What is the Plan? A Discussion With Bill Dunkelberg and David Kotok

Here is our latest comment in The Institutional Risk Analyst:


We end the interview with a four point proposal for the banking mess:

1) President Obama, flanked by Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair, to lead G-10 to announce a temporary sovereign guarantee of all bank deposits, foreign and domestic, and agree to national treatment of bank bond holders and OTC counterparties on a case-by-case basis, using actual realized and probable losses as the decision point for resolution.

2) FDIC suspends all bank insurance premiums for 2009 and directs all depositories to suspend dividends and retain capital to help stabilize the aggregate capital of the industry and thereby the lending base. This would be coupled with access to the Treasury and all the dollars we are pouring into sick institutions in order to finance FDIC activities.  Starting in 2010, FDIC insurance premiums are tied to all bank liabilities, not just deposits, and increase with bank size and complexity.  Need legislation for this.

3) Operating under open bank assistance, the equity holders of C are wiped out. The Fed, FDIC and OCC begin to make board changes and the Treasury invites bond holders of C to form a creditor committee. The new C board recruits new management that knows how to do basic banking. C creditors and FDIC negotiate a 50/50 debt for equity and FDIC insured bond swap. Resolution remains the ultimate threat by FDIC, so the creditors will probably play ball after some yowling. Once C is in hand, Treasury and Fed begin the resolution of AIG and managed “blow up” of the CDS market as now called for by Myron Scholes, among others, and then accelerate active stress assessment of remaining money centers.

4) Treasury then begins to bid selectively for toxic securitizations, contributes these assets to the DIP. FDIC uses its receivership powers to dissolve the DE trusts that are the issuers of the toxic waste, gain control over the underlying loans, and sell this collateral back into the market. As the quid pro quo for the deposit insurance premium relief, the banking industry must be ready to buy these loans from FDIC with financing from the Fed and service/work out same. The community bankers get an asset they can work and shelter from the immediate cost of the large bank cleanup.  We help homeowners without further government subsidy.


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