A Stabilization Plan I Can Support
by tdaxp ~ October 1st, 2008
While George Bush and Nancy Pelosi push their plan to subsidize the banking industry, an alternative is being formulated by some in Washington that instead focuses on liquidation and recapitalization, with less spending by the government.
Some details:
Bailout and Accounting Rules: GOP Members Forging Alternative to Paulson Bailout - Financials * US * News * Story - CNBC.com
Components of the alternative plan including the following, according to sources:* Require the Treasury Department to guarantee, at up to 100 percent, bank losses resulting from failed mortgage-backed securities originated prior to the plan’s enactment. Such insurance, supporters say, would provide immediate value to the securities and a foundation for which they could then be sold. The Treasury Department would finance that insurance by assessing a premium on outstanding mortgage-backed securities.
* Allow companies to carry back losses arising in tax years ending in 2007, 2008, or 2009 back five years, generating a tax refund and immediate capital
* Allow a “repatriation window” for profits earned by U.S. firms overseas. Such repatriation amounts would not be taxed if invested in distressed debt (as defined by Treasury) for at least one year.
* Allow banks to treat losses on shares of preferred stock in Fannie Mae and Freddie Mac as ordinary losses, not as capital losses
* Suspend the capital gains tax rate for two years
* Limit backing of high-risk loans by Fannie Mae and Freddie Mac
* Schedule Fannie and Freddie for privatization
* Suspend “mark-to-market” accounting until the SEC can issue new guidelines that will allow firms to mark these assets to their true economic value
* Stabilize the dollar by repealing the Humphrey-Hawkins Full Employment Act, which alternative bailout supporters say diverts the Federal Reserve’s attention from long-term price stability to short-term economic growth
* Require the Treasury to write rules prohibiting excessive compensation or golden parachutes to executives of failed companies
* Task the SEC with regular, annual audit reports of entities the federal government has brought under conservatorship or now ownsThe development of the alternative plan comes as members of the Senate consider voting on the original financial rescue plan as soon as Wednesday evening. The $700 billion rescue bill may be attached to a tax plan that included relief to taxpayers paying the alternative minimum tax, or AMT.
Sounds good. Of course, it’s chief benefit (and probably drawback, in the eyes of Bush, Pelosi, and Paulson) is that it does not write checks to foolish bankers.
[1] http://www.tdaxp.com/archive/2 008/06/19/the-foreign-polic...
October 1st, 2008 at 8:59 am
“* Require the Treasury Department to guarantee, at up to 100 percent, bank losses resulting from failed mortgage-backed securities originated prior to the plan’s enactment. Such insurance, supporters say, would provide immediate value to the securities and a foundation for which they could then be sold. The Treasury Department would finance that insurance by assessing a premium on outstanding mortgage-backed securities.”
Bad idea. Once again, this shifts all the risk to the Taxpayer from the banks. This is the same effect as the original Paulson plan. If this is the main part of the new plan, I would vote against it still.
“* Allow companies to carry back losses arising in tax years ending in 2007, 2008, or 2009 back five years, generating a tax refund and immediate capital”
I guess this would work. They would get cash in the form of an immediate tax refund in lei of a future smaller tax bill.
“* Allow a “repatriation window” for profits earned by U.S. firms overseas. Such repatriation amounts would not be taxed if invested in distressed debt (as defined by Treasury) for at least one year.”
I suspect all sorts of games will be played with this that has nothing to do with the crisis . How much cash for the banks will this generate is this estimated to do?
“*Allow banks to treat losses on shares of preferred stock in Fannie Mae and Freddie Mac as ordinary losses, not as capital losses”
I don’t see any reason to do this.
“* Suspend the capital gains tax rate for two years”
I am in favor of lower taxes. This will not put cash into the banks short-term. For the long-term health of the economy, lower taxes (assuming lower USGOV spending) is a good thing. This is bad public policy becuase the bailout should be about the immediate problem.
“* Limit backing of high-risk loans by Fannie Mae and Freddie Mac
* Schedule Fannie and Freddie for privatization”
Split them up and spin them off to the public. No GSE needs to be around as long as they were.
“* Suspend “mark-to-market” accounting until the SEC can issue new guidelines that will allow firms to mark these assets to their true economic value”
Bad idea. Those wanting this suspended is so that companies can book those assets at there face value (100%) as opposed to closer to the true economic value (around 30%).
A big problem with the this entire mess is we don’t know how to value these complex assets. Anything that involve shuffling around these assets will have major problems.
Suspending mark-to- market is also a bad idea in that it will further reduce the usefulness of the balance sheet in providing information as the financial state of a bank. Bad financial info is a major cause of the mess.
“* Stabilize the dollar by repealing the Humphrey-Hawkins Full Employment Act, which alternative bailout supporters say diverts the Federal Reserve’s attention from long-term price stability to short-term economic growth”
This is a bad . This act focuses the Fed on sound Monetary Policy (Monetary Economics,inflation fighting) among other things. It is mostly advisory though. I suspect there is a hidden agenda in its re-peal tha thas nothig to do with “the crisis”. This shouldn’t be touched.
“* Require the Treasury to write rules prohibiting excessive compensation or golden parachutes to executives of failed companies”
What’s excessive? Also, what crystal ball is used to know that Company A at time Y will be failing at time Y + Z? when it sets compensation at time Y.
“* Task the SEC with regular, annual audit reports of entities the federal government has brought under conservatorship or now owns”
That sounds okay. Maybe this would be better in the Treasury department.
I guess I would recommend voting “no” on this plan too.
Here is my plan:
http://purpleslog.wordpress.com/2008/09/30/on-the-bailout-part-4-what-i-think-should-be-done-short-term/
October 2nd, 2008 at 11:45 am
Purpleslog,
Thanks for the detailed response!
Increased FDIC insurance should go along with increase insurance premiums for banks. If this program works well, it is self-financing — as the FDIC has been.
Several of the suggestions amount to tax breaks, so are good if not necessarily part of a solution.
Given that they needed to be rescued, Fannie and Freddie will probably be liquidated to pay for what it owes to the US, hopefully ending their corporate existence.
Good thoughts on the drawback of mark-to-market.
The Humphrey-Hawkins Full Employment Act confuses fiscal and monetary policy. Monetary policy should be aimed at avoiding inflation and deflation. Other social goods (the employment rate, personal incomes and their skew, etc) are best dealt with through fiscal policy.
As to excessive compensation, this is mostly a red herring, but it is important to avoid setting the example that a company can ‘just’ turn to the government for this kind of help. Destroying shareholder wealth, upper management, etc, of such companies are reasonable goals for the federal government to pursue in any bailed out company. We are being asked to step in to avert a catastrophic and very quick financial disaster. That may be a reasonable use of public money: saving bad companies is not.