An Alternative to the Paulson Plan - One That Does Not Violate the Spirit of Democracy
Comments & Analysis - Letter
Financial Times - September 29, 2008
by Janet Tavakoli, president of Tavakoli Structured Finance, Inc.

Sir, Rather than adopt any form of the Paulson plan, which uses billions of US taxpayer dollars and forces risk and potential losses on taxpayers – rather than 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 recapitalise when it was easier (within the past two years) and now they cannot because no one trusts the value of the assets.

Now we have no time for Chapter 11 bankruptcy protection (creating a new capital structure in which former shareholders are wiped out), in which creditors agree either: 1) to discount debt in exchange for warrants (for potentially viable enterprises); or 2) to transform (discounted) debt into new equity. Instead, we can force creditors – including credit default swap counterparties – to accept a restructuring plan (this was done during the Great Depression). 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 to be done through such a forced restructuring plan. The Paulson plan destroys capitalism (those who stand to gain should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States.

JT Note: P. 88 of the proposed Act (released September 28) extends the SEC’s authority to suspend mark-to-market accounting (FAS 157) when it is “in the public interest and protects investors.” Do not expect a thaw in the market freeze. This Act buries problems and prolongs price uncertainty.


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