Posted by WLS:
One of the great weaknesses of the bailout package as proposed was its lack of specificity about where the money was going. It was too easy to simply demagogue the package as a bailout of Wall Street “Fat Cats.”
Treasury should provide a list of institutions that will be considered for relief under the proposed legislation, and an estimate of how much in bad debt each institution will be trying to sell to the Treasury.
The reality is that not all this money is going to Wall Street “Fat Cats.” As an example — and this is simply a hypothetical made to make a point — I think public sector employees in California might view this issue differently if they knew that CalPERS (California Public Employee Retirement System) owned $20 billion in bad mortgage bonds. That would be a huge drag on CalPERS’ ability to generate earnings in the future.
Right now those bonds have a value of $0.00 because there are no ready buyers in the market. But, if a given bond is backed by $5 million in real estate as collateral, then the bond — even with no buyers — has an inherent value of $5 million. If the Treasury buys that bond from CalPERS for $2.5 million, CalPERS has to take a 50% hit on its balance sheet, but at least it gets the $2.5 million to invest elsewhere on behalf of its retiree members in an effort to generate earnings/income for its beneficiaries. Right now that bond is nothing more than wallpaper.
So, if Treasury had a tangible list of institutions that are likely to be the recipients of bailout money in exchange for collateralized debt instruments they cannot sell in the current market conditions, a large segment of people who are viscerally opposed to this approach may begin to understand that they have a financial interest in seeing these institutions be able to un-tangle themselves from this mess.
Second suggestion — have the legislation require that in an agreement that each selling institution must sign in order to participate, that the money they receive be held in a separate blocked account which can be used for no other purpose than to reinvest in their core business functions. It cannot be used for ancillary business needs such as compensation, dividends, etc. This would be subject to both regulatory and congressional oversight. If the businesses want the billions to take the bad debt off their books, then they are going to have to commit to using the money they receive in a constructive fashion. They can make the specific decision about where they put it to use, but certain types of uses would be prohibited.