Jim Cramer’s $500 Billion Bank Bailout Plan

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Additionally, if some of these "failing" companies see that the deal they get from the government is not very attractive, they may miraculously figure out how to handle their own problems or find an alternative White Knight which is not as greedy as the federal government; in either case, a desirable outcome.
How Much to Appropriate?
I have heard that $700 billion was calculated by assuming 5% nonperforming mortgages and simply multiplying 5% times the total value of all US mortgages. If true, the government shouldn't need anything close to that. This would be a huge pot of money just waiting to be stolen.
$700 billion assumes 1) that all dicey mortgages are worth zero (no income and no asset value in the real estate) and 2) that the companies will go bankrupt if they don't receive the full original value for these problem loans. Both assumptions are ridiculous.
If all such loans were completely nonperforming, the mortgage holders would be losing a total of about $55 billion per year in income. How does that require an injection of $700 billion?
Of course, it's not quite that simple because nonperforming mortgages must be carried on the balance sheets at a very low value, decreasing the creditworthiness of the banks. This is only an accounting figment and does not represent reality. The real estate is still there and it has value. Nevertheless, even neglecting the value of the real estate the amount of injection required to clean up the balance sheets might be another say $45 billion, bringing the total to $100 billion.
The $700 billion request, further assumes that the companies had no margin for error. Most companies should be able to lose 5% of their income and yet take corrective action to avoid bankruptcy. Some companies may be holding well above 5% problem loans and they will need more liquidity. But then, logically, others must have less than 5% and they will need less or no help from the government.
Let's see how they spend the first hundred billion dollars and then go back to Congress if necessary.
Regulations
As Mark Cuban pointed out, in less colorful terms, any regulations developed by Congress will have their locks picked by the smart guys on Wall Street before the president's ink is dry. I think Mark Cuban and Sarah Palin, working separately, came up with a great insight, transparency through the Internet.
If all transactions are published on the Internet, the government doesn't need a huge regulation law nor a large regulation bureaucracy. The population will do it. I know that having the people know what's really going on scares the hell out of most politicians, but I hope and believe that both of the presidential candidates are different in this regard.
Objective #2, Further Explained
2. No Resolution Trust Corporation this time.
(I moved the further explanation of Objective #2 away from the beginning of this working paper because I didn't want to detract from the efficient pre

C. Sterling Portwood of HI 5:17PM September 25, 2008

Three Basic Objectives
1. To prevent a progressive collapse of the US economy, liquidity must be injected into the mortgage system.
2. No Resolution Trust Corporation this time.
I was involved with the Resolution Trust Corporation the last time and the government should avoid taking on this responsibility this time. Banks, through their mortgage and REO departments, are much better at handling negotiations with mortgagees concerning staying in the properties and paying reduced mortgage amounts, foreclosures if necessary, maintenance and upkeep of the properties after foreclosure, and resales. Objective #2 will be justified in greater detail at the end of this working paper.
3. Officers and stockholders of organizations bailed out by government should suffer severe financial consequences, to assuage moral hazard and for the perception of equity on the part of the population.
Alternative Solutions
1. Government loans to the companies, secured by the company's assets, à la AIG.
2. Government purchases of new stock offerings, which have a priority call on the assets of the company.
3. Government purchase of newly issued convertible, which have a priority call on the assets of the company.
Any of these three would be acceptable, but I would prefer number three.
The major question is how much to pay. Like AIG, leaving the stockholders with about 20%, as opposed to nothing, seems about right.
Another approach toward determining an appropriate price might be to require that new stock or convertible bonds be issued, say 30% be sold on the open market at a given price sufficient to clear the 30% offering (like a typical new stock offering), and the government guarantee to purchase the remainder at half the given price. This would set a market price for the stock, given government support, and give the government the extra benefits it deserves.
Why should the government get the benefit of a 50% discount? Because the government may be the only entity capable of saving some of these companies. Without its investment, the deal could not happen. So, in fairness, the government, i.e., the people, should benefit from that fact, as opposed to other stockholders. In this case the government is playing the role of a large investment business and should be remunerated consistent with that role.
Without government investment the companies are worth nothing. But with the government bailout, the companies should be worth a lot and just compensation for the government should be about 80% of that increase in value.
This approach to the injection of liquidity should enable the government, in the long run, to do much better than breakeven . The political benefit from such an outcome, or even the valid projection of such an outcome, at this moment, would be enormous.

C. Sterling Portwood of HI 5:15PM September 25, 2008

Why not give the money to the people who owe the loans

Dan of 10:41AM September 21, 2008

"Bailout" is an overused and misused term. Its a bailout when taxpayer dollars are spent to remedy private problems. Long Term Capital was not a bailout. Chrysler repaid their loan. Bear Stearns is still being un-ravelled although the back stop carries all the real bailout potential.
Everyone expects the Fed to solve all problems. This is for congress. Drill for oil to lower energy prices. End ethanol to lower fod prices. STOP SPENDING OUR MONEY on worhtless government programs. Balance the budget by freezing and then cutting spending and watch the dollar strengthen.
Lastly, get out of areas where the private sector can do the job. Free markets will fail occassionaly but they will also allocate the losses where they belong-not shafting taxpayers.

Patrick of IL 4:48PM July 16, 2008