Do We Need This Bailout

I am not a George Bush Fan, however on Wed night he gave a compelling speech. I believe that President Bush made a sincere plea to Americans and Washington Politicians to pass some sort of legislation that will help begin to restart this economy. That restart is in the form of a financial bailout up to $700 Billion dollars. This money would be used to purchase mortgage back securities and other credit derivatives that are grappling and seize the books of financial institutions both large and small. The theory is that if these securities were transferred off the books, that would begin to free up liquidity for banks to begin issuing new loans, refinancing existing loans, and hopefully restart the extension of credit to various entities. Question, how much is required, who will manage it, what risk will the taxpayer incur, will it be enough, and what does the general public get out of it? These questions and more are reasons why the bailout has yet to be approved.

Now I will not be able to provide the exact answers to these questions because no one in the general public has seen the full scope of the plan as of yet, but I will offer some of my intellectual opinions. Let's attack the first question which is "How Much Is Required"...$700 Billion dollars is a large number. That is nearly 2xs the size of Wal-Mart's gross annual sales , but is this enough? Is this too much? I believe that a line of credit up to $1 trillion dollars should be extended however maybe only $300 Billion should be utilized right now to begin bailing out Washington Mutual, Wells Fargo, Community and Regional Banks. When it comes to the large institutions such as Wachovia, Bank of America and JP MorganChase for example extensions of credit should used since they are well capitalized however their negative, bad subprime debt could be sold to the government. The way it should be controlled is that good debt could be purchase at no less than 40 cents on the dollar and no more than 60 cents on the dollar. Bad, defaulted or pending default debt should be sold to the government at no less than 10 cents on the dollar to no more than 30 cents on the dollar. Is this extremely low, yes, however, if you want to be bailed out and get it off the books why not sell it to the taxpayers for a discount? From there the banks can receive an loan from the Fed to begin opening the credit markets at competitive short term rates. This strategy should encourage companies to retain good debt and not just unload everything off onto the taxpayer.

What Does the Fed do with the debt?
Now here is where the homeowners receive their bailout. Once the debt is transferred to the Fed, a series of teams will begin to feverishly unwind the derivatives and begin to put a face to the note. Any loan under $417,000 that was put into a bad loan, is pending foreclosure, or currently in foreclosure should be forced to refinance with no questions asked. If the homeowner refuses to accept the forced re-fi then the government has the right to seize the asset and sell it in a government auctions. The good loans over that amount could be repackaged and re-sold to to banking firms and mortgage outfits. Inorder for this option to be successful, it would require an extension of credit from the government however it could be a situation where preferred equity in the company is exchanged with the government for the sale of the packaged securities. Then at a time when the government feels they have received max value from the sale, they can liquidate the securities on the open market.


I think there comes a point in time when we all have to put partisanship to the side and begin to move this effort forward in executing a plan that will benefit both America and the U.S. people.

originally written on 9/24/2008