Over at Clusterstock Henry Blodget has been one of the loudest voices calling for an alternative to the ongoing bailouts, and calling for the people responsible to at least be fired.
Today he proposed a simple way to "fix" the bank balance sheets without taxpayer involvement.
Here is the crux of the proposal
You just have to fix the banks the right way.
What's the right way?
- Temporarily seize the banks
- Write their assets down to nuclear-winter levels (or, if desired, put them in a big bad bank, as Sheila Bair wants to do.)
- Convert enough of their debt to equity to put them in a strong capital position.
That's it. No taxpayer money. No citizen outrage. No comical "Yes, we're lending" assurances when what the banks are really doing is, sensibly, hoarding everything.
We could do this to Citigroup and Bank of America tomorrow afternoon, and on Wednesday morning, two of our biggest banks would be rock solid (they could also still be publicly traded, under the same ticker symbols, with different shareholders). The banks would have hundreds of billions of dollars of assets on their balance sheets that would be marked at or below market, and they could sell them for gains or hold them as their managers saw fit. They would be liquid and able to lend. They would have no reason not to lend because their assets had already been written down to the worst-case scenario.
So, take over the banks (they are insolvent, so the regulators can step in to take control). Once the banks are under control of the regulators, the regulators could write down all the dodgy debts. The bondholders could choose to either get wiped out or convert their debt to equity (given that choice they would choose equity). Then voila, new stable banks, now in the hands of the bondholders, and the government (and taxpayers) off the hook.
Who gets hurt in this scenario? Most importantly, not the taxpayer. Instead the common shareholders get massively diluted or wiped out (so their shares would not be worth much if anything at all). Many bondholders would see their bonds converted to debt and therefore would feel the most pain. No more regular interest payments and those "safe" bonds will have been converted to "risky" equity. They may though still make some money back if the banks do well going forward. Depositors would remain protected.
Hey, sounds good to me. The people that made the mess pay first. Any investor buying bonds in Citi was probably far more qualified to analyze that investment than any "subprime" borrower was their own situation. If you are going to make subprime borrowers and other high risk borrowers pay, the least you can do is make sure the "big" boys pay first...IN FULL.