Washington Post business columnist and Pulitzer Prize-winner Steven Pearlstein reminds investors that a complex financial crisis will not be solved by a simple solution.
Hence, Pearlstein's offered a four-part solution that he believes will get the United States back on the road to financial health.
The first involves a limited guarantee against default by the federal government for packaged loans that circulate in the "shadow" banking system, such as the way Fannie Mae (NYSE: FNM) and Freddie Mac (NYSE: FRE) do with conventional mortgage-backed securities. The FDIC is working on plan to do the above, he said, funded by either bank fees or via a modest contribution from the $700 billion TARP.
Second, the FDIC, via a new program that covers $1,000 in refinance closing costs, should be able to encourage more banks to renegotiate at-risk mortgages, greatly reducing the number of home foreclosures that are at the root of the bad bond/toxic asset pipeline.
Comment: The view from here argues that had the FDIC under chairwoman Sheila Bair been allowed to implement a version of the above program a year ago, the U.S. would have been that much closer to reducing foreclosure rates. The previous presidential administration did not act swiftly on Bair's proposal -- an unmitigated policy error that the current administration inherited. Hopefully, the Obama administration will correct it.
Third, the Federal Reserve would buy some toxic assets or take them as collateral for fresh loans to banks via current and new "facilities." The U.S. Treasury would provide borrowed money as equity, or as risk capital, for these facilities, which the Fed would then leverage via printed dollars, thus injecting a substantial amount of capital into the banking system.
Comment: To-date, the Fed's and Treasury's toxic asset removal programs have been characterized as being slow. What's more accurate: the toxic asset pie is so large, it will require larger interventions.
Fourth, the Treasury could attract private capital to banks by offering some form of guarantee on any new, preferred stock issued by the banks. In return for the guarantee, the Treasury would receive warrants from the banks for up to 49% of a bank's common stock, if/when the stock price recovers. Pearlstein argues this would avert nationalization.
Bank Sector/Economic Analysis: Pearlstein outlines a multifaceted solution that has merit. Conversely, a simple, one-dimension answer is not likely to address the many weak points in the system. One modification of Pearlstein's plan: congressional banking sector reform must contain a prohibition of the Frankenstein-like derivatives that helped create the financial crisis in the first place.
Closing Bell: Economic Catapult for Thanksgiving & Black Friday (WMT, TGT, GRMN, GOOG, MSFT)
Deere up on Q4 earnings performance
Reid Hoffman: LinkedIn will go public (at some point)
