Instead of the Government taking over the BAD Assets, let the Government take over the Liabilities we are trying to protect from the insolvency of the Bank ... together with as many "good" assets as required to back those liabilities.
Leave the existing bank holding company with the trash ... as well as any good assets left over, if they actually had backing for all their "old-fashioned banking operations" liabilities ... and the balance of the liabilities, and pack them off to bankruptcy court.
Now, I don't trust the Senate Blue Dogs and Geithner and Summer to avoid running a "New Good Bank" into the ground, which is where ChrisCook's idea comes in ... bring the government ownership of the Good New Bank into a Limited Liability Company, and allow a solvent bank to buy in as managing partner. The preference would be to spread the managing partnerships around.
And then we will have a functioning banking system, ready in case the recession hits bottom and we need the banks during a recovery (which we will).
What I am proposing here is, of course, not my idea ... someone said Joe Stiglitz had an alternative approach, and I am always ready to read and think about what Joe Stiglitz says. The only piece I added is something that ChrisCook has presented repeatedly at the EuroTrib.
In more detail:
- Bring the insolvent banks into receivership
- Take the depository liabilities we wish to protect into a new bank holding company
- Take over as many sound assets as required to back the depoository liabilities
- If there are not enough good assets, the government covers exactly as many trash assets as needed for the new banking operation to be on a sound footing, and the old bank has to issue Senior Bonds for the balance
- If the bank has more than enough "good" assets, they keep the balance
- put the old bank with its remaining liabilities and assets through bankruptcy court and let ordinary bankruptcy proceedings work their course
- the government puts in the restructured bank as their contribution to a Limited Liability Company, and a solvent bank buys into the LLC as managing partner.
- Move on to the next bank.
Some points.
A big part of this is the problem of "moral hazard". A bank that is "too big to fail" has incentive to gamble. If it wins, it pockets the winnings, if it loses, the government pays off the bookie. The senior executives and shareholders are, in effect, holding the banking operations hostage to support their financial gambling habit.
This turns it on its head. Take too many gambles, get found out for being insolvent, and all the insured and otherwise valuable liabilities walk out the door, with the good assets needed to back them. And a bank executive facing the threat of insolvency will know that if they double down and lose, they are likely to have their golden parachute completely wiped out ... while if they play the game straight, the bank is likely to go into bankruptcy with some sound assets, and executive owed compensation may get dimes on the dollar rather than nothing or pennies on the dollar.
Also, to be clear, the employment contracts of regular bank employees in the operations involved in the protected liabilities are themselves protected liabilities ... the people engaged in the boring old banking operations being used as a cash cow for gamblers are offered the first crack at employment in the Good New Bank.
How does this fit with Geithner's Plan
I don't expect Geithner's plan to be successful in getting the big insolvent banks up and running again. However, it may be useful in keeping banks that are near the edge from falling in ... always a danger during a recession as steep and likely to be as long as this one.
The main interaction with Geithner's "TARP Millenium Edition", though, is that these Wall Street Wizards will not admit to themselves, let alone in public, that many of their activities over the past twenty years have involved creating fictitious wealth as a means of grabbing a share of someone else's real income ... until getting hit on the head with the fact multiple times.
And some of them never will.
Now, just as the infusion of liquidity by the Fed between December 2007 and September 2008 did not fix the insolvency crisis, but did stave off the threat of total collapse for about ten months, the new infusion of liquidity is likely to also stave off collapse for a while.
Things in the Finance Sector will, of course, not get better until we once more have a banking system where a bank with a credit-worthy customer coming in the door can raise the funds without paying a steep premium because of fear's about the bank being credit worthy.
But we need time to push genuine solutions into the public debate, and Geithner's plan offers the possibility that it just might buy as that time.
With the added goad that ... there is no guarantee that any more holding actions can be fought. It becomes more and more important that the next big "financial rescue" is rescuing the financial services that Main Street needs from the corporations that are currently holding them hostage.