- Jun 6, 2007
- 852
- 483
- 910
Its worrisome to think about what the White House will propose to solve the credit crisis problem the nation is experiencing in light of the high priority they currently put on silencing critics especially critics in their own party. Will they be taking action so they can say they are taking action or will they in fact be exercising excellent judgment? They made a really huge mistake with the salary cap mandate of $500,000/year on top bank executives taking TARP money lets hope they dont repeat it. This mandate has and will discourage banks from participating in this recapitalization of banks program which the nation desperately needs banks to participate in; good and fair rules in this area should definitely be promulgated but not this one, it should be rescinded.
Back to the credit flow problem, the White House has not disclosed its plan yet, but it has given hints of its thinking and the critical importance of this problem therefore warrants public commentary. The White House deserves a lot of praise for dropping the straightforward solution to this problem which would have been the government buying up toxic assets on banks books and just infusing the banks with capital to facilitate them lending again because this solution would cost probably at least three to four trillion dollars which the country cant afford. The major concern that the American people should have with the initiatives the White House seems like it will be proposing is that it will stick the taxpayers with the bill to clean up the toxic asset and undercapitalization problem and it will be a big big bill. This is especially the case with the troubled asset part of the problem; the right approach on this part of the problem should be the government says to the banks the costs to fix this troubled asset problem is too high, you are fully responsible for this problem you hold these assets on your books until you can responsibly sell them without government help or they are redeemed and the government will help you manage the problem so you can still function well as businesses that extend credit.
The White House also deserves high marks for their supposes plan to get credit flowing normal again by pursuing the government providing insurance on various types of loans banks make. It is surely hoped though that the Government charges some level of fees to banks for this activity so that at the end of the day the taxpayer isnt losing any money over this initiative. Moreover, one would think the American people would like to see some mechanism in the system to insure that banks were making prudent loans, something like the government is only insuring the loans up to seventy-five percent of the loan loss so banks have some skin in the game, that is, have an incentive to not make bad loans.
As for the talk of the government providing insurance for secondary markets for asset backed securities or loans that fall under the classification of troubled assets this is a dumb, stupid, idiotic idea and the American people should make a large public outcry over this. Some of these assets at best are worth sixty to seventy percent of their face value the government will lose and lose big on such a program. Some collateral property has had its market value drop forty percent since 2007, were in a recession a lot of borrowers dont have the money to pay their loans even with good loan modifications - No, no, no the banks dont unload these assets at the taxpayers expense. Again, banks can be put in a state even with bad assets on the books, that is if a bank needs help in this area, where they have sufficient capital to fulfill the economys credit needs.
One related issue is that one hears in the media that the Obama White House is planning to liberally (not on a case-by-case basis with compelling reasons) convert preferred stock which the government owns in banks to common stock shares in those banks, this is heart-braking news because it just means that the TARP program which was supposed to be a loan program where the U.S. taxpayers will get their money back into a spending program where U.S. taxpayers will have to pay for this program with their hard earned dollars. These preferred stocks came into government hands as you will remember as the mechanism by which the government injected TARP money into banks; if a bank wanted $ 50 million of TARP money, the Treasury would transfer $ 50 million dollars to the bank and the bank would give the treasury $50 million of preferred stock shares, the preferred shares paying a certain interest rate having priority over common share dividends and if a bankruptcy occurred having high priority amongst creditors.
This whole initiative reeks of a give away to Wall Street and shareholders of banks, its the old story of Washington helping the powerful at ordinary Americans expense and its wrong and shouldnt occur.
What to do about the problem with some banks needing additional capital so they can lend. The Treasury Department has $350 billion of TARP money it just received this year. Start infusing this money into banks by means of preferred shares and/or common shares (or warrants) using fairness and prudence and the like as the guide for the means used. One critical feature with future TARP money going into banks is that there should be a condition that the bank that receives such money must lend it or pay a penalty unless bank regulators put restrictions on lending the money the nation needs to get credit flowing normally this condition will help. It is a commonly held belief on the bank capital issue problem to belief the solution is to have the banks raise private capital. The obvious problem is that the troubled assets on banks books deter capital investors for fear these troubled assets will drop precipitously in value or will bring the bank huge liabilities. The solution is to provide thorough transparency on these assets so investors can reliably value the assets and know with reasonable certainty the banks liabilities. A banks troubled assets can be divided into four parts. The first are those assets that are collateral back debts or debt securities if worse comes to worse and there is a default the collateral is worth a good amount and the assets still have significant value. The second is collateral back security assets where due to the priority of the securities relative to the collateral the assets may be worth nothing. The third is non-collateralized assets. The fourth is derivative contracts, credit default/index/currency swaps and the like. Banks should be mandated to identify the first three groups of assets as clearly as possible (mandate outside experts evaluate the value of these assets) to the public and update it regularly. On the fourth type of asset the government will have to step in and limit the banks liability, most importantly getting stock shares in the bank so as to compensate the government for the losses it occurs, the government should do what it did with AIG and Bank of America swap assets.
If this approach mentioned in the preceding paragraph doesnt work in getting private capital into banks. The government if it doesnt already do so can back bonds and preferred stocks that banks sell or issue. Lastly, if the government backing on devises business use to raise capital isnt sufficiently effective for the banks the government can infuse the banks with more capital but this should be the last resort. To an impartial observer it really seems that the hang-up to the credit flowing problem in America is a problem solved by the government insuring a lot of credit and the government deterring banks sitting on capital the capital needs issues for banks seems ancillary. If one gave the banks two trillion dollars tomorrow, the nation would still likely have a credit flowing problem. Again, the one critical thing going forward that the Treasury must do is to implement rules where if banks dont lend this new capital they get they incur a financial penalty, this rule has to stay in effect for as long as the flow of credit is impaired in this country.
Finally, it has been mentioned that the White House is planning to ask the Congress for like $500 billion dollars to solve the credit crisis problem. This is a good idea and the White House should get it but there should be tight strings on it, the government has to stop being Santa Claus with taxpayer money. It should not be used for any type of industry wide purchase of troubled assets. It should not be used for any banking industry wide infusion of capital unless all other means of raising capital for banks has been pursued and the results have been unsatisfactory and the Federal Reserve Board certifies this is the case and this infusion is needed for the nations interests to be protected.
On the Executive pay issue, the rules dont want to discourage highly capable top executives from taking employment with or staying employed with banks and thereby leading banks and the industry back to vigorous health; and again, the rules dont want to discourage banks from participating in vital government assistance programs for banks. The Executive pay rules should prevent top executives from taking any extraordinary pay or bonuses or reward pay from taxpayer monies given to the banks. The rules should ban top executives from getting bonuses when their bank is doing poorly. Moreover, long-term because the financial industry has abused the compensation system and for that matter U.S. industries across the board has done the same banks and large corporations in all industries where the corporation is a publicly held corporation should be required to submit bonuses, stock options and the like to shareholder votes for approval, have some industry wide pay scale as a default should be permitted if the shareholders dont approve the executive pay packages to enable businesses to remain competitive in their pay so as to maintain and acquire good top executives.
Back to the credit flow problem, the White House has not disclosed its plan yet, but it has given hints of its thinking and the critical importance of this problem therefore warrants public commentary. The White House deserves a lot of praise for dropping the straightforward solution to this problem which would have been the government buying up toxic assets on banks books and just infusing the banks with capital to facilitate them lending again because this solution would cost probably at least three to four trillion dollars which the country cant afford. The major concern that the American people should have with the initiatives the White House seems like it will be proposing is that it will stick the taxpayers with the bill to clean up the toxic asset and undercapitalization problem and it will be a big big bill. This is especially the case with the troubled asset part of the problem; the right approach on this part of the problem should be the government says to the banks the costs to fix this troubled asset problem is too high, you are fully responsible for this problem you hold these assets on your books until you can responsibly sell them without government help or they are redeemed and the government will help you manage the problem so you can still function well as businesses that extend credit.
The White House also deserves high marks for their supposes plan to get credit flowing normal again by pursuing the government providing insurance on various types of loans banks make. It is surely hoped though that the Government charges some level of fees to banks for this activity so that at the end of the day the taxpayer isnt losing any money over this initiative. Moreover, one would think the American people would like to see some mechanism in the system to insure that banks were making prudent loans, something like the government is only insuring the loans up to seventy-five percent of the loan loss so banks have some skin in the game, that is, have an incentive to not make bad loans.
As for the talk of the government providing insurance for secondary markets for asset backed securities or loans that fall under the classification of troubled assets this is a dumb, stupid, idiotic idea and the American people should make a large public outcry over this. Some of these assets at best are worth sixty to seventy percent of their face value the government will lose and lose big on such a program. Some collateral property has had its market value drop forty percent since 2007, were in a recession a lot of borrowers dont have the money to pay their loans even with good loan modifications - No, no, no the banks dont unload these assets at the taxpayers expense. Again, banks can be put in a state even with bad assets on the books, that is if a bank needs help in this area, where they have sufficient capital to fulfill the economys credit needs.
One related issue is that one hears in the media that the Obama White House is planning to liberally (not on a case-by-case basis with compelling reasons) convert preferred stock which the government owns in banks to common stock shares in those banks, this is heart-braking news because it just means that the TARP program which was supposed to be a loan program where the U.S. taxpayers will get their money back into a spending program where U.S. taxpayers will have to pay for this program with their hard earned dollars. These preferred stocks came into government hands as you will remember as the mechanism by which the government injected TARP money into banks; if a bank wanted $ 50 million of TARP money, the Treasury would transfer $ 50 million dollars to the bank and the bank would give the treasury $50 million of preferred stock shares, the preferred shares paying a certain interest rate having priority over common share dividends and if a bankruptcy occurred having high priority amongst creditors.
This whole initiative reeks of a give away to Wall Street and shareholders of banks, its the old story of Washington helping the powerful at ordinary Americans expense and its wrong and shouldnt occur.
What to do about the problem with some banks needing additional capital so they can lend. The Treasury Department has $350 billion of TARP money it just received this year. Start infusing this money into banks by means of preferred shares and/or common shares (or warrants) using fairness and prudence and the like as the guide for the means used. One critical feature with future TARP money going into banks is that there should be a condition that the bank that receives such money must lend it or pay a penalty unless bank regulators put restrictions on lending the money the nation needs to get credit flowing normally this condition will help. It is a commonly held belief on the bank capital issue problem to belief the solution is to have the banks raise private capital. The obvious problem is that the troubled assets on banks books deter capital investors for fear these troubled assets will drop precipitously in value or will bring the bank huge liabilities. The solution is to provide thorough transparency on these assets so investors can reliably value the assets and know with reasonable certainty the banks liabilities. A banks troubled assets can be divided into four parts. The first are those assets that are collateral back debts or debt securities if worse comes to worse and there is a default the collateral is worth a good amount and the assets still have significant value. The second is collateral back security assets where due to the priority of the securities relative to the collateral the assets may be worth nothing. The third is non-collateralized assets. The fourth is derivative contracts, credit default/index/currency swaps and the like. Banks should be mandated to identify the first three groups of assets as clearly as possible (mandate outside experts evaluate the value of these assets) to the public and update it regularly. On the fourth type of asset the government will have to step in and limit the banks liability, most importantly getting stock shares in the bank so as to compensate the government for the losses it occurs, the government should do what it did with AIG and Bank of America swap assets.
If this approach mentioned in the preceding paragraph doesnt work in getting private capital into banks. The government if it doesnt already do so can back bonds and preferred stocks that banks sell or issue. Lastly, if the government backing on devises business use to raise capital isnt sufficiently effective for the banks the government can infuse the banks with more capital but this should be the last resort. To an impartial observer it really seems that the hang-up to the credit flowing problem in America is a problem solved by the government insuring a lot of credit and the government deterring banks sitting on capital the capital needs issues for banks seems ancillary. If one gave the banks two trillion dollars tomorrow, the nation would still likely have a credit flowing problem. Again, the one critical thing going forward that the Treasury must do is to implement rules where if banks dont lend this new capital they get they incur a financial penalty, this rule has to stay in effect for as long as the flow of credit is impaired in this country.
Finally, it has been mentioned that the White House is planning to ask the Congress for like $500 billion dollars to solve the credit crisis problem. This is a good idea and the White House should get it but there should be tight strings on it, the government has to stop being Santa Claus with taxpayer money. It should not be used for any type of industry wide purchase of troubled assets. It should not be used for any banking industry wide infusion of capital unless all other means of raising capital for banks has been pursued and the results have been unsatisfactory and the Federal Reserve Board certifies this is the case and this infusion is needed for the nations interests to be protected.
On the Executive pay issue, the rules dont want to discourage highly capable top executives from taking employment with or staying employed with banks and thereby leading banks and the industry back to vigorous health; and again, the rules dont want to discourage banks from participating in vital government assistance programs for banks. The Executive pay rules should prevent top executives from taking any extraordinary pay or bonuses or reward pay from taxpayer monies given to the banks. The rules should ban top executives from getting bonuses when their bank is doing poorly. Moreover, long-term because the financial industry has abused the compensation system and for that matter U.S. industries across the board has done the same banks and large corporations in all industries where the corporation is a publicly held corporation should be required to submit bonuses, stock options and the like to shareholder votes for approval, have some industry wide pay scale as a default should be permitted if the shareholders dont approve the executive pay packages to enable businesses to remain competitive in their pay so as to maintain and acquire good top executives.
