Lest I be accused of cheap humor at the expense of beleaguered Banking executives, or being too glib, let me posit just a few concrete examples that make sense, to me at least, of steps that should be taken in response to the current financial crisis:
1. There should be no severance compensation of significant value to any executive with managerial responsibility for lending practices that resulted in significant losses to the failed institutions. If they are paid anything, it should be in the lowest grade/highest risk commercial paper that was created under their management. This would result in relief on the institution’s balance sheet by removing a liability [in the form of a contractual severance payment or other compensation due expense] and also eliminate some of the “toxic” assets that the taxpayers are being asked to purchase. If the subordinated instruments turn out to have some value at some indefinite point in the future, then the executives could cash them in and pay taxes on the gain.
2. The Government should restrict purchases to risky or defaulted loans that actually have tangible assets behind them. In the case of the RTC, mortgages purchased by the government were based upon actual real estate, not speculative derivative profits from the purchase and future sale of sometimes undefined assets. In many cases, the financial institutions cannot say specifically what assets the “toxic” commercial paper represents. In such cases, the Government should not buy them. Let the institution eat the losses as the government purchases higher grade asset based instruments. The result would be that the banks would still get infusions of cash, but the risk to taxpayers in the deal would be lessened. There would at least be a chance to recoup the buyout expense.
3. The Government should consider a mortgage loan program. If the Government chooses to implement a program to restructure the purchased defaulting mortgages or to extend more time for the borrower to pay before actual foreclosure, the process would be facilitated by having identifiable property that could be assessed. This action would help stem the decline in home values, albeit indirectly, because the inventory of housing would not to continue to swell with properties being offered at lower and lower prices because of foreclosures.
4. Medium sized institutions that can be saved with infusion of capital should be targeted so that the trend of consolidation of large financial institutions that are buying up assets and other financial institutions can be slowed or halted. The consumers cannot expect to benefit from a Government funded monopolization of the credit industry.
These are just a few examples of the steps that seem to me most obvious. At the same time, new regulations and oversight must be fashioned and implemented to try to prevent the current crisis for recurring.
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