Alternative Ideas for Rescue Plans
All financial crisis have one of three issues: Liquidity, Solvency & Capital. The current crisis has all 3. Any plan to help resolve the emergency should be tailored to address all three.
The main problem with most of the proffered solutions is they fail to address all three. Here are some of the better ideas floating around that do exactly that:
• WSJ Heard on the Street column, and NYT Economic Scene both ask: "Why don't we have a Buffett-like GS deal?"
• Floyd Norris writes: "It is unsettling to see Wall Street firms that only a week ago feared for their survival hoping to get rich off this program. It needs to be carefully monitored to keep it from becoming a scandal of its own."
• Barron's Mike Santoli points out that current banking regulations forbid Private Equity (and SWFs) from buying more than 20% of a bank w/o submitting the whole firm to regulation as a bank holding company. That should be waived to allow more private capital to flow into the system.
• Merrill Lynch's David Rosenberg suggests that "the Federal Reserve step in as the repo clearinghouse for all term repo trades. For a counterparty-risk based fee the Fed would guarantee that, only in the event of counterparty failure, the surviving counterparty would receive your cash, not the collateral that was posted for the funds, back from the Federal Reserve. The Federal Reserve would own the collateral."
• Martin Wolf has 3 suggestions:
- Force banks to write down assets to market value, stop paying dividends, and raise new equity.
- Force banks to write down assets and then recapitalize them by converting debt to equity.
- Force banks to write down assets and have the government take equity stakes via preferred stock.
• Joshua Rosner, managing director of Graham Fisher, says price the paper in terms of defaults: "In structured securities, there is no coming back . . . once the underlying collateral defaults, you'll never have recovery."
• Our own humble 30/20/10 program for private equity funds to get involved in Home Mortgage workouts.
• Miller Tabak's Peter Boockvar points out that the $40 Billion per year in dividends the 20 largest banks pay should be suspended, and redirected towards recapitalization.
• More Floyd Norris: "The prices paid for assets should be transparent to the public, and some way should be found to allow others to bid for them, in at least some cases. That would help to assure that the price being paid was a fair one."
• Arnold Kling says: We don't need to bail out Wall Street to protect Main Street. All we have to do is make sure that sound borrowers, especially small businesses, have access to credit. Banks can do the job, although regulators may have to reduce capital requirements.
• Jeff Matthews asks: "How is it that Warren Buffett can cut a better deal with the best-run financial company in America than the U.S. Treasury can ask from the worst-run financial companies in America?
• The Public seems to be very very unhappy with all of this: "Around the country, Republican and Democratic voters are rising up in outright opposition to the White House plan or, at the very least, to express concern that it is being pushed through Congress in haste."
Any other good ideas out there?
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Progressive taxation.
Add liquidity to the system by reducing taxes at the low end (including the smaller businesses), while increasing revenue by increasing taxes steeply at the high end and outlawing offshore tax havens, thereby reversing the transfer of wealth that has occurred during the rule of the Bush Junta.
Now that's what you call socialism...
Posted by: leftback | Sep 25, 2008 12:06:16 PM
My Plan:
1. Mandate a 12-1 leverage cap for all financial institutions to take effect within 180 - 270 days
2. Temporary ban on capital raising by banks – water can’t dilute poison. You eliminate the poison first then add more water.
3. Force banks, etc to reach this 12-1 leverage cap by selling their toxic assets within 180 - 270 days via a US Govt Auction. The US Govt will be the Auctioneer but will NOT bid for assets.
4. Any bank that is unable to sell sufficient assets to bring it under the 12-1 leverage cap will automatically be nationalized by the US Govt at a price of $1. All shareholders and bond holders forfeit their assets. This will provide an incentive to the banks/financial institutions to sell these assets.
5. The US Govt will now hold all the toxic assets to maturity - this will prevent private market bidders from low-bidding in (3) above. Private market bidders in essence are being told, you buy the assets during the auction or you will not have another opportunity to buy the assets, as the US Govt will sieze them at an effective rate of ZERO and then hold them to maturity.
6. Any bank that falls under nationalization will also have its CEO, Board of Directors and members of the Management committee and all employees directly involved in structuring, trading, purchasing these assets for the past 5-10 years disgorge all compensation earned during the past 5-10 years.
7. Create standardized CDS products that traded on an electronic exchange. All non-standard CDS products should be liquidated in the OTC market or swapped into standardized CDS products prior to the commencement of the new CDS exchange. The exchange will commence within 180 - 270 days.
8. New Mortgage Financing Rules: 20-30% minimum govt mandated down payments. Strict Debt to Income limits, etc. These rules must be codified into federal law.
9. New Credit Card/Auto Finance rules: strict rules on the amount of credit card/Auto finance debt available to consumers.
This is the plan to address all issues of this mess. Yes there will be pain all around, but it will flush out the poison and set America on strong footing for the future. Most importantly it avoids the inflationary and weak dollar crisis that America will be faced with if the 700B plan goes through and it gets America of the drug called “easy credit”. We need to return to a “Good Cash’ society that lives within its means.
Posted by: cptrader | Sep 25, 2008 12:11:56 PM
My plan:
Make taxpayer money available ONLY for those financial firms that are facing bankruptcy, AND which are willing to wipe out stockholders. Also, the bondholders of the financial company in question should take a hit.
In other words, this option should be somewhat better than bankruptcy for a given company, but only somewhat better.
Once the government purchases the mortgage-backed assets of such a financial company, that company can then try to raise capital on its own, or else be taken over by another company.
The result? (a) no moral hazard, (b) those who took too much risk will pay a price, and (c) the taxpayers are not left holding the bag (except to a very small extent).
Of course, it will mean 2 or 3 quarters of negative GDP. But we will survive.
Posted by: DL | Sep 25, 2008 12:15:08 PM
Soros discusses the bailout with some of his own ideas here;
http://www.ft.com/cms/s/0/ecd19642-8a9a-11dd-a76a-0000779fd18c.html
Posted by: Isaac | Sep 25, 2008 12:17:47 PM
Summary
The Treasury is concerned that a lack of balance sheet capacity in the banking industry will cause liquidity to dry up for good credit consumer and corporate borrowers. Their solution is to relieve this pressure by helping to recapitalize money center banks by purchasing dodgy, hard-to-value assets. Instead, the fed should intervene directly in the consumer and corporate credit markets that they are concerned about. This could be accomplished either directly, through secondary markets or in conjunction with healthy, well-established retail providers. This plan would be more likely to work, is likely to be profitable and avoids many of the moral hazard concerns with the current Treasury plan.
Proposal
The Treasury and the Fed are right to be concerned that a lack of balance sheet capacity at banks could cause serious problems in important end user credit markets. However, they have the solution completely backward. If we are concerned that certain credit markets for creditworthy individuals and firms are in trouble then the solution is to inject capital directly into those markets. This is the obvious solution and has several advantages over what has been proposed by the Treasury Department. While the Treasury has presented a proposal which bails out money center banks, it should instead be focused on primary credit markets that effect consumer and business borrowers.
Proposal
1. The Treasury Secretary should specify which primary credit markets are essential to the functioning of the economy. Inter-bank lending and markets not directly associated with consumers are excluded.
2. The Treasury Department should intervene in these markets either by (a) setting up entities to directly lend to borrowers or (more likely) (b) purchasing securities in the secondary market based on market prices or (c) injecting equity capital into entities administered by financial institutions with distribution capacity that are active in important primary credit markets. There are plenty of retail institutions in the private sector with the ability to facilitate such action; the difficulty in implementing this proposal is no worse than implementing the current treasury proposal
3. The Treasury should hold these positions until markets begins to function normally.
Advantages over Treasury Proposal
(1) The Treasury’s proposal is sensitive to further declines in asset prices; this proposal is not. $700 BN should be enough to clear any market we care about.
(2) This proposal keeps credit markets open to future worthy borrowers without rewarding those who caused the problem.
(3) The Treasury’s plan will likely lose a few hundred billion dollars. If liquidity is indeed the primary problem in important credit markets, then the government should make money under our proposal.
(4) It should be easy to exit – once markets begin to function normally, the debt should be easy to sell.
Posted by: Justin Dangel | Sep 25, 2008 12:18:41 PM
Ripped straight from Karl Denninger, Market Ticker:
The problems:
1) There is no way to value any financially-related firm in the United States as their balance sheets are nearly 100% opaque; until you force Level 3 assets and "off balance sheet" exposures out in the open (this does not require "mark to market", but it DOES require that you force firms to expose both the claimed assets and their valuation models) investors cannot have an informed opinion of a firm's true value, or even whether that firm is solvent.
2) Without caging the derivatives monster you cannot stop a disorderly unwind, thereby making it impossible to know whether you will suddenly get hit with a Cat 5 hurricane of cross-defaults.
3) Without taking down irresponsible leverage, which the firms have refused to do voluntarily, you cannot prevent failures that result from very small losses in these firm's portfolios.
His suggestions:
1) {Agrees with] U.S. Securities and Exchange Commission Chairman Christopher Cox said Congress should ``immediately'' grant authority to regulate credit-default swaps amid concern the bets are fueling the global financial crisis.
2) Rescind the 2004 order that permitted leverage to exceed 12:1. It took only an administrative action to drop the regulation, so you can put it back in force the same way.
3) Implement the requirement to disclose all Level 3 assets in specificity along with their marking model (in total) every quarter in the corporate 10Qs and 10Ks. This should be able to be done administratively as well, but if it is not, a one-paragraph bill will fix that problem.
Posted by: pmorrisonfl | Sep 25, 2008 12:22:38 PM
If you REALLY want to stimulate the economy, I recommend the following:
"THE BIRK ECONOMIC RECOVERY PLAN"
I'm against the $85,000,000,000.00 bailout of AIG. Instead, I'm in favor of giving $85,000,000,000 to America in a We Deserve It Dividend.
To make the math simple, let's assume there are 200,000,000 bonafide U.S. Citizens 18+. Our population is about 301,000,000 +/- counting every man, woman and child. So 200,000,000 might be a fair stab at adults 18 and up.
So divide 200 million adults 18+ into $85 billion that equals $425,000.00.
My plan is to give $425,000 to every person 18+ as a We Deserve It Dividend. Of course, it would NOT be tax free.
So let's assume a tax rate of 30%. Every individual 18+ has to pay $127,500.00 in taxes. That sends $25,500,000,000 right back to Uncle Sam. But it means that every adult 18+ has $297,500.00 in their pocket. A husband and wife has $595,000.00.
What would you do with $297,500.00 to $595,000.00 in your family?
Pay off your mortgage - housing crisis solved.
Repay college loans - what a great boost to new grads.
Put away money for college - it'll be there.
Save in a bank - create money to loan to entrepreneurs.
Buy a new car - create jobs.
Invest in the market - capital drives growth.
Pay for your parent's medical insurance - health care improves.
Enable Deadbeat Dads to come clean - or else!
How do you spell Economic Boom?
Remember this is for every adult U S Citizen 18+ including the folks who lost their jobs at Lehman Brothers and every other company that is cutting back. And of course, for those serving in our Armed Forces.
If we're going to re-distribute wealth let's really do it...instead of trickling out a puny $1000.00 ( "vote buy" ) economic incentive that is being proposed by one of our candidates for President. If we're going to do an $85 billion bailout, let's bail out every adult U S Citizen 18+!
As for AIG - liquidate it. Sell off its parts. Let American General go back to being American General. Sell off the real estate. Let the private sector bargain hunters cut it up and clean it up.
Here's my rationale: We deserve it and AIG doesn't.
And remember, The Birk plan only really costs $59.5 Billion because $25.5 Billion is returned instantly in taxes to Uncle Sam.
Kindest personal regards,
Birk
T. J. Birkenmeier, A Creative Guy & Citizen of the Republic
P.S. To the above, I would add that the money should be given to U.S. Citizens who actually pay taxes.
Posted by: K. Keppel | Sep 25, 2008 12:23:06 PM
What I find totally shocking is that the Congress has not heard from even ONE expert witness with an alternative plan.
When it came to the question of whether to raise margin requirements on futures traders, the House and Senate held at least a half dozen hearings. Ditto for the Sirius/XM merger.
But when $700B is at stake, how many expert witnesses do they have? ZERO.
Posted by: DL | Sep 25, 2008 12:23:18 PM
cptrader - That is one big axe! Bravo!
Posted by: catman | Sep 25, 2008 12:23:31 PM
Barry, c'mon -- get serious!
Throwing money at a problem that is based on lack of transparency? Nonsense.
We all know what happened, and the fallout is banks won't lend to each other, or anybody else, increasingly. It has to do with trust. Nobody knows what's on anybody else's balance sheets, and they've all proven to be deceptive.
There's plenty of capital available. The fed window has been open to everyone except drug dealers. There needs to be total openness about asset quality, income quality and credit history -- just like in retail lending.
Everybody knows that -- it's the dirty little secret. Bush/Paulson would rather create fear so they can grab power and enrich their friends. And there's nothing anybody can do about it. Let's not kid ourselves.
Posted by: Mark | Sep 25, 2008 12:26:01 PM
The Emergency Banking Relief Act of 1933 allowed a plan that would close down insolvent banks and reorganize and reopen those banks strong enough to survive. This would restore confidence in the banking system as well as credit availability as solvent banks reopen with the governments “seal of approval” and avoids having to tax the citizens to bail out bad actors on Wall Street as well as avoiding the devaluation of the US dollar. Additionally, insolvent entities can be identified and dealt with.
http://en.wikipedia.org/wiki/Emergency_Banking_Act
Posted by: That Guy | Sep 25, 2008 12:26:37 PM
Suspend the mark to market rule immediately.
Posted by: Patrick Neid | Sep 25, 2008 12:28:14 PM
From the CNBC website today:
THE BANKING SYSTEM NEEDS ANOTHER $500 BILLION to survive beyond the $700 billion rescue plan being contemplated by Congress, said Pimco founder Bill Gross.
Posted by: DL | Sep 25, 2008 12:28:33 PM
THE IRS should obtain BONUS FIGURES from the last 10 years from all FINANCIAL FIRMS (and all companies listed on the restricted non short-sale list) and tax all employees, CEOs and executives at 100% retroactivity. Bankruptcy rules should be amended so that these financial folks would be on the hook for these payment indefinitely.
The funds recouped should be redirected to purchase preferred shares of financial firms and would be called the BONUS RECAPITALIZATION PLAN... all future dividends could then be used to pay for social security in the future.
Funds could also be loaned to foreclosure victims to get caught up interest free, with the guarantee that this money would be repayed within 25 or at the time of sale of the home.
Posted by: Mattie | Sep 25, 2008 12:28:54 PM
American Rescue Bank (ARB)
If Washington really wants to solve the problems associated with lending not happening, then a new bank backed by $700B of equity is the right solution. Even with a conservative amount of leverage (from the Chinese, Korea's and Middle Easterns) your talking about $4.2T of new liquidity for new credit/loans. The liquidity would go unfiltered and not watered down directly into homeowners, automobile lending, commercial lending, small business loans, etc. This would ensure that no liquidity from the government would go to fund past problems, executive compensation, pension funds that invested poorly, Bill Gross, Warren Buffet, etc.
Part of the ARB plan would be a target to privatize the bank (through IPO) within 3 years but at the latest 5 years ensuring real returns for the Government (real way to reduce the national debt rather than adding to it). With the current proposal on the table, in addition to the problem with executive compensation and rewarding people for past mistakes, I see the banks just hording the cash and deleveraging their balance sheets like the experience in Japan (e.g. instead of 20X leverage just moving down to 15X leverage with no additional liquidity for "Main Street"). Ultimately a deep recession will come without a way to keep liquidity flowing.
Posted by: asearon | Sep 25, 2008 12:31:30 PM
I'm close to Cptrader above:
An RFC for failing firms worth saving.
Bankruptcy for everyone else.
Treasury holds auctions for solvent firms wanting to liquidate assets and private bidders wanting to speculate. (no government bid)
Posted by: ftm | Sep 25, 2008 12:33:21 PM
How about Mish's Open Letter To Congress On The $700 Billion Paulson Bailout Plan
http://globaleconomicanalysis.blogspot.com/2008/09/open-letter-to-congress-on-700-billion.html
And John Hussman's An Open Letter to the U.S. Congress Regarding the Current Financial Crisis
http://www.hussmanfunds.com/wmc/wmc080922.htm
Posted by: Bubbles | Sep 25, 2008 12:34:46 PM
my opinion is:
There is no alternative to a very deep recession in the USA, Europe and (perhaps not as deep) Asia.
Long term the most important thing for the USA is to learn to live within its means, spend much less, drive savings rates up, try to get as much of its industrial base back.
Reform the Federal Reserve along the lines of the European Central Bank: a central bank should care about inflation and nothing else, no growth and employment mandates because this growth mandate is used by the Wall Street mafia to justify excessive money creation.
Also, reenact a sort of Glass-Steagall and forbid high leverage from anybody with access to the Federal Reserve window.
Posted by: LooksLikeItIsTooLateToWakeUpAmerica | Sep 25, 2008 12:35:05 PM
Birk, I have some very bad news pertaining to your Plan. Check your math, you dolt. Kind of ruins your plan that every taxpayer only receives $425!!!
Posted by: Adam | Sep 25, 2008 12:38:28 PM
Art De Vanny (Professor Emeritus of Economics at the University of California, Irvine and member of the Institute for Mathematical Behavioral Sciences) posted the following on his blog http://www.arthurdevany.com/?p=1239 :
"Everyone will admit that nobody really knows what the mortgages or the securities derived from them are worth. The market is illiquid to an extreme. The proposed bail out makes it rational to wait to unload them to see what the seller can get later. So, the plans being discussed to reinject liquidity to the market are having the opposite effect. It is making the market go away until mortgage holders can see what the Treasury will pay for them later.
As William Goldman famously said of movies, nobody knows anything when it comes to predicting what a movie will earn when it finally reaches the market. I showed in my book, Hollywood Economics, that the way to solve the problem of unpredictable results is to set the price later when you do know. How is that done? Well, to use the movies as an example, you make contingent contracts that pay based on the revenues a movie earns after it is released. Virtually all the industry’s contracts follow this principle, which I call the Option Principle. Designing option-like contracts lets you pay when you do know.
It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns. At each strike point, the option would pay a percentage of the value of the asset.
The option would be designed so that the buyer earns a share of the future value of the mortgage security if it rises. The option would be of no value and would not be exercised if the value of the mortgage security fails to exceed the first, lower strike price. The homeowner also should receive a share of the future appreciation. This would give all the parties to the mortgage a share in the future appreciation. Had options of this sort been issued at the initial purchase of the home, the speculative aspect would have been properly separated from the homeowner aspect and this whole mess would not have happened. The homeowner/speculator would have sold all or some of the risk of future appreciation to the market."
Posted by: Andreas | Sep 25, 2008 12:38:52 PM
I have sent this through to you as an email (not sure if the address on the page actually gets to you but:
September 25th 2008
Dear Sirs
In order to alleviate the current financial market problems, it is important to understand and address the root causes – not just the symptoms and peripheral issues. Topics such as executive pay, bonus schemes, mortgage application fraud, regulatory fraud, credit derivatives and investment mis-selling all need addressing in time, however the primary concern for now must be to stabilise the global financial system and have it reopen for business.
Key Problem: The unwinding of a leverage based liquidity bubble, leading to a situation where we have “Too many assets – not enough end holders”.
The fundamental problem we currently face stems from too much credit being advanced that was being financed by ever increasing leverage.
In order to fully appreciate this problem it is important to understand how the problem developed.
The Virtual Money Machine
Banks, Investment Banks, Hedge Funds and others dramatically increased their level of leverage over a number of years – the same equity base was being used to support more and more financial assets.
The recycling of deposits between institutions created a virtual money machine
• Entity A would raise $100 and buy a MBS or ABS from Lender B
• Lender B would lend $100 to the public via mortgages, credit cards etc
• The proceeds of sales would be deposited back into the Banking Industry
• The Banking Industry would lend the $100 to Entity A via a money market transaction
• Bank A would use the $100 to buy a MBS or ABS from Lender B
This recycling went on relentlessly as long as Entity A kept buying the securities and increasing its leverage.
As long as Entity A kept buying the bonds, Lender B was under pressure to lend as much money as possible via mortgages, credit cards etc because it was ‘selling’ the loans to Entity A at a profit. The current crisis was driven by the Lenders NOT the borrowers.
With excessive leverage and a timing mismatch between long term mortgage backed bonds and short term funding, the moment the music stopped Entity A was out of business: read Northern Rock, Bear Stearns, Lehman Brothers et al.
Secondary Implications
Entity B stopped performing the ‘gatekeeper’ roll of assessing the ability of the borrower to repay, as the risk was being passed onto the buyer of the bonds.
The unquenchable demand to buy securities and increase the degree to which equity was leveraged resulted in a credit boom. Borrowers were offered enormous amounts of money (this also fuelled the private equity and leveraged buyout frenzy) as the money machine turned, leading to significant asset price inflation. The ease of borrowing enabled people to pay higher and higher prices for houses and other assets.
3rd Quarter 2007
The virtual money machine stopped turning. Many institutions woke up and found they had excessive gearing, loans supported by assets of questionable value and an excessive reliance on short term funding.
Once write-downs began and the focus became de-leveraging, the virtual money machine began to operate in reverse:
• Entity A turns from buyer to seller
• The mortgages and loans cannot be ‘undone’ and the prices of the securities keep falling as Entity A is forced to liquidate.
• Without Entity A, Lender B can no longer make new loans to the public as these cannot be funded via securitisation.
• The banking industry is awash with Mortgage and Loan backed securities it is struggling to fund.
• Confidence has been lost in lending between financial institutions due to risk of losses on these securities.
• This is the liquidity squeeze.
Current Situation and Solutions
Two Distinct Problems
Problem 1: Many home owners paid too much for their houses. Time, inflation and economic growth will eventually solve this problem as long as markets are stabilised and we prevent massive forced foreclosures and liquidations.
Problem 2: Lack of liquidity in financial markets as too many assets (bonds) are looking for long term homes. There is no single solution to this problem however a number of different processes can aid in freeing up markets.
Proposed Solutions
Solution 1 : Accounting
Key Problem for Banks: Asset backed securities valuation
Valuations are not reflecting expected losses on the underlying mortgages. Banks are being forced to write down security values at a greater pace than the expected losses are increasing – These additional capital charges are putting further pressure on de-leveraging and also adding to a sense of fear in the public and loss of confidence.
Solution: Allow banks to create very tightly regulated Special Purpose Vehicles to enable holdings of specified securities to be accounted for using standard credit techniques – not securities market valuations. These SPV’s remain on balance sheet and securities transferred into them stay there. Valuation is linked to default rates and expected losses given default of the actual mortgage pool.
Role of Government/Industry
An independent body needs to be established to provide valuations of these securities and mandated loss provision requirements to the holders.
Advantage
Banks would be able to write back significant amounts of their loss provisions from these securities.
Overriding Criteria
The owner of an asset must reflect actual losses that have occurred from foreclosure and liquidation and make provisions for expected loans currently in default.
Solution 2: Liquidity in Markets
Flight to quality and loss of confidence has left banks struggling to raise short term funds and stopped banks recycling funds between themselves.
Solution: Enable the Central Banks to massively expand their intermediary role. In the case of the USA for example, issue $500 billion (or other significant amount) in 1, 3 and 6 month Treasury Notes and offer the funds raised to the banks using repurchase transactions via tender. This is the same process as existing facilities, just on a much larger scale. Such a significant increase in available funding will ease pressure on banks and LIBOR and generate a significant profit to the central banks. The borrowing will also disappear over time as the crisis eases and equity is raised to invest in MBS’s
Solution 3: Unwind Tranching
The tranching of a securitisation sounds appealing in concept, however the reality is that the different tranches simply cannot be priced in the real world. Yes it is possible to say that a senior tranch carries less risk than a junior or equity tranch, however converting this into a pricing method/formula/system is impossible without making assumptions that are unrealistic. This failure is one of the root causes of the current crisis – “Too Many Quants – Not Enough Common Sense.”
Government Role
A useful role of a government vehicle would be to facilitate the unwinding of these tranched securities.
Solution 4: Facilitate a Reduction in Foreclosures
In order to halt the spiralling lower in property prices and social disruption from foreclosures the process needs adapting. A form of the 30/20/10 proposal by Barry Ritholtz of Fusion IQ should be adapted.
In essence distressed homeowners are given the capacity to convert a portion of their mortgage into a 10 year zero interest 2nd mortgage. Please see the proposal at http://bigpicture.typepad.com for further details.
Solution 5: Funding Vehicles to buy MBS’s
In order to ease liquidity problems we need to create ‘homes’ for the pool of securities currently clogging up financial markets.
Allow the creation of tax exempt, retail and institutional closed end Exchange Traded Funds to purchase these securities with maximum allowable gearing of 3 to 1. The funds purchase these securities in the secondary market. Income and capital gains are tax free, however investors will wear the burden of any losses, which will be tax deductible.
Key Advantage: Those that have behaved prudently and saved can benefit from these investments, rather than just footing the bill from tax payer bailouts.
These will be ‘one-off’ closed end funds.
Conclusions
Losses must be taken
At the end of the day trillions of dollars worth of loans were made to people without adequate assessments being made regarding their ability to repay. Total losses from bad debts will run into hundreds of billions of dollars, however the global financial industry can absorb this if given the time to digest.
Many people that paid inflated prices for houses will live in those houses and repay the mortgage. These potentially trillions in current mark-to-market losses need never be realised if the system and economy are given the breathing space to function.
There is no single solution to this problem, however the proposals I have sketched out here will help alleviate the pressures.
Yours Sincerely
Steven A Bowles
Posted by: Steve Bowles | Sep 25, 2008 12:40:26 PM
Barry,
Did you miss this too? That we're going to hand $25 billion to Ford, GM, and Chrysler? They're using this current crisis to fly way under the Radar.
http://biz.yahoo.com/zacks/080925/14895.html?.v=1
Is there anything we won't bail out? Who bails us out when the government is insolvent?
Posted by: C. Fischer | Sep 25, 2008 12:41:03 PM
K. Keppel, the T. J. Birkenmeier plan is off by a factor of 100.
85 Billion divided by 200 Million is 425 not 425,000.
Posted by: Grant Case | Sep 25, 2008 12:41:08 PM
American Rescue Bank
Asearon seems to be onto a interesting idea. Why should Main Street fund Wall Streets past problems. This is a perfect way to solve the real problem which is to inject liquidity into the system. If you don't do this, I see serious dilution of OUR taxpayers money to fund 1. executive compensation 2. past problems 3. deleveraging the instutions (i.e. hording cash). It would be pretty easy to set up given all the unemployed bankers out their these days. I'm sure one of the banks would be more than happy to perform the servicing for the new bank. When its time to privatize, ARB could be sold off as one group or as multiple groups.
Posted by: Robert Fendello | Sep 25, 2008 12:43:12 PM
K. Keppel
85b/200m = $425 not $425,000.
Posted by: spudvol | Sep 25, 2008 12:44:08 PM
