House Progressives Propose Bailout Alternative

A number of house progressives who voted against yesterday's bailout bill, including Pete DeFazio, Donna Edwards and Marcy Kaptur, have just held a press conference unveiling their own proposal. Text below. Commentary to follow:

DRAFT

No BAILOUTS Act

Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security

1. Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2. Require the Securities and Exchange Commission to restricting naked short sells permanently

This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

3. Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies "to protect the integrity and quality of the securities market and strengthen investor confidence." This rule prevents market crashes brought on by irrational short term market behavior.

4. "Net Worth Certificate Program"

This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount "borrowed" as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

5. Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

Comments (24)

1. my head hurts....

   Posted by frosty zoom at 09/30/2008 @ 5:09pm

2. All good ideas except perhaps that SEC should leave mark to market in place with regard to stock valuation on balance sheets, but allow banks to use "economic value" with regard to determination of their reserve requirements for regulated lending.

   Posted by OneVote at 09/30/2008 @ 5:46pm

3. How can we do a bailout without changing legislation that enabled the crisis - like Phil Gramm's Commodity Futures Modernization Act that permits unregulated grammswaps? Saavy money-makers on Wall Street will just do it again!

   Posted by rikkiw at 09/30/2008 @ 7:08pm

4. This looks like "smoke and mirrors" along with "creative accounting" thrown in for good measure. This just kicks the can down the street"

   Posted by hkeirc at 09/30/2008 @ 7:20pm

5. As I read this, the mark-to-market rule remains in place as the general rule. The alternative valuation can be used only "when no meaningful market exists."

   It seems reasonable to me in this limited situation. We know that the value of a pool of mortgages is more than zero, both because many borrowers are making payments and because the underlying real estate is worth more than zero. But because there is no current market, the banks have been required to put them down to zero on their balance sheet, restricting their ability to lend out money, even though they're getting regular monthly payments on most of this zero-value asset.

   All this lets them do is use an alternate method of valuation. It's not particularly radical; when you are valuing an office building, you can either use the sale price, or the present value of the stream of net rental income.

   It's a lot less radical than handing one man $700 billion to go buy whatever he wants to, at whatever price he chooses, without any oversight, as originally proposed.

   Posted by bcazden at 09/30/2008 @ 7:43pm

6. Why would progressives such as DeFazio propose the same thing as Michele Bachman (R - MN)? Both Bachman and DeFazio were on NPR yesterday afternoon (not together), with different reasons why the current bailout bill should not be passed. His made more sense. But now he's suggesting the same thing as this right-wing Republican Why?

   Eliminating the mark-to-market rule would appear to be another way for the for the financial wheeler-dealers to do more of the same, with even less transparency. Sounds like enablement for more financial disasters.

   How does that help?

   Seriously.

   --Sandy

   Posted by macinnis22 at 09/30/2008 @ 8:07pm

7. This is much more reasonable than throwing another trillion dollars of debt at our grandkids.

   If we are forced into the market to buy up the garbage, fine, but we can not rely on this measure alone. But we must also implement other reasonable measures such as these to limit the need to increase the national debt to 11 trillion dollars.

   Enough is enough. If we must weather a recession, so be it. The economic cycle is alive and well.

   Posted by solomon740 at 09/30/2008 @ 8:39pm

8. This is a BRILLIANT solution to the problem!

   How can it be that there is suddenly evidence of intelligent life on Capital Hill?

   Posted by MarionPolk at 09/30/2008 @ 9:36pm

9. Goldman Sachs created the ABX index in 2006, then shorted it to death in 2007, causing investors to believe that the value of performing loans was less than the face value of the loans, and requiring banks to book paper losses on every loan, as soon as it was made.

   Under the "mark-to-market" rule, no lender can afford to make any loan, so no new loans will be made, no matter how much cash is given to financial institutions.

   Posted by MarionPolk at 09/30/2008 @ 9:46pm

10. Big improvement. However it was suggested by someone on TV that the "mark-to-market" rule could be implemented with a three year moving average so that any spikes of value, up or down, would be integrated out and a slow movement of valuation kept.

    Posted by pyeatte at 10/01/2008 @ 12:15am

11. How does raising the FDIC protection from $100k to $250 help either to unfreeze credit or to halt the freefall in the housing/mortgage markets? What are they doing there?

    Posted by FSK405K at 10/01/2008 @ 03:32am

12. Would any of these financial institutions have gotten "too big too fail" under Glass-Steagall? Why don't any of these bailout solutions require the re-separation of investment banking from savings and loan banking and insurance banking?

    Posted by HAL9000 at 10/01/2008 @ 09:10am

13. Wonder why crap like this happens? Scammers find holes in legislation and laws to exploit to their advantage. Since they are skirting what is legal and not legal, they get away with leaning extremely to the illegal side because they have the high powered attorneys representing them, in some cases the very same folks who wrote the laws in the first place. The laws need to be written in an exact manner leaving no question about the intent of the law and or regulation. No exceptions. No loopholes etc. Ditch the vague rules governing wallstreet.

    The difference between the haves and the have nots can be distinguished between inherited wealth and also by attorneys specializing in business accounting. Most people don't even have a private attorney to write a friggin will let alone a financial advisor on how to skirt the law to their financial benefit. That's the root of this problem....vague regulations and laws being exploited by corporations and the extremely well to do. THen there's the issue of the wealthy hiding their assets in the international banking system beyond the arm of the U.S. government. The banks may be out of the reach of the government, but not the U.S. citizens hiding their extreme wealth in these accounts. The fed needs to nail these assholes to a cross.

    Posted by Wolfgang1 at 10/01/2008 @ 09:42am

14. How does raising the FDIC protection from $100k to $250 help either to unfreeze credit or to halt the freefall in the housing/mortgage markets? What are they doing there?

    Posted by FSK405K at 10/01/2008 @ 03:32am

    it might convince fewer people to remove much needed cash from banks.

    cash the banks don't have.......

    Posted by frosty zoom at 10/01/2008 @ 09:45am

15. cash the banks don't have.......

    Posted by frosty zoom at 10/01/2008 @ 09:45am

    The banks have been making loans based on debt. I'll attach a link that explains this. It's pretty long, about 45 minutes or so, but it's worth the watch. I've posted it before.

    http://video.google.com/ videoplay?docid=-9050474362583451279&hl=en

    The theory is that the banking system make 10K off a 1K loan even though they don't even really have the 1K to loan in the first place. It's all a confidence game really, confidence that the bank really does have the money stashed in a vault somewhere. Problem is that they don't. They are making profits off money on loans they really don't have.

    Posted by Wolfgang1 at 10/01/2008 @ 10:04am

16. Furthermore, what about the history of mark-to-market? The practice was apparently formalized to prevent accounting fraud.

    Posted by Zero at 09/30/2008 @ 6:02pm | ignore this person | warn this person

    Zero....I agree with you....see other post on Nichol's alternative bailout. Depositors and FDIC at extreme risk by relaxation of mark to market....no doubt. When you've got banks leveraging depositors' savings at 20 to 30:1 you are asking for big trouble by letting banks (essentially) create their own accounting rules.

    What I hope that this alternative would entail is a temporary relaxation not a permanent relaxation until (or if) liquidity is restored and a strict mandate to work out bad debt "economically valued" so that all bank assets would have to be eventually restored to mark to market valuation. Would you rather have the government take the bad debt off the banks books for $700 billion?

    Posted by OneVote at 10/01/2008 @ 10:32am

17. Under the "mark-to-market" rule, no lender can afford to make any loan, so no new loans will be made, no matter how much cash is given to financial institutions.

    Posted by MarionPolk at 09/30/2008 @ 9:46pm | ignore this person | warn this person

    Not really. If you got a good credit rating, a downpayment, and your collateral isn't trash, you can still get a loan. Such a notion eh?

    Posted by OneVote at 10/01/2008 @ 10:57am

18. This link provides a little food for thought. I broke the link up so I could submit it here.

    http://www.guardian.co.uk/commentisfree

    /2008/sep/28/usforeignpolicy.useconomicgrowth

    Posted by Wolfgang1 at 10/01/2008 @ 11:50am

19. WASHINGTON -- The Securities and Exchange Commission and the U.S. accounting-standard setter issued guidance that will allow companies to use more flexibility when valuing securities in a market that has dried up, a move the banking industry hopes will relieve pressure on company balance sheets.

    Tuesday, the SEC and Financial Accounting Standards Board issued "clarification" to accounting rules that require companies to value securities at the price for which they can be sold in the market, known as mark-to-market, or fair value, accounting. FASB said it is preparing additional guidance for later this week.

    The clarifications allow executives to use their own financial models and judgment if no market exists or if assets are being sold only at fire-sale prices. They were welcomed by banking and financial-services groups that have lobbied the SEC and FASB to change the rules. Those efforts were ramped up in recent days as Congress was drafting a rescue bill.

    Because of the credit crunch, the industry has said both the accounting treatment and how it is interpreted by auditors was too conservative and resulted in losses at financial institutions that were bigger than they should have been. They said the rules forced companies to write down assets tied to companies that had no chance of defaulting largely because there were few buyers or sellers.

    The move Tuesday addressed many of their concerns. The SEC and FASB stopped short of bowing to pressure from some lawmakers and lobbyists who were seeking a complete suspension of fair-value accounting.

    Congressional leaders are considering codifying the SEC's move in a new version of the legislation the Senate could vote on Wednesday......

    Wall Street Journal 10/01/08; Kara Scannell

    Posted by OneVote at 10/01/2008 @ 11:52am

20. I agree with Zero that this proposal is dubious.

    First, who is going to benefit from the raise in the FDIC ceiling? How many people on Main Street actually have more than $100,000 in an account. Further, the limit is account-specific, not person-specific. A married couple could have three accounts, one for each and one held jointly and have $300,000 covered.

    Second, mark-to-market is designed to avoid accounting tricks. The lack of a market for the CBOs can be addressed by government acquisition of these securities (one of the few provisions of the bailout plan that I agree with) to clear them off their books. Value can be added to these by a provision permitting bankruptcy judges to adjust mortgage terms in some cases thus allowing some of the underlying mortgages to be paid-off, which would restore some value to the securities.

    Third, short-selling is an important part of keeping share prices honest. I do support the up-tick rule however, as the forces intermittent pauses in short-selling trends.

    Posted by brunowe at 10/01/2008 @ 1:01pm

21. Perhaps the lesson to learn here is that Progressives don't have a good grasp of economics.

    Posted by srjenkins at 10/01/2008 @ 1:15pm

22. What is going on where our so-called media, including NPR, won't even bother to inform us about the provisions actually in the bill? We need details and lots of them. The articles by Galbraith, Black and by Steiglitz, on this web site, provide insight on just what it should include, but it's impossible to find out, short of reading every page of the damn thing, what will actually be in there. We were told for years that derivatives were too complex to explain, and that was a lie. One sentence: Home loans, increasingly over-valued and under-capitalized, were packaged into pools according to risk, then split up so that they could be combined with pieces of other pools to create "investements" that found their way into bank portfolios. That's it.

    Posted by ncimon at 10/01/2008 @ 2:26pm

23. ncimon -- derivatives are, in fact, hard to explain. For instance, the example you gave isn't a derivative. A pool of mortgages is a direct investment. The problem with the mortgage pool is that it can be very hard to evaluate what all the separate pieces are worth. So investment bankers paid rating agencies to give them a rating. When, surprise, surprise, they rated them AAA, then investors all over the world thought that they were very secure -- "safe as houses", as the old phrase goes. Then it turned out they weren't.

    Derivatives, however, are securities whose prices are based on the price of different, underlying securities, be they stocks, bonds, mortgages, commodities .

    Derivatives include futures, options, warrants, convertibles, and swaps. Credit default swaps -- a type of insurance against debt defaults -- are what undid AIG.

    Evidently there are a lot of complicated kinds of swaps: I keep reading about "financial engineers" who invented proprietary derivatives which they computer tested for performance in various market situations and which they thought were foolproof. But the fools outsmarted themselves and now there are a lot of very opaque derivatives whose values are unknown -- maybe unknowable.

    Posted by wpeltz at 10/01/2008 @ 8:32pm

24. The reason for raising the FDIC ceiling has to do with making depositors have more confidence in the safety of their funds, especially the customers with smaller accounts. Few people have $100K in the bank, but a lot of people with a few hundred or thousands in accounts were causing a run because they were afraid they would lose their money even though that was not possible. The $250K level just makes it seem more secure.

    Posted by pyeatte at 10/02/2008 @ 6:24pm