A Better Alternative

A bailout proposal that will work needs to unambiguously address the issue that Secretary Paulson and Chairman Bernanke have identified as the principal threat to our nation's economic well being. That threat has been identified as the unwillingness of banks to lend to each other or to non-bank borrowers. The purported reasons for this unwillingness to lend is that mark to market markdowns of "toxic securities" on bank balance sheets will shrink their equity base, reducing their ability to lend to bank and non-bank borrowers. In addition, markdowns on the balance sheets of their fellow banks who they might lend to will undermine the creditworthiness of those banks leaving the lender bank with a bad loan to a borrower bank.

The solution proposed by Treasury is to create a $700 billion buyer of these "complicated" securities that will cause the market to value these "toxic securities" at a price closer to their "yield to maturity value" rather than the "fire sale" prices that are currently being offered. Becoming the buyer of the last resort for the $14.8 trillion U.S. residential and commercial mortgage market seems to be an extremely indirect way of bolstering the capital accounts of U.S. banks.

A better alternative to the current plan is a simpler and far easier to implement plan that directly addresses the ability of U.S. banks to increase their capital accounts and their willingness to lend to bank and non-bank borrowers.

The proposal is simple. Any "FDIC insured" financial institution in need of capital can raise 10% preferred stock plus warrants (struck at 90% of the prevailing market price/value of their common equity) from the U.S. Government's bailout fund. Generally the same structure and yield offered to Goldman Sachs by Berkshire Hathaway in its recent $5 billion preferred stock issuance. The fund would need only $350 billion to achieve its goal of restarting lending as all FDIC insured institutions had a total of $1.4 trillion of equity capital and only $300 billion of "toxic" mortgage securities on their books as of June 30. This available funding would represent a 25% increase in U.S. bank capital if it was all taken, which is unlikely as many banks have a lower cost of capital even in today's turbulent market. In addition, FDIC insurance rates should be increased to cover any losses that Treasury experiences from institutions that participate and fail in the ordinary course. Additionally congress should consider raising the $100,000 cap on insured deposits to further bolster confidence in U.S. banks, but such an increase is not required to make the program work. This program will be used to stabilize all worthy U.S. banks and will benefit depositors, but not shareholders.

This program is designed to be completely self-funding. In addition, it will allow the holders of these securities, who presumably know them best, to manage and liquidate them at their discretion. It will also hold them accountable for their investment decisions while guaranteeing the financial strength of the U.S. banking system. This program is knowable in scope as all participants are currently regulated and report their assets and capital to their regulators. Additionally, given the fact that only FDIC insured institutions would be participating, any losses incurred in this program (which is unlikely given its design) would simply be reducing future losses that the U.S. government would have had to shoulder if the FDIC insured entity would have failed. Furthermore, the government will benefit the system, probably earn an attractive rate of return and not be exposed to a new bureaucracy with a questionable ability to buy assets of varying complexity and value.

This program will communicate unequivocally to global markets that the U.S. banking system is sound. It will also communicate to FDIC insured banks that in this time of high interest rates for business and individual borrowers and low cost government guaranteed funding, the best thing they can do to quickly rebuild and grow their capital accounts is to lend to creditworthy borrowers.

Comments

[sposton]

I agree that the proposed bailout is not the best way to go. I think we are all looking at this from an isolated perspective and blaming Wall Street alone for this fiasco. They are guilty all right but our problem is much wider. The fact is this America has been making wrong choices on many fronts for a long period of time. Our trade policy goes counter to the interest of the American people and one can trace this bubble directly to the wrong choices in our trade policy. David Pilling's article in today's FT speaks to this:

http://www.ft.com/cms/s/0/4cc53650-901b-11dd-9890-0000779fd18c.html?nclick_check=1

[SailFree]

http://online.wsj.com/article/SB122282635048992995.html

According to a very bright guy, Bill Clinton, the bank deregulation he, Chuck Schumer, Joe Biden, John Kerry, and enough Democrats and Republicans to give a 90-8 vote signed in 1999 had beneficial, nto harmful effects, on the economy.

Clinton KNOWS the problem stems from the REGULATION, not deregulation, that mandated the bad loans, and from the corruption at Fannie Mae that overvalued the mortgages they were bundling and selling.

[SailFree]

Even better would be rescinding the laws that mandate giving loans to unqualified borrowers and siccing the special prosecutors on ACORN for extortion and blackmail.

[bacaangel]

Banks/companies that are Regulated are not experiencing any econimic crisis, just the investment banks/companies which are not regulated or de-regulated and have no oversight! "One of the regulations meant to keep insiders from driving down the prices of their own company"s stock so that they could sell short at will to make a quick million whenever they felt like it was called the "uptick rule". The "uptick rule" is another one of the FDR Era regulations which the Heritage Foundations was talking about when they said that they wanted to roll this country back to the days of Herbert Hoover. They succeeded. The Bush administration got rid of this safeguard last year---with predictable results. The uptick rule is fairly simple. "

(And by the way, Sec. Paulson has a nickname only the insiders know of -- Hanky Panky Paulson!)

http://www.investopedia.com/terms/u/uptick...

[SailFree]

This is not true, as Bill Clinton has just said. I have submitted post and link and await its approval. The banks who are less regulated, more flexible, are the ones surviving. Soprry to intrude with the truth.

[drblack]

If you believe in Freedom,The United States and the Constitution you will put your money where your mouth is.
Freedom is gained by people willing to die for it. All you have to do is risk money.
This is your chance to take back your country.
Do you have the courage to stand up for Freedom and America?

No bailout unless regular Americans are given help,regulations are placed on ALL financial systems(hedge funds included.)
Bankruptcy law is put back to where it was before it was changed a few years ago in favor of the credit card companies. No one should go broke getting medical attention and strict limits are placed on interest.
Foreclosures are to be stopped and loans renegotiated.
No business can be "Too Big To Fail" and those that are to be broken up.
Business must pay its taxes and NO ONE can have secret off-shore accounts.
Those who created this mess should be investigated and treated like the criminals they are. No more shielding of the rich.
There must be harsh penalties for anyone who breaks laws related to finance.

This is your chance to save the USA and restore Freedom,Justice and the Constitution.

[iralarry]

We lived with them on Montague St in a basement down the stairs.
There was music in the cafes at night,
and revolution in the air...bob dylan

Finally, FINALLY, outrage, yes OUTRAGE at this foolishness.
For once, ONCE, I am feeling like a republican on this issue.
Please, Don't hit me. The fact is, Wall street is Appall street in my eyes. The nerve of our elected officials to pay greater credence to the power brokers getting richer by the day rather than the street beat getting broker by the second. Hear our VOICE. NO BAIL OUT! Go back and do it again, and this time get it right.

[valentinemichaelsmith]

The house republicans are not standing up for the country . They're trying to protect their friends in the business sector .

What are they asking for , an end to mark to market accounting and government backed insurance ? In other words a bigger blanket to cover up the shortcomings so as not to dry up investment in institutions that have made bad decisions . And if an asset becomes really rotten they can just drop it and collect from the government ( we the people)

This bailout needs to go to the root cause, people who have lost the ability to make mortgage payments because of preditory lending .

And there has been no mention of the next crisis ; People who have been getting by by using credit cards to pay for necessities such as groceries and gas and are now maxing out . With 30% interest rates they will never be able to pay that off . Does the mob even charge 30% ?

[SailFree]

No, it's not primarily the banks that caused the problem, but the congressional mandating of unsecured, unwise loans to people who would have, if objectively analyzed, been turned down for loans in a rational world,. Congress causes much mischief by trying to repeal the laws of nature.

[SailFree]

Thanks for honoring our troops! Finally!

[NYC Lover]

Hello, All,

First time posting here for me, although I've been lurking for a while and learning agreat deal from many of you.

Maybe I am too stupid or too drunk to understand this plan, so maybe someone could put this in grade school English for me? What, exactly, is Tony's and Richard's proposal?

Thank you.

[jumbojb]

Is anyone familiar with Richard Defazio's "No Bailout Act"?

I'm not sure how far along it is, in it's formal draft, but it seems very smart.
I heard him speak on the radio and he was loquacious and on target.

http://www.defazio.house.gov/index.php?option=content&task=view&id=441

Has anybody else heard anything about this?

Thanks!

[jimgilliamv2]

Tell me why do democrats fall over themselves to give the republicans what they want after the house republicans voted down the bill. Do the democrats have no spine? Seriously, in a time with disastrous deficits and a gigantic $10 TRILLION national debt, we need more tax cuts? If this is what democrats stand for then America deserves the financial havoc it will bring.

[Paul Abrams - Huffpost Blogger]

I agree. Great minds think alike!
www.huffingtonpost.com/paul-abrams/its-the-liquidity-stupid_b_129017.html
posted 9-24.

[Pex]

The missing piece in every proposal I have seen so far is that nothing is requiring the banks to begin lending again. If they feel uneasy, they will continue to stay on the sidelines as much as possible. Every previous move made by Paulson and Bernanke left the same problem. When Bernanke opened up the discount window, there should have been some requirement that the institutions stepping up were going to use the funds to do some good; not just to clean up their books a bit.

So let's say the banks ofload their questionable securities positions through the new TARP program. Then what? Unless and until banks feel more confident about exactly what real estate prices should be, nothing will change.

[schatsie]

You know the rich are sitting on BAGS AND BAGS of money...Buffett threw a tip (5%) on the table, he and Gates are sitting on close to 100 billion total themselves... and that is only the top 2 of the Forbes 500...

If they believe in the 'FREE MARKET' and democracy, why will they not invest in these banks?
I am afraid that insisting on Buffetts terms will still result in Bank Failures, I think he and Paulson determined that GS would get bailed out no matter what...

[SailFree]

It was REQUIRING THE BANKS TO LEND TO UNQUALIFIED PEOPLE which caused the problem! Get real! REQUIRING THEM TO LEND AGAIN WOULD BE MORE OF THE SAME POISON!

[mfelder]

Has anybody ever considered that this is an unusual situation. How many times in history have we had millions of homes foreclose in a short period of time. The truth of the matter is that many of these brokerage firm created investment vechicles that were not sound and were not backed by good solid mortgage deals. I think for the banks, these foreclosure presented a major problem and for the government an even more serious problem. When we get mortgages from the banks, those mortgages are usually backed by the FHA or some federal entity. Those federal entities says that should the homeowner foreclose the government will pay the lender. The truth is that the government did not have the funds to pay those lenders for all those failed mortgages. Everyone took their eye off the balls and now we have to fix the problem.

[Tronic]

Thank you, Messrs. Ressler, for accurately defining the problem, along with an intelligent, rational solution.
This problem began with Americans buying property they couldn't afford, with the intent that somewhere down the road the price will rise, at which time they'd "flip" the property and cash in a tidy profit.
The current legislation before Congress calls for the Federal government to buy a slew of "toxic assets", hold them until market prices rise, and then sell them for what some believe will be a net profit. This is the same sales pitch that created the problem in the first place! Wall Steet's pyramid scheme has mushroomed to colossal proportions, and they're trying one last hustle on the only one big enough to buy it - the American Taxpayer.
Bush's Bailout for the Billionaire Boy's Club - Just Say No!

[mfelder]

I think this is a good alternative plan. But there is nothing in the plan that is being pushed by Washington that says that they will not use the mark to market rules. I think they will employ all the tools at their disposal. This current plan says that their initial outlay will be $250 Billion. And I am sure that the group will have the opportunity to view the books of those who come to the government for a bailout. Not all banks will qualify.

[freshnotbitter]

your plan is one more alternative that makes more sense than the plan on the table. So what gives?

The beltway elites want the power to corrupt. That means giving the Treasury a play money account that he can use to, for example, buy bad paper from the prince of Abu Dhabi in return for an equity investment by Abu Dhabi in Goldman Sachs or giving Goldman the investment banking deals that really put caviar on the table.

By dealing only with fdic banks/fed banks as you propose in arm's length transactions you are taking the corruption out of it. How dare you? Your plan has no chance of passing at all.

I gave twenty five bucks to my republican congressman today for having voted against the bail out and I will not vote for anybody or give money to anybody who votes for a phony bail out bill.

[dadw5boys]

HOW ABOUT THE BANK OWNERS PUTTING THIER MONEY IN THE BANKS TO RISK ???????

DON'T JUST RISK THE DEP[OSITS OF OTHERS !!!!!!!

[LatteLibertine]

I'd support buying everyone one Wall Street a copy of the song "The Gambler". That's about it :)

[All in All]

This plan sounds more "sound" then the one that's up for grabs at the moment, however it's not what Our Government wants.

Our Government wants a plan that includes more access of Our Tax-Payer Dollars to Foreign Banks......