How the collapse should have been handled…


Richard Moore

Bcc: usual suspects


We have been encouraged to believe that there was no real alternative to the bailout schemes that have been implemented by the various Western governments. This is nonsense. What is true, is that no other solution would have pleased the financial elites who designed the collapse. The bailout tells us something about who controls the political process, and what their goals are, but nothing about economic sense.
I’m going to outline a quite different solution that could have been implemented, if our elected officials were representing us, the voters, rather than the financial establishment. I’m not talking about an ideal solution, nor a radical solution, but rather the standard solution, the kind that normally happens to a business that goes bust. That is to say, the failed banks and financial institutions should have been placed in liquidation – but with adequate attention to the public welfare. Here’s the scenario, with the USA as an example, and I imagine the economists out there could improve on it…
When a business goes into liquidation, what normally happens is that the assets are auctioned off, and the proceeds are then distributed to the creditors, and if any is left, to the stockholders. In the case of the failed banks, the liabilities exceed the assets by a fair margin, so there would be nothing left for the stockholders. As the biggest stockholders are members of the financial elite, it is easy to understand why didn’t want this normal path to be followed.
The failed banks had the following things:
     • good financial assets (outstanding good loans, cash on hand)
     • toxic financial assets (subprime mortgages and other over-extended loans)
     • financial liabilities (deposits)
     • plant, staff, and operations (bank buildings, leases, employees, customers, etc.)
Step 1: The Treasury purchases the toxic assets from the failed banks at their market value
The market value would be relatively small, say a few billion dollars, as compared to a few hundred billion dollars. As a result of this step, the condition of the banks would not be changed at all – they would still be just as insolvent as before, no more no less – however their books would be much cleaner and easier to deal with (in later steps). The toxic assets would be gone, and the cash-on-hand would be increased by the amount paid by the Treasury for the bad loans.
Also as a result of this step, the government would become the mortgage holder for all those bad loans. The government would then have total freedom to adjust the interest rates downward (or eliminate interest altogether), and to work out plans with the home and business owners so that most of them could stay in their homes and operate their businesses while paying back what they could. By such means, the government would eventually get back what it paid for the loans, and probably a lot more in the long run. 
Step 2: Remaining financial assets and liabilities transferred to a new entity, a Liquidation Trust on behalf of the depositors.
What this means is that those who had deposits in the banks would get their fair share of the financial assets, as in any liquidation. As the payments came in on the good loans, they would be distributed pro-rata to the depositors. In addition, the cash-on-hand (increased by Step 1) would be distributed immediately to the depositors.
What this also means is that the banks, still in receivership, would now have no assets or liabilities, other than their plant and operations.
Step 3: Re-capitalize the banks under new ownership.
The government now infuses capital into the banks, and continues them in operation under new ownership. The new stock would be split between the government and the depositors, as the depositors have a legitimate interest in the plant and operations, which are among the assets under liquidation. The board of directors of the re-vitalized banks would include representatives of all stakeholders: the government, the previous depositors, the bank’s customers, and the communities in which the banks operate.
In this way there would be no disruption of banking services, and the new board of directors would be in a position to get the economy back on its feet again. The new capital would be used to make loans to individuals and businesses that are able to make their payments, and interest rates would be fair and reasonable. The taxpayers would be getting good value for the capital infusions, rather than having all those billions go into the black-hole pockets of the financial elites. 
As I mentioned, this is not a radical solution, but a standard business solution. Any competent accountant could think of it, if we weren’t all hypnotized by elite-serving media propaganda. If Obama, who we know is very intelligent, really were a man of the people, one could only wonder why he is 100% in support of the disastrous and unnecessary bailout schemes.