Bond trading, not bailout, is how to rescue banks
COMMENTARY by Sandy Lewis
US Treasury Secretary Henry Paulson's big mistake was to cast his $700 billion financial rescue plan of the financial industry as a bailout.
He did so because it was, and remains, a bailout. The trouble is it won't work. The math doesn't track and the strategy is wrong.
Any government plan to save the economy should be a fund — call it the Public Value Fund — designed to trade us out of this tangle. The last thing we need is a blind trust that will buy and bury the junk assets of our nation's banks out of sight.
To earn trust, the fund should take the form of a publicly owned bond-trading firm with open transactions based on widely distributed research, a transparent sales process and congressional oversight. Think of it as trading firm owned by and working for the American taxpayer.
Why a trading firm? Because there isn't enough money to do it any other way. We must fund a market, not a bailout.
A new legislative package should define a threefold mission for this fund, its managers and trustees:
First, using Fannie Mae's resources, direct the fund to research, track and disclose the approximate value of the debt instruments that are out there, one by one, asset by asset, mortgage by mortgage.
This also would make mark-to-market accounting what it should be — the immutable law of the land. Mark-to-market isn't the culprit; it's simply a way of telling it like it is to investors and the public.
Second, create a sales reporting mechanism that offers the needed disclosure for these securities so as to start recycling rather than warehousing the toxic assets. This would ensure accurate, thorough, timely information.
Third, buy equity or preferred stock, with or without warrants, in stable lenders on Main Street that must raise capital as they record losses on the garbage that clogs their books and impairs their capital.
This is the part of the banking community that hasn't destroyed itself. There is no point in trying to prop up the self-destructive mega-banks simply because we are so afraid of what will happen if we don't.
Disclosure, the first step, is the most important. It is absent in the current congressional package.
The anxiety on the Street can be calmed and dispelled with fully disclosed market data. The federal government can gather and disseminate the information for all to see, and add more and more as it becomes available. The government has unique powers; it must use them.
The fear now sweeping over the markets and destroying wealth around the world will be contained and dispelled only with readily available market data.
That is why the fund would have a congressional mandate to gather information and publish it in detail on the Internet.
The public has a right to know the value and price of a bond or security purchased by the Public Value Fund, exactly what's inside and how it's performing, and the price it fetches in a sale to willing buyers in whole or in pieces.
Congress would also invite every lender or agent that originated a mortgage loan or leveraged-buyout loan within the past 10 years to review each loan and publicly certify the present value of the collateral supported by a fresh appraisal.
How else can a market work? We must get real with the public's money and show everyone how it is being used.
With a trading market built around the best disclosure money can buy, confidence and the capital that flows with transparency will come. Healthy, open markets attract capital.
Secrecy and opacity scare investors.
The professionals who would make this work will come from banks, debt-research houses, law and accounting firms, bond houses and the rating companies. As a former investment banker, arbitrager and stock and bond trader, I can say this: this fund should be the Peace Corps of the bond market, a chance for some of our most successful to give back — and atone for their sins.
Justice Louis Brandeis once spoke of government as a great teacher.
The men and women who sign on to the Public Value Fund will be known as teachers and healers of a wounded system in need of their care, care given through the judicious, market-based, strategic use of fund assets and an open trading process.
As the market for these assets forms and competition for them deepens, the Public Value Fund might close its doors and return its borrowed capital and profits to the Treasury.
Public confidence must be the goal for Congress now. It begins with the Public Value Fund. We have no choice. We must make this work.
