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Alternative
to Treasury Bailouts: One that does
not violate the Spirit of Democracy
by
Janet Tavakoli - September 25, 2008
The Treasury's plan, a spin of the Paulson
Plan, uses billions of taxpayer dollars and forces risk and potential
losses on taxpayers--instead of on those who enjoyed the gains.
I advocate an alternative.
Creditors
including credit default swap counterparties failed to renegotiate
terms
when they
had the
chance.
Financial
institutions
did not recapitalize when it was easier (within the past
2 years) and now they cannot because no one trusts the
value of the assets.
Now we do not have time for Chapter
11 in which either 1) creditors agree to discount debt in exchange
for warrants (for potentially viable enterprises) or 2) creditors
agree to transform (possibly discounted) debt into new equity
(a new capital structure
in which former shareholders are wiped out).
Instead
of TARP, handing out money to cover banks' losses,
we can force creditors to accept a restructuring plan (this
was
done
during
the Great
Depression). Creditors (debt
holders) including credit default swap counterparties would
be
compelled to accept a restructuring plan. That requires
partial forgiveness of debt in many cases and/or a debt for
equity swap.
If we are determined to violate personal
property rights, I prefer it be done through a forced debt forgiveness
and a forced
capital restructuring (debt for equity swaps), rather than through
a massive bailout (any of the various forms of the Paulson Plan).
The current plans destroy capitalism (those who stood to gain--and
already made off with large gains--should bear the risk) and violates
the spirit of democracy established by the Founding Fathers
of
the
United
States.
Letter
to the Editor - Financial Times - September 29.
2008
JT
Note:
The Act released
on September
28 extends
the SEC's
authority
to suspend
mark-to-market
accounting
(FAS 157) (P.
88) when
it is "in
the public interest
and protects investors." Do
not expect
a thaw in the
market freeze.
The proposed
Act
buries problems
and prolongs
price uncertainty.
This bill did
not
pass, but future
versions may
include this
provision.
This a huge
mistake. FASB
board members
support
mark-to-market
accounting, especially in
illiquid markets.
The SEC should,
too. This provision
is
ridiculous
and seems meant
to
promote
hold-to-maturity
pricing for
credit derivatives
trading
books and CDO
portfolios.
The danger
is that Federal
portfolio
managers can
claim they
are making
money on carry
trades while
the assets
are declining
in value
due to defaults
or permanent
value destruction
of
collateral.
This situation
can continue
for a long
time to create
the false appearance
of profitability.
In other words,
U.S.
taxpayers can
be told
they are making
money on their
$700 billion
investment,
when in reality
they
are losing
money. I would
rather
know the market
price,
even if the
news is bad
news.
Warren
Buffett came
out strongly in favor
of mark-to-market
accounting for the
bailout in an interview
with Charlie
Rose (and Warren
Buffett) on October
1, 2008 and CNNmoney
on October 2, 2008. He
proposed another
viable alternative
to the Bills
floating in
Congress. He
proposes to
let
private equity
investors put
up 20%. The
U.S. Treasury
will put up
80%
with the following
terms:
it gets paid
back first,
receives
interest on
its investment,
and gets a
share
of the profits.
This is a way
of ensuring
market pricing
and allowing
the
banks
to delever
while the Treasury
(the
only source
of a large
enough
balance
sheet) levers
up with the
protection
of a 20% cushion
and mark-to-market pricing.
This proposal
is a good one
for
viable banks.
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