How The Plan Stacks Up
Grading today's government action.
Last week, in response to Ben Bernanke's request for help, I offered a template for how I thought the regulators could best attack the problems in our financial system.
I thought it would be useful to evaluate today's actions against my proposal.
1. Establish a moratorium on all US bank common and preferred dividends. - No.
2. Declare insolvent all banks on the FDIC and FSLIC problem bank list and merge them into a stronger financial institution (any bank with assets larger than $20 billion whose September 30th Tier 1 capital ratio is less than 8%). - No.
3. Take the $700 billion authorized by Congress and put it as common stock into any bank sufficient to raise the system wide bank Tier 1 capital level to at least 10%. Then go back to Congress and get authorization for another $500 billion, just in case. - $250 billion, while good, is insufficient and it's not common stock: It's preferred.
4. Establish a marketplace for the public trading of toxic debt. However, don't provide government funding to purchase the assets. This will begin a flooring process. Tell banks they have 12 months to get the bad stuff off the books. And as assets are sold at a loss, commit to using the $500 billion in additional funding. Agree to "make whole" all financial-institution Tier-1 capital ratios at no less than 6% through 2010. - N/A.
5. Go raise super senior preferred stock from the private sector and pay market rate dividends on it. - No, the government is hoping for "crowding in" versus followers.
I will give Sheila Bair credit for her change in the deposit insurance ceiling to unlimited. I liked the trade off for corporations: "You will get your principal back, but at the cost of interest on it." Seems like a very fair trade to me.
Most troubling to me in all of this is the inherent assumption on the part of Treasury that what we have is a liquidity crisis, not a solvency crisis.
The system needs more capital: common shareholder capital.
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