My considered, but possibly unconstitutional, not to mention probably unworkable, proposal to fix the banking system:
- Stop trading of all bank stocks.
- Declare all deposits and all debt issued by banks to be government guaranteed for the next 5 years.
- Require all banks to write down all mortgages issued after 2000 by a formula determined by zip code, valuing the home at the same variance from the 2007 median but relative to the 1997 median extrapolated by CPI+1%.
- Buy all underwater or non-performing mortgages at the new values off the books.
- Offer to buy MBSs and similar toxic waste from all non-banks at the same write-down level.
- Work through the books of all banks to see which are still solvent starting at the bottom of the size scale.
- Let trading resume on solvent banks.
- Nationalize insolvent banks (public or private), wipe shareholders, clip bondholders, and revoke warrants.
- Recapitalize insolvent banks and set up a schedule for selling them off.
- Work through bad mortgages, offering a) principle write-downs with a shared appreciation clause to people who were more-or-less responsible and are relatively solvent, and b) one-step non-judicial bankruptcy with repossession, a non-pursuit agreement, and a rent-back offer to the irresponsible and/or hopelessly insolvent. Fraud by any borrower should be pursed.
- Set up a schedule to sell off government-owned properties.
This plan focuses on residential mortgages. Of the other four big distressed classes, CRE mortgages can be treated in similar manner with more case-by-case decisions. LBO loans are often made by highly speculative players, so the government should take on those loans only if it is providing DIP (debtor-in-possession) financing as well. The total amount of consumer credit (primarily credit cards) and auto loans outstanding is much less, as well as being too fine-grained to be worth working through, so borrowers and/or creditors will to have to deal with those on their own.
Obviously, this proposal screams "MORAL HAZARD" at an ear-shattering volume. But we are way, way, way beyond the point of being able to limit the harm to those who were "irresponsible." The money is gone. *Poof* Time has come to accept that and get the banks back to a point where they can (and will) loan again. On the plus side, it does mete out a bunch of harm to shareholders who let lending get out of hand.
The unworkable aspect of this plan is assembling sheer number of appropriately qualified workers that would be needed. There are a lot of newly unemployed financial services workers floating about. But locating them, leasing enough workspace, equipping them with computers, providing instructions, and setting them to work would be a huge and time-consuming task. The workers at the ratings agencies, the latter having proved themselves to be completely useless, could (should) be dragooned in place to provide a jump start. But the task would still remain daunting, to say the least.