The Bailout, And An Alternative

Roger H. Tilton writes:

Last month I began my 20th year as a registered financial adviser at a large, well-known Wall Street investment bank. Now, only two such banks remain in the United States, and both recently morphed into bank "holding companies."

Exactly two weeks ago, I woke up in Seattle, where I started in this business, wondering if my firm still existed. I came here to meet with clients, a practice I started when I began my career, because I believe in face-to-face meetings.

Then, as now, I felt prospective clients deserved to get a look at me, to read my body language, to assess my skills and my knowledge of the investment world.

I wanted to teach what I could, to help new investors feel secure, to help them invest wisely enough to outperform inflation and taxes. Nothing exorbitant, just a safe, comfortable return consistent with their ability to tolerate risk, to tolerate market swings. A relationship and investment plan cemented with trust.

Even in rough times, and we've been through many, the fittest firms would always survive and the riskiest firms would fail. The markets react, adjust and move on.

The other night during a prime-time address, President Bush warned us that catastrophic consequences (another Great Depression) await if we don't do what he says and do it now. That sounds a lot to me like that "mushroom cloud" or "the sky is falling." Problem is, I don't believe him this time. Let's see if the sky really does fall. And if it does, we'll deal with it then, and know who to blame.

The Bush administration track record should not push us to support this bailout. Let's wait another month and let the voters decide which direction we should take.

Moreover, since I've worked on the inside on Wall Street for 19-plus years, I'm here to say, "Don't trust."

In fact, I'm here to scream: "DO NOT TRUST!"

Don't give bailout money to Wall Street! They (we) will only do what they (we) have always done. We'll say thanks for the money, and that this won't happen again. Then a few years (or months) from now, all will be forgotten and we'll remove the oversights, and guess what?

Same problem, only different derivatives, and much, much worse.

In real capitalism, institutions fail, survivors pick up the pieces. (Note Washington Mutual, Wachovia, Lehman Brothers and Merrill Lynch, all acquired by survivors.)

As for that $700 billion? If we as taxpayers really want to appropriate that much money, I say let's rebuild trust with the American consumer. Let's send $7,000 to each of the 100 million families affected by all these mortgages. Let's this time change course. Let's this time err on the side of the consumer, not the Wall Street institutions. Make the bad mortgages whole; absolve the consumer.

Let Wall Street figure out its own way out of its and Bush's mess. Congress, please do not offer a handout to the Bush administration, Treasury Secretary Henry Paulson and their Wall Street friends. They knew the risk; let them pay the consequences. Do not fall for their "trick" and "treat" them to a Halloween and Election Day "bailout."

Meanwhile, John Sowell reports:

U.S. Rep. Peter DeFazio offered up his own plan Tuesday to strengthen the nation’s financial system, a day after the House rejected President George W. Bush’s Wall Street bailout plan.

“We believe, having talked with regulatory experts, the former head of the Federal Deposit Insurance Corporation during the savings and loan crisis, a dozen economists, local bankers, that there is a low-cost, no-cost, lower-risk resolution of this problem,” said DeFazio, who voted against the administration plan and criticized pumping $700 billion into Wall Street fixes.

The DeFazio plan would incorporate several measures suggested last week by William Isaac, the former chairman of the Federal Deposit Insurance Corp. under President Ronald Reagan. Those measures, DeFazio said, would get at the root of the bank liquidity problem.

DeFazio was joined at a Washington press conference to announce the plan by seven other Democrats, six of whom had also voted against the administration bailout plan. The Senate is expected to vote tonight on a bailout plan, while the House reconvenes tomorrow to address the financial crisis.

The proposal would raise the limit from $100,000 to $250,000 on bank savings insured by the FDIC. That idea has been floated the last couple of days in several circles as a way to improve confidence in banks and urge customers from withdrawing their money.

It would also restore a program used during the savings and loan crisis during the 1980s to help banks and thrifts short on capital to obtain assistance. The institutions would receive certificates called net work certificates that could be carried on their books and provide short-term capital with no actual exchange of cash.

From 1982 to 1993, banks with a total of $40 billion in assets participated in the program, DeFazio said. Three-quarters were able to improve their financial situation with no further assistance, he said.

Participating banks would be subject to strict oversight by the FDIC, including scrutiny of pay for top executives and action against poor management. Financial records and business plans would also be subject to review.

The program would enable the federal Security & Exchange Commission to allow banks to list the value of mortgages they hold at a future value. Under the current system in place, because there is no meaningful market for mortgage-based securities, banks must value assets at “fire-sale” prices, DeFazio said.

That, in turn, creates a capital shortfall on paper, he said.

The plan would also place restrictions on two short-selling techniques. Under DeFazio’s proposal, the SEC would be required to implement a rule banning naked selling, selling a stock at a loss without first borrowing the shares or ensuring the shares can be borrowed.

Such practices can harm the companies represented in the sales and hurt their efforts to raise capital, DeFazio said.

“There is no economic value produced by naked short sales, but significant negative effects,” he said.

The plan would also block short sales without an uptick in the market. It extends a temporary SEC rule implemented Sept. 19 to protect the integrity of the securities market and strengthen investor confidence.

The rule prevents market crashes brought on by irrational short-term market behavior, DeFazio said.

Among those who joined DeFazio at the press conference were Democratic Reps. Elijah Cummings and Donna Edwards of Maryland, Mazie Hirono of Hawaii, Lloyd Doggett of Texas and Bobby Scott of Virginia. They signed on as co-sponsors and said the nation would be better served by taking the time to put together a carefully considered bill than to rush through with an expensive bailout plan under increasing criticism from economists.

The Service Employees International Union, which represents two million workers nationwide, endorsed the DeFazio proposal.

“We finally have a plan that will restore confidence in the financial markets without writing a blank check to the same Wall Street banks and CEOs who got us into this mess,” SEIU President Andy Stern said in a written statement. “This is an important, short-term solution that protects taxpayers and their savings accounts. To revive the economy over the long-term, we must address rising unemployment, stagnant wages, the health care crisis, and a tax system that is tilted in favor of the wealthy.”