I have the following plan which will solve most of the problem especially in the Credit Crisis and provide liquidity to the Banks and the economy in whole. At the same time reduce the loss of the Government money and if any loss should go to the owner of the problem who will have around 10 years to take the loss. Instead of the taking on unknown risks to the Federal Government or the Federal Reserve, the plan will provide known risks before hand.
1. Keep the plan simple enough, so that it is very easy to understand and implement
2. Instead of buying the assets from the Banks, Government can actually loan out say in three parts, either 50% of the face value, 60% of face value and 70% of loan value(underlying asset value) . This can be decided by the Banks/Government
3. The Government can issue say $1 trillion of 10 year treasury bond for around say 3 coupon (the prevailing rate).
4. the government will charge 3% over the coupon rate for 70% of loan value, 2% over the coupon rate for 60% of loan value and 1% over the coupon rate for the 50% of the loan value (this percentage can be a variable depending on the what the experts agree on)
5. The banks need to pay 10% of the Loan value as principal each year with the interest accrued. So if they got $5 billion dollars, when then the underlying loan is $10 billion dollars, they need to pay $500 million dollar + $200 million dollars interest( 4% on $5 billion dollars). They need to mark to market the original $1 billion dollars
6. The mark to market for these securities will be waived (I know this will be a very contentious point, but we have to do something to bring the credit back to normal). But, as soon as the mortgage defaults they have to mark to the market that portion of the loan. The waiver is only for the loans that were originated before say 2008.
7. Get back the $350 billion distributed as capital and use this way. That way, we'll taken care of $1.4 trillion worth of CMBS et.al. which will allow the banks to keep the capital and allow them to lend as they have to pay interest on the loan.
8. Because of the ownership not changed from the banks to Government, the loss to the government will be limited
9. At the same time, the banks will have enough capital and they can distribute the losses the problem loans over a period of 10 years.
10. I'm not saying there won't be any Bank failures, because of the program but, this plan will limit it to minimum.
11. Also, this is not the perfect plan but, people smarter than me can build on the framework.
12. This will free up capital from Banks and they don't need to dump at depressed price which is vicious cycle and at the end of the day (rather 10 years), they need to eat out any losses on the problem loans they had and government is not going to take much loss.
13. Also, we can put the government loans at the top of the capital structure so public money won't be spent on unwise decision the part of banks
14. There won't be any guarantee on the loans either commercial paper or any other kind.
15. The same model can also be applied to the Mortgages of individual homeowners with slight modifications to suit them with the loss going back to the mortgage owners themselves
16. This way you can measure how much money is lost, if any, for the government. You can keep track of what is going on with any money that has been provided to the banks.