Tuesday, September 23, 2008

A better Plan to save Wall Street and the taxpayers" money.

A better plan to stabilize the financial markets is to simply let the Federal Deposit Insurance Corporation take over the insolvent companies and form a holding company and reopen as one large institution. Just as when the FDIC takes over smaller banks the same rules should apply here. The new holding company can then operate the new banks keeping the good accounts and spinning the bad ones to a second operating company to work through them eventually restoring some of them and liquidating the rest. If any legitimate debt holders are established then stock could be issued to these legitimate debt holders ( likely bond holders). After a period of time this new company could do a stock offer selling the entire company back into the private sector. Problems solved, seven hundred billion of tax payers money would be saved. The cost of the new company would be returned back to the taxpayers from proceeds of the sell of the stock at the return to the private sector from government operation. The fat cats on Wall Street could be returned to work for the new company but like all reorganizations at a lower cost to the new company allowing it to return to health much faster.

Both Wachovia and Washington Mutual as well as all the community and regional banks that are or become distressed should be included in the new Holding Company thus making a network of bank outlets available to allow loans between banks to be unfrozen and allow the system to do a restart with these outlets being secure and adding the desperately needed stability to the entire banking system. If a bank becomes weak it needs to be added very quickly keeping the system calm.

The changeover could be done over a weekend without any disruption of any kind. Each of the banks taken over would continue to operate under it's present name and corporate structure except that the boards would become advisory only with the final authority being held with the new holding company. Over time most of the banks could be either spun off or several combined under a new corporate configuration and then spun off or sold. The stability of the entire banking system would be the most important goal.

The Federal Reserve System looks at all the deposits at all the banks as one total, so this new bank would not alter the loan patterns from what it would be with if all these various banks that would be part of the new holding company were operating separately. All the bad things being claimed by Mr. Paulson would be avoided with this plan and the best part of this plan are NO TAXPAYER costs beyond the administrative cost of the new bank holding company.

This plan takes a second look at the way the taxpayer’s money is used and avoids benefitting those that caused the problem to begin with. They took unnecessary risk and have lost so the bailout should take the control of the future out of these either corrupt or incompetent executives hands and allow a time out for our banking system to stabilize and get back on track.

The one caveat I have for the new Holding Company, which plans to put these bad debt mortgages in, is that a provision in the restructuring should provide a way for people that are in these mortgages to be able to stay in the home. One idea would be to renegotiate the value of the property back to an equity position with the caveat that they could not sell their home, for eight to ten years or some other appropriate time frame. The reason that I would like to see this put into the terms for use of this agency to stabilize the mortgage market is that if something isn’t done the power structure that will be controlling this new agency will likely sell off these homes at a larger loss than leaving people in the homes or working out something for them. If this doesn’t happen many insiders, the money crowd, Wall Street types you know the folks that got us in this mess to start with will come in and buy these properties up for pennies to the dollar at leaving the homeowner homeless the taxpayer on the hook for the costs and the rest us no better off than we are now. There could be a deed restriction on these homes that required them to pay the proceeds of the write-down out of the home or of the equity of the home as a penalty for moving too fast. The whole idea for this bailout is to stabilize the mortgage market, financial market, and the economy.

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