Since Secretary Paulson put his proposal in three pages, I’m going to lay out my proposal in less space than that. Here goes:
Point #1 – The Treasury is hereby authorized to spend up to $700 Billion to stabilize the banking and financial services sector in such manner as it sees fit. There will be two main priorities in their decision making: a) To increase the flow of credit in the banking and mortgage markets so that the healthy of the economy is improved, not hindered and b) To increase the likelihood that eventually the taxpayer will receive a profit rather than incur a loss.
Point #2 – Any institution that sells any “troubled” assets to the Treasury shall sell them at a price that is established by joint decision of the Treasury, the institution, and a committee formed of 2 members of the Senate Banking Committee, the Vice President of the United States, and 2 members of the House Banking Committee and the chairman of the SEC. The target price shall be no more than 45 cents on the dollar. Under no situation will the purchase price be more than 50 cents on the dollar without the joint approval of the House and Senate Banking Committees, and no more than 65 cents on a dollar without approval by the full Congress.
Point #3 – Any institution that sells troubled assets to the Treasury shall immediately reduce their dividend to 20% of what it was (can be adjusted for inflation annually according to the CPI), and all officer level employees (from the CEO down 3 levels on the corporate hierarchy) will have their salary reduced to a maximum of 3 times the average salary that they pay their employees. So if the average Bank of America employee makes $50,000 per year, the CEO’s salary will be no more than $150,000.
Point #4 – If the institution is currently servicing the debt, they will remain servicing the debt and will provide monthly reports to the Treasury on the status of the payment history, collection procedures and, if necessary, foreclosure efforts.
Point #5 – If a bank, like Bank of America (just to pick on the biggest one) sells $100 billion in “troubled loans” to the Treasury, it will receive $45 billion for those loans. Those funds will be used to recapitalize the bank and encourage further responsible lending. If such a $55 billion loss in this example were to cause solvency issues, the financial institution should and will work closely with the Federal Reserve, the FDIC and any other regulatory bodies who can assist in working through those solvency issues. The Treasury will have the ability to extend timelines for dealing with solvency issues in an effort to find an acceptable and least costly opportunity possible. If no other alternative is viable (including sale/merger), the FDIC, Treasury and the Fed will work for an orderly takeover by the FDIC and distribution of assets. There is the very likely possibility that this bailout might cause some banks to go under and while that is painful, the banking and financial system had swelled to an unsustainable size in today’s market and needs to contract. It is the duty of the Fed, the FDIC, the Treasury and all of those involved to help that contraction happen with as little pain as possible.
Point #6 – There will be no dilution of equity for shareholders in said institutions as the Federal Government will not be taking an equity interest in said institutions. The Federal Reserve will be buying assets from the institutions, not owning the institutions. The sale of those assets will come with certain restrictions, i.e. the salary caps and dividend caps mentioned before and servicing requirements. If the institution is servicing said assets in such a way that makes them eventually saleable and the Treasury is able to sell them at a profit, the profit will be divided as follows: a) The original tax payer investment will be paid back first. b) Then the shareholders shall be given a one time stock dividend cumulatively equal to 20% of the net profit. c.) The management of the financial institution shall get a bonus equalling a net of 10% of the profit. d) The remaining 70% of the profit shall be divided as follows: 20% to the general operating budget of the United States government, and 50% to the Social Security Trust Fund (as that is our next problem to deal with). At that point, all salary and dividend caps will be lifted and the institution is free to pay their CEO whatever they wish as long as they live within banking regulations.
Point #7 – The Treasury will set up such regulatory and oversight boards so that Fannie and Freddie and the entire mortgage backed securities market (or whatever is left) will continue to function and will continue to be able to provide those with good credit, verifiable income and a downpayment can get a mortgage that is reasonable for their income levels.
Point #8 – The Treasury will set up a special “Mortgage Fraud Commission.” Anyone who can prove that the mortgage they obtained was obtained due to fraud on the part of their lender without their knowledge will be entitled to a special homeownership benefit that will help them stay in their home. The package of homeownership benefits will be decided by the commission and will only be eligible in the cases of fraud on the unknowing. The Treasury realizes that there are many people who would like to receive benefits and stay in their homes, but also realizes that it creates a huge moral hazard for the government to be the lender of last resort to individuals as well as to financial institutions. Not all Americans who purchased homes in the unsustainable housing boom that happened should, in reality, stay as homeowners and it would be irresponsible for the tax payers to have to pay for them.
Point #9 – The Treasury will provide monthly financial reports on the status of the “Project Rebuild Banking” to the Congress every 30 days for the first 6 months, then quarterly after that. All reports shall be made available for public viewing at “projectrebuildbanking.gov”
I sincerely believe that this proposal would accomplish three main objectives:
- It would increase the available capital in the banking system to encourage responsible lending.
- It would provide for an orderly wind down of the institutions that aren’t healthy enough to stay around (as opposed to the $85 Billion in 24 hour madness of the AIG arrangement).
- It wouldn’t reward those who were a part of making the mess that we’re in. The banking institutions and executives would be rewarded if they clean up the portfolio and return a profit to the tax payers but only if they turn a profit.
What do you think? I’d like to say that we have a lot of time to talk about this, but in reality we don’t. If you don’t like it, let’s discuss what you don’t like. If you do, or you have your own ideas, TALK TO YOUR CONGRESSMAN AND YOUR SENATORS NOW BECAUSE BY THE END OF THE WEEK IT MIGHT BE TOO LATE…..
And spread the word, now!
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I didn’t go into the mortgage business to become a government employee and I don’t want them to take over the entire industry, just give us a much needed boost to get the mess cleaned up.
Sincerely,
Chris Johnson says:
This will ensure that banks at least rise to the level of mediocrity.
September 22, 2008 — 8:08 pm
Tom Vanderwell says:
Don’t you think that mediocrity would be better than downright failure?
Get them to mediocrity first and then go from there…..
September 23, 2008 — 4:44 am
Dave says:
Tom, Thankyou for all your hard work to write this piece. I think you are on target. I think #6 is especially well done and very important.
September 23, 2008 — 5:23 am
John Sabia says:
Great job – sums it up very well.
September 23, 2008 — 5:45 am
Michael Cook says:
While I will certainly agree that it is well done, the question I have for you is would a bank take bankruptcy over your plan? I do not say this to be facetious, but rather because it seems too onerous.
Simply selling the assets at no more than $0.55 on the dollar could prove to be a breaking point for the likes of WaMu. Most of these instruments are not marketed to market and to take a loss of that caliber, might bring their tier 1 capital so low that they could not operate. #5 gets at this issue, but why would I even come to the window if you are going to essentially force me into bankruptcy? Better to keep living a lie if the truth will kill you.
Again, I think this is a great attempt, but my only add would be allow the payment to be based on some agreed upon methodology without a ceiling. This would create a new market for the products and at the very least get people trading among themselves. If the market comes up with $0.55, so be it, but its a little scary putting a ceiling on the value because of all the hype.
September 23, 2008 — 3:05 pm
Michael Cook says:
Also, I would love to see what kind of CEOs you get if you are only paying $150,000. I think that piece of the proposal needs to be thought again. I know everyone is harping on Exe. Comp., but its supply and demand. There are not very many people capable of running a bank (or any business) very well at a high level. Salary limits will only serve to push out the most talented people and replace then with the also-rans.
How about making their base pay $300k+ and tieing more of their compensation to performance metrics, capping it at a number people will want to shoot for ($2 million+). Tieing it to risk adjust performance might make it fair and help all parties.
September 23, 2008 — 3:12 pm
Tom Vanderwell says:
Michael,
A bank might very well go under under this plan. If you read what Yves has to say over at Naked Capitalism, banks are going to go under because of the Fannie Freddie plan any way.
Let’s face it, even coming from one of the banker, we’ve got a bigger banking system than we need to have. Read it here at http://www.nakedcapitalism.com/2008/09/banks-take-bigger-than-estimated-hit-on.html
In regards to the comp plan, look at it as the ultimate incentive comp plan. If a bank, say B of A, sells $10 billion in troubled loans to the Treasury, the CEO and his top people take a hair cut on their comp plan. But if they can turn around and restore the profitability of that package of loans and sell them on the private market for $10 billion, they get to split a 10% bonus on the $5.5 billion. Assuming that there are 15 people who took a pay cut, and that they split the bonus evenly, that would give them each a bonus of $36.6 million if I figure my math right.
That’s a pretty big pot at the end of the rainbow if you ask me…..
But your idea makes sense too. I’m just trying to ramp up discussions…..
Tom
September 23, 2008 — 4:30 pm