All financial crisis have one of three issues: Liquidity, Solvency & Capital. The current crisis has all 3. Any plan to help resolve the emergency should be tailored to address all three.
The main problem with most of the proffered solutions is they fail to address all three. Here are some of the better ideas floating around that do exactly that:
• Floyd Norris writes: "It is unsettling to see Wall Street firms that only a week ago feared
for their survival hoping to get rich off this program. It needs to be
carefully monitored to keep it from becoming a scandal of its own."
• Barron’s Mike Santoli points out that current banking regulations forbid Private Equity (and SWFs) from buying more than 20% of a bank w/o submitting the whole firm to regulation as a bank holding company. That should be waived to allow more private capital to flow into the system.
• Merrill Lynch’s David Rosenberg suggests that "the Federal Reserve step in as the repo clearinghouse for all term repo trades. For a counterparty-risk based fee the Fed would guarantee that, only in the event of counterparty failure, the surviving counterparty would receive your cash, not the collateral that was posted for the funds, back from the Federal Reserve. The Federal Reserve would own the collateral."
• Martin Wolf has 3 suggestions:
- Force banks to write down assets to market value, stop paying dividends, and raise new equity.
- Force banks to write down assets and then recapitalize them by converting debt to equity.
- Force banks to write down assets and have the government take equity stakes via preferred stock.
• Joshua Rosner, managing director of Graham Fisher, says price the paper in terms of defaults: "In structured securities, there is no coming back . . . once the underlying collateral defaults, you’ll never have recovery."
• Our own humble 30/20/10 program for private equity funds to get involved in Home Mortgage workouts.
• Miller Tabak’s Peter Boockvar points out that the $40 Billion per year in dividends the 20 largest banks pay should be suspended, and redirected towards recapitalization.
• More Floyd Norris: "The prices paid for assets should be transparent to the public, and
some way should be found to allow others to bid for them, in at least
some cases. That would help to assure that the price being paid was a
• Arnold Kling says: We don’t need to bail out Wall Street to protect Main Street. All we
have to do is make sure that sound borrowers, especially small
businesses, have access to credit. Banks can do the job, although
regulators may have to reduce capital requirements.
• Jeff Matthews asks: "How is it that Warren Buffett can cut a better
deal with the best-run financial company in America than the U.S.
Treasury can ask from the worst-run financial companies in America?
• The Public seems to be very very unhappy with all of this: "Around the country, Republican and Democratic voters are rising up in
outright opposition to the White House plan or, at the very least, to
express concern that it is being pushed through Congress in haste."
Any other good ideas out there?