Kuhl's Alternative

Randy Kuhl has posted an alternative bailout plan. It's hardly a serious alternative. Here are some quotes and a few thoughts:

Require the Treasury Department to guarantee losses up to 100%, resulting from the failure of timely payment and interest from mortgage-backed securities (MBS) originated prior to the date of enactment. [...] Direct the Treasury Department to assess a premium on outstanding MBS to finance this insurance.

In 2006, the Mortgage-Backed Security market was $6.1 trillion. Let's assume that we're looking at $8 trillion today. Earlier this year, Merrill-Lynch sold some lower-grade MBS at 22 cents to the dollar. Let's assume, charitably, that 25% of entire MBS pool is bad debt. We need an insurance pool capable of taking a loss of $2 trillion. How are banks that are already broke going to pay those kind of premiums?

Immediately suspend the capital gains rate from 15% for individuals and 35% for corporations. By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy.

The "unwanted assets" that the banks would be selling aren't worth what the banks paid for them. So, there won't be any capital gains on those assets. Even if the banks sell both MBS and "good" assets, the losses from the MBS will offset the gains from the "good" assets.

Suspend “Mark to Market” Accounting: Direct the SEC to suspend the mark-to-market regulatory rules until the agency can issue new guidelines that will allow firms to mark these assets to their true economic value. The current rules contribute to a downward spiral as firms have to evaluate their assets not on the basis of their long-term investment but rather on a short-term mania.

"Mark to Market" is simply reality-based accounting. If banks are allowed to value securities at any price they think is reasonable, they'll have a major incentive to keep those assets on their books at inflated values, guaranteeing that there will be no market in them for the indefinite future. And there's no evidence that "Mark to Market" is causing a downward spiral, as Forbes notes in its story about the Merrill-Lynch sale earlier this year:

"I have previously argued that mark-to-market losses exaggerate the severity of the credit crisis," wrote investment strategist Ed Yardeni in his e-mail newsletter Tuesday. "Then again, Merrill Lynch converted its mark-to-market losses into permanent ones.... This is bad news for other investment banks and commercial banks trying to get rid of loans and securities in a market flooded with distressed assets."

The plan that failed today had many faults, but at least it was an attempt to inject some liquidity into the market. Kuhl's plan expects banks to conjure up capital from thin air, sell worthless assets at a profit, and pretend that the rest of those assets are worth far more than their real value. It's a fairy tale solution to a real world problem.


I respect this analysis but don't think the rank and file will regard it as "fairy tale." I think Randy was right to vote against the package and that, frankly, his vote today will be remembered (assuming the election were today) as having sealed the deal in his re-election.

Randy's been signaling that he's still open to a compromise, so we'll see what we end up with. He may end up voting for something.

Nice summary.

Personally, I don't think the political fall-out of this will be that great one way or the other for anyone but John McCain.

I agree.