a citizen’s journal by Thomas Nephew

Support the No BAILOUT Act

Posted by Thomas Nephew on October 2nd, 2008

Via CredoAction.Com:

We need a progressive alternative to the Bush Bailout.

Members of the House of Representatives did the right thing on September 29th when they voted down the Emergency Economic Stabilization Act of 2008. That bill was a sham of a compromise that handed the Bush Administration all kinds of victories. Now it’s time for a new bill, and a better bill. […]

…there is another option: the No Bailout Act. Reps. Peter DeFazio, Donna Edwards and Marcy Kaptur, among others, have proposed this bill as a progressive alternative to the Paulson plan. The bill isn’t perfect, but it’s better than what we’ve seen so far. The House deserves a chance to vote on it. […]

Time is of the essence – the House will likely take up this matter very quickly after the Senate passes its bill. Sign this petition today to tell Rep. DeFazio that you support his efforts to provide a progressive alternative to the Bush Bailout. When he goes to the floor of Congress to plead his case, let’s make sure he’s got some ammunition.

The House of Representatives did the right thing by voting down the Emergency Economic Stabilization Act of 2008. Now that the Senate has passed a near clone of that bill, the House has no reason to back down on its previous principles. The House must stand strong on its opposition to the Bush Bailout – one way it can do that is by voting on the No Bailout Act. We support a progressive alternative to the Paulson plan. We can’t afford a blank check to Wall Street.

Representative DeFazio describes the No BAILOUT Act here; I particularly favor points (4) and (5) below.

1) Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.
This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.

2) Require the Securities and Exchange Commission to restricting naked short sells permanently
This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.

3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.
This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies “to protect the integrity and quality of the securities market and strengthen investor confidence.” This rule prevents market crashes brought on by irrational short term market behavior.

4) “Net Worth Certificate Program”
This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount “borrowed” as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.

5) Increase the FDIC Insurance limit from $100,000 to $250,000.
The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

3 Responses to “Support the No BAILOUT Act”

  1. RobertNAtl Says:

    Relatively early after the Lehman bankruptcy (and I think even before the Paulson meeting with Congressional leaders), the SEC issued a temporary prohibition on short selling (of any type) financial stocks. The prohibition has now been extended to the middle of October.

    I never thought the SEC decision to ban short-selling of financial stocks made any sense, but it did lead me to wonder why a more direct solution to the subprime mortgage crisis hasn’t been discussed: Simply banning (“temporarily” but subject to extension) the bundling and securitization of *any* subprime mortgages, and of any credit default swaps “insuring’ those bundled subprime mortgages. That seems to me to be both (a) a more effective means of addressing the underlying problem (or, more precisely, a way to keep the problem from becoming any bigger) and (b) a more targeted way of exercising the SEC’s powers. It’s the value of these securities that the holders apparently can’t assess, which is affecting their balance sheets and causing interbank lending to slow down/stop entirely.

    It certainly seems like a feature that should have been included in the rescue package/bailout bill/”economic stabilization bill.” As it is, I don’t know of any restrictions on the continued sale of these securities and derivatives.

  2. Thomas Nephew Says:

    I agree that I wouldn’t focus on short selling per se or on the “uptick” part of it. It’s like saying we’d all be better off now if short sellers just hadn’t discovered/uncovered that there was a problem. The part of the DeFazio bill I mainly support are (4) and (5), I don’t have a big problem with the short selling parts, I just think they’re kind of head in the sand measures.

    And I agree that banning the bundling and insuring of subprime mortgages seems like a straightforward way to at least stop the problem from getting worse.

    I suppose a counterargument is to ask where that leaves the suckers currently holding said bundles. But they can sell the individual mortgage “atoms” one at a time (I’m assuming the underlying mortgages can at least be identified, right?). Why not, I guess; it’s inconvenient, but their convenience is not high on my list of concerns.

  3. RobertNAtl Says:

    Those “suckers” include outfits like UBS, so it would be safe to say they are down the list of my concerns. Anyway, I didn’t mean to suggest that current holders couldn’t enforce the terms of their securities, just that no additional securities of this type (and regardless of their nomenclature, they are definitely securities) can be created and sold by the holders of individual mortgages.

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