BloggingStocks' Peter Cohan has written extensively on the need to recapitalize banks, and economist Richard Felson concurs. However, Felson argued that the revised rescue bill should give banks and other institutions the option of either offering their distressed/bad debts to the U.S. Treasury in its reverse auction or accepting a mutually agreeable investment by the U.S. Treasury into the institution.
Creating options for stressed banks
"This will give banks more options, and in my view more incentives to participate in the rescue plan. If the plan just contains asset purchase provisions some banks may balk at the prospect of selling some assets at a fire-sale price of 10 cents or 15 cents on the dollar, and that may prevent some distressed assets from being removed from the system, delaying the financial system's recovery," Felson said. "Offering to buy a stake in the bank offers another recapitalization option."
Second, the revised rescue bill should contain beefed-up mortgage refinance authority and funding for the Federal Housing Administration, U.S. Treasury and other appropriate agencies, so says economist David H. Wang.
"Some may view it as unfair, but I would argue we need a dual approach to this rescue, removal of distressed assets from banks, and addressing the source of those distressed debts, homeowners in danger of foreclosure," Wang said. "We have to dramatically lower foreclosures to end the chain reaction of mortgage foreclosures to bank failures to financial system stress."
Wang said there's disagreement concerning how much refinance authority the FHA has, in dollar terms. Depending on varying interpretations of existing regulations, the FHA could be able to refinance less than $100 billion or up to $250 billion, he said.
The disagreement presents an opportunity for Congress, starting with the U.S. Senate, "to clarify the language and also add funds and/or mortgage insurance authority to the FHA to enable more Americans to keep their homes," Wang said.
"At the end of the day, we have to address the financial crisis at both stress points: at banks, to make sure the credit markets continue to function, and with homeowners, to address the cause of these bad assets," Wang said.
Housing Sector / Economic Analysis: As economist Wang noted, it's becoming increasing clear that stabilizing the financial markets will require both top-down and bottom-up approaches. No one is arguing that the approach will make distressed assets as valuable as U.S. Government bonds. Further, market absolutists will likely protest government assistance for homeowners in danger of default, under the theory that 'those who made bad choices (or experienced bad luck) must be punished by the market,' but the view from here says that argument is morally, philosophically, and macro-economically insufficient given the pressures building on the financial system.