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Friday, October 10, 2008

Suggestions for the Meltdown/Bailout

Congressman Stark, Oct.10.2008

Re: Banks, Economic Meltdown

I bet you are busy.
Here are four suggestions that Democrats should bring to the table.

1. Homeowners sacrifice part of future appreciation of home value when they accept reduction in mortgage value. A fair give and take for both sides.

2. Federal government takes a SENIOR claim on failed banks that supersedes bondholder and shareholder claims.

3. Create a central bank with $300 billion, leverage it to $1.8 trillion, take over many insolvent banks. Government operates failed financial institutions until they can be resold to private market. Frank Mankiw’s idea of sharing equity 50 - 50 with private investors in individual banks is not so hot. It’s too slow and piecemeal. Grab them in one fell swoop.

4. Go with Levy Institute and Nouriel Roubini’s plan for public investment in infrastructure.

These are my sources:

1. and 2. John Hussman, Ph.D.

5) To assist homeowners, the bill should allow for a reduction of mortgage principal during foreclosure, but the mortgage lender should also receive a Property Appreciation Right (PAR) that gives the original lender a claim on future property appreciation up to that original mortgage amount. In other words, the homeowner receives a substantially lower mortgage balance and payment burden now, but the lender stands to be made whole over time through property appreciation rather than immediate burdens on the homeowner to make payments.

2) In return for these funds, the government should NOT take equity (which is a subordinate claim and also creates potential conflicts of interest), but instead should take a SENIOR claim that precedes not only the stockholders but also the senior bondholders in the event the company defaults anyway. Congress may need to make some modification to existing bankruptcy law or provide for expedited bondholder approval to do this, but essentially, the government's claim should be subordinate only to customers in the event of default, and senior to both stockholders and bondholders. However, it should also be countable as capital for the purposes of satisfying bank capital requirements.

3. Professor Peter Dorman’s “Plan B” as presented at

4. Nouriel Roubini’s web page -- World Is at Severe Risk

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