Saturday, September 20, 2008

Roundup of Bailout Ideas

Here's a quick roundup of the various bailout ideas/proposals that have been floated in the past few days. I'm sure there are plenty that I've missed. What's interesting to me is the surprising heterogeneity. When people have to quickly come up with their own proposal, and can't take their queue from other people's proposals, there's less time for groupthink to take hold. Paul Volcker, Nicholas Brady & Eugene Ludwig: Resurrect the Resolution Trust Corp.

"We should move decisively to create a new, temporary resolution mechanism. ... This new governmental body would be able to buy up the troubled paper at fair market values, where possible keeping people in their homes and businesses operating. Like the RTC, this mechanism should have a limited life and be run by nonpartisan professional management."
Nouriel Roubini: New version of Home Owners' Loan Corporation.
"We need a new HOLC -- more than a new RTC or RFC -- to provide massive debt relief to the household sector. We need to create HOME (Home Owners' Mortgage Enterprise)."
Raghuram Rajan: Force shareholders to recapitalize the financial system. (This is an oddly intruiging idea, even though I think Rajan dramatically overestimates how much capital the financial system needs, and underestimates how much capital the shareholders of the best-off financials actually have. Still, if less capital was needed, this would have been a good idea.)
"I would propose a more direct solution. The need of the hour is to recapitalise the financial system. Why not ask the shareholders of financial companies to do it? ... "First, all levered financial companies (including banks and investment banks – defining who these are is an important but not impossible detail) should be asked to impose a temporary moratorium on dividend payment immediately. Second, all large well-capitalised levered financial companies should make rights offerings (if the rights are offered at a large enough discount to the market price, shareholders will be forced to subscribe) to their shareholders amounting to 2 per cent of their risk-weighted assets."
Steve Randy Waldman, Interfluidity: Unilaterally reorganize and recapitalize the most important firms.
"Broadly, my view is that if we are going to legislate, Congress should empower regulators to declare systemically important firms insolvent, write off existing common and preferred, fire incumbent management and unilaterally convert debt to equity as far up the capital structure as they need to go until the firms are unambiguously well-capitalized, with little or no public money involved. Going forward, investors should understand that firms that are too big to fail are too big to be debt-financed, and government enforcement of debt claims against such firms will be limited. ... "As far as the money is concerned, throw it at infrastructure. Increase worker bargaining power by offering Federally funded retraining sabbaticals for any worker over thirty who decides they want to retool. I'd rather see a new WPA than a new RTC."
Robert Reich: RTC in exchange for banks voluntarily opting into the equivalent of Chapter 11.
"[I]t makes sense to allow the big banks to wipe their balance sheets clean of as many bad loans as they can identify, and put them into a special agency that then sells them for as much as possible. The agency would bundle or unbundle the risky loans, slice and dice them as needed, with the goal of getting the most for them on world markets by creating a market for them. "But there's no reason taxpayers need to be involved in this. "Whether you call it a reorganization under bankruptcy or just a hellova fire sale, the process should resemble chapter 11 under bankruptcy. Any big financial institution that wants to clear its books can opt in. But the price for opting in is this: Investors in these institutions lose the value of their equity. Executives lose the value of their options, and their pay (and the pay of their directors) is sharply limited. All the money from the fire sale goes to making creditors as whole as possible."
Douglas Elmendorf: Have the government buy equity in the whole financial sector.
"An alternative to the government buying certain types of debt from financial institutions is for the government to make equity investments in a wide cross-section of such institutions. For concreteness, suppose that the government offered to make an equity investment in every firm regulated by a federal or state banking regulator equal to 10 percent of the market value of the company as of September 1st in exchange for a 10 percent equity stake in the company. (The 10 percent figure is illustrative. As with the first approach, a judgment about the appropriate total amount of government funds would need to be made.)"
Luigi Zingales: Require partial debt-to-equity swaps. (h/t Tyler Cowen)
"As during the Great Depression and in many debt restructurings, it makes sense in the current contingency to mandate a partial debt forgiveness or a debt-for-equity swap in the financial sector. It has the benefit of being a well-tested strategy in the private sector and it leaves the taxpayers out of the picture."
Mark Thoma: Overpay for illiquid assets + Taxpayers get percentage of future profits for a period of time.
"Here's a proposal. First, in return for taking toxic assets off of a firms books at a price that is higher than the market rate, the government would get a share of any future profits the firm makes for some time period, say 10% for ten years, something like that. Administratively, it could come as an increased tax rate on profits and, if it helps politically, it could be earmarked for a particular cause. The government pays the firm a fair value for the assets plus an additional amount to help with recapitalization, and in return gets a claim on future profits for a period of time (I would also tie executive compensation directly to profits to help prevent gaming). "For additional recapitalization, I would do something similar. Give the firms a zero or very low interest term loan and, in return, taxpayers get a share of future profits for a period of time, say another 25% (or whatever rate is appropriate, the rates could be set so that, even with expected defaults, taxpayers ought to make a profit). The firm pays back the zero interest loan in full and gives up a share of future profits."


Richard A. Wiseman said...

I realize that there is more to the financial crisis than the mortgage fiasco, but since we the tax payers are ultimately to bear the burden of the “fix”, I have a partial fix that I would like to offer.
Rather than bail out the institutions, require the mortgage lenders who hold the notes on personal family homes to refinance the loans on the homes, where the subprime trap has sprung, at a fixed rate based on the current value of the home. The government bailout would involve: they, (whatever institution is supplying the bail out money), would negotiate with the lender a paydown of part or all of the difference and carry a second at no interest until the home is sold at which time the government would recoup some or all of the money. As an additional option, if the home did not sell at the original loan amount and the second was not erased, the difference could be added to the selling price as a continuation of the second mortgage. I believe that this approach would be far less costly and would still hold the lending institution and the home owner responsible for their creative financing. Yours truly, Richard A. Wiseman


Theirs nothing like a good bailout.

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