What is the Plan? A Discussion With Bill Dunkelberg and David Kotok
Here is our latest comment in The Institutional Risk Analyst:
http://us1.institutionalriskanalytics.com/pub/IRAstory.asp?tag=346
We end the interview with a four point proposal for the banking mess:
1) President Obama, flanked by Fed Chairman Ben Bernanke and FDIC Chairman Sheila Bair, to lead G-10 to announce a temporary sovereign guarantee of all bank deposits, foreign and domestic, and agree to national treatment of bank bond holders and OTC counterparties on a case-by-case basis, using actual realized and probable losses as the decision point for resolution.
2) FDIC suspends all bank insurance premiums for 2009 and directs all depositories to suspend dividends and retain capital to help stabilize the aggregate capital of the industry and thereby the lending base. This would be coupled with access to the Treasury and all the dollars we are pouring into sick institutions in order to finance FDIC activities. Starting in 2010, FDIC insurance premiums are tied to all bank liabilities, not just deposits, and increase with bank size and complexity. Need legislation for this.
3) Operating under open bank assistance, the equity holders of C are wiped out. The Fed, FDIC and OCC begin to make board changes and the Treasury invites bond holders of C to form a creditor committee. The new C board recruits new management that knows how to do basic banking. C creditors and FDIC negotiate a 50/50 debt for equity and FDIC insured bond swap. Resolution remains the ultimate threat by FDIC, so the creditors will probably play ball after some yowling. Once C is in hand, Treasury and Fed begin the resolution of AIG and managed “blow up” of the CDS market as now called for by Myron Scholes, among others, and then accelerate active stress assessment of remaining money centers.
4) Treasury then begins to bid selectively for toxic securitizations, contributes these assets to the DIP. FDIC uses its receivership powers to dissolve the DE trusts that are the issuers of the toxic waste, gain control over the underlying loans, and sell this collateral back into the market. As the quid pro quo for the deposit insurance premium relief, the banking industry must be ready to buy these loans from FDIC with financing from the Fed and service/work out same. The community bankers get an asset they can work and shelter from the immediate cost of the large bank cleanup. We help homeowners without further government subsidy.
Comments?
March 8th, 2009 at 11:50 pm
Why limit it to C? I mean, if the market (financial shorts) has decided (hijacked the debate due to regulatory incompetence) the problem is impossibly low TCE, and that T1C is meaningless, aren’t BAC and others essentially in the same boat? Frankly, I’m tired of the never-ending C-bashing when by almost any account there are others out there. Many others. Sure, they may wipe C first, but then it will be BAC, WFC, etc. Whacking C, and only C, isn’t going to do anything systemic other than create a continuous rolling crisis–which won’t solve a thing (other than helping shorts exit positions when the equity goes to zero).
Also, what will happen if there’s ever an outcry about a majority of government capital sent to AIG ending up at GS, HF’s, and foreign institutions? “Blowing up” seems to be Myron’s specialty, by-the-way.
And I really want to know, what is so God-damned sacrosanct about MTM-accounting. It clearly does not work (unless one’s short the financial sector) as intended. Furthermore, FASB 157 is but one disaster in a series of accounting changes that have only poured gasoline onto the current systemic crisis. Aren’t these the very same geniuses that created rules to allow off-balance sheet structures to begin with? Then at the worst conceivable time, decided to require banks to reconsolidate all of it back onto their balance sheets?
Finally, I’m sure the general answer is going to be transparency solves all problems, or similar nonsense. If this is something that is a core-belief, then why aren’t we screaming for the US Government to play by the same GAAP rules in their accounting? I am so sick of the hypocrisy.
Disclaimer: I am agnostic when it comes to long or short. So, if you’ve made money as the system burned, good for you. I am, however, tired of the “debate” being focused on C and AIG. These clowns pushed the regulatory environment to the limit in every imaginable way. They are simply symptoms of a broken system. Tell me how to fix the system, not the crisis.
March 9th, 2009 at 1:20 am
…FDIC insurance premiums are tied to all bank liabilities.” Does the legislation dealing with this only create the mechanism for insuring liabilities or does it also insure that we don’t create an FDIC version of AIG?
I don’t think yowling will be an apt description of reaction to your solutions (which seem fairly reasonable to me). I guess this will shine some light on the counter-parties involved. Get ready for the fight of your life – whoever has the job of announcing this as a solution.
I’m also a little confused by the very last sentence on homeowners.
March 9th, 2009 at 1:25 am
I mean the fight that would/will ensue if this was taken as THE solution. There are surely BIG players out there counting on this bailout to continue and REALLY want that money to keep coming.
March 9th, 2009 at 2:01 am
1) Define ‘temporary.’ Bankers need to be told (rather firmly, one should add) that this situation will exist only for as long as it takes to become functional again, and that the governments are holding a stopwatch in one hand, and a pistol to their heads in the other. If they dawdle, then we might as well take them under.
Once this guarantee is in place, the bankers must be prohibited from taking on more risk (either on a per-loan or systemic basis). The sovereign backstop should be used only to allow the banks to become functional again, not to load up on more risk and hand pawn it off on the taxpayers.
There is some question whether or not Switzerland has the sovereign resources to backstop their banks. What should a sovereign do in this case?
2) If we’re going to use the FDIC to suspend dividends, is this dividends on only the common, or on the common and preferreds?
If the FDIC will be granted such authority, then should not the FDIC also be able to set executive compensation for these banks as well as prohibit all acquisitions and mergers not previously announced, or make all M&A subject to FDIC review?
3) re: the resolution of the CDS market: either we have credit rating agencies or we have the CDS contract. One or the other, not both. AIG should be prohibited from writing any more CDS contracts, and should be forced to buy out as many contracts as economically possible before they go to default.
4) I have some thoughts about the “toxic” assets, but time does not permit me to write up the comments now.
March 9th, 2009 at 7:15 am
All common and preferred, at least for banks < 1 on CAMELS.
March 9th, 2009 at 11:38 am
It’s nice that Kotok admitted where he’s coming from:
“Kotok: Well, I have a bias here. I represent bond holders and my clients are bond holders. ”
Could this have something to do with his adherence to the systemic risk theory? Do people who don’t stand to make money from bailing out the creditors support the domino theory?
March 9th, 2009 at 2:26 pm
Chris,
There is a lot of hard work going into what you are doing and proposing and attempting to push through, and it is appreciated. Fwiw, your 4 point proposal on resolving the banking mess reads a little out of context. The context of the proposal is better understood if readers read the prologue discussion with Dunkelberg and Kotok. So I recommend readers click through to the link.