This started out as a comment at TDAXP [1].
Here is what the USAGOV should do (not what they plan to do [2]) – and it should be done quickly and without mercy:
1) Have Bank regulators set the appropriate capitalization level for the bank
2) Assuming level not met, declare bank insolvent.
3) Wipe the shareholders (common and preferred) equity out.
4) Wipe out a significant amount of the long term debt (at least 50%)
5) Convert the rest of the debt to “equity”.
6) Fire the Board. Fire the Executive Leadership team. Fire the Auditors.
7) Hold an Open Auction for Preferred Stock and Common Stock to get capital infusions.
8 ) If the appropriate capitalization level set by regulators is not reached, USAGOV also makes an investment as either as a secured loan or as a purchase of prefered stock (plus warrants) at an above market coupon rate (say 1.5 X market rate) to reach that level while also transferring all of the “toxic assets” to a USAGOV fund that maybe the Taxpayers can get something back someday.
9) The executives, boards and auditors should be investigated for fiduciary misconduct and civil litigation undertaken by US Attorneys to recover cost and looted wealth on behalf of the old shareholders.
Primary End Result: A working publicly-tradeable bank with an appropriate level of capitalization that is without “toxic assets”.
Secondary End Result: Taxpayers/USGOV may collect some money eventually from the Toxic Assets.
Note 1: USGOV should create closed-end mutual funds to sell off pools of the Preferred Stock to recover USGOV upfront outlays [3] and lessen USGOV temptations to interfere with those banks.
Note 2: I don’t have any “rescue” for Mortgage holders. Let the mortgages fail, and don’t prop up housing prices. This needs to correct.
Note 3: I don’t have any “rescue” for long failing companies. Let them die. Let Creative Destruction take place. Don’t feed the zombies.
http://www.wisegeek.com/in-business-what-is-a-zombie.htm
Note 4: The only stimulus I am interested in [4] is something along the lines of:
(a) Create Incentives for Businesses to Make Capital Investments by allowing 100% immediate depreciation
(b) Cleanup and rebuild America’s National Parks – and the state and local parks too.
(c) Finish the Yakima Nuclear Waste project
(d) Clean Up the Brownfields and toxic dumping grounds
(e) Start planning and constructing a national network of Smart Power Grids
(f) Install Municpal Plasma Furnaces [5] [6] across the country to create energy and elimnate landfill trash dumps.
(g) Pick a single “Wow” project.
Note 5: I would be okay with just (a), (e) and (f) from above.
Note 6: On that too-big-to-fail crap. Any enterprise that is “too big to fail” should have anti-trust action taken against it by USGOV/DOJ to break it up rapidly. [7]
Note 7: The currently regulatory alphabet soup is a failure. SOX is a failure. They should be replaced with something. I will leave that something for now to Future Purpleslog.
If USGOV tries to lessen this, they will just stretch it out and make it worse. Nor will the Political class be able to avoid giving rewards, favors, and protection to allies. They just can’t help themselves.
Update – Note 8: USGOV should fast any regualtory red tape for those startup up brand new banks from scratch.
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[2]
http://hotair.com/archives/2009/02/11/the-only-man-for-the-job-lays-an-egg-on-wall-street/
[3]
https://purpleslog.wordpress.com/2008/11/16/monetize-the-tarp-on-the-bailout-part-27
[4]
https://purpleslog.wordpress.com/2008/11/28/a-better-stimulus-plan-on-the-bailout-32/
[6]
https://purpleslog.wordpress.com/2008/11/13/energy-entrepreneurship-plasma-gasification-of-trash/
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Filed under: Business, Economics, FuturePurpleSlog, Public Policy |
PurpleSlog - The Future Will Be Kludged 
Toxic assets…let ’em go man…because they’re gone. After one entity bought the now worthless asset, why should a taxpayer pick up that mistake?
If I as an induhvidual (See Dilbert) buy an investment that goes bad, then I made a mistake and will learn from it in the future; I get to hold on to it. While it would be nice to get my money back,
it wouldn’t be right unless it was some sort of security (ie – I bet and lost).
As I understand it today (see ‘induhvidual’ above) the toxic assets are really just the intangible idea of ‘risk’ from a mortgage and not an actual mortgage or land. I would rather buy part of a mortgage/real estate than purchase the idea of ‘risk from loaning out money for land’. [Does that make me old and fiscally conservative instaed of youthful and experimental?]
my .02 🙂
Ku, I do not propose that USGOV “buy” the toxic assets. The assets can not be valued with any accuracy. Most plans that want USGOV to buy the toxic assets are a fraud on the US Taxpayer [1], the goal being in those plans to suck money from US Taxpayers for the Toxic Assets at an inflated price for the benefit of the existing corporate shareholders.
I do not advocate this.
What I am stating is as part of handling the insolvency of the bank, which includes wiping out the equity of the existing shareholder, that the toxic assets be transferred from the books of the the failed bank to the a USGOV fund if any USGOV money (in the form of Secured Loans or Preferred Stock) is invested in the new bank. I do not propose the USGOV “buy” the assets, or rather, the price for the assets is $0. If the toxic assets every do produce value, that cash can go into the US treasury.
So, to be clear, I do not advocate that USGOV buy “toxic assets” from stumbling banks to prop them up. Most of the bad bank schemes you read about are just plans to bilk more money from taxpayers.
I advocate rapidly killing insolvent banks,wiping the shareholders and bondholders (to some extent), re-capitalizing with new investors and USGOV investment the new bank, and seizing the “toxic assets”. The new bank that rises from ashes of the old bank will not have any “toxic assets” on its balance sheet. If the toxic assets ever can be sold, that will be a bonus to the US treasury.
[1]
More onthe Succiness of the the Porkulus:
http://www.ibdeditorial.com/IBDArticles.aspx?id=319334273223204