Asian markets -- the ones that have "forced" Washington to do emergency rescue plans by Sunday night for the last several weeks -- have their verdict on the latest version of the $700 billion bailout plan. And those markets are not happy. Tokyo's Nikkei lost 1.3% while Hong Kong's Hang Seng Index fell 2.1%. In addition, Asian markets don't seem to like the spread of the contagion to Europe where Belgium's Fortis needed a $16 billion government injection to stave off bankruptcy.
But the bailout plan -- dubbed Troubled Asset Relief Plan (TARP), if it passes, would give Washington political cover as it enters election season. Not only that, it would lead to a 126% increase in the national debt since 2000 -- from $5 trillion to $11.3 trillion (a dangerously high 79% of GDP). However, it is a flawed plan and as I posted, here's what I think would be a better approach:
- Cull the banking herd. I think the banks need to be triaged – that is decide who the winners and losers are. Recapitalize the winners and force the losers to merge or close.
- Give taxpayers equity. Make sure that the taxpayers get enough of an equity stake to have a shot a winning back their money – this could be done through the same structure used with Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) – senior preferred stock.
- Kill the reverse auction. Buying toxic waste in a reverse auction is not likely to work – it either creates losses for the taxpayer or the bank. If the TARP buys toxic waste above the amount it is stated on the bank's books, the bank will readily sell it but that will leave the taxpayer with a loss. If TARP buys the asset below the stated value, the taxpayer might benefit but the bank will take a hit to capital – which will further weaken it since it can't raise capital.
- Fix the short-term credit markets. There seems to be a problem with the short-term money markets. That is banks are not making short-term loans to each other and companies can't sell commercial paper (CP). There is hoarding of cash going on. TARP does nothing to address this problem. Perhaps if the government guaranteed CP – as it did with money market funds – it could get things moving again.
Still, something is probably better than nothing in this case. I happen to think that it would be better to get it right rather than fast.
Peter Cohan is President of Peter S. Cohan & Associates. He also teaches management at Babson College and edits The Cohan Letter
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Reader Comments (Page 1 of 1)
9-29-2008 @ 7:01AM
Steve Harmon said...
I agree that there has to be a better way to get the banks to loan to each other, which seems to be the main problem.
9-29-2008 @ 7:30AM
Huck said...
What Mr. Cohan has suggested isn't brilliant, but in leu of circumstances, It is a far better suggestion than a 700 billion sniper shot in the dark that will end up like birdshot all over the place. In my personal and patriotic opinion, the 700 billion bailout is only for the greedy and not for the needy. And it is your taxes and mine that will pay for it. It is past time that the government stop ignoring the American people and start listening to us. They should freeze the presidents personal assets and use the money to pay for the war of lies that he so eagerly started and too stuborn to pull out. He should be considered a democrat because he lives to the mascots reputation. Please write or e-mail your congress rep. and tell them to continue to say no to the 700 billion bailout plan. May God Bless America. Your government will not.
9-29-2008 @ 8:58AM
Michael said...
I personally believe if the 700 billion were distributed to the tax payers (18+)instead of the banking institutions, you would 1, not be taking tax payers money to bail out the banks and 2, still funnel most of the money to the banks. Most would either pay off mortgage debt or invest it. You solve the tax payer forclosure/income problem and fund the banks at the same time...definitely the best solution.
9-29-2008 @ 11:32AM
shelly said...
Michael,
Great thought.
That makes far to much sense. Our government is not smart enough to think of a simple way to fix this problem.
9-29-2008 @ 2:03PM
Laisseraller said...
Great Article! The truth which country is got the $700 billion? Search using "Got $700 billion?" http://got700billion.blogspot.com/
9-29-2008 @ 2:25PM
Thomas Paine said...
I haven't been paying as much attention to all of the $$$, as Mr. Cohen has done, but it would seem to me that our Gvmt has spent upwards of 10% of the "bad mortgages" out there in banking-land.
I wonder if, when that amount of our spent tax dollars reaches into the 70% or so, someone will ask how come we didn't just BUY the damned Bad Mortgages to begin with?
It looks to me as a plan to correct Debt, with even more Debt. Oh well, greater minds than me are at work here, I guess. But, I'll still offer my opinion like any other brash American with Hutspa!
1. Place a 6-month moratorium on all mortgage defaults. Homeowner/taxpayers are protected - check!
2. Amount spent so far: $5000 for every man, woman and child in America (give or take a smidge). Deposit that amount into (225M) individual bank accounts, in special can't-touch-it-for-6-months pseudo-401(k) accounts. Banks are infused with cash - check!
3. Figure out everything after all of the "thrashing" has finished and we have a young, energetic President. Road to recovery - check!
Peter, I'd be curious if you still hold with the "let it all crumble, if that's what happens" school of thought??
9-29-2008 @ 7:29PM
lou said...
Bail out the Needy not the Greedy!
McCain wants cap of 400,000 for bailed out ceo's --How bout 40$
http://www.squidoo.com/double_speak
9-29-2008 @ 5:06PM
Steve Johnson said...
I'm starting to get depressed and I'm an optimist! Possible solution: Have the home owners that took out these upside down mortgages take on part of the loss if they have to give the home back to the bank- period. What percentage, I don't know perhaps 50%. In exchange they get to keep their credit status and it allows them to purchase again in the near future. Most of these losses are very doable for most of these home owners! It really is a case of buyer beware! Or, if they're not willing to do this, assign an insurance type premium to any loan they take out for a lifetime. Also, investigate all loan fraud and aggressively prosecute! If you granted a fraudulant loan we want as much of the money back as possible. If you lyed on a loan ap (no ss# required, no income check,etc) the tax payers would like it all back no matter how long it takes-please see your loan doc gov small print (it's a Federal offense)
Live below your means and embrace Christianity! Aren't ya all tired of this moral decline? The Republicans voted correctly in my opinion!