Bill King, who I have quoted many times in this space, puts forth an intelligent alternative to the two plans circulating D.C. — the DOA Paulson Bailout plan, and the even sillier House Republican Plan.
I would strongly suggest the economic staff of both Presidential candidates review this.
Here are Bill’s starting premises:
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It’s wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.
Basics of the King Report Bailout Plan:
• Directly recapitalize banks by
the US government allocating $500B into a plan for community-type banks
to increase their capital in partnership with the government.
• The government would match existing or some
percentage of existing bank capital. If it would be better, a separate
bank could be created. Place a limit of say $1B per bank.
• This would create $5 trillion of credit at
conservative 10 to 1 leverage. This is more than the entire private
mortgage market. It is a much better use of capital instead of
absorbing $700B of losses with
no means to discern resultant credit creation.
• Give the banks a tax rate of 15% on consumer
and commercial lending for 5 years and the right to buy out the
government share of the operation at some premium.
• Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
• To help the big banks, allow them to create
a consumer & commercial lending facility with the 15% tax rate
benefit. This should entice private equity and sovereign funds as well
as Wall Street remuneration that was garnered over the past decade or
• Prohibit trading, especially derivatives, in
consumer & Commercial lending operations. However pure hedging
would be allowed.
• Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.
• Foreign banks in the US could be included if they have respective funding from their government.
• The real estate problem is due to the fact
that American incomes do NOT support current prices. Easy credit
allowed them to purchase homes they couldn’t afford.
• Any solution to clear the real estate market
must entail hiking income, which is very difficult, or allowing prices
to drop to levels that the average American can support. This helps
average Americans, not the big banks and investors stuck with
• No bailout for the imprudent and reckless
but a means to directly help Americans and procure capital from private
and sovereign sources because a new financial system must be
• This is not likely to be the final model but
it is a stop-gap measure that will resonate with average Americans.
It’s a way to connect with Middle America because it benefits them
directly and is not an exclusive Wall Street bailout.
• The cause of our current financial morass is
Big Government + Big Business = Crony Capitalism + Funny Money =
concentration of wealth and risk + declining US living standards.
• The solution is decentralization of the
financial system, like the tech industry, which will lower systemic
risk, foster competition and yield better ideas, services and companies.
Thanks, Bill — great stuff.