David Kirkpatrick

February 11, 2009

A brilliant bank bailout plan …

Filed under: Business, Politics — Tags: , , , , , , , — David Kirkpatrick @ 4:47 pm

… from Andy Kessler. Andrew Sullivan called this idea “wacky,” but I like it. Certainly not all that wacky — just a way outside the box.

From the link:

Now with TARP 2.0, renamed a friendly Financial Stability Plan, the idea is to entice private capital to buy these bad loans and derivatives in an effort to set the “market price.” But Mr. Geithner hasn’t solved the dilemma of banks not wanting to sell and become insolvent. Moreover, no one is going to buy these securities ahead of Mr. Geithner’s action with the “full resources of the government” to bring down mortgage payments and reduce mortgage interest rates. Lower mortgage payments means mortgage-backed securities would be worth even less. Six months to a year from now, big banks may still be weak and the ugly “n” word of nationalization will be back.

Mr. Geithner should instead use his “stress test” and nationalize the dead banks via the FDIC — but only for a day or so.

First, strip out all the toxic assets and put them into a holding tank inside the Treasury. Then inject $300 billion in fresh equity for both Citi and Bank of America. Create 10 billion new shares of each of the companies to replace the old ones. The book value of each share could be $30. Very quickly, a new board of directors should be created and a new management team hired. Here’s the tricky part: Who owns the shares? Politics will kill a nationalized bank. So spin them out immediately.

Some $6 trillion in income taxes were paid by individuals in 2006, 2007 and 2008. On a pro-forma basis, send out those 10 billion shares of each bank to taxpayers. They paid for the recapitalization.

Each taxpayer would get about $100 worth of stock for each $1,000 of taxes paid. Of course, each taxpayer has the ability to sell these shares on the open market, maybe at $40, maybe $20, maybe $80. It depends on management, their vision, how much additional capital they are willing to raise, the dividend they declare, etc. Meanwhile, the toxic assets sitting inside the Treasury will have residual value and the proceeds from their eventual sale, I believe, will more than offset the capital injected. That would benefit all citizens, not the managements and shareholders who blew up the banking system in the first place.

1 Comment »

  1. I do not believe that this is the right approach. Even though I am a very progressive person I think that too much government control over our economy is a bad idea. Having said that, I rrecognize that the government has a right to exercise some control over banks, because of the large amount of money that the government is giving them. But we have to remember that government, through its own failure to regulate, is deserving of some blame for the crisis we’re facing. But let’s remember that if a government official or a politician said, at the height of the housing boom, that too many Americans were being allowed to buy too many homes they can’t afford with money they will not be able to pay back the public would have been outraged. So, the public, much of which is now really angry, needs to realize that it had a sstrong hand in getting us where we are now.

    American Reality

    Comment by Jonathan Simeone — February 11, 2009 @ 4:59 pm


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