Bank Bailout Could Cost Up to $4 Trillion

taps65 at 23:50 2009-01-30 said:

3 step solution

1- the government buys all the homes and give the people a sustainable and suitable obligation

2- repudiate bad debt, seek accountability and sequester ill gotten wealth

3- let the banks suffer losses.

the cost: a lot less than the mounting deficit. Permalink

mattroberts at 00:39 2009-01-31 said:

Maybe someone with a strong understanding of our financial system can help me better understand this mortgage crisis and tell me why the following solution will not work. I'm not a financial pro, just a regular guy reading the headlines. Here’s the situation: So far Citibank (we’ll use them as an example, but this can apply to any bank) has taken approximately $45 billion of TARP funds, plus another $300 billion in government guarantees. This has not solved that problem. So, rather than writing more big checks to Citibank (and others), why not have the government simply purchase 51% of their stock and thereby make the required changes to solve the mortgage crisis (e.g., keep people in their homes).

Citi has approx. 5.5 billion shares, trading at about $4. So, 2.7b shares at $4 is approx. $10.8 billion dollars. Let’s round up to $11 billion. So, for $11b, our govt. can take control of Citi. Look they’re going to do it one way or another, so let’s do it the less expensive way. At some point down the road, the govt. can slowly sell those shares, hopefully for a profit.

First off, the govt. splits Citi (using Citi as an example) into a two separate holding companies: a good bank and bad bank, each with it’s own P/L and capital structure, similar to the plan currently being discussed, but slightly different. The good bank will contain all cash deposits and any other "good" assets tied to depositors, or is clearly worth more than the underlying capital.

The bad bank half of Citi would contain all the “toxic” junk and financial instruments that are not tied to depositors, or are difficult to value. This would certainly include whole residential loans (our mortgages) along with all the MBS/CMBS stuff.

Now, any mortgage that Citi owns directly, the govt. rewrites the loan principal balance to the current market value (BPO), or whatever the homeowner can afford to stay in the home, assuming they still have a job. On the loans that Citi doesn’t own and simply is servicing, the govt. breaks the servicing contract with the underlying investors under a force majeure and renegotiates with them to write down the principal balance on certain loans. If the investors don’t agree, Citi will no longer service those loans.

On all the MBS and CMBS, etc. instruments, write them down to zero, or close to zero, or better yet, put them on an auction site and sell to the highest bidder, and let the creditors (not the tax payers) take the hit. Why shouldn’t they be accountable as they were part of the problem to start.

Furthermore, the govt. would then also reinstitute the Glass-Steagall act and also enact other regulations to prevent a crisis like this from ever happening again.

So, before getting into any more details, I’d like to hear some comments on why something like this is or isn’t workable. Thanks. Permalink