An “open letter” from John P. Hussman, Ph.D., presents a true alternative.
In all reports about what’s going on with respect to the current hearings over U.S. Treasury Secretary Henry Paulson’s $700 billion plan to bail out Wall Street institutions, there appears to be only two options available for the U.S. Government can either bail out banks with a massive purchase of their “troubled assets,” or it can do nothing and watch markets collapse (if that is indeed what would happen without a formal bail-out).
Not many individuals are offering much in the way of alternative solutions – most seem content to lob criticism at Paulson, Bernanke and co. without suggesting what might be done instead of a taxpayer-funded purchase of opaquely valued “assets.”
There is one economist who has an opinion about what might be done to help the situation that involves neither a taxpayer burden nor a market collapse, and that economist is John P. Hussman, Ph.D.
In his weekly market commentary, published on the site www.hussmanfunds.com on Monday under the title “An Open Letter to the U.S. Congress Regarding the Current Financial Crisis,” Hussman outlined a plan that can be summed up with the following excerpt:
The appropriate solution is not for the government to replace the bad assets with public money, but rather for the government to execute a receivership of the failed institution and immediately conduct a “whole bank” sale – selling the bank's assets and liabilities as a package, but ex the debt to bondholders, which preserves the ongoing business without loss to customers and counterparties, wipes out shareholder equity, and gives bondholders partial (perhaps even nearly complete) recovery with the proceeds.
Hussman went on to state that “the key is to recognize that for nearly all of the institutions currently at risk of failure, there exists a cushion of bondholder capital sufficient to absorb all probable losses, without any need for the public to bear the cost.”
The guy doesn’t just whistle Dixie about his proposal – he outlines it in detail and uses a simple bank balance sheet mock-up to show how it would work.
And so why is this little-known economist talking about bondholder capital when not one of the major proponents (or opponents, for that matter) has mentioned it (yet)?
Hussman does more than address the problem of financial institution liquidity and solvency; he also goes on to offer a strategy for assisting U.S. homeowners, something that was obviously missing from Paulson’s plan and an oversight that the Democrats pounced on.
To read Hussman’s complete “open letter,” which I encourage all Stockhouse readers to do, navigate to the following link: http://www.hussmanfunds.com/wmc/wmc080922.htm
It may not be perfect (I am not one to judge) – and in fact, perhaps it is not even possible under the circumstances – but it is an intelligent, well thought out and sincere attempt to come to a solution that does not entail one extreme ($700 billion bail-out) or the other (market collapse).
Let’s hope those on the decision-making end of things take the time to seek out the opinions and advice of others in this process before it is too late.
