The Obama administration developed a plan to purchase "toxic" assets from banks, but the problem is how these assets prices. One way to find a solution that will look at the lessons learned from other countries. In the 1980s, Chile had an insolvent banking system, not to lend money to consumers and businesses can, and that as a consequence led to a major recession in the country. The government then solved the problem by the central bank to lend money to theTroubled banks in the form of a "Subordinated Debt". The "Subordinated Debt" was a 30-year loan for each bank with a fixed interest rate that took into account future inflation granted. There were some restrictions from the government to banks to encourage them to pay as quickly as possible, but in general there were no significant restrictions on their business. Once they have received the loans, the banks went back to his work, the country finally moved out of recession andToday, the banking system in Chile is probably the most stable in the region, the subordinated debt has been paid in full, and the Central Bank even money on the process.
Today, the U.S. banking system has kept the same problem with the major financial institutions, the assets may be sold at market prices is likely to force most of these institutions into bankruptcy. The main problem is how these assets, the price, but we do not seem to understand that the attempt to give a fair pricethese assets, we are basically trying to take the necessary steps to resolve the problem to skip. We need to give the markets at a fair and reasonable price, the assets, but not the market that rules are clearly involved, up to and invest.
One way to have clear rules, is to follow the example of Chile. Instead on "good banks" and "bad banks", it could be a big bad bank will give that money to the financial institutions in exchange for their toxic assets. ThePrice for these assets, the purchase price, which is already in the balance sheets of individual banks, which takes in the light of all the depreciation that has already been made. This is it does not matter if Bank A will have a lower price for a similar asset as the bank B. The only difference is that the loan will be made to Bank B to be higher than the bank A, bank B to pay overtime so more money in the interest on that loan.
Since this loan will be using the money of taxpayers,then we must be careful, not every American is exposed to unnecessary risks. One way to do it will be to index the loan at the rate of inflation (again, following the example of Chile). The loan could, for example, for 30 years at an interest rate of 2% plus inflation. In this way, if inflation rises more overtime then we as taxpayers do not lose purchasing power to borrow the money to the banks. This also has the advantage that we can give the money to the banks to be at a reasonable pricepayable overtime.
Another aspect to consider is that those assets purchased by this "Major Bad Bank" will eventually have a value and will be sold back to the markets, most probably at a profit. This Major Bad Bank will be holding assets at a discount price that can recover in 3 - 5 or 10 years depending on how long the recession lasts. The only difference is that this Bad Bank can wait those years, but our financial institutions can't.
The Government should place some restrictions on this borrowed money. Most importantly, we have to remember that the capital markets will eventually take over this situation. As mentioned before, the capital markets will start to participate when the rules are clear for everybody. If one restriction is to eliminate dividends on common equity, then we will be telling people not to invest in our financial system. We need the price of the common equity to go higher in order for the institutions to raise more capital and in To take advantage of private equity holdings in them. All restrictions must be in the direction of room for the banks the money go in the future, but at the same time to limit excesses. For example, it is a good idea, salaries and bonuses that CEOs and board members of limited use, but is not a good idea, bonuses, restricted to employees.
A final point is that the solution should be offered only once. This is not something negotiable between the banks and the Treasury. Itis a unique offer, where the banks have to decide what to sell to this important bad bank and at what price. A key factor in this decision would be the ability of the bank which is able to pay his debts at a fixed rate plus inflation over the next 30 years or earlier. If a bank will not able to participate in this offer, because he does not think that it is able to repay the debt. This essentially means the bank in question should go into bankruptcy because he is insolvent today, and itbecome insolvent in 30 years.
Saving the financial system is in the best interest of all people in this country. We're beyond the point whose fault it was. We need our banks again put in the shop, but not at the expense of taxpayers. Following the example of other nations in the past can give us an idea of the crisis.