An Open Letter to Tim Geithner
Todd Harrison of Minyanville suggests the following actions:
• Immediately suspend all common stock dividends for banks on the receiving end of the Troubled Asset Relief Program. Even a penny or a quarter is too much, given the circumstances.
• Immediately suspend all preferred dividends for TARP-recipient banks, including payments to the government. As regulators consider non-cumulative preferred stock as tier-one capital, make it act like tier-one capital. The underlying documents permit up to five years of dividend suspension and most preferred shares are already trading as if that will happen.
• Convert the government’s preferred holdings to common stock and offer the same terms to existing preferred shareholders. It’s time to build a foundation rather than another house of cards. No investor believes that tier-one capital — let alone “shareholder equity” — is anywhere near tangible common equity. So force that convergence.
• Cap deposit rates as was done in 1935. Right now, deposit rates are dictated by the weakest of financial institutions, and those rates discount the value of FDIC insurance. Even with all the Fed’s actions, bank net interest margins are not expanding and as a result, banks have to reprice loans higher.
• Establish a financial institution governing board made up of bipartisan leadership from Congress and representatives of the Federal Reserve and Treasury and ask. Paul Volcker to chair it. Industry leaders need a single board to be accountable to rather than an endless stream of Congressional committees and bureaucrats.
• Within the top 25 largest financial institutions in the country, begin the internal separation of the good assets and businesses from the bad. What you started inside Citigroup (C) has merit elsewhere. After good businesses are “cleansed,” sell a small, 10%-15%, minority stake in each through IPOs available to all investors. With transparency and clean balance sheets, there will be strong investor demand, but we must give all investors — not just politically connected private-equity firms — the opportunity to participate and use the proceeds to replenish capital. Over time — measured in years, not weeks or months — the investments can be spun off and good businesses will cover a significant amount of the incurred losses.
• For smaller, troubled banks, please let them fail. When they do, transfer the assets to an RTC-like entity. Then, using a Web-based auction process open to all, invite investors to bid on troubled assets. There will be plenty of demand.
• Decide today what you want the banking industry to look like on the other side of this crisis. Whether it’s capital and liquidity requirements, deposit limits or conflicts of interest, the time for proactive thought is now.
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Source:
An open letter to Tim Geithner
How to restore confidence in the troubled financial system
Todd Harrison
12:03 a.m. EST Feb. 4, 2009
http://www.marketwatch.com/news/story/An-open-letter-Secretary-Geithner/story.aspx?guid=%7B492388D6%2D31BB%2D493D%2D91CD%2DD9627E74492A%7D
February 4th, 2009 at 3:56 pm
I like Todd’s suggestions, but they fall under the assumption that Geithners intentions are honorable. I don’t think they are.
February 4th, 2009 at 4:26 pm
Let’s define “bank”… are these guys still going to chase high yields, leveraged?
Why? Well, for profit, of course. I’d make them non-profits. Let private investors chase that stuff, not utility institutions that we depend upon for other functions.
February 4th, 2009 at 6:15 pm
@ wally: That’s a Glass-Steagall maneuver right there. I guess the Chinese walls idea didn’t work out…
February 4th, 2009 at 6:23 pm
“• For smaller, troubled banks, please let them fail. When they do, transfer the assets to an RTC-like entity. Then, using a Web-based auction process open to all, invite investors to bid on troubled assets. There will be plenty of demand.”
February 4th, 2009 at 6:27 pm
Oops…wanted to leave a reply, which is–What the hell is the difference between “smaller” banks and the behemoths? If its okay for smaller banks to fail, why not bigger ones?
It just incentivizes the already stupid acquisitions of banks, large and small, everywhere. Just like a the saying goes about a bank debtor– if failing costs the government a million dollars, the government owns you. If failing costs it a billion, you own the government.
February 4th, 2009 at 6:35 pm
Ditto to Curmudgeon. And I don’t see any discussion of a haircut for the debt???
The loss rates on the top banks are going to be multiples of Tier One Risk Based Capital, INCLUDING THE TARP. The TARP preferred in C, BAC, JPM and probabaly WFC is toast, IMHO. So any discussion that does not include a proposal for a pre-pack deal to haircut the debt is not credible, again my view.
How about this? We stop out the loss rates for the $1.5 trillion in bank bond holders at 50% of par, but they must agree to accept only token equity participation in the new bank and rely on the bad bank outlined above to recover above 50%. For C bond holders, that may not be a bad deal.
Q: When are the C and other money center bondholders going to organize so that they can discuss good proposals like this. Whether or not this precise outline is the ticket, this is the type of conversation that need occur.
Chris
February 4th, 2009 at 7:06 pm
It’s a good start.
Add to it that every tax paying American citizen gets a percentage of common stock and voting rights and from all TARP institutions and it becomes a square deal.
February 4th, 2009 at 7:19 pm
OK…someone smart…what is happening in Japan?
http://www.rttnews.com/CorpInfo/EconomicCalendar.aspx
2/4/09 06:50 PM Japan Buying Foreign Bonds (Yen) JAN 30 ¥ 457.4 B – ¥ 54.2 B Japan
2/4/09 06:50 PM Japan Buying Foreign Stocks (Yen) JAN 30 ¥ 482.2 B – ¥ 90.7 B Japan
2/4/09 06:50 PM Foreigners Buying Japan Bonds (Yen) JAN 30 ¥ -341.7 B – ¥ -92.5 B Japan
2/4/09 06:50 PM Foreigners Buying Japan Stocks (Yen) JAN 30 ¥ -328.9 B – ¥ -376.3 B Japan
From page 3…
It appears the rest of the globe is getting out of the Japanese stock market and that Japan is buying foreign bonds and getting out of their bond market…
I am not interested much in stocks here, but I am interested in bonds…Mannwich, Lefty, Karen, Crummy?
any reasons??
February 4th, 2009 at 7:22 pm
Let them ALL fail as the market is insisting they should, and as they so justly deserve to do. As for compensation of their executives, civil and criminal penalties should apply – it is the American people who should receive recompense. This is not the time for coddling criminals.
Stand out of the way and let the chips fall where they may.
February 4th, 2009 at 9:44 pm
I’m not sure what letters Tim Geithner is reading but there are definitely some things happening in D.C. right now that may not be so good for the Stock Market. I don’t know what’s happening, but the technicals look really, really bad at this point. Under the most obvious model I can see, we should see a collapse in the next 48 hours. The model suggests a “third of a Third” wave coming and requires a sharp drop very soon. If fact if we don’t see big dump by Friday, and instead we just chop and grind higher, then this most bearish short term model is probably not valid. Any break back above 842 (futures) would harm this short term uber-bearish model as well.
For anyone holding length, I would use 810, 800 and 780 on the CASH S&P as some round stop loss levels. I.e. Break of 810 should be Code Yellow, 800 should be Code Orange and 780 should be your Red Threat Level….i.e. Get the F*&k out the Market.
February 4th, 2009 at 9:45 pm
bruce in TN.
Japan is imploding. The strong Yen and Global Depression has caused some of the large industrial output drops ever recorded in modern economic times….just a guess.
February 4th, 2009 at 9:55 pm
Blog post on Japanese “issues” for Bruce in TN
http://www.nakedcapitalism.com/2009/02/japan-on-edge-of-abyss.html
February 4th, 2009 at 10:23 pm
I would like to put another thought in here; really a sequence of thoughts. Please follow my logic and the show me where I’m wrong:
1) Any ideas put forward should help revive the economy short term while advancing systemic solutions long term. No other suggestions should be entertained.
2) The writedowns of the last 6-12 months have resulted from the devaluation of what are now value-free securities (ie. those for which there are illiquid markets), backed by an unknown mix of mortages of varying underlying value, including many sub-prime, etc.
3) The banks have already taken the hit on these and either recapitalized or taken TARP or other govt infusions. Ie if these the securities ever regain any significant value, the banks holding them will make money…
4) Since the outcome of 3 is unlikely to happen soon, pass on the loss to the underlying instruments. Yes, I do mean that. Devalue the debt owed, so that If the nominal value of an MBS is $100M but it is currently (over?) valued at $20M and has not market, reduce the obligation of the underlying mortages by 80% accross the board. That will almost certainly ensure that the homeowners concerned will be able to pay the balance offs, will improve their credit ratings, andwill have more disposable income to spend and stimulate the economy. It will also guarantee the new $20m face value of the MBS.
5) note that 4 costs both the taxpayer and the banks exactly $0.
(I have been considering airing this for a while, then I heard that John Stuart was proposing that the TARP money be given to the debtors so that they could pay down their mortgages, which would still not solve the liquidy and credit problems.)
February 5th, 2009 at 3:05 am
Preferred shareholders getting “toasted” would really hit endowment fund payouts. With so many in the Administration and Federal Reserve Banks having strong links to Academia, could this have at least a subliminal impact on their decision making?