An Alternative Bailout Proposal

A large number of critical thinkers here have weighed in on how bad an idea it is to give the ex-chairman of Goldman Sachs (now Treasury Secretary) $700 billion to bury in securities which the creators of the problem refer to as 'toxic waste'.

In response to protests of how bad an idea this this, many of you have responded with 'Do you have an alternative plan?'

Here is an alternative plan; take the $700 billion and recapitalize the banks and insurance companies buried in the toxic waste. Specifically exclude the hedge funds; their investors all certified they were big boys who could take their lumps when they got in. Take an equity stake in return and dilute the existing stockholder's equity. Forget congress capping executive compensation, let their shareholders do it as payback for the dilution of equity. Force a mark to market and get all this garbage off everyone's balance sheet.

Then take the equity stakes taken in compensation and put it in the social security trust fund (if there really still is one) to reduce the load on the grandchildren we are asking to pay back this debt.

The core mortgage securities are not as worthless as currently thought. The CDOs and CDS's are what will require the bulk of recapitalization. But there will be hard equity in the social security trust fund which will more than return the investment and it will be that: an INVESTMENT. Put a steel fence around it to keep congress' hands off.

There is a huge universe of possible solutions available when talking about throwing this amount of cash at the problem. If all we did was borrow another trillion dollars to pay everyone's mortgage down, it would have the same bailout effect and would stimulate the largest refinance activity in years. The banks would be back in the black by the end of the year and the unemployment rate would drop as loan officers were called back to work. On top of that, consumers would have cash to spend their way back to an integer GDP.

The bottom line which seems to be agreed upon here on SA is that giving a blank check to Hank Paulson to keep his buddies in yachts for FY2009 is the worst idea ever promulgated from DC. Alternatives abound.

Disclosure: None

Comments

[raising4dau...:]

Makes too much sense and doesn't benefit any of the vampires that lobby and fund Congress.

2008 Sep 24 04:13 PM

[ginchinchili:]

This is not the first I've heard on this course of action rather than the Paulson bailout. I think there are compelling reasons to give it serious consideration, though on the issue of executive compensation, the government, not the companies' own compliance and investor relations departments, should produce a clear and concise form to be sent to each share holder allowing them to vote on the pay earned by top executives, which would include ALL compensation. No room for semantic funny business. I am so sick and tired of the people in charge of determining the direction of our country screwing things up and not only getting away with it, but actually being rewarded for it. Face it, we, and subsequent generations, will be paying for these people's mistakes for a long time to come, but we must begin involving ourselves and forcing reason and oversight in the functions of our government, including the roll industry plays in government policy, or kiss the American way goodbye.

2008 Sep 24 04:32 PM

[swaps:]

Heres the alternate plan I posted at the NY Times (if they accepted it) and the Denver Post.
Swaps

Congress should not gallop ahead at full speed to fix in 48 hours a problem that has been building for years.
Paulson and the government until now have favored funneling the money into the top, instead of starting at the bottom.
Amounts from $300 to $1,200 were given away as a tax refund. The government giveth.
But I calculate the $700 billion bailout Paulsen requests for Wall Street comes out to $9,333 - before interest - for each of the roughly 75 million tax paying households in the U. S. Of course, the cost for the previous takeovers and bailouts swell the per household tax bill even higher.
Why not have Congress give the $9,333 instead to each house hold, with the restriction it could be used to only pay down debt or save in a financial institution or one of the identified financial services stocks. People in debt would repay lenders, which would help both. And people not in debt would invest savings or stock in the financial system, helping to build liquidity. The savings or investment would be restricted from withdrawal for at least five years, for stability. Financial systems that can't be helped by this plan because they are too far gone would be allowed to go bankrupt under the cleansing mechanism of Darwinian free market forces.
Congress has to realize the current $700 billion mess is just the latest in a series of crises still to come. That is how it has been playing out all year.

2008 Sep 24 04:37 PM

[H.J. Huneycutt:]

This makes a lot more sense to me. If the crisis is liquidity, simply make the financial institutions more liquid by buying equity. Paulson's solution is simply to write a blank check for not-so-great assets with nothing in return. The government should have an investment fund managed for this purpose.

If they did this (unlikely), they should do it in one big spree. The Democratic counter-proposal to Paulson's plan essentially allows the government to buy equity over time --- however, the equity will gain in value and have much lesser upside as the Feds buy the assets. It's better just to negotiate a low price right now that will keep the institutions liquid and potentially make a decent return.

2008 Sep 24 04:48 PM

[apppro:]

Implement a:
Wind-Fall Capital Gains Tax of 65% on SHORT SALES!
They thought they were doing the right thing as 'market oversight' so - LET THEM HELP PAY FOR THIS!

2008 Sep 24 04:57 PM

[Terry McDonald:]

Simple fix for problem
If they really wanted to fix the problem they would simply expand the FHA insurance to cover all single-family mortgages funded before Dec. 31, 2007. Then force the banks to renegotiate the sub prime mortgages to a fixed rate 3 to 4 % 20 years mortgages, which would be 2% over Prime and 85 to 90% of the homeowners, would be able to afford. This would stabilize the mortgage market; reduce the liability to the taxpayers, which would beneficial to both Wall Street and Main Street. But this is just to simple therefore it will never happen.

2008 Sep 24 06:40 PM

[REal broker:]

Dan,

I like the idea except, I do not trust govt. with the SS trust fund??

How about taking the $700B (and any other funds that will inevitably be approved for similar purposes) and dividing it equally into every tax payers retirement accounts (if you don't have a retirement account, get one). as it looks like the initial payout to the American tax payor(s) would be about $5,200.00 each. The(se) dollars MUST stay in American tax payor(s) retirement account(s), placed ONLY in American owned and operated banks, and can ONLY be invested (by the banks) in wholly owned and operated American company(s) that employ ONLY tax paying American citizens.

NOTE: We will have get used to being a manufacturing based economy again, that PRIMARILY NOT EXCLUSIVELY produces and consumes it's own products. Sorry this fantasy of not manufacturing anything and letting others do the low wage work (manufacturing) so we can indulge ourselves with low cost products, and in return we get to have only high paying hi-tech jobs, and provide the world economy with financial support services only, was an ill conceived fantasy has turned into our nightmare!

Under this plan we accomplish several goals.

First, we acknowlege that we need to get back to a balanced manufacturing/service based economy that really works.

Second, we acknowledge that we need to have more equity invested into our economy by saving and investing and not just spending every last penny we make on payday! This bailout money MUST only be used for investing in America, and not spent on crap we imported from other countries. Remember the $300.00 check we just got to spend any which way we want, we can't do that again!

Third, the banks get the liquidity they claim to need, and the tax payors get something to counteract the inflation we are about to create.

This is a very simple plan of manufacturing and consuming our own products, which will allow the service industry(s) to flourish, and for us to collectively and safely have the financial resources to provide for ourselves with the education and proper health care we desire.

The part of all this plan some Americans are NOT going to like is having to give up the "etitlement" attitude. This attitute and the politicians who pandered to it, along with the citizens who allowed it to flourish (which in one form or another is ALL of us), is the very core reason we are in this position. If we have the courage to let go of our fears and embrace our faith in society, we can and will overcome.

The ulternative is to continue down this path headlong into the financial and social ruin of our great nation, with the end result being poverty and suffering for all.

Consider all we have been through as a nation and look at the results of our decisions. Forget the politics, and let go of the blame.

2008 Sep 25 08:18 AM

[timfogl:]

I kind of like this one I received from a friend:




To: the many people I know who are on my email lists
I don't know who this guy is. But it kind of makes you think......

The Birk Economic Recovery PLan

Hi Pals,

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 billon 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

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.

Sure it’s a crazy idea that can “never work.”

But can you imagine the Coast-To-Coast Block Party!

How do you spell Economic Boom?

I trust my fellow adult Americans to know how to use the $85
Billion We Deserve It Dividend more than I do the geniuses at AIG or
in Washington DC.

And remember, The Birk plan only really costs $59.5 Billion
because $25.5 Billion is returned instantly in taxes to Uncle Sam.

Ahhh...I feel so much better getting that off my chest.

Kindest personal regards,

Birk

T. J. Birkenmeier, A Creative Guy & Citizen of the
Republic
PS: Feel free to pass this along to your pals as it’s either
good for a laugh or a tear or a very sobering thought on how to
best use $85 Billion!!

2008 Sep 25 11:19 AM