Bailout Plan fails in Washington

Q:   So, Bill what's your plan? 

A:   Follow FDR's bank holiday approach from 1933

Admittedly, I was no fan of the 'bailout' even with the around the edges tweaking provided so the fact that it failed this afternoon from my perspective is a good thing though painful to some.

The basic problem I have with the failed 'plan' is:

1. It issues 'debt' and purchases (owns) the mortgages of the very poor.

2. It buys out Wall Street and doesn't hold them accountable for there actions and mis-deeds.

Over the last few days, folks have asked me what my solution is. While I am not in Washington and while the Congress and President don't care what I (or you) think; here are my thoughts on how to fix what is obviously broken and get a package that works:

1. The purpose of 'bailout' should be to provide liquidity and adequate capital to the market. Right now, the pipeline of mortgages and loans is clogged. Lots of loans going in, few mortgages being sold and packaged. The Government has the responsibility to provide liquidity. Banks can't sell CMO assets and therefore can't make new loans. They lack the 'cash' (liquidity) to continue to operate the mortgage machine of the US economy.

2. The government is NOT responsible for insuring that stocks don't go down or responsible for bailing out companies (or individuals) that make bone headed investment decisions (subject to the liquidity and capital issue in 1 above which are of a national nature).

3. It is a very BAD idea for government to own the mortgages of its citizens and in particular to own vast numbers of 'sub-prime' mortgages of poor mostly minority voters. If ever there was a trainwreck in the making it is to have the US Government receiving the mortgage check for tens of millions of folks in or near poverty. It is a cinch that once the government owns them, folks will stop paying and the government will refuse to foreclose on them. Worse, would be offers from politicians to 'help' in exchange for their 'votes'. The middle class who pays their bills will be forced to subsidize and pay off this debt without clearing out the foreclosed homes to worthy buyers. In my opinion this is a risk that is just too great and stands the chance of creating vast suburban slums.

4. The current failed plan purchases mortgages (packaged as CMO's). We purchase them and the wall street guys get CASH so that they can keep lending. The Government should not purchase the mortgages directly but should allow the market to dispose of them while the taxpayers provide liquidity to cover the losses on these securities.

So what is my idea?

THE 1933 BANK HOLIDAY APPROACH 

1. To borrow a chapter from FDR's 'bank holiday' plan of 1933.

2. To issue non-voting preferred stock (instead of purchasing mortgages) with a stated interest rate equal to the value of liquidity and capital needed.

3. To allow the free market to dispose of the existing mortgages and CMO's so that the government does NOT own the mortgages of individual homeowners.

4. To allow the taxpayers to receive interest on their investment (as opposed to a bailout without any consequences).

5. To create liquidity and capital with the non-voting preferred stock that will allow the credit process to continue.

6. To allow the banks and mortgage company to pay back the US Government (the taxpayers) over time reducing this preferred stock.

7. To allow the market to determine how much these securities are worth and to work out individual credit problems on a case by case approach (as opposed to a blanket ownership of mortgages by the government).

8. To make the companies that made the bad loans accountable for their own actions.

9. To reverse the bad policy decisions that modified the CRA and other laws that allowed lax credit underwriting for political and or social engineering reasons.

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Commissioner Bill James has represented District 6 on the Mecklenburg County Commission (Charlotte, NC) for 12 years. He is a CPA by trade having spent 15 years or so working for various 'big 6' accounting firms dealing with banks and financial institutions around the globe.

The following summary of FDR's 'bank holiday' from the Executive Intelligence Review (2007) is excerpted as follows for reference purposes:

Banking Holiday Proclaimed

"By Inauguration Day," wrote Roosevelt, "practically every bank in the country had either been closed or placed under restrictions by State Proclamations. Federal Reserve banks observed the State holidays, and were also closed on March 4th. All the leading exchanges ceased operations. It can be said that financial and banking business in the United States had stopped." President Roosevelt's first Presidential Proclamation, issued the day after his inauguration, called Congress into an extraordinary session which would be held on March 9. But his proclamation proclaiming a bank holiday, although issued on March 6, had actually been the first proclamation drafted.

The bank holiday was to continue until March 9, when the extraordinary session of Congress would be held. On that day, Congress passed the Emergency Banking Act, which extended the bank holiday in order to give the government time to reorganize the banking system. The Act provided for massive influxes of credit into the system by authorizing banks to issue and sell their preferred stock to the Reconstruction Finance Corp. This permitted them to obtain funds without creating claims superior to the claims of their depositors. The legislation also made it possible for any member bank to meet all demands for currency, so long as it had sound assets, because it could borrow against these assets from the Federal Reserve banks.

"Between March 6th and March 9th," wrote Roosevelt, "we were busy drafting this legislation in conference with the Congressional leaders, and also devoting ourselves to devising arrangements to permit the banks to meet certain essential payments during the banking holiday.

"The Secretary of the Treasury issued a series of regulations, and distributed them through the Federal Reserve banks, permitting specific types of banking transactions." Banks were also permitted to perform certain functions required to provide the community with food, medicine and other necessities of life, to relieve distress, and to pay usual salaries and wages; and banks were authorized to accept special trust deposits withdrawable on demand-but all of these regulations prohibited any bank from paying out gold or gold certificates or permitting any withdrawals of currency for hoarding purposes."

Restoration of Confidence

At the end of the bank holiday, the banks in the 12 Federal Reserve cities were opened, and on the following day, the sound banks in around 250 cities opened their doors. In succeeding days, sound banks in smaller cities and towns opened. Roosevelt wrote that, "By this time, there had been such restoration of confidence, that as soon as the banks were reopened, a large volume of currency was re-deposited.... There was also a rapid return of gold and gold certificates to the Reserve banks and to the Treasury. By the middle of April, deposits in the reporting member banks had increased by $1 billion, and before the end of June, by more than $2 billion."

A reorganized banking system with increased deposits and the ability to call upon Federal credit was an essential precondition for America's ability to assert her national sovereignty, in order to provide for the general welfare. As President Roosevelt wrote, "The New Deal was fundamentally intended as a modern expression of ideals set forth one hundred and fifty years ago in the Preamble of the Constitution of the United States-'a more perfect union, justice, domestic tranquility, the common defense, the general welfare and the blessings of liberty to ourselves and our posterity.' But we were not to be content with merely hoping for these ideals. We were to use the instrumentalities and powers of Government actively to fight for them."