Saturday, September 27, 2008

Bailout Revisions

The things that Readers should know about, but won’t get from Me: here, here, and here.

I contemplated yesterday on the flight of Cash from Banks, and Jim Kramer put a more cogent expression on his program: the real Need to increase the limit on FDIC Insurance on Deposits. The simple routing of Purchase Transfers through the Banking Demand Deposits necessitates a higher Protection umbrella, as Checks are cut for all Stock transfers, Commodity purchases, and Employment payrolls. Bank Reserves are being denuded simply because no One wants to keep uninsured funds in any Bank today, beyond an absolute Necessity Point. One does not desire to buy Movie Tickets, while the Fire Dept. is working to put out the Theater Fire. Something about a high risk premium demanded, without any Reward advanced against that Risk. Banks are strapped for Cash because the FDIC will not join the new Century (I think We a up to $2 million per Depositor, considering the increased funds, and the declining number of distributive banks.)

The second item I would outline must be that Government must join the Markets, not dictate to them. The proposed Bailout is going to fail even if passed, if Treasury and Federal Reserve believe it is a basic process of absorbing bad Paper. Treasury must open Trading desks in the various Markets and online, where they Buy and Sell Securities. Transparency remains the most important Issue, but the manner of transparent discovery is equally as vital. Clarity must be expressed in Terms which Traders, Venders, and Equity holders can all understand; this entails an environment similar and familiar to normal Trading activity. Banking controls should be implemented by buying Long, or selling Short. The Treasury should both Buy and Sell, and do so within parameters previously set, but adjusted continually to meet current economic conditions. The only advantage the Treasury should use is their uniformity of Policy, and their large Credit line.

The third proposal I would like to advance is that the bad Paper should be tied to the Equity securities. I have messed around with the Numbers, but it is hard to come up with an exact set because of the lack of a Market, and an absence of Econometrics. I suggest a 18:1 ratio of Bad Paper/Bank Stock. This ties the Paper to the Stock (evaluated at current Market pricing). A rise in Stock pricing would inhibit the Sale of Bad Paper, and contretemps effect on Stock pricing. Banks would be eager to sell Bad Paper if Stock price was low, but less desirous if Stock prices were higher; the Whole workable only if it required Treasury or Fed acceptance of Bank Stock issuances and Management Compensation. The Treasury must be equally willing to sell Bad Paper and Equity Stock as buying it, and allowed to separate the Two in Sale transactions. The one satisfying element to such a Program would be the much smaller requirement of Government funding, and the chance to make a Profit on the Transactions. lgl

1 comment:

MattYoung said...

I noticed the absolute lack of information about how treasury participates.

I hear about a one time purchase of [paper to reset its price, but Prof Lux makes the point I have seen absent from the discussions. In order to maintain price and its variance, a number of transactions must be made in the market place. Price variance has to be maintained by a continual updating of trades, just like variance in a linear estimator can only be kept low by a series of samples.

What Prof Lux talks about can be derived from linear estimation theory. This is relatively new stuff, and Paulson is not likely to understand it.