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Markets | Economy | Companies

Current DateTime: 12:35:25 15 May
2009
LinksList Documentid: 23452764
Expiration DateTime: 5/15/2009
12:36:24 PM

What Will Lead Stocks Higher?
Here Are Four Candidates

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Current DateTime: 12:35:25 15 May
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LinksList Documentid: 23452000
Expiration DateTime: 5/15/2009
12:36:40 PM

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Current DateTime: 12:34:16 15 May
2009
LinksList Documentid: 24355697

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LinksList Documentid: 24890560

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If Financial Bailout Package Is Needed, What's
Best?

Topics:Mortgages | Real Estate | Politics &
Government | Credit | Stock Market | Economy (U.S.) | Banking

Sectors:Financial Services |
Banks

Companies:Wachovia Corp | Citigroup
Inc

By: Albert Bozzo, Senior
Features Editor | 01 Oct 2008 | 04:32 PM ET

Text Size

As Congress tries again to pass a
financial rescue plan, the question remains whether a bailout is actually
needed—and if so, what are the options.

Do
Nothing

There’s no shortage of people
proposing that Darwinian market forces can and should sort out the problem.

“Capitalism is where the market
does its work,” legendary investor Jim Rogers, CEO of Rogers Holdings,
told CNBC Wednesday. “You let things collapse…and you have a clean growth
afterwards.”

Variations on that idea include
letting financial institutions such as IndyMac
and Lehman Brothers fail and allowing
shotgun marriages, such as Citigroup
and Wachovia.

The free market school also says
government is also a source of the problem.

That includes the issue of moral
hazard—using taxpayer funds to bailout reckless private companies and
encouraging more risk in the future.

For
Investors

Five
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“Government policy caused this
problem,” says the Cato Institute's Dan Mitchell, citing, among other things,
easy money from the Fed and the existence of government supported entities such
as Fannie Mae and Freddie
Mac.

Mitchell and other free market
champions say if the only other choice is a bailout, “the correct response is to
do nothing.”

“That’s not an option,” says
economist Robert Brusca of Fact And Opinion Economics. “Once the Treasury
Secretary and Fed Chairman say 'we need a blank check, and don't ask, just do
it,' they've told us there's big trouble out there.”

That thinking is underscored by
the stock market's historic selloff Monday following the House’s surprising
defeat of the bailout bill’s first iteration and the near frozen credit markets
of late.

Treasury
Auction

Though Treasury Secretary Henry
Paulson’s original plan is short on details—and has since been saddled with
unhelpful provisions—its goal is simple.

The government—and possibly
private sector firms—will buy mortgage-backed securities to shore up the balance
sheets of financial firms.  This is turn will reintroduce some pricing
model, returning liquidity to a thin and depressed market.

“Conceptually it works,” says one
former FDIC official. "It’s sort of a trust-me plan.”

In the savings and loan crisis,
the FDIC, and later the Resolution Trust played that role, but in this case
there’s a vacuum.

“You don't have any natural
stabilizing mechanism," says former senior Treasury official Robert Glauber, who
now teaches at Harvard University. “The fundamental argument here is to get
these markets unlocked.”

AP

Critics say the process is
impractical and thus won’t work.

“It doesn’t solve the big hole in
the balance sheet unless they vastly overpay for these products,” Nobel
Prize-winning economist Joseph Stiglitz told CNBC. "It’s an impossible
task...buying up all these bad assets.”

Recapitalization
Plan

Stiglitz and others support more
aggressive and direct government intervention, as was the case in the Swedish
banking crisis of the 1990s.

Under this model, the US
government would supply capital in exchange for some sort of ownership stake,
which is “more transparent” and a better deal for taxpayers, says Stigliz, now
with Columbia University.

Others say though a
recapitalization removes some uncertainty it has its own complications.
For one, if the government gets a stake, it dilutes existing shareholders.
What's more, capital infusions might also keep open some institutions that
should fail or be merged into another.

Recapitalization  “goes
further down the road to nationalizing the banking system,” says Brusca, who
adds, “You don't want to be in hock to Uncle Sam and have him have voting
rights.”

Glauber, for one, isn’t ruling out
the possibility of recapitalization, but at a later stage. “There may be
solvency issues,” he says, if the private sector can’t produce enough capital.
(He expects vulture funds and other firms to wind up participating in the
Treasury auction.)

Eliminate Mark To
Market

For some, part—if not all—of the
solution lies in a simple but radical change in current accounting rules: the
so-called mark-to-market rule, or FASB 157.

The rule, which went into effect
in late 2007, basically says the existing value of a security is based on what
you can sell it for in the current market place.

The rule is “well-intentioned,”
says Joshua Ronan, professor of accounting at NYU’s Stern School of Business,
but has created the market equivalent of a "negative feedback loop" or
transactional gridlock.

“If the market is temporarily
depressed for a number of reasons, then you are compelled to value these assets
at what you can sell them for. But any number of these assets—CDOs—are very
illiquid, thus trading is thin,” explains Ronan.“As a result, you have to resort
to models, and in this environment people will be very cautious and mark them
down."

Brusca says institutions seeking a
waiver of FASB 157 could be required to accept many of the same conditions—such
as restrictions on CEO pay—now in the current legislation.

The current bailout legislation
includes language restating the authority of the Securities and Exchange
Commission to suspend FASB 157 if it is in the interest of investors and
taxpayers.

RELATED
LINKS

Current DateTime: 12:35:25 15 May
2009
LinksList Documentid: 26978661

US Senate Passes Bailout

What's in the Senate Plan

Poll: What Do You Think?

GOP's Alternative Proposal

Bailout Is Wrong: Jim Rogers

D-Day for Hedge Funds

Credit Crunch to Hit
Consumers

Some say not so fast.

“I don’t think the solution is to
abandon the rule,” says Glauber, who played a key role in the first Bush
administration’s savings and loan bailout efforts. “It needs to be enforced
orderly. Sophisticated investors simply don’t trust the numbers being put
out.”

There’s also considerable
speculation that the mark-to-market rule will complicate price discovery in the
Treasury auction process.

Right now the Treasury plan—as
obscured as it may now be—remains the best hope, but hardly the only one.

“This plan isn’t a do-or-die
plan," says Brusca. "This is just the plan du jour. If they don't pass this
plan, they'll be another."

© 2009 CNBC.com

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