Learn about Bailout 14: Possible Solution Video

Get it off your chest – be the first to comment on this video!

Learn about Bailout 14: Possible Solution

I tried recording this possible solution to the bailed out video just now but apparently the sound went bad, so I just restarted my computer. So hopefully I won’t turn into slow motion man again. Well anyway, the whole discussion so far has been focus on how did the credit crisis gets started and why the current bail out proposal one is wrong from just the moral hazard and fairness point of view. And why probably it won’t work even to begin with, so you know why even go into it and some of you all say, well you know what could be the solution. And I’ve argued a little bit in the wealth destruction video that you really cant legislate against reality that you kind of to have to let things correct. You cannot create wealth to just by passing bills. All you can kind of do is shuffle around who takes the looses. But in one of the videos I argued and that you know if the government was serious about helping Main Street about loans to Main Street. Why don’t they lend directly to Main Street and I kind of said it a little bit flips idly that if that was their intention that’s what they should do at the 700 billion dollars. And I get a letter from an e-mail from a friend from business school very intelligent fellow who I respect very much and he essentially; he has solution that I think is essentially that to loan directly to Main Street. Don’t bail out these people who have already acted extremely irresponsible and essentially write them checks from American tax payers. And his discussion, his suggestion is instead of buying worthless assets. Why not create new banks fully capitalize by the government but you might not even have to be capitalize them and let those banks lend directly to main street. And he makes some interesting points. He says; let me make sure I can fit all of this. I don’t know if you can read it. I want this to all fit. Well he makes interesting point, 700 billion dollars of capital. This is his e-mail that he sent to me with 700 billion dollars of equity. This is more book equity and therefore more lending power than bank of America JP Morgan City group Washington mutual and Morgan’s Stanley combined. So combine these institutions which are really the pillars o four financial system. They represent 619 billion dollars of book equity and remember this is what; this is their book equity. This is what they say is the book value of their assets but we’ve already learned that their problem being over stated and that’s why we have to go and buy them at prices more than what they worth. But this 700 just to get an idea of how large of a dollar amount this is. This 700 billion is more than what these banks say their words. It’s probably several multiples of what they really are worth, some of these banks probably aren’t worth anything and as they points out. The new bank would have no prior committed loans, so the incremental amount of lending available would be much larger which means you are not lending into a black hole. When you lend money or you essentially give money to one of this banks that have all these other bad liabilities. Your money is essentially just being poured into about black hole and there’s no assurance that, that bank is going to go and then lend to that money to other people, and go to Main Street. But if you injected into a bank with a completely pristine balance sheet, a new bank, you could call it you know the bank of Washington. The bank of Jefferson and I would actually recommend having multiple banks just so you have competition and you don’t have that two big to fail problem. But these banks, they would have a pristine balance sheets and they would go out, and make loans. And they would go out and make loans wherever it is most prudent. And he says you know this accomplishes the goal of injecting lending capital under the system without creating the moral hazard problem and at the end of a few years. The government will probably be able to IP or sell the bank for more than one times book value which will include the original 700 billion, generating the substantial profit to tax fare, exactly. in fact they either do that, the government could own it and then try to IP owe it in five years or so like Todd suggest or another option is maybe each of these banks, maybe the bank take 700 billion and creates 10 banks and each have 70 billion in initial equity capital. And maybe the government issues 300 million shares of each of those banks and every American man, woman and child gets one share of each of those banks. I think that would have a very powerful political statement and it actually would make economic sense. All of a sudden you would have the American people are now the owners of the banking system instead of this concentrated wealth that’s really formed over the past 150 years in the old banking system. And then you know he goes onto pointing out some other things. Sure the more current banks would fail probably quicker and we all know that’s a good thing. What happened in Japan? What happened in the Japan is we kept infusing capital into, well we didn’t. The Japanese government kept infusing or either did it themselves or coax other people to infuse capital into banks that were essentially zombie banks that were in Soviet and just slow down. It had to slow down the downfall and essentially led to their lost decade. So he says you know more banks would fail but many of them probably deserve to fail and the financial system would be preserve. I agree with them completely, if the new bank wants to lend new money to new bars, it can or if it thinks it would make more money buying up all loans like the CDO or the residential morgues back securities at a deep discount it can do this too. It will be making a clear economic profit decision and I had to add just so that we make sure that the management of these new entities. So that they are align with profit making as oppose to bailing out their own previous past bad decisions or bailing out the people who they used to work with. I would try to not put these banks in New York maybe you’ll put them in Detroit, in New Orleans and stock in California which is a foreclosure capital of the world, of the country. I'll put then in places that are separate from Wall Street higher very intelligent people who are have some distant from what has happened the last five, six years in Michigan and I'll tell you. There are tons and tons of very competent, very intelligent managers who understand these issues deeply in this country. Unfortunately, a lot of them haven’t been heads of bank lately and they would be happy to work for something less than 20 million dollars a year. In fact, I think many of them would do it out of picture out of duty but you could pay them 100,000 dollars a year and then you could say you know what, you as new employees of these new American banks that are owned by the American people. And they can be traded on an exchange, so it’s essentially immediately privatize, never owned by the governments, immediately own by the private sectors, by the American people not by the government. When I say American people, it’s literally owned by private individuals not by the government but you could actually create an incentive structure that whatever the equity value of your company is in five years out. You all as the employees share one percent of the benefit and actually that’s a huge number that actually might be too much but you will be able to hire excellent managers especially considering how many people are getting laid off right very intelligent people because of bad risky decisions made by others. Then he finishes up. I recognize this would be less politically popular among banking lobbyist but seed is a much better way to one protects the financial system. I agree with him completely to minimize the risk, maximizes the award to the US government and he welcomes any comments, criticisms and I think it’s interesting. He started off the idea. He says; the problem is this sort of plan would be political suicide with key financial donors to political campaigns and that’s true. Unfortunately, I think this is a good idea but I think the current old banking system has a much more receptive ear of our government unfortunately than I or Todd or frankly the American people seem to have right now. But anyway lets just, you know I was kind of parsing Todd e-mail. Let me actually draw a plan of what this would be, so you take 700 billion dollars and let me write that out. You take that 700 billion and you I don’t know, you put it. I think the more banks the better. You want to competition. You don’t want to have these two big to fail problem. So you take that 700 billion and the first time I recorded this video I said you put it in 10 banks but I don’t know, lets put it in. lets see if you, 700÷10 banks would be 70 billion each. If you do 70 banks, you would have 10 billion each, so lets do that. Put it in 70 different banks or maybe do it 50 different banks that one bank for each state of the country. 70 different banks, I mean that sounds crazy but when you think about what the government was originally. Actually let’s do 50 banks. I like the sound of that. One bank in every state, right I think and there are all not constrained in New York and there not, you know so get fresh thought, fresh blood in them. And they actually might, they might actually hire that are getting laid off in the manufacturing sector or the real state sector or whatever. You take 50 different banks. You capitalize them each with what, 50 goes into 700 billion, 1.14 times, and right 14. Let see, 15 rights, it goes at 14 times. So you capitalize them each with 14 billion dollars, so there balance sheet is going to look like this, equity. This is each bank, 14 billion of original of initial equity and this is going, there going to have 300 million shares. One for every American and if they don’t like the holding shares of bank, they sell them. they all IP own and exchange this and then this will be member banks of the fed and so they can, they’ll be regulated but they can lever up 10 to 1. So they can let say with 14 billion dollars of assets, each of this banks can control 100 with 14 billion oh equity. Each of these banks can control 140 billion of assets which essentially that’s 140 billion that they can lend out to the world if they see good returns, good economic investment in Main Street. They’ll do it there, if they think some of the existing banks are actually good credit risk that they could lend maybe to JP Morgan or bank of America. They’ll do it. Maybe they won’t do it at 6% like the fed wants them too or at 2% or whatever. They’ll say it’s a little risky maybe I'll do it at 10 or 12% and this, another side note that I like to say. It seems like the fed is getting frustrated that it wants to dictate that banks have to lend to each other 2% but there willing to only lend to each other 6% and so it’s losing control over that notion of what banks lend to each other at. 6% is still low if I have to lend money to someone who could go under next week. I want at least 12 or 15% and I don’t think that’s a crazy interest rate that’s what people were paying in the early 80’s, and they weren’t talking about financial Armageddon back then. But anyway each of these banks would have 140 billion in assets and then I don’t know how much in liabilities. Let see 140-14=124 billion in liabilities and their very easy to raise, to borrow money. This bank would have an easy time borrowing money from a bunch of different people and why is that? Well one, they have completely pristine balance sheets. No one worries about what kind of stinky things they have on this side because its all new investments and then if the government really wants to make sure that these banks get off the ground running. They can put, they make them temporary government backstop on it, so essentially they can be government sponsored at a price but indefinitely. We don’t want to Fanny Mae, Freddy Mack again. You could say five year government backstop which essentially says if you lend to these banks over the next five years. Anyone lending to these banks over the next five years if for whatever reason, these banks would have to go under. You will be made hole, so there’s literally no risk to investing in these banks and frankly, frankly if just this five year government bank stop, government backstop on these banks. I think will encourage people to invest equity in these banks and the government might not even have to put this 14 billion in each bank. But anyway I’ve ran out of time. I'll continue this in the next video.

Khan Academy

The Khan Academy is a not-for-profit organization with the mission of providing a high quality education to anyone, anywhere.

http://www.khanacademy.org/

I tried recording this possible solution to the bailed out video just now but apparently the sound went bad, so I just restarted my computer. So hopefully I won’t turn into slow motion man again. Well anyway, the whole discussion so far has been focus on how did the credit crisis gets started and why the current bail out proposal one is wrong from just the moral hazard and fairness point of view. And why probably it won’t work even to begin with, so you know why even go into it and some of you all say, well you know what could be the solution. And I’ve argued a little bit in the wealth destruction video that you really cant legislate against reality that you kind of to have to let things correct.

You cannot create wealth to just by passing bills. All you can kind of do is shuffle around who takes the looses. But in one of the videos I argued and that you know if the government was serious about helping Main Street about loans to Main Street. Why don’t they lend directly to Main Street and I kind of said it a little bit flips idly that if that was their intention that’s what they should do at the 700 billion dollars. And I get a letter from an e-mail from a friend from business school very intelligent fellow who I respect very much and he essentially; he has solution that I think is essentially that to loan directly to Main Street. Don’t bail out these people who have already acted extremely irresponsible and essentially write them checks from American tax payers.

And his discussion, his suggestion is instead of buying worthless assets. Why not create new banks fully capitalize by the government but you might not even have to be capitalize them and let those banks lend directly to main street. And he makes some interesting points. He says; let me make sure I can fit all of this. I don’t know if you can read it. I want this to all fit. Well he makes interesting point, 700 billion dollars of capital. This is his e-mail that he sent to me with 700 billion dollars of equity. This is more book equity and therefore more lending power than bank of America JP Morgan City group Washington mutual and Morgan’s Stanley combined.

So combine these institutions which are really the pillars o four financial system. They represent 619 billion dollars of book equity and remember this is what; this is their book equity. This is what they say is the book value of their assets but we’ve already learned that their problem being over stated and that’s why we have to go and buy them at prices more than what they worth. But this 700 just to get an idea of how large of a dollar amount this is. This 700 billion is more than what these banks say their words. It’s probably several multiples of what they really are worth, some of these banks probably aren’t worth anything and as they points out.

The new bank would have no prior committed loans, so the incremental amount of lending available would be much larger which means you are not lending into a black hole. When you lend money or you essentially give money to one of this banks that have all these other bad liabilities. Your money is essentially just being poured into about black hole and there’s no assurance that, that bank is going to go and then lend to that money to other people, and go to Main Street. But if you injected into a bank with a completely pristine balance sheet, a new bank, you could call it you know the bank of Washington. The bank of Jefferson and I would actually recommend having multiple banks just so you have competition and you don’t have that two big to fail problem.

But these banks, they would have a pristine balance sheets and they would go out, and make loans. And they would go out and make loans wherever it is most prudent. And he says you know this accomplishes the goal of injecting lending capital under the system without creating the moral hazard problem and at the end of a few years. The government will probably be able to IP or sell the bank for more than one times book value which will include the original 700 billion, generating the substantial profit to tax fare, exactly. in fact they either do that, the government could own it and then try to IP owe it in five years or so like Todd suggest or another option is maybe each of these banks, maybe the bank take 700 billion and creates 10 banks and each have 70 billion in initial equity capital.

And maybe the government issues 300 million shares of each of those banks and every American man, woman and child gets one share of each of those banks. I think that would have a very powerful political statement and it actually would make economic sense. All of a sudden you would have the American people are now the owners of the banking system instead of this concentrated wealth that’s really formed over the past 150 years in the old banking system. And then you know he goes onto pointing out some other things. Sure the more current banks would fail probably quicker and we all know that’s a good thing. What happened in Japan? What happened in the Japan is we kept infusing capital into, well we didn’t. The Japanese government kept infusing or either did it themselves or coax other people to infuse capital into banks that were essentially zombie banks that were in Soviet and just slow down.

It had to slow down the downfall and essentially led to their lost decade. So he says you know more banks would fail but many of them probably deserve to fail and the financial system would be preserve. I agree with them completely, if the new bank wants to lend new money to new bars, it can or if it thinks it would make more money buying up all loans like the CDO or the residential morgues back securities at a deep discount it can do this too. It will be making a clear economic profit decision and I had to add just so that we make sure that the management of these new entities. So that they are align with profit making as oppose to bailing out their own previous past bad decisions or bailing out the people who they used to work with. I would try to not put these banks in New York maybe you’ll put them in Detroit, in New Orleans and stock in California which is a foreclosure capital of the world, of the country.

I'll put then in places that are separate from Wall Street higher very intelligent people who are have some distant from what has happened the last five, six years in Michigan and I'll tell you. There are tons and tons of very competent, very intelligent managers who understand these issues deeply in this country. Unfortunately, a lot of them haven’t been heads of bank lately and they would be happy to work for something less than 20 million dollars a year. In fact, I think many of them would do it out of picture out of duty but you could pay them 100,000 dollars a year and then you could say you know what, you as new employees of these new American banks that are owned by the American people. And they can be traded on an exchange, so it’s essentially immediately privatize, never owned by the governments, immediately own by the private sectors, by the American people not by the government.

When I say American people, it’s literally owned by private individuals not by the government but you could actually create an incentive structure that whatever the equity value of your company is in five years out. You all as the employees share one percent of the benefit and actually that’s a huge number that actually might be too much but you will be able to hire excellent managers especially considering how many people are getting laid off right very intelligent people because of bad risky decisions made by others. Then he finishes up. I recognize this would be less politically popular among banking lobbyist but seed is a much better way to one protects the financial system. I agree with him completely to minimize the risk, maximizes the award to the US government and he welcomes any comments, criticisms and I think it’s interesting. He started off the idea.

He says; the problem is this sort of plan would be political suicide with key financial donors to political campaigns and that’s true. Unfortunately, I think this is a good idea but I think the current old banking system has a much more receptive ear of our government unfortunately than I or Todd or frankly the American people seem to have right now. But anyway lets just, you know I was kind of parsing Todd e-mail. Let me actually draw a plan of what this would be, so you take 700 billion dollars and let me write that out. You take that 700 billion and you I don’t know, you put it. I think the more banks the better. You want to competition. You don’t want to have these two big to fail problem. So you take that 700 billion and the first time I recorded this video I said you put it in 10 banks but I don’t know, lets put it in. lets see if you, 700÷10 banks would be 70 billion each.

If you do 70 banks, you would have 10 billion each, so lets do that. Put it in 70 different banks or maybe do it 50 different banks that one bank for each state of the country. 70 different banks, I mean that sounds crazy but when you think about what the government was originally. Actually let’s do 50 banks. I like the sound of that. One bank in every state, right I think and there are all not constrained in New York and there not, you know so get fresh thought, fresh blood in them. And they actually might, they might actually hire that are getting laid off in the manufacturing sector or the real state sector or whatever. You take 50 different banks. You capitalize them each with what, 50 goes into 700 billion, 1.14 times, and right 14. Let see, 15 rights, it goes at 14 times.

So you capitalize them each with 14 billion dollars, so there balance sheet is going to look like this, equity. This is each bank, 14 billion of original of initial equity and this is going, there going to have 300 million shares. One for every American and if they don’t like the holding shares of bank, they sell them. they all IP own and exchange this and then this will be member banks of the fed and so they can, they’ll be regulated but they can lever up 10 to 1. So they can let say with 14 billion dollars of assets, each of this banks can control 100 with 14 billion oh equity. Each of these banks can control 140 billion of assets which essentially that’s 140 billion that they can lend out to the world if they see good returns, good economic investment in Main Street. They’ll do it there, if they think some of the existing banks are actually good credit risk that they could lend maybe to JP Morgan or bank of America. They’ll do it.

Maybe they won’t do it at 6% like the fed wants them too or at 2% or whatever. They’ll say it’s a little risky maybe I'll do it at 10 or 12% and this, another side note that I like to say. It seems like the fed is getting frustrated that it wants to dictate that banks have to lend to each other 2% but there willing to only lend to each other 6% and so it’s losing control over that notion of what banks lend to each other at. 6% is still low if I have to lend money to someone who could go under next week. I want at least 12 or 15% and I don’t think that’s a crazy interest rate that’s what people were paying in the early 80’s, and they weren’t talking about financial Armageddon back then.

But anyway each of these banks would have 140 billion in assets and then I don’t know how much in liabilities. Let see 140-14=124 billion in liabilities and their very easy to raise, to borrow money. This bank would have an easy time borrowing money from a bunch of different people and why is that? Well one, they have completely pristine balance sheets. No one worries about what kind of stinky things they have on this side because its all new investments and then if the government really wants to make sure that these banks get off the ground running. They can put, they make them temporary government backstop on it, so essentially they can be government sponsored at a price but indefinitely. We don’t want to Fanny Mae, Freddy Mack again. You could say five year government backstop which essentially says if you lend to these banks over the next five years.

Anyone lending to these banks over the next five years if for whatever reason, these banks would have to go under. You will be made hole, so there’s literally no risk to investing in these banks and frankly, frankly if just this five year government bank stop, government backstop on these banks. I think will encourage people to invest equity in these banks and the government might not even have to put this 14 billion in each bank. But anyway I’ve ran out of time. I'll continue this in the next video.

Transcription by: Scribe4you Transcription Services