Alternative Bail Out Plans

While Nancy Pelosi and Barney Frank hold Press Conferences claiming the Republicans won't modify the bad bankruptcy bill to enable renegotiation of bad primary residence mortgages.... and Barney Frank claims the Paulson plan is the only plan that can pass in some modified form....

Other economists are writing up their own alternative plans and posting them online.

 

A few are reposted here.

Bill King's Plan

 

Premises

  • The US credit system is broken.
  • The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
  • It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
  • The Wall Street model, securitization and extreme leverage, is obsolete.
  • US financial institutions need to recapitalize.
  • Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
  • Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
  • It’s wasteful & foolish to put more money in an obsolete non-functioning system
  • Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
  • If you want to get money to the consumer: the less middlemen, the better.
  • Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.

Basics of the King Report Bailout Plan

  • Directly recapitalize banks by the US government allocating $500 billion into a plan for community-type banks to increase their capital in partnership with the government.
  • The government would match existing or some percentage of existing bank capital. If it would be better, a separate bank could be created. Place a limit of say $1 billion per bank.
  • This would create $5 trillion of credit at conservative 10 to 1 leverage. This is more than the entire private mortgage market. It is a much better use of capital instead of absorbing $700 billion of losses with no means to discern resultant credit creation.
  • Give the banks a tax rate of 15% on consumer and commercial lending for 5 years and the right to buy out the government share of the operation at some premium.
  • Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
  • To help the big banks, allow them to create a consumer & commercial lending facility with the 15% tax rate benefit. This should entice private equity and sovereign funds as well as Wall Street remuneration that was garnered over the past decade or so.
  •  Prohibit trading, especially derivatives, in consumer & Commercial lending operations. However pure hedging would be allowed.
  • Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.

Further considerations


  • Foreign banks in the US could be included if they have respective funding from their government.
  • The real estate problem is due to the fact that American incomes do NOT support current prices. Easy credit allowed them to purchase homes they couldn’t afford.
  • Any solution to clear the real estate market must entail hiking income, which is very difficult, or allowing prices to drop to levels that the average American can support. This helps average Americans, not the big banks and investors stuck with overpriced mortgages.
  • No bailout for the imprudent and reckless but a means to directly help Americans and procure capital from private and sovereign sources because a new financial system must be implemented.
  • This is not likely to be the final model but it is a stop-gap measure that will resonate with average Americans. It’s a way to connect with Middle America because it benefits them directly and is not an exclusive Wall Street bailout.
  • The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.
  • The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.

 

 

Lucian A. Bebchuk's Plan and Working Paper

  1. The Treasury should only buy troubled assets at fair market value. 
  2. The Treasury should be allowed to purchase, again at fair market value, new securities issued by financial institutions needing additional capital.
  3. To ensure that asset purchases are made at fair market value, the Treasury should buy them through multibuyer competitive processes with appropriate incentives

In more detail ,  Bebchuk declares underlying  principles of a bail out:

  1. No overpaying for troubled assets: The Treasury’s authority to purchase troubled assets should be limited to doing so at fair market value.
  2. Addressing undercapitalization problems directly: Because the purchase of troubled assets at fair market value may leave financial firms severely under-capitalized, the Treasury’s authority should be expanded to allow purchasing, again at fair market value, new securities issued by financial institutions in need of additional capital.
  3. Market-based discipline: to ensure that purchases are made at fair market value, the Treasury should conduct them through multi-buyer competitive processes with appropriate incentives.
  4. Inducing infusion of private capital: to further expand the capital available to the financial sector, and to reduce the use of public funds for this purpose, financial firms should be required or induced to raise capital through right offerings to their existing shareholders.

 

Roubini HOME 10 Step Plan

  1. First, like in the Treasury TARP plan you need to buy illiquid/toxic assets and take them off the balance sheet of banks and financial institutions to reliquify them and allow new credit creation.
    • The biggest problem here  is one of the proper valuation and the proper price
  2. In exchange for the purchase of illiquid asset  the government gets preferred shares.
  3. Inject further public capital in the form of preferred shares in the financial institutions.
  4. Existing shareholders of the banks need to take a first-tier loss to minimize the risks for the government share.
    • Suspend dividend payments.
  5. Convert some of this unsecured debt into equity.
  6. Let other insolvent banks and financial institutions to go bust and disappear.
  7. Failed banks go to the HOME.
  8. A HOLC-like program for debt reduction of the household sector.
  9. Change of the Basel II capital adequacy ratios.
  10. Start implementing rapidly a reform of the system of regulation and supervision of financial institutions in a world of financial globalization.

Mother Jones has a list of other alternatives and the reasons they will not work.

 

There seems to be a very common thread coming to consensus on these alternative plans.  My take of the best ideas to date:

  • Key is the pricing and exposure, timing of that exposure of bad assets.  Do this wrong and it could exacerbate the situation. 
  • A key missing element is a HOLC and the ability to renegotiate from the bottom up, household debt and bad mortgages.  Build a new house on Sand....
  • Final key is to not let further bad banking practices continue.

 

This WSJ Shiller Interview also confirms one of the major issues is the pricing of these assets which the Treasury Secretary is proposing to buy:

 

One thing is certain, after these closed door deals are finalized if Congress doesn't realize they need to release every detail to the public before voting.....this country just might revolt.  The rage is churning.

 

Meta: 

Comments

DeFazio - Make Wall Street Pay for It's Own Bail Out

I find this interesting and I wonder if it's true. Honestly DeFazio has been so right on so many issues, he probably knows something we don't.

Tax on each transaction, well how many are there per day? (stock transactions).

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Invest in America instead of Bailout

This is a copy of a letter that I have sent to Sen. Obama:
I agree with most of your policies, however I do not agree with any type of bailout for Wall Street because:
1. It will increase our national debt and make it harder to achieve the goals that you want during your term in office.
2. It will weaken the Dollar, cause inflation, and could hurt our credit rating.
3. It will not restore confidence. It will only show people how bad things are.
4. Our tax money should not be used in such a manner.
5. This problem manifested itself in the lower & middle class; and a bailout would be trying to repair it by giving money to the upper class.
I don't want to just complain without offering a potential solution. I suggest that instead of another stimulus package; that the $700 Billion be spent on GREEN Energy. Fill the empty abandon factories with workers making wind turbines, solar parts, electric cars, etc. This will create jobs; stimulate investments; and curb global warming. Lenders will be more likely to lend to these projects if the U.S. is involved. You could also sell "Energy Bonds" instead of war bonds. A free check from the government is nice, but the money doesn't go too far. People want to stand on their own two feet; not receive handouts. It would give people a sense of accomplishment; a common united cause. Once workers started making money, credit would once again free up. The problem with the bailout is that if it does not work, we are out of bullets! It could be the straw that broke the camel's back!

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Bailout bill

Ok here is the deal what actually needs to happen is we need to instead of the 700 billion bailout they need to give so to say another stimulus to the American people, lets say just a round number 150k and allow us to spend it as we see fit, not only will this help bail out the middle and lower class Americans with bill paying but it will also surge the economy because of the cash flow that it will be getting. I know there are people who would abuse it but honestly what is it to them if they cant help us by giving us the money instead of the sentate

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Bailout alternative

I heard of another very similar plan. Every man & woman over the age of 18 (voting age) would receive approximately $400,000. This money would be taxed (back to the government.) These recipients would then be mandated to pay off their mortgage and credit card debt (giving liquidity back to the banks.) Plan would only cost 70 Billion rather than the proposed 700 Billion. If the government chose to do some other shoring up of the banking institutions, there's plenty of money left over and those of us who haven't contributed to the banking debacle would actually have some money in our pocket.

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Bailout alternative

might want to check your math

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I missed that

You're right- she's off by AT LEAST a factor of 1000.

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Maximum jobs, not maximum profits.

math

at least people are reading, trying to engage. I saw that math error and this is so common, folks just do not have a sense of numbers, of proportion....and so you get these sorts of comments.

If we can get people to start being able to read numbers, graphs...that will only help to make smart policy Populist.

But, this is the people's blog so correcting these sorts of things is part of this.

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It occurs to me this could be plan B

As it would work as well, and for small enough money to pay for it, if it was enacted next January or February (when Congress evaluates the current bailout and figures out if they want to spend the final $350 billion) and still save money.

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Maximum jobs, not maximum profits.

House Republicans release a Plan

Plan (pdf).

I haven't had time to analyze it. I do know most experts said the insurance idea simply will not work and on the repatriations of overseas capital.....well, I think that just might work and is also a common Democratic idea too.

On the tax code changes, well, that still reduces revenues (i.e. indirectly the taxpayer pays) but considering a $700B giveaway, might not be such a bad way to do it.

On the change in accounting...hmmm....I'd suggest a temporary suspension and demand hearings from various accounting, economic, fiscal experts be held for I am unsure of the real effects.

More later.

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Bailout Plan Alternatives

If you were to listen to financial news, a la Bloomberg, as 99% of Wall Street does, you may have heard the show "On The Economy" were alternatives are discussed by the 'best minds on Wall Street'...there you would have heard Charles Calomiris, a professor at Columbia speak intelligently about the equity purchase solution. His approach is generally supported by others in the field (http://www.voxeu.org/index.php?q=node/1683) At the time of the interview on Bloomberg he had not been contacted by a single member of Congress regarding potential alternatives to the Paulson plan. The Calomiris plan minimizes the taxpayer risk (along the lines of a Warren Buffett type of investment) and leaves the debt in the private sector to unwind.

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you're kidding

I've heard that on other shows where they are just railroading this through without any hearings, any experts testifying and even their own CBO has said it's simply impossible to estimate the costs and clearly questions Paulson's plan.

I think that's what DeFazio are trying to do, they know a few things are bi-partisan, they will work, already vetted (notice they are taking the plan from the expert who managed the S&L crisis) and get those through but to not even based a plan on a consensus of experts or at least discover cause and effect....well, they also shut out all but a few even in "negotiations" (read obfuscation) of the bill.

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