This bailout policy is simply wrong as Paulson proposed
it. In a rush to judgment, the Congress is trying to
tweak it. It’s pretty well too late to stop it even if
the elected officials were reading this. However, there
may be some value in writing this as an exercise. Your
comments would also be valuable.
The Big Picture:
90% of mortgages are currently being paid on time and in full.
Only 3% of mortgages are in foreclosure. Yes, that is high.
The bailout dollars requested are about $5,000 for each
person in the American workforce; the bailout has to be
paid for by borrowed money. If there absolutely must
be emergency action to “save the financial system,” then
there are safer, less costly alternatives. Here they are.
Provide NEW capital to fund NEW quality mortgages:
This allows lenders to do business as usual.
Rule: The borrower must have twenty percent down.
Rule: The lender has to hold the mortgage.
Rule: The borrower may not take out a second mortgage.
Rule: The borrower may not use built-up equity for
a second mortgage nor a line of credit.
Rule: The mortgage must have a fixed rate of interest.
Provide NEW capital to buy OLD mortgages:
Rule: The mortgage is current.
Rule: The mortgage was issued 5 or more years ago.
Establish a “Foreclosure Holiday”:
Rule: The homeowner in foreclosure gets a 3-month grace period.
A “Foreclosure Holiday” works like the Roosevelt “Bank Holiday”
in the Great Depression, The purpose was to stop a
“run” on banks. Less well-known was the “Insurance
Holiday.” No one could cash in an insurance policy
for six months. Thus, the idea of a “Foreclosure Holiday”
is an available option.
Mortgage Administration:
Rule: When a mortgage is issued, establish
that only one company may handle the
payments for the life of the loan.
That could be the lender issuing the loan
or a licensed company agreed upon by both parties.
Explain Federal Deposit Insurance:
Conduct a national media campaign to educate the
public. The message should be:
1) Your bank deposits, in an FDIC bank, are insured
up to $100,000.
2) Put any money over that amount in a different bank.
3) The interest on your $100,000 CD is NOT insured.
The insured amount is $100,000, and not a penny more.
It’s hard to believe how many people lose money in
banks like IndyMac because their deposits exceed $100,000.
Second, there is turmoil as many small depositors withdraw
their money even though it is wholly insured by the
full faith and credit of the U.S. government.
Fatten up the FDIC reserves:
The banks pay a premium for federal deposit insurance.
Those FDIC reserves have been depleted. It’s time to
raise the premiums. Meantime, one bailout action could
be for the Congress to pump up the FDIC assets.
All the money will be repaid with the higher premiums.
Let the markets invest NEW capital:
One of the complaints is that there is not enough
money available. There are only two sources of money.
DEBT and EQUITY. Any bank or other company needing to borrow
money would be expected to offer a higher interest rate.
Second, new equity capital can be raised by selling stock.
The market will work when the price is right.
EXAMPLE #1: Goldman Sachs made a deal with Warren Buffett.
The company agreed to pay a 10% dividend on Buffett’s
$5 Billion of preferred stock. Buffett’s investment
is completely NEW money. Why did it happen? That
10% rate of return made it happen. Then, Goldman raised
another $5 billion in a separate stock offering.
EXAMPLE #2: JPMorgan Chase bought Bear, Stearns
a few months ago. This week they bought Washington
Mutual. The investor with the money took over.
Why? The price looked right.
Create a “National Mortgage Exchange”:
Let the financial institutions sell their “toxic
mortgages.” They are not worthless. If the value
of a foreclosed house is down, that’s just a reality.
The house itself is not worthless. The holder of
the mortgage owns the property, right? If the price
is right, there will be a buyer who will pay the
owner real money. Thus, the selling financial company
gets its money and can return to business as usual.
The government can establish some rules and promote
such a market, or even create an exchange, like
a stock or commodity exchange.
FINAL SOLUTION: Let the voters decide.
The American people and their elected representatives
are being asked to take monumental actions overnight.
This crisis did not arise overnight. What is wrong
with a “system” that gets this out of whack?
Where have our national elected officials been?
Do you think they deserve to be re-elected?
This writer thinks it’s time for sweeping changes.
/rb/