An Alternate Solution to the 'Bad Bank' Problem 21 comments
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The fundamental issues that must be addressed include:
- The total size of the US banks asset problem is $2 Trillion. (See Goldman Sachs report from Thursday), a much larger amount than the Geithner plan addresses. In addition, there are foreign banks that hold $1 Trillion of troubled US assets. The market knows this and that is why the Geithner plan fell so flat.
- There is no way to fairly value the problem assets. Either you kill the banks or you cheat the taxpayers. This has always been a fatal flaw of the Bad Bank approach.
- The $900 billion stimulus program has little chance of success unless the banking sector has been stabilized and viable.
- America has limited financial resources to deal with this problem in the year 2009.
The following is an outline of an alternate plan. It address all of the issues identified above. This approach relies on techniques that have been used in the past. It is not free. But it is clean.
- Congress authorizes a new Resolution Trust “RTCII”.
- Congress authorizes RTCII to borrow money. Up to a face amount of $2 Trillion.
- Congress Authorizes Treasury to Guarantee the Obligations of RTCII.
- RTCII issues $2 Trillion of zero coupon bonds due in twenty years. The implicit coupon on the bond is set at 10%.
Note: Yes I said 10%. The proper market coupon for this would be 3.5%. Therefore these zero coupon bonds would be priced to yield 6.5% higher than comparable Treasuries. I said there was a cost. The 6.5% premium is a cost that would be born by the taxpayers. There will be potential offsetting gains, but that can’t be predicted. I will provide details on the costs to the public of this proposal at the end of the discussion.
At a rate of 10%, the price today of the 2 Trillion of zero coupon bonds is $300 billion. That is the dramatic effect of compound interest over twenty years. The cash cost is 15% of par.
$300 billion is equal to what Treasury gave to the banks in TARP I. That is important because A) the banks have the money, and B) in this transaction they will use that money to buy the RTCII zero coupon bonds. This returns the TARP money back to the Treasury.
There are many strings attached to allowing a bank to acquire the RTCII bonds. The following is a discussion as to how it could work with a fictitious bank: Gotham Bank or “G”.
Assume that G is very big and important. G has already taken $45 Billion of TARP money. G has a mountain of questionable loans. These bad loans come from all segments of its loan/investment portfolio. A total of 1/4 ($300 Billion) of its book is tainted. There is no way to value this at this time. To liquidate the portfolio at current market levels would wipe G out.
G takes the $45 Billion of TARP money and buys $300 Billion (45/15%=300) of RTCII Zeros.
Again, this process returns the TARP money back to Treasury. This transaction is a swap of the TARP funds for a like amount of cash value RTCII zeros. It eliminates the taxpayer exposure and replaces it with an obligation due in 20 years.
G bank takes the $300mm of face value zeros and the $300mm of questionable loans and separates them from its remaining core activities. It is both a good bank and a bad bank.
To do this and balance the books G must take a one time, non-cash write off of as much as $45 Billion. As this is a non-cash loss it will not impair G.
As part of the transaction G will give common shares to RTCII. In addition the TARP Preferred stock will be converted to common equity. The banks need to have common equity, not preferred, if they are to survive and have strong balance sheets.
The payment outcome of the questionable assets is now certain. They will be worth their full value in 20 years because they are 100% secured by the RTCII Zero coupon bonds. Because principal payment is now certain, the accountants, AICPA and FASB will all sign off. No need for mark to market any longer. There is precedent for this. The necessary favorable accounting treatment was granted to the banks in the mid 1980’s when the Brady Plan was introduced to save the banks from soured loans to developing countries. This is a bigger scale, but the principal is the same.
In future periods G would benefit from collections made from the assets in the bad bank. It could be a source of significant income over time. It can no longer produce a loss. G bank has been saved. What is good for G bank is also good for US taxpayers going forward.
G Bank, all the other banks, Treasury and the Fed would love this. It will work. The question is how much will it cost. And how will that cost be felt over time.
There is no cash cost to this solution for twenty years. That is very favorable. However there is an effective cost of $700 billion to the taxpayers over the 20-year life of the transaction. That means that it will cost us $35 billion a year for 20 years. Over the life of this proposal this will average about 5 Basis Points of GDP. A manageable annual cost.
The $700 Billion is a very big number. But look again at what has been done. The first step of this is that the $350 Billion of TARP money is returned to the Treasury. In addition, there will be no need to spend the remaining $350 Billion of TARP money.
There is an additional potential benefit from this approach. There are many foreign banks that do business in the US that have their own problem loans to US borrowers. These banks play an important role in our economy. They would love to be in this plan as well. The plan can be easily expanded to include foreign banks. However the cost of this would not be born by US taxpayers. If a UK bank wanted to participate, then the UK taxpayers would have to subsidize that cost. The cost to the US taxpayers would be zero.
The foreign banks that would want to participate in this program would require subsidies from their central banks. This would therefore be similar to our TARP program. All of the relevant central banks have enormous swap lines with the NY FED. Therefore the subsidized amount could be funded with no capital market consequence. This is another key benefit.
There is nothing in this proposal that requires any current funding. There would be a favorable cash flow to Treasury of $350 Billion. In 2009 this is a very important consequence. There is already a risk that the US has crowded itself out of the debt market. Future issuance of Treasury debt is staggering. This proposal reverses $700 billion of current year financing requirements into future years. This solves almost 1/3 of the current year funding requirement. By itself, this makes for a compelling argument in favor of this approach to the problem.
This plan would have a carrot and a stick to it. The structure of the transaction eliminates the risk of principal loss to the bank. Therefore they will have a tremendous incentive to renegotiate problem loans. They would have the capacity to reduce both principal and interest on existing loans without loss. This is what has to be done to clear the logjam.
In exchange for the privilege of buying the RTCII zeros, the banks agree to use this as a way of absorbing the losses over twenty years. This takes the necessary restructuring of the loans away from the public sector and leaves the problem where it belongs, between borrower, lender and if necessary a court. The amount of Government money required to restructure mortgage and credit card debt to more manageable levels would be greatly reduced by this proposal. All the parties would have a motivation to restructure and move on.
This approach would create an incentive for the banks to restructure credit card debt. Assume that there is a borrower who is seriously delinquent on $20,000 in CC debt. The bank can now say, “pay me $50 per month for the next twenty years. “ The borrower would love that. It would solve their problem.
For the bank it means that over the next twenty years they will collect $12,000 (50*12*20) plus they will collect the $20,000 at maturity from the zero. Today they are sitting with a bad loan. Using this approach they will collect their full principal and a reasonable return. The borrower will be able to restructure under manageable terms.
Assume that a borrower had a $200,000 mortgage on a home worth only $120,000 today. The bank could write the mortgage down to $100,000 (half!) and reduce the remaining interest to a 4% fixed rate for twenty years. A tremendous improvement in terms for the borrower. The bank would receive $80,000 (4% for 20 years) plus $100,000 (principal) plus $200,000 (proceeds from the RTC zero). A total of $380,000 over the twenty-year period. Again, a reasonable return for the bank.
We must create the capacity to absorb the losses and restructure the debt in a way that preserves the viability of the financial system.
I would appreciate any comments, thoughts, ideas, rage or enthusiasm that this outline may evoke.
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On Feb 15 09:43 AM rphwrf wrote:
> This approach assumes that the 'underwater' borrower still has income.
> The jobless cannot afford to pay utilities let alone a reduced mortgage.
This proposal seems fixated on the concept of returning money to the treasury, and claims that this somehow eliminates the exposure of US taxpayers. However, it doesn't actually return money to the Treasury, returning money to the Treasury would be bad for the economy, and it doesn't eliminate the exposure of the US taxpayers, it increases it.
1. From a risk standpoint: Under this proposal, the government borrows money from the troubled banks, paying them 10% interest. Some banks will not participate, either because they don't want to, or because they don't have enough cash. So nothing changes. For banks that participate, the taxpayer exposure to TARP is still there. Now the bank owes the government money, and the government owes the bank money (whether in the form of TARP or an equity stake). Banks will have less cash on hand to deal with their financial woes, increasing the chances that they will not survive (i.e. increasing the risk to taxpayers). On the other hand, the bonds are marketable in bankruptcy, so the government is locked into its 10% obligation even if the bank fails. The taxpayer pays twice: Once for TARP (or loss of equity), again for the new bond in the hands of a receiver.
2. From an economic standpoint: The economy runs on money supply. During recessions, the government lowers interest rates to help increase the availably of money, which stimulates the economy. This proposal *removes* money from the economy by having the government borrow money from an already troubled financial industry. Removing money supply hurts the economy, it doesn't help it. The last thing you want to do at this point is return money to the Treasury. The time for that is after the recession has ended and businesses are growing again.
3. From a taxpayer standpoint: The proposal *guarantees* that the taxpayer will pay for all tainted assets (good and bad) in the form of interest payments, and get nothing in return. Some (5-20%) of the tainted assets will actually be good, and the banks will reap the profits. The taxpayer would be better-off if the government simply purchased all of the tainted assets and collected on the good ones. 5-20% of the value of the tainted assets would be returned to the taxpayer, rather than a 100% obligation on the part of the taxpayer.
The problem of such a long maturity is that it looses credibility when you try to restructure a CC debt over 30 years.
However, restructuring mortgage debt with a new final maturity of 30 years makes a lot of sense.
How about a compromise? 1/3 of this matures in 20 yrs, 1/3 in 25 years and 1/3 in 30 years. This would address the concern you raise and give the banks a range of maturities to restrucure problem loans.
Thanks,
Bruce Krasting
Yes you are correct. I am assuming that the economy does not go into a complete free fall and that there is "something" to save. I think this approach addresses the bad bank problem in a better way then has been proposed. If you are right and we are going into a downturn where paying for food and shelter will be a challenge for American then this proposal has no merit. Nor do any others.
On Feb 15 09:43 AM rphwrf wrote:
> This approach assumes that the 'underwater' borrower still has income.
> The jobless cannot afford to pay utilities let alone a reduced mortgage.
You are generally right in your observations. Over the 20 year time horizon The tax payer is on the hook for this. I attempt to describe the real costs and when they will be felt. This proposal attempts to play with time.
We need to defer the impact to the banking system over an extended period of time.
My feeling is that the TARP plan was a mistake. It has not achieved the objectives.
This proposal reverses the TARP capital injections into the banks. It does that on day one.
On your # 1 - Yes the banks will have less cash on hand as you suggest. However if this is done properly they will not have the problem loans any longer. The principal value of the 'bad' assets is now assured. They can not lose money on the bad loans. Therefore they do not need the cash to support the bad credits.
#2 I do not think that $300Bill will impact money supply in a meaningful way. Keep in mind that the Treasury created $300B two months ago when they created the TARP. America needs to borrow $2 Trillion from the public markets in the next 18 months. That has never been done before. I for one, do not think it can be accomplished without significant consequence. This proposal addresses the bad bank problem and reduces Treasury borrowing requirements by $700B in 2009. This reduction in required debt issuance is the most desirable aspect of the approach to the problem.
#3 I do not agree. The taxpayers will suffer greatly if the banks fail. They will suffer an $800Billion loss from the stimulus package as that has no chance of success if the banking system is not viable. The taxpayers will get equity in the banks that participate. This might not offset the costs over the 20 year time horizon. But it might.
Two years ago if you looked at the market cap of the US banks it would add up to about $3t. It is a fraction of that today. Who knows what it could be in 20 years. I admit that this is a crap shoot. However if we do not act to save the financial system we have no chance. Just crap.
You are not including the benefits to tax payers that would be realized rom restructuring all of the problem debt.
Bruce Krasting
> jack
Wonderfull Idea!! Spread the risk over time, I did not figure this out until
I read your article.
But help address the 2.5 million homes currently owned by Financial Institutions.
I, Remove 2 million homes from the MLS (for Sale) that financial institutions currently have
for Sale. Any Institution that received TARP funds will be required to first offer the home
to the RTC for purchase. RTC will not purchase any home above $417,000. No Jumbos.
2, Government Resolution Trust will purchase these homes from these institutions for 20%
less than original first Mortgage amount. No negotiating.
3, 600 billion dollars to buy these homes (app $300,000 each average) will come from the sale
of long term 30 year bonds. (Currently app 3-5%) issued by Government.
4. RTC will send these homes to the local HUD offices for disposition thru voucher program
(rentals). $5000 will accompany each home for repairs & upkeep. eventually as the MLS
system reaches certain inventory levels (i.e. 30-60 days) HUD will be allowed to place these
homes on the sale market. If the inventory increases HUD will remove homes accordingly.
This will be a local HUD market decision, differing from region to region. Rental Income will
help cover expenses such as maintenance, insurance and property taxes.
Pro's:
Supply/demand economics will create a bottom in the housing market once 2 million homes
for sale are removed. Prices will start to increase.
Local governments will see a bottom in declining values and revenue will increase as values
slowly stabilize and slowly increase.
Individual homeowners as well as other sellers will find a housing market ready and able
to absorb the inventory.
Banks will now have a fresh source of funds to lend on homes that are not declining in value.
Banks will be able to clean balance sheets of hard to liquidate assets.
Lending/leverage/credi... markets will slowly begin to return to normal. Applications will
increase, appraisals, home inspections, title work, all types of stimulating activity for business.
As home prices stabilize and increase the local HUD agency selling homes over a 3-7 year time
frame will see prices rise for properties purchased by the RTC. HUD will only be required to
return to RTC the original amount of the purchase price plus the 20%. Or the original amount of the
selling banks first mortgage.
Once the RTC is closed and all homes sold, all losses (if any) will be covered proportionately
by the selling institutions. All financial Institutions selling homes to the RTC will share the loss
at the RTC as a percentage of total homes purchased and homes sold to the RTC. That percentage
will be the Banks percentage for covered losses. These losses will be paid by the banks over a 30 year period liquidating the original bonds sold to finance the purchase.
Other agenda items:
Mark to Market accounting will only apply to non performing assets.
Spend 50 billion each year for the next 3 years rebuilding infrastructure. Bridges, Roads, tunnels,
water plants, dams, levies anything to create jobs.
Stimulus checks for $300 only help pay a credit card bill once.
Any comments?
Suppose in your example that $150 billion of Gotham Bank's $300 billion of toxic assets become totally worthless during the twenty year period. Could you walk through what transactions Gotham banks has each year and at the end of the 20 years to close this transaction out.
Also might it not make more sense to have a similar approach but based upon a shorter period to deal with delinquent credit card expenses. Say 8-10 years?
Also consider spreading out the timing of valuing the purchase of common equity in the banks - see the following:
An ongoing issue has been the Government's taking equity stakes in the banks when their common stock prices are so low. It is extremely dilutive to existing common stock owners and as a result many common stock investors avoid investing in banks which makes raising new capital through stock placements virtually impossible for banks.
As an alternative please consider the following approach:
1) The Government could invest in a senior convertible preferred stock of the bank in question.
2) This convertible preferred would have a nominal interest rate on it of say 5-7%.
3) The convertible preferred issue would convert into the bank's common stock automatically in four equal traunches.
4) The trauches would convert in years 4 and 5 and 6 and 7 after the preferred was issued.
6) The Government would choose the conversion date any time during one of the conversion years.
7) The Conversion price would be at 90% of the average daily common stock price during a 20 day trading trading period prior to the chosen conversion date. Private investors could also invest with the government on the same terms.
8) The bank could also buy the preferred stock back at par at any time and pay any interest due.
This approach has a lot of benefits associated with it:
1) It gets new money into the banks. Initially it wold be government money.
2) It does not severely dilute (virtually wipeout) existing common stockholders.
3) It encourages confidence in the banks and encourages common stockholders to again invest in the banks.
4) If the bank stock rebounds, which is what I would expect to happen in most cases, it would allow the bank to issue new stock and retire the Government convertible preferred shares. Such a stock issue would be at a much higher level than today's stock prices in most cases.
5) The approach reasonably protects the taxpayer interests and provides a return to the Government for taking some risk.
6) It is a fair approach considering that numerous Government actions have heavily contributed to the banks getting into some of the financial predicaments that they are currently in.
I would also consider special reduced capital gain taxes for investors that invest in banks and other financial institutions to provide encouragement for long term capital investment and capital formation in financial institutions.
If I was king, I would also tax very heavily any gains made on short sales or other investors that use various financial instruments that drag down the common stock value of financial institutions. There is no point in the Government injecting money into the financial system and at the same time allowing short sellers and others to simultaneously destroy the worth that the Government and other investors are trying to create.
On Feb 15 06:49 PM Bkrasting wrote:
> socrateazz, Thank you for this suggestion. A very good idea. This
> concepts works best if the final maturity is 30 years versus my proposed
> 20.
>
> The problem of such a long maturity is that it looses credibility
> when you try to restructure a CC debt over 30 years.
>
> However, restructuring mortgage debt with a new final maturity of
> 30 years makes a lot of sense.
>
> How about a compromise? 1/3 of this matures in 20 yrs, 1/3 in 25
> years and 1/3 in 30 years. This would address the concern you raise
> and give the banks a range of maturities to restrucure problem loans.
>
>
> Thanks,
> Bruce Krasting
I have been watching and participating in the global capital market for a long time. In my opinion we are less than one month away from falling in a very big hole. A hole that will take at least a decade to climb out of.
I think the powers to be know this and that is why this is happening so fast. We are going to make some blunders by moving so quickly.
I do not thing we have enough time to do what you are suggesting. I hope that I am wrong. If I am right, then get your seat belt on it is going to get very bumpy.
bk
On Feb 17 12:03 AM User 347956 wrote:
> Makes more sense to me to figure out what actually happened first
> before we start handing out money. Still don't understand why the
> regulators haven't been actively trying to build out the audit trail.
> It's not easy, but not *that* hard either -- and if we don't, they
> (Regulators) will never know what the OTC debt markets look like.
> There are specific places where specific pieces of debt reside --
> about 20 banks created a total of about 4000 CDOs, start there, and
> work out the connections. Then we can talk about valuations. But
> valuations of the underlying are not as much of a problem as the
> web of connections and obligations created by the CDS trades around
> them. Let's document what actually happened and where things are
> before trying to cobble together a solution.
If Gotham Bank has 300 mm of troubled assets and half of those are worthless we are in deep trouble. There is no real 'solution' if the magnitude of the problem is so large. If that is the case then we should roll up the tents, cancel the Stimulus Program (it has no chance if the banks are dead) and start growing gardens because we are going to get hungry.
I was a banker for many years and I made some incredibly stupid loans over that period. I once was involved with a $100mm loan to Peru that went bust before the first interest payment was made. We got back about 50% after 10 years. I financed a huge inventory of single channel CB radios in the early 80's. A week later multi channel cb's came out. That loan went bust too. We liquidated everything at 50 cents on the dollar.
A mortgage on a house can not be worth "0" either.
My point is that it is not reasonable to assume that a loan portfolio that is distressed is worth 0. Some parts maybe, but not all of it. So let me address your question assuming that $150B is going to produce 25 cents on the dollar (extreme) and the other $150 bill is going to be worth 75 cents. This then produces an expected result of an average collection rate of 50% over the 20 year period.
Gotham acquires 300mm of face value RTC zeros at a cash cost of $45 bill. This cost reverses the previously established loan loss reserves on the trouble assets.
Therefore Gotham will collect over the twenty year period A) 25% of $150b= $37.5 bil. B) 75% of $150 bill= 112.5 bil and C) $300 bil from the RTC Zero.
The total over the 20 year period is $450Billion. Far more than the principal balance that is now outstanding (thus the favorable accounting treatment). The bankers are not getting rich here. 20 years is a long time. However they are "whole". They can get back to their knitting and make some smart loans. They will not be dead.
On the question of reducing the time period to ten years: If this actually comes up for discussion I would be at the head of the list trying to achieve a shorter duration. I do not think it will work. The banks and the borrowers can not solve this magnitude of problems in ten years. It is just too big. How about this, a compromise. This is restructured so that there is a 10, 20 and 30 year tranche. That keeps the average life at 20 years and keeps the economics in place. However some of the CC problems are fixed int the 10 year time from. Some mortgages and other CC are restructured to the 20 year maturity and the most troubled mortgages are restructured to the 30 maturity. ( I am sounding like a Pol)
On the broad topic of Preff shares I do not agree with you. PREFF is debt. They just do not call it that. The banks do not have the capacity to make the dividend payments. The do not have a chance to pay it off. It just will not work in my opinion.
The Pref idea was a Paulson concept. It does look better. It actually looks like the Government Is Senior to the Common shareholders. This was done so that congress could say, "We will get the money back and actually make a return". That was never true. Things have deteriorated a lot since November and the first TARP deal.
I am going to go out on a limb and say that within the next few months the Treasury will cave on this and covert the Preff to common.
On the question of how much common should the public sector own of the Banks? I have a simple but costly answer. The amount of common that is owned by the public sector should not exceed 25%. That is my rule. It is not going to work if we dilute exiting common holders to "0". This is throwing the baby out with the bath water.
For what it is worth I think the valuation for the common should be the average price for the past year. Yes that is much higher than today's price. But conversation at current levels wipes out existing shareholders and gives them no chance to recover over the next 10-15 years. That is not a solution.
Thanks for these tough questions.
bk
On Feb 16 10:00 PM RonMcD wrote:
> Bruce,
>
> Suppose in your example that $150 billion of Gotham Bank's $300 billion
> of toxic assets become totally worthless during the twenty year period.
> Could you walk through what transactions Gotham banks has each year
> and at the end of the 20 years to close this transaction out.
>
> Also might it not make more sense to have a similar approach but
> based upon a shorter period to deal with delinquent credit card expenses.
> Say 8-10 years?
>
> Also consider spreading out the timing of valuing the purchase of
> common equity in the banks - see the following:
>
> An ongoing issue has been the Government's taking equity stakes in
> the banks when their common stock prices are so low. It is extremely
> dilutive to existing common stock owners and as a result many common
> stock investors avoid investing in banks which makes raising new
> capital through stock placements virtually impossible for banks.
>
>
> As an alternative please consider the following approach:
> 1) The Government could invest in a senior convertible preferred
> stock of the bank in question.
> 2) This convertible preferred would have a nominal interest rate
> on it of say 5-7%.
> 3) The convertible preferred issue would convert into the bank's
> common stock automatically in four equal traunches.
> 4) The trauches would convert in years 4 and 5 and 6 and 7 after
> the preferred was issued.
> 6) The Government would choose the conversion date any time during
> one of the conversion years.
> 7) The Conversion price would be at 90% of the average daily common
> stock price during a 20 day trading trading period prior to the chosen
> conversion date. Private investors could also invest with the government
> on the same terms.
> 8) The bank could also buy the preferred stock back at par at any
> time and pay any interest due.
>
> This approach has a lot of benefits associated with it:
> 1) It gets new money into the banks. Initially it wold be government
> money.
> 2) It does not severely dilute (virtually wipeout) existing common
> stockholders.
> 3) It encourages confidence in the banks and encourages common stockholders
> to again invest in the banks.
> 4) If the bank stock rebounds, which is what I would expect to happen
> in most cases, it would allow the bank to issue new stock and retire
> the Government convertible preferred shares. Such a stock issue would
> be at a much higher level than today's stock prices in most cases.
>
> 5) The approach reasonably protects the taxpayer interests and provides
> a return to the Government for taking some risk.
> 6) It is a fair approach considering that numerous Government actions
> have heavily contributed to the banks getting into some of the financial
> predicaments that they are currently in.
>
> I would also consider special reduced capital gain taxes for investors
> that invest in banks and other financial institutions to provide
> encouragement for long term capital investment and capital formation
> in financial institutions.
>
> If I was king, I would also tax very heavily any gains made on short
> sales or other investors that use various financial instruments that
> drag down the common stock value of financial institutions. There
> is no point in the Government injecting money into the financial
> system and at the same time allowing short sellers and others to
> simultaneously destroy the worth that the Government and other investors
> are trying to create.
>
>
>
Granting a 5 million temporary investment based immigrant visa to applicants who agree to invest $500,000 to buy houses anywhere in the USA. That is the applicants must agree to buy $500,000 worth of house and hold the house for a peiod of 5 years . 5 million multipled by half a million equals $2.5 trillion which will absord at least 10 million housing units assuming the medium price of 250k.
The mere announcement of this plan is sufficiently enough to put a floor on the housing market.
The problem in this plan: Can the US still attract upper-middle class immigrants from other countries given the trouble the world is in?
brucekrasting.blogspot...
On Feb 17 01:41 PM vaughn wrote:
> I have a better alternative of providing $2.5 trillion without costing
> a cent to the taxpayers.
>
> Granting a 5 million temporary investment based immigrant visa to
> applicants who agree to invest $500,000 to buy houses anywhere in
> the USA. That is the applicants must agree to buy $500,000 worth
> of house and hold the house for a peiod of 5 years . 5 million multipled
> by half a million equals $2.5 trillion which will absord at least
> 10 million housing units assuming the medium price of 250k.
>
> The mere announcement of this plan is sufficiently enough to put
> a floor on the housing market.
>
> The problem in this plan: Can the US still attract upper-middle class
> immigrants from other countries given the trouble the world is in?
Any solution has to either allow the banks to forebear (i.e. probably carry the loans at something other than market value), or it has to provide the banks enough equity to offset the loss after marking the loans to their market value.
In my view, forbearance makes sense if the banks can earn more than the ultimate losses, over a reasonable time frame, from its normal business profits.
If the bank cannot do that, then the government has to provide equity, and because the stock price is so low, the often amounts to "nationalization", even if it is not 100%.
Whether the equity is provided directly as cash , as a note, or as an implicit subsidy through paying more than the asset is worth seems to me to be the triumph of form over substance. There may be financing and cash flow implications, but the end result is the same.
To me, Geithner is attacking the problem in two ways: he is planning to set up an auction to have assets sold off at higher than the current distressed levels by somehow having the government influence the asset price.
Secondly, he is providing capital to shore up the bank's equity position.
Your plan sounds a lot more like forbearance to me. My eyes glaze over all the details you provide in your example, but at 35,000 feet, it looks to me like you give the bank enough money (purchase stock with a note) to hold the bad loans longer without hurting their ability to do regular business, and you finance it by issuing government debt.
On Sep 08 03:24 PM t4 wrote:
> Typical big government - big business - tops down solution - total
> failure just like existing solutions. Enter 21st contury economics!
> The answer is bottoms up solution - This is how to rebalance the
> economy. Create what amounts to a federal debit account in the amount
> of $100k for all citizen tax filers in 2008. This account can be
> used only for home loans, car loans, credit cards - the major causes
> of the debt crisis. Taxpayers would be given till EOY to debit this
> money against the selected debtors. THis would wipe out most loan
> issues immediately, put money back in the econ immediately. Rebalancing
> is what's neede not refinancing more bonuses for bank execs - read
> about it on my site.