A good plan, better than many
Veterans of the last bank rescue propose something similar today:
An alternative plan to recapitalize banks can be based on one that helped resolve the savings and loan and banking crises of the 1980s and early 1990s. Then, as now, massive declines in asset values occurred simultaneously with two recessions. Over that lengthy period, there were times in which virtually all savings and loans and some of nation’s largest commercial banks were insolvent on a fair value basis. During that time, however, the banking system continued to function, providing adequate financing to credit-worthy borrowers. The program enabled the resolution of problem assets in an orderly fashion over time and in a way that maximized recoverable value while not inhibiting traditional banking operations.
The policies implemented during that period worked. By 1989 Congress was able to provide funds to close the remaining insolvent savings and loans and create the Resolution Trust Corporation (RTC) to work out of the remaining troubled assets. Likewise, the FDIC in the early 1990s was able to close remaining insolvent banks without direct taxpayer assistance.
We recommend that the current administration draw from that experience and model the CAP after the Net Worth Certificate Program that Congress enacted in 1982. Both the Federal Savings and Loan Insurance Corporation (FSLIC) and the FDIC were able to shore up the capital of weak institutions with no cash outlay. The FSLIC and FDIC purchased capital certificates from troubled banks that the agencies deemed viable. They paid for the certificates by issuing FSLIC and FDIC senior notes to the banks. As the banks regained profitability and access to traditional capital markets, the certificates were redeemed in exchange for the agency notes.
William M. Isaac, former Chairman of the FDIC recently stated in a column for the Washington Post that “the net worth certificate program was designed to shore up the capital of weak banks to give them more time to resolve their problems. The program involved no subsidy and no cash outlay….. If such a program were enacted today, the capital position of banks with real estate holdings would be bolstered, giving those banks the ability to sell and restructure assets and get on with their rehabilitation. No taxpayer money would be spent, and the asset sale transactions would remain in the private sector where they belong.”
Not a bad plan. We like our plan better, but this is okay. Both are certainly superior to half-nationalizing Citibank, or the really nutty idea of further limiting mortgage interest deductions.