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Ramesh Krishnan is a contributor to Seeking Alpha.
- Trading frequency: Weekly
- Interests: Dividend stock ideas & income, Options, Stocks - long
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TARP solution, Maybe Everyone and their brother and sister offered their solution the Credit Crisis and I thought maybe I can offer mine. 1. Keep the plan simple enough, so that it is very easy to understand and implement 2. Instead of buying the assets from the Banks, Government can actually loan out say in three parts 50% of ...More
the face value, 65% of face value and 80% of loan value 3. The Government can issue say $1 trillion of 10 year treasury bond for around say 2.9 coupon. 4. the government will charge 3% over the coupon rate for 80% of loan value, 2% over the coupon rate for 65% of loan value and 1% over the coupon rate for the 50% of the loan value 5. The banks need to pay 10% of the Loan value as principal each year with the interest accrued. 6. The mark to market for these securities will be waived. But, as soon as the mortgage defaults they have to mark to the market that portion of the loan. The waiver is only for the loans that were originated before say 2008. 7. Get back the $350 billion distributed as capital and use this way. That way, we'll taken care of $1.4 trillion worth of CMBS et.al. which will allow the banks to keep the capital and allow them to lend as they have to pay interest on the loan. 8. Because of the ownership not changed from the banks to Government, the loss to the government will be limited 9. At the same time, the banks will have enough capital and they can distribute the losses the problem loans over a period of 10 years. 10. I'm not saying there won't be any Bank failures, because of the program but, this plan will limit it to minimum. 11. Also, this is not the perfect plan but, people smarter than me can build on the framework. 12. This will free up capital from Banks and they don't need to dump at depressed price which is vicious cycle and at the end of the day (rather 10 years), they need to eat out any losses on the problem loans they had and government is not going to take much loss. 13. Also, we can put the government loans at the top of the capital structure so public money won't be spent on unwise decision the part of banks 14. The same model can also be applied to the Mortgages of individual homeowners with slight modifications to suit them Let me know your comments/ideas/suggestions Thanks for taking the time to read. Ramesh Krishnan
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