A Bailout Plan That Can Succeed

Posted on September 9, 2008 at 12:00 AM PST by

We all know by now that the House of Representatives rejected HR 3997, the $700 billion, poorly constructed Emergency Economic Stabilization Act of 2008. Let’s be clear. This bill was a disaster. Nearly every member of Congress that I heard speak during debate today agreed that the bill was a not what they would like to see, but for some reason concluded that even though it wasn’t any good, they should still vote for it.

The fun didn’t end there. I heard several members of Congress talk about how mark-to-market accounting rules are causing this mess. Instead of having banks mark a worthless asset to zero; these individuals would rather allow a bank to carry an asset at an artificially high valuation, thereby prolonging this crisis. Marking assets to higher valuations than they’re worth does not solve the problem. It merely turns a gaping into a constant wound that will eventually cause the institution to bleed out.

Let’s get real. Taxpayers don’t like this deal because it bails out Wall Street and will likely not solve the problem. Shifting capital from taxpayers to banks without an actual plan to fix foreclosures and asset valuations is a net wash, not a solution.

I’m going to propose a simple solution that I believe could work:

Instead of providing handouts to bankers, announce that the Federal Government will nationalize any bank unable to meet capital requirements and unable to raise private capital. Like Sweden in the early 90’s bleed all private capital from the bank, write down every loan as aggressively as accounting rules allow, and then inject taxpayer capital in exchange for substantial stakes in banks worth saving. Allow other banks to fail, but pass FDIC reform that temporarily guarantees all deposits and transition those deposits to other institutions that the taxpayers now own. With an increase in the FDIC insured limit, depositors can feel confident in putting their money in United States banks once again. Pass legislation that encourages mortgage forbearance or renegotiation for responsible borrowers, thereby stemming the tide of foreclosures. Once markets recover, unlock taxpayer value by taking the nationalized banks public again. This plan in no way bails out Wall Street, gives the taxpayer every advantage, and directly attacks the foreclosure problem.