We all know that credit crunch has been propelled by easy credit for mortgages. Mr. Smith bounght a house for 1m, got 700,000 USD, after one year the value of his property was 2m and banks were happy to lend 700,000 more, and so on.
When everyone realized the king was naked, things got nasty.
AIG played an important part on this process. Underwriting CDS for CDO, they hedged risks for many financial counterparts. Now they got bailed out, saving AIG and financial firms who lent too easily. With tax-payer money.
But, in easy terms, some tax-payers got money from banks for their properties and they were not able to repay. Most of them spent money they borrowed too easily in every types of goods, from basic to luxury, exstend the apparent benefit of easy credit to almost all US companies, from large retail to small specialized shops. Plus big corporates, which directly had benefit from spending euphoria, gave generouos compensation to their top dogs and nice dividends to their stockholders.
Now the bailout is asking all of them to give back part of these benefits, addressing the mistakes made in the past. These mistakes were made by few, true, but the majority had their advantages. Now the majority pays, and should not complain.
Not everyone had same portion of these toxic benefits, but I believe it's good everyone plays his role of giving back what was not fully entitled of, throught these massive bailouts.
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My two cents - you have given a post facto rationale on why everyone should dig into their pockets to pay for this mess. Clearly this is not ideal - as you said, the distribution of benefits vs costs is not equal for everyone.
I don't mind dipping into my pockets to pay, as long as I know that my money is being put to good use. This is where even socialism fails to deliver the goods. The Governments are picking winners and losers on my/the tax payer's behalf. Classic example of loser - Lehman (;)), winner - Auto sector. In Auto, we are clearly pouring more good money into a bad businesses. What holy right do Government's have in picking which sector deserves support over the other, more so if it is my money that they are spending?!
It is hard to argue that taxpayers should cover losses suffered by bank shareholders and bondholders given that the latter groups acted as investors. In search of higher returns, investors incur risks—and if these risks materialize, it is the investors who should cover them, not the taxpayers. Although this may seem harsh, investing cannot be risk free, and it is up to investors to hold to account the management of the companies in which they have invested. This is in contrast to regular deposits, which do not involve “investing” so much as “storing” money.
Given that the ultimate goal is to stabilize the economy and stop the downturn, policymakers could consider taking the following steps.
Step 1. The real estate bubble was fi nanced by opaque pools of toxic mortgages that were bundled together and sold as safe securities in the form of collateralized debt obligations (CDOs). The problem was that none of the investors (nor, frankly, the banks) had any notion of how poisonous the underlying collateral was. One option, therefore, would be for bank regulators to set a signifi cantly higher capital requirement for securitization transactions—one that requires a 100 percent deduction from regulatory capital for opaque and illiquid CDOs. In a January 2009 paper from the Basel Committee on Banking Supervision, banking supervisors have already considered this option. The Bank for International Settlements
proposes a 100 percent deduction if banks cannot perform, on their own, a proper due diligence on CDOs and the underlying collateral pool (that is, if a bank relies solely on rating agencies for a risk assessment). To facilitate an emergency implementation of this idea (and to avoid a lengthy review of a bank’s CDO operations
and IT infrastructure), we would propose applying the “100 percent deduction rule” to all CDOs
whose value dropped below a 50 percent threshold during the crisis. Broadly speaking, this would apply to all CDOs rated AA or lower. The same logic applies to nonsecuritized loan portfolios—here, too, banks need to increase loan loss provisions by applying similar assumptions to future losses. At the same time, governments should continue to guarantee deposits up to a certain threshold as well as short-term investments in banks.
Step 2. Banks should review their equity position in light of the new regulatory requirements. If a bank does not have suffi cient equity, it should endeavor to raise the necessary amount from private sources. If a bank is not able to raise the required equity in the capital markets, all bank bondholders (with the exception of those who signed bonds with government guarantees in the last 12 months) should be required to accept a debt-for-equity swap. This move would dilute the stake of shareholders and, in eff ect, transfer ownership of the bank to the bondholders.
Step 3. If, after step 2, the bank’s equity still falls short of the required level, the government should underwrite any further equity issuance to close the gap. Depending on the amount necessary to close the gap, the government may actually end up holding a stake of up to 100 percent of the bank. After the restructuring, the bank can be sold again.
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