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An Alternative to Treasury Bailouts: One that aggressively hurts Bank Bondholders (Janet Tavakoli)

Kick moral hazard to the curb.  Punish the risk-takers.  Photoshop by Mark McHugh is Paulson with CNBC's Erin Burnett.

While preparing a new guest post from JT, I came across the following piece.  You will notice it was written prior to TARP passage.




Alternative to Treasury Bailouts: One that does not violate the Spirit of Democracy

Janet Tavakoli - September 25, 2008

Creditors including credit default swap counterparties failed to renegotiate terms when they had the chance. Financial institutions did not recapitalize when it was easier (within the past 2 years) and now they cannot because no one trusts the value of the assets.

Now we do not have time for Chapter 11 in which either 1) creditors agree to discount debt in exchange for warrants (for potentially viable enterprises) or 2) creditors agree to transform (possibly discounted) debt into new equity (a new capital structure in which former shareholders are wiped out).

Rather than adopt any form of the Treasury's plan (a spin of the Paulson Plan), which uses billions of taxpayer dollars and forces risk and potential losses on taxpayers—instead of those who enjoyed the gains—I advocate an alternative.

Instead of TARP and handing out money to cover banks' losses, we can force creditors to accept a restructuring plan (this was done during the Great Depression). Creditors (debt holders) including credit default swap counterparties would be compelled to accept a restructuring plan. That requires partial forgiveness of debt in many cases and/or a debt for equity swap.

If we are determined to violate personal property rights, I prefer it be done through a forced debt forgiveness and a forced capital restructuring (debt for equity swaps), rather than through a massive bailout (any of the various forms of the Paulson Plan). The current plans destroy capitalism (those who stood to gain--and already made off with large gains--should bear the risk) and violates the spirit of democracy established by the Founding Fathers of the United States.

Letter to the Editor - Financial Times - September 29. 2008

JT Note: The Act released on September 28 extends the SEC's authority to suspend mark-to-market accounting (FAS 157) (P. 88) when it is "in the public interest and protects investors." Do not expect a thaw in the market freeze. The proposed Act buries problems and prolongs price uncertainty. This bill did not pass, but future versions may include this provision. This a huge mistake. FASB board members support mark-to-market accounting, especially in illiquid markets. The SEC should, too. This provision is ridiculous and seems meant to promote hold-to-maturity pricing for credit derivatives trading books and CDO portfolios. The danger is that Federal portfolio managers can claim they are making money on carry trades while the assets are declining in value due to defaults or permanent value destruction of collateral. This situation can continue for a long time to create the false appearance of profitability. In other words, U.S. taxpayers can be told they are making money on their $700 billion investment, when in reality they are losing money. I would rather know the market price, even if the news is bad news.











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Reader Comments (17)

How will it go the next time around...will bank creditors be asked to take a hit...
Sep 22, 2010 at 12:46 PM | Registered CommenterDailyBail
I think that depends on people's ability to comprehend the problems and vote out the enablers...

BTW - that was one of my earlier efforts at photo-shopping, I think I've gotten a lot better since then.
Sep 22, 2010 at 2:09 PM | Unregistered Commentermark mchugh
I thought you sent it to me way back in the day...i like it...
Sep 22, 2010 at 3:19 PM | Registered CommenterDailyBail
Fannie and Freddie: guilty?

Sep 21st 2010, 18:03 by R.A. | WASHINGTON

AS A general rule of thumb, the answer to the question, "Did x cause the crisis?" is no, for all x. No one factor caused the crisis, and that's as true of the involvement of Fannie Mae and Freddie Mac in mortgage markets as it is of anything else. The right question to ask is to what extent various factors contributed to the crisis. Where Fannie and Freddie are concerned, the answer would seem to be: some, but less than many may imagine.

Sep 22, 2010 at 3:34 PM | Registered CommenterDailyBail
I'm rich; tax me more

Congress should let the Bush tax cuts expire for the wealthiest Americans and use the additional tax revenues that are generated to invest in infrastructure and research.

Sep 22, 2010 at 3:34 PM | Registered CommenterDailyBail
Ally Financial legal issue with foreclosures may affect other mortgage companies

Sep 22, 2010 at 4:39 PM | Unregistered CommenterTexas Dar
Z's response to DB's comment/post above...I'm rich; tax me more...

Gruener received $1.07 million in contributions to his committee, but virtually all of it was from himself, meaning that each vote cost approximately $400. http://en.wikipedia.org/wiki/Garrett_Gruener

Hmmmm, softball pitch to Z. If Gruener believes that the government is better able to spend his money then why is he the director of a venture capital firm?

He writes, “As important, it (letting the Bush tax cuts expire) puts funds in the hands of those who will spend them, generating demand that will pull us out of our economic crisis and toward a new cycle of growth.” He also says, “Now that the Bush tax cuts are about to expire, Republicans are again arguing that taxes should remain low for the wealthy. The idea is that this will spur people like me to put more capital to work and start more ventures, which will create new jobs, power the economy and ultimately produce more tax revenues. It's a beguiling theory, but it's one that hasn't worked before and won't work now.”

He is contradicting himself. He should close down the venture capital firm and give that money to the Obama Administration to spend. I would have expected someone like John Kerry or Al Gore to write such a silly article.

I guess I won’t be asking Ask.com (Gruener is the founder) any economic questions.

Okay, disagree with me DB/Dr. P.
Sep 22, 2010 at 5:56 PM | Unregistered CommenterZ
Looks like the "Gum-Ball" machine is stuck "Free,Just Push the Levier", get a gum ball every time, "Z"...........as the Branson Comic Yalk-Of Smerioff" says ......."What-a-Country"....!
Sep 22, 2010 at 8:38 PM | Unregistered CommenterTexas Dar
Yes Tex Dar.

Who am I Tex Dar?

Z, what a beatdown of Gruener. Great post.
Sep 23, 2010 at 1:41 PM | Unregistered CommenterZ
z..i will respond...i could care less about the whether the top rate goes to 39%.. i didn't even read the entire article you're quoting...we need to cut the corporate tax rate...it's the highest in the world and twice as high as it is in france...
Sep 23, 2010 at 6:59 PM | Registered CommenterDailyBail
GOP 'Pledge To America' Director Lobbied For AIG, Exxon, Pfizer, Chamber


"Paul & Paul" in 2012 !
Sep 24, 2010 at 2:48 PM | Unregistered CommenterTexas Dar
nice find texas d....good link...
Sep 25, 2010 at 6:25 AM | Registered CommenterDailyBail
White House Insider On Obama: The President Is Losing It

Read more: http://newsflavor.com/opinions/white-house-insider-on-obama-the-president-is-losing-it/#ixzz10mlIOKqr

A longtime Washington D.C. insider, and former advisor to the Obama election campaign and transition team, speaks out on an administration in crisis, and a president increasingly withdrawn from the job of President.

Read more: http://newsflavor.com/opinions/white-house-insider-on-obama-the-president-is-losing-it/#ixzz10mlh43hW
Sep 27, 2010 at 10:01 PM | Unregistered CommenterTexas Dar
thanks texas d...more good links...
Sep 28, 2010 at 1:14 AM | Registered CommenterDailyBail
Just ran across one more good link on BHO & Severe Depression

White House Insider: Obama Battling Severe Depression
Sep 29, 2010 at 6:17 PM | Unregistered CommenterTexas Dar

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