An Alternative Bailout Proposal

Includes: IAI, IYF, XLF
by: Dan Walker

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