Sat 27 Sep 2008
Bill King’s Bail-out Plan
Posted by Prieur du Plessis under Guest Bloggers, Investment, Markets, Money
Still on the topic of the bail-out plan, guest contributor Bill King (The King Report) offers his ideas on how to put a more credible plan together. His thoughts are insightful and deserve the urgent attention of the powers that be.
Premises
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It’s wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.
Basics of the King Report Bailout Plan
• Directly recapitalize banks by the US government allocating $500 billion into a plan for community-type banks to increase their capital in partnership with the government.
• The government would match existing or some percentage of existing bank capital. If it would be better, a separate bank could be created. Place a limit of say $1 billion per bank.
• This would create $5 trillion of credit at conservative 10 to 1 leverage. This is more than the entire private mortgage market. It is a much better use of capital instead of absorbing $700 billion of losses with no means to discern resultant credit creation.
• Give the banks a tax rate of 15% on consumer and commercial lending for 5 years and the right to buy out the government share of the operation at some premium.
• Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
• To help the big banks, allow them to create a consumer & commercial lending facility with the 15% tax rate benefit. This should entice private equity and sovereign funds as well as Wall Street remuneration that was garnered over the past decade or so.
• Prohibit trading, especially derivatives, in consumer & Commercial lending operations. However pure hedging would be allowed.
• Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.
Further considerations
• Foreign banks in the US could be included if they have respective funding from their government.
• The real estate problem is due to the fact that American incomes do NOT support current prices. Easy credit allowed them to purchase homes they couldn’t afford.
• Any solution to clear the real estate market must entail hiking income, which is very difficult, or allowing prices to drop to levels that the average American can support. This helps average Americans, not the big banks and investors stuck with overpriced mortgages.
• No bailout for the imprudent and reckless but a means to directly help Americans and procure capital from private and sovereign sources because a new financial system must be implemented.
• This is not likely to be the final model but it is a stop-gap measure that will resonate with average Americans. It’s a way to connect with Middle America because it benefits them directly and is not an exclusive Wall Street bailout.
• The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.
• The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.
Sen. William Proxmire to Alan Greenspan at Al’s confirmation hearing: “You think, if we erected Chinese walls, you can still merge banking and commerce. And that shocks this Senator, and I think it should shock many others. You, in my judgment, favor an increased concentration of banking …
“You can’t have competition without having a large number of banks, as many banks as possible competing in every banking market. Do you have a conviction that regulators, no matter how able, cannot do the job as effectively and efficiently as competition? I hope as chairman you can show us this …
“It seems to me that banking in this country and finance in this country is likely to move very sharply… in the direction of concentration….I think most senators, if they thought very long about it, might be very concerned too. And I think the American people would be concerned too”.
Source: Bill King, The King Report, September 26, 2008.
Related articles:
Morgan Stanley: Bail-out Plan: Will it Work, and How Will Markets React?
Bespoke: Bank and Broker Default Risks Soars
Email
Digg
Del.icio.us
Technorati
Stumble
Reddit
Facebook
Email
Twitter
RSS reader
![[Most Recent Charts from www.kitco.com]](http://www.kitconet.com/charts/metals/gold/t24_au_en_usoz_4.gif)
September 27th, 2008 at 8:57 pm
Also see the following comments from “Mr Constitution”, Ron Paul:
Financial institutions are “designated as financial agents of the Government.” This is the New Deal to end all New Deals.
Then there’s this: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.
There goes your country.
Even some so-called free-market economists are calling all this “sadly necessary.” Sad, yes. Necessary? Don’t make me laugh.
Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we’re supposedly presented with this November: yes or yes. Now, with a backlash brewing, they’re not quite sure what their views are. A sad display, really.
Although the present bailout package is almost certainly not the end of the political atrocities we’ll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.
The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?
When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.
In liberty, Ron Paul
September 28th, 2008 at 8:19 pm
Very interesting articles but, I am confused. I live in a small town in the middle of the country and this “bail out” is hard to understand. John Mauldin says it is necessary for the survival of our economy and financial crises that we face and then these two articles and a few others make the average person weary, conserned, and doubtful that anyone knows the real solution for this problem (mess).
Thanks for listening,
Norris Lovan
Elkhart, IN