who is know because they do not believe banks marks and they think there are hidden losses.]

He then maintains that the problem is funding. That is, given the banks reliance on wholesale funding, it is the inability to borrow that is sending the system to hell in a handcart - or at least sending the TED spread to 3%. Given the central bank liquidity flooding the system I don't believe this part either. I do think Hempton is right about confidence being key, but surely the cheapest way to buy some of that it to fix the underlying mortgages. Still, it is an interesting argument and I'd like to see a three way debate between John, the proponents of 'recapitalise the system' and those who think mortgage mods are the way to go.