An Alternative Bailout Plan
Steve Stephens, a valuable director on the Club’s board, submitted the following proposal as an alternative to the current $700 billion bailout plan. The Club remains opposed to the bailout plan and currently has not endorsed a comprehensive alternative, but Stephens’ idea is both rational and creative.
Dear Pat,
What is the goal of the U.S. Government in this financial crisis? To provide a bailout for excessive, tax incented behavior or to inject capital into the banking system? If it is the former, then the current $700 billion bailout plan is the answer. If it is the latter, then may I propose an alternative?
The U.S. Treasury should purchase bank owned real estate, that is main or branch buildings, funded with a debt service schedule to match the terms of a lease back to the selling institution. The new U.S. debt would pay no interest until a balloon maturity using these bank assets as collateral. Any bank gains from this transaction would be postponed until the end of the lease term. A bank which currently leases space could also avail itself of this low cost financing.
The results would be that banks owning non-performing loans would free up non-earning assets substantially adding to their capital base (lending capacity) while working out of their bad loans. Banks which are not in trouble could also avail themselves of the sale/leaseback which would eliminate the pitfall of rewarding poor lending practices. Additionally the U.S. taxpayer would have earning assets as security.
Along with the recommendations that you have already made, suspending mark to market requirements and the FDIC guarantee of overnight bank lending, ideas such as this will employ the market to work out of the credit implosion and the resulting deflation.
I know the current plan is likely to pass, but we should encourage alternatives up to the last minute.
Sincerely,
J.T. "Steve" Stephens, Jr.
