There is a problem with bailouts.
Why didn't the bank bailout of September 2008 solve the problem and when are we getting our money back? When debating whether to bail out the car manufacturers, certain members of Congress asked, what assurances there are, that more bailouts won't be needed. Without finding out what went wrong, what's stopping the banks from asking for more next year?
Where is the accountability of the bailouts?
Bailouts build a house of cards to cover up the banks' collapsed house of cards. This didn't work in Japan. Japans' banks' books were cooked, they never addressed it and after ten years they still haven't dug themselves out because their house of cards cancels the effectiveness of fiscal or monetary policy.
Bailouts don't restore free market principles, rather it weakens them. The government props up failed managements, weak board of directors and destroys ownership accountability. There is no exit strategy to remove the massive infusion of the peoples money into the banks.
I think the conclusion is that we have tried bailouts and they have failed.
When dealing with the banking problem we should address the fundamental problem, the inaccurate accounting records at the banks.
Performing stress tests on faulty accounting records only produces inconclusive calculations. The stress tests are a superficial excuse, to give bailout money according to personal whims, such in the case of Paulson always favoring Goldman Sacks. A suggestion of saving the biggest campaign donors could be made.
It is inevitable that the bank ownerships will change. The government is not tackling the banking problem in the right order. The government should restore the accuracy of banking records first. Then, it would clearly know how much to prop up the banks. With accurate records and government support, trust will be restored to the credit market, the banks can be sold at a better price because new owners don't have to the discount the unknown and the on-going shape of the market is healthy.
There are two accounting issues.
1)the fair market value of securitized mortgages
2) the bundled mortgages should be booked as long term assets but because of the bundling the mortgages are in current assets. This distorts all significant financial ratios.
Securitized mortgages are faulty because there they could not handle lowering property values. The accountability of the bundled mortgages should lie with the bundler because they own the title. They diffused accountability when they bundled the mortgages. This is what must be restored.
The government should consolidate all bundled securitized mortgages, use a task force of Audit firms to re-value them, then re-distribute the actual mortgages back to eligible holders.
The banks will properly show mortgages in their long-term assets instead of current assets when they held the securitized slices.
Here is a proposal that is open to any improvements. I hope it is transparent that it tries to address the real problem.
Detailed explanation.
Securitized mortgages means mortgages were bundled then tranches of the bundle were sold off. The accountability of mortgage ownership got lost in this process so when housing prices dropped, no clear owner could be found. In the end it is truly the banks who should own the mortgages but they moved they mortgages holdings from long term assets to current assets to give the appearance of improved financial ratios.
1)Collect all bundled mortgages.
2)Classify the Mortgages
Within each bundle is a list of mortgages.
All the mortgages must be placed on a master list.
This list must be sub-divided in the following order:
Region/city New England, Rust belt, New York, East coast, Florida, Nevada etc
Interest rate Standard prime, escalating interest rates including subprime
Current market value divided by mortgage
Mortgagee income to mortgage amount -ability to repay
Within each region you will be able to determine three categories
Low, medium and high risk.
3)Calculate the write down.
4)Collect all holders of bundled mortgages
5)Pro-rate the write down according the portion of the bundled mortgage holding.
6)Classify holders
Banks allowed to issue Mortgages in US and those not allowed.
7)Re-distribute the gathered mortgages to the banks allowed to issue mortgages in the US.
The US government only has jurisdiction over banks allowed to issue mortgages in the US. The other holders will get no mortgages, it's a risk they took. If this is too severe offer silent partner relationships with the banks with title.
The redistribution will have to depend on what the data looks like. Redistribution must be as fair as possible so should be done before a tribunal using a lottery if necessary. Ideally regions would be distributed to a regional bank but markets may have to be tranched among several banks to fairly spread the risk.
The treasury will have to engage external auditors who just completed auditing the bankers books to staff the project and will need information technology assistance.
Credit Default Swaps
Now that we have valued the bundled mortgages, the credit default swaps (CDS) can be valued. The swap issuers wanted to be unregulated, so be it. The government should pressure any purchaser who has received TARP funds to annul all their credit default swaps. This should provide relief to the financial institutions who issued CDS. The TARP purchaser is double dipping government funds since it took the TARP money and also gets the swap payout from AIG which is also government money. If the outstanding payout is still too much, the government declares that under exceptional circumstances (economic distress) the issuers of CDS are not obligated to fully honor payment on an illegitimate financial instrument, the securitized mortgages. So, only a partial payout will be required.
There is no need for a government bailout. This government intervention is doing for the public what an individual citizen cannot do, in the fairest way possible.
We will have restored, as fairly as possible, a mortgage market true to capitalism.
