FTSE fails to hold rate cut gains (so do DJI and DAX)

FT ^ | 10/08/08 | Michael Hunter

[politicket]

If that’s what you’re advocating, then be honest about it.

If it is for the fight of our nation's continuing freedom then so be it...

[WV Mountain Mama]

Here is a plan that would not involve socialism. It would also restore the most critical element of banking. Trust.

http://www.stopthehousingbailout.com/genesis.pdf

[NVDave]

There are good elements of that plan, some of which I’ve advocated. The suggestion that we push CDS instruments onto an open exchange, for instance, I applaud. They’re working with the CME on that plan as we speak.

I think that there should be SEC regulation of the instruments and fees charged to fund the exchange and verification of the terms of the instruments. That won’t come for free; unless we charge fees for this, the exchange is going to want money to set up the market, and the SEC will need money to enforce regs, so we can either charge the participants fees or we can take money from the taxpayers.

The bit about leverage is problematic and is the cause of the market downturn in commodities and stocks right now — the big banks and funds are de-levering. It is necessary, but it is also causing the deflation we’re seeing. The time period on this needs to be longer, lest we have more market disruptions. It took a couple years to get up to 40:1; removing it all in six months (25% of the time) is faster than markets normally would sell off. Markets usually go down in one third the time it took them to go up, so we need to see at least eight months on the de-levering requirement.

The first issue, forcing all assets onto the balance sheet — that’s the problem. Now that the i-bank is dead and gone, and the remains are regulated banks, there are reserve requirements here. As they force non-performing, hard-to-mark assets onto the balance sheets, they have to raise cash to bring their reserves back up to minimum required levels.

Karl is suggesting LIBOR+800bp, which would be OK - IF the banks would take those terms. Right now, because the short-term credit markets are seized up, the bottom-line terms on that money is that it is over 11%!

Buffett just came across on Goldman and GE with a flat 10%. No reference to a “benchmark” — so now the companies taking Buffett’s money have a firm, committed rate, rather than this spread over a benchmark that is itself a symptom of the problems.

What is also needed is an option for warrants - if the company doesn’t have the cash flow right now, then they should issue warrants at a very favorable strike, and the government should give them an buy-back option that is appropriately expensive. Buffett is charging a 10% buy-back fee on the warrants from Goldman. Goldman also had to issue a snootful of new common to raise more capital from the public.

Other issues that need to be addressed:

- raise the capital reserve requirements to 10%, perhaps 12%.

- If the target has an excess of CDS contracts, then as time and money permit, they should buy them back and retire them, and be prohibited from selling CDSs above what they can deliver. There’s two parts to regulating CDS contract - the open exchange, (above) and (like insurance companies) the company writing the CDS needs to have the available capital to be able to pay if the bond defaults. No more of this nonsense where some pipsqueak writes CDS contracts and hasn’t a 10th of what is required to honor them.

- All bonuses should be canceled until such time as the government money is returned (give the SOB’s incentive to get off the dime). Using the pay of the POTUS or Congress as a benchmark is silly and makes it look like this plan is typical populism. If we want to get serious, we simply chop all bonus structures. Taking money from the government is prima facie evidence that the executives are not performing above average. If we want to cap the pay, then cap the pay at a punitive level. Make is $100K, period, no discussion.

- All acquisitions by a bank taking government money are subject to review and approval/denial.

- no stock buybacks until the government is repaid.

I’ve advocated getting senior preferred in return for capital infusions, and creating a regulated market for CDS before here on FR. People think that putting money into a bank and getting stock in return is socialism. So if that’s socialism, then this plan is, indeed, socialism.