Todd Harrison of Minyanville suggests the following actions:
• Immediately suspend all common stock dividends for banks on the receiving end of the Troubled Asset Relief Program. Even a penny or a quarter is too much, given the circumstances.
• Immediately suspend all preferred dividends for TARP-recipient banks, including payments to the government. As regulators consider non-cumulative preferred stock as tier-one capital, make it act like tier-one capital. The underlying documents permit up to five years of dividend suspension and most preferred shares are already trading as if that will happen.
• Convert the government’s preferred holdings to common stock and offer the same terms to existing preferred shareholders. It’s time to build a foundation rather than another house of cards. No investor believes that tier-one capital — let alone “shareholder equity” — is anywhere near tangible common equity. So force that convergence.
• Cap deposit rates as was done in 1935. Right now, deposit rates are dictated by the weakest of financial institutions, and those rates discount the value of FDIC insurance. Even with all the Fed’s actions, bank net interest margins are not expanding and as a result, banks have to reprice loans higher.
• Establish a financial institution governing board made up of bipartisan leadership from Congress and representatives of the Federal Reserve and Treasury and ask. Paul Volcker to chair it. Industry leaders need a single board to be accountable to rather than an endless stream of Congressional committees and bureaucrats.
• Within the top 25 largest financial institutions in the country, begin the internal separation of the good assets and businesses from the bad. What you started inside Citigroup (C) has merit elsewhere. After good businesses are “cleansed,” sell a small, 10%-15%, minority stake in each through IPOs available to all investors. With transparency and clean balance sheets, there will be strong investor demand, but we must give all investors — not just politically connected private-equity firms — the opportunity to participate and use the proceeds to replenish capital. Over time — measured in years, not weeks or months — the investments can be spun off and good businesses will cover a significant amount of the incurred losses.
• For smaller, troubled banks, please let them fail. When they do, transfer the assets to an RTC-like entity. Then, using a Web-based auction process open to all, invite investors to bid on troubled assets. There will be plenty of demand.
• Decide today what you want the banking industry to look like on the other side of this crisis. Whether it’s capital and liquidity requirements, deposit limits or conflicts of interest, the time for proactive thought is now.
An open letter to Tim Geithner
How to restore confidence in the troubled financial system
12:03 a.m. EST Feb. 4, 2009
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