From a current stock holder, the plan is not very convincing. As your example makes clear, even with a positive balance sheet, you may end up wiped out, if you participate (the 25 bn equity is wiped out by the 20 bn loss). Only the lower borrowing costs help the company, so current stock holders might encourage the management to muddle through as long as they can.
This undermines the purpose, why the banks are rescued at all. There need to be banks making new loans or extending existing loans beyond the ones already made.
Yet another problem, how to account for gov't changes on mortgages. If the gov't says, it reliefs people by cutting down the mortgage they hold, they are producing losses for the banks, which might argue, without the gov't these losses wouldn't have been so big.
Another question is, when the toxic waste is sold, isn't there a large incentive for the banks to buy there toxic waste back at too high prices? As they have just purchased the stuff, there is no reason to book it lower than the fantasy price. If the bank doesn't know if it will go bust in the long run, they might even buy themselves once again into insolvency terrain, which means, the long term borrowing costs of the banks won't go down really much, once a company has started to participate into the plan. If the gov't forbids banks to buy its own debt back to overvalued prices to prevent that the bank just unmakes the plan, once it has profitted from the lower interest, then you prohibit as well that such a bank finds another source of refreshing its equity. Or the banks make one to the left accounting, every bank takes the assets of its neighbouring bank for a fantasy price and everybody is happy. So the fed would have to hold the portfolio to maturity, which might be long times.
One possibility is as well, that a CEO, who knows he is running a fundamental insolven bank (but not illiquid as the toxic stuff is at the fed), might pillage his bank by selling fundamental sound stuff to another bank. If we have really an undervaluation problem right now, this selling would be below the recovery value. That means, the CEO would ride his bank deeper into the shit, but as the bank is anyhow a gov't owned bank the moment the fed sells the bad stuff, that doesn't matter for him. The bank taking the good stuff might be grateful to him, still (or his private hedge fund).
I think the best plan would be to buy bank of America (e.g. 95%) and just provide real economy credit via that bank by introducing a huge amount of equity, while leaving other banks to themselves. The Dodd plan might be better than the Paulson plan, but might not help to bring the financial market to function again. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
OK, admittedly there the zero is supressed, but still scary. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
From a current stock holder, the plan is not very convincing. As your example makes clear, even with a positive balance sheet, you may end up wiped out
Isn't this why the Tarp retains the right to sell the assets when it see fit? If the bank is insolvent, then it sells to get senior equity and obtain the proceeds from the liquidation. If the bank is not insolvent, it sells assets to get the profits until the difference between the price paid for the toxic asset and the sell price.
The equity holders therefore only loose money if the bank is insolvent, which is reasonable. OR maybe I just get this wrong. Rien n'est gratuit en ce bas monde. Tout s'expie, le bien comme le mal, se paie tot ou tard. Le bien c'est beaucoup plus cher, forcement. Celine
So the fed would have to hold the portfolio to maturity, which might be long times.
Apparently when a US financial institution holds a debt instrument it can claim it "holds it for investment" in which case it doesn't get market to market but instead retains its original purchase price (the "hold-to-maturity price"). Maybe this is just a way to allow banks to change the classification of the assets. Because that is cheating, the Treasury gets equity in exchange. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
But I doubt there will be a lot of house price inflation. The recent high (CPI) inflation numbers were mostly due to increases in the price of tradable goods. A dollar decline creates inflation in the tradable goods sector, but unless Asians and Europeans start to buy houses in the USA, this won't help the house prices to increase. Only a wage price spiral could do that. Not in sight. The last quarters US GDP deflator was ~0.8% Japan has not had a cumulative GDP deflator of 25% in the last 20 years. In a medium bad case scenario, the US would develop Japan-like. Probably still better than a great depression. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Buying the mortgages is effectively what the bailout plans want to authorise, and the Dodd version contains some specific provisions about preventing foreclosure on mortgages that the tresury buys, as well as giving the Tresury the contingent equity. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
While the Dodd plan may help to prevent forclosures, which may be helpful for the banks, especially those which don't know who their debtors really are and therefore can't make a deal with them, I'm pretty sure, it don't foresee an equity stake in the houses. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
No, the treasury buys the mortgages at par and then the banks hope that the house prices reinflate so that the Treasury doesn't have to exercise its option. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
But under the Dodd plans the equity is realised over months or years, and Obama can be blamed for nationalising the banks :-)
Under the Paulson plan, the Tresury simply loses money. A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
So if the economy doesn't run well the next 4 years, because of the mess that is, it will be blamed on Obama's socialism. Maybe the Dodd plan isn't that bad, as there is a scapegoat to prevent anti-capitalistic spin. I only hope Obama is really elected and the mess doesn't fall McCain on the feet ;-) Maybe I should change my signiture, but I think by now it are anyhow only the masochists left favouring McCain. Der Amerikaner ist die Orchidee unter den MenschenVolker Pispers
Won't help a lot. The bad mortgages will go bust rather soon. A rapid house price increase in the longer term would help only, when the banks would go for a Chris Cook style solution, where they essentially foreclose the homes, but don't sell them, but instead rent them out.
Not quite.
My solution is in fact a transfer of title by the Banks to a quasi REIT and then for the banks to sell off their Units in the affordable rental streams flowing through these REIT's.
The outcome of this "asset-based" solution is far more advantageous to the banks than any conventional "deficit-based"solution involving new credit.
In this model,the properties themselves will never be sold again, remaining in "custody".
However, the "Co-owner" Occupiers may change, and the "Co-owner" Investors may change, particularly as Occupiers may gradually become Investors as well, simply by buying Units....... "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
The key is always to use language which is understood, and not only do I tend to write "financespeak" but it's UK "financespeak".
The proposal also has elements of what I have heard called an "evergreen lease" (not a UK expression).
Sort of an "evergreen lease to buy" "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
However, I think that a few "worked examples" set forth in common language would help, also. My biggest problem has been understanding how your system would work in practice. We have been taught to believe in "marketplace competition." Why should that competition not extend to the very nature of ownership in society? As the Dutch said while fighting the Spanish: "It is not necessary to have hope in order to persevere."
Why shouldn't we unlearn what we've been taught? A vivid image of what should exist acts as a surrogate for reality. Pursuit of the image then prevents pursuit of the reality -- John K. Galbraith
Why shouldn't we unlearn what we've been taught?
The reason is that there are no returns going to unnecessary "rentiers". This is what the Cooperative movement calls the "Cooperative Advantage".
The competition that I foresee is not for pieces of paper representing IOU's/claims over wealth made by intermediaries, but competition for "Quality" instead.
There is no Profit and no Loss within a partnership framework, merely creation and exchange of "Value" in all its forms (and "Money as Debt" is not one of them).
Such a "cooperative of cooperatives" partnership model would IMHO be what Yunus calls "Not for loss".
Here's an example.
A portfolio of 5,000 25 year mortgage loans @ 6% pa average $200,000 to a total value of $1 billion. Each borrower must currently repay $1303.77 per month or $15,645.24 pa for the life of the loan. A rental is set at an "affordable" level - (say) an average "affordable" rental of $500 per month or $6,000 pa and this rental is then Index - linked. This gives a total Rental Pool of $30m in the first year, rising with inflation. This Pool is "Unitised" into (say) a million "Units" or "millionths". Each Unit consists of one millionth of the economic interest / "ownership" of the pool of properties and carries an income of $30.00 in the first year, rising with inflation thereafter. It is now simply a question of the market price of these Units: at $1,000 per Unit the initial return is 3%. The proceeds of a sale at this price would be $1bn, and this would pay off the debt at 100 cents on the dollar. At $750 per Unit the initial return would be 4% and the proceeds $750m or 75% of the nominal value of the debt. And so on.
A portfolio of 5,000 25 year mortgage loans @ 6% pa average $200,000 to a total value of $1 billion. Each borrower must currently repay $1303.77 per month or $15,645.24 pa for the life of the loan.
A rental is set at an "affordable" level - (say) an average "affordable" rental of $500 per month or $6,000 pa and this rental is then Index - linked. This gives a total Rental Pool of $30m in the first year, rising with inflation.
This Pool is "Unitised" into (say) a million "Units" or "millionths". Each Unit consists of one millionth of the economic interest / "ownership" of the pool of properties and carries an income of $30.00 in the first year, rising with inflation thereafter.
It is now simply a question of the market price of these Units: at $1,000 per Unit the initial return is 3%. The proceeds of a sale at this price would be $1bn, and this would pay off the debt at 100 cents on the dollar.
At $750 per Unit the initial return would be 4% and the proceeds $750m or 75% of the nominal value of the debt.
And so on.
The key point is that the higher the level at which the initial "Capital Rental" return is set, the less likely it is that it will be paid in its entirety, and therefore the less "certain" it is, and the more risky it is.
Risk does not lead to Reward: Reward leads to Risk. "Any economic unit can emit money. The serious problem is to get it accepted" Hyman Minsky
the Doods' plan will carry beside it an informal FBI watchdog to detect those practices. they can be detected now that there are on investment baks.
And we shoudl remember that nobody cares abut hedge funds as long as no private bank holds stakes on them... and soon they will not have it.
Another point, even if a hedge fund with no oversight wanted to follow the path you indicate because he has at the other side a bank too big to fall, the FEd and the FBi can crack him down if the problem is not systemic (if the banks depend signficatively on hundred of ehdge funds revenues for part of their assets , then I think nationalization is the only option).
but if hedge funds effects are low (as I think theya re),a dn the FEDs go with the FBI, the Dodd bill seems workable if we put the tag at a couple trillion dollars at the end of the day.
A pleasure I therefore claim to show, not how men think in myths, but how myths operate in men's minds without their being aware of the fact. Levi-Strauss, Claude
And for common shareholders, the size of the public authority preferred holding is known up front, rather than being a subject of speculation regarding how the sale of the shitpile will work. I've been accused of being a Marxist, yet while Harpo's my favourite, it's Groucho I'm always quoting. Odd, that.
