As you can tell by the number of the posts on this subject, I think we are in a very serious financial situation in this country. It’s bad for everyone and like many others while I think the Bailout is necessary, I would prefer any solution that doesn’t involve the government. Unfortunately, I don’t think a pure market based solution is possible.
That said, I considered what it would take for me to part with my money to provide liquidity into the banking system.
I will not just write a check to the Treasury. Thats like handing it to Ted Stevens. I’m not going to voluntarily give a year’s supply of crack to the junkies.
Here is what I will invest in:
If Treasury Secretary Paulson were to create an ETF to buy all the assets the bailout was planning to buy, along with all the warrants and shares of stocks in the bailout companies it can get, and then have any receipts generated by those assets, whether by sale, or regular income such as rent or mortgage payments or servicing them, go into the fund, I would buy at least $50,000,000.00 of shares in The Fund.
It would not be difficult to do. Whatever funding that the Treasury Secretary says is necessary for the Bailout would first try to be raised privately from other Funds and individuals by selling them shares in The Fund.
If the amount of shares sold falls short of what the Treasury has defined as being need, the underfunded amount would be funded by the purchase of shares in The Fund by the treasury.
The ETF would initially be valued at the total amount raised and then trade based on its financial results and the trust the American people and international markets have in the job the Fund is doing to monetize the assets. If the fund is making money, the ETF will trade up. If not, not. Either way, the share price and the transparency required of the ETF will make it obvious to taxpayers just how well their taxpayer dollars are performing.
If The Fund is as successful as some think it could be, it could pay dividends. Those dividends will be paid to investors, and to the US Treasury.
In addition, once the assets purchased by the ETF are aggregated and documented, and hopefully the economy has improved, it would be possible to trade out baskets of assets with institutional shareholders. This is a process that will help keep the fund honest in how it manages the assets. If the Fund is not doing a good job of monetizing the assets, Institutional shareholders will look to exchange their shares for baskets of assets in hopes of better monetizing them.
This fund, like every other, would have investment guidelines. The same guidelines that the Treasury would use to work out the assets it would have purchased directly. The fund, like every other, will have analysts and accountants and the same type of people that the Treasury would have hired to work out the assets, except hopefully it would be run more efficiently as a publicly traded fund.
I can’t think of any reason why this wouldn’t work, and why it wouldn’t be a better idea than the current Bailout options that I have heard discussed.
If they need someone to help put it together and/or run it, I’m happy to help.
Tell me what you think
You could sell this idea to the public directly if American tax-payers have a stake in the remainder of the fund not acquired by the wealthy. This will show Americans their government is willing to work with them and should improve overall morale knowing they have a direct monitor. As shown by the tea-parties around the country many people are feeling really screwed and many fear a socialist or welfare state coming on. Id be on board.
Comment by John S. Gorny -
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To spend $10.00 dollars for Americas military to protect our troops in times of war and Congress cried as if the sky was falling. When it comes to filling thier own pocket with money they pass 100s of Billions immediately and then cry he or she got more than me. So they pass more billion dollar deals to stop the crying but then even more cry. Congress should just pass a Gazillion bizillion bail out and every person on earth can pocket millions just like Congress and the CEOs. YES I know only ones that fail at the position they hold deserves the bonuses. Help wanted High pay plus bonusses must be able to lie, cheat, rearrange the bottom line until total collapse and point at each other while giving your self a bonus’s. A must after bailed out throw a party without cwhithout one cent of one own money. P.S. after the party take the candle and balloon display home.
Comment by Good Idea -
It’s pretty obvious that this charade has failed to produce the desired results. Join the fight against corrupt politics at http://EndTheBailouts.com.
Comment by Jason Green -
Unjust Enrichment Laws filed Against All Ceo’s would recover over $200B Plus stop this corruption in its tracks. Type
1 M2 M3 Money supply hidden since 2005. The Fed Congress CEOs all have known this would happen sooner if they released the M3 in 2006 2007 2008. They compounded the problem to unjustly enrich then self.
Comment by poor sinner -
Mark, Do you still have that $50mm to spend on this solution?
“With the Federal Reserve we are exploring the development of a potential liquidity facility for highly-rated AAA asset-backed securities. We are looking at ways to possibly use the TARP to encourage private investors to come back to this troubled market, by providing them access to federal financing while protecting the taxpayers’ investment. By doing so, we can lower costs and increase credit availability for consumers. Addressing the needs of the securitization sector will help get lending going again, helping consumers and supporting the U.S. economy. While this securitization effort is targeted at consumer financing, the program we are evaluating may also be used to support new commercial and residential mortgage-backed securities lending.”
It looks like today Paulson stepped up to the table and called your bluff. His speech is basically advocating a vehicle that can trade like ETFs. Are you still in?
http://www.ustreas.gov/press/releases/hp1265.htm
Comment by econ365 -
Bail out has not a chance. Like adding money to a broken ATM machine putting out millions. Why add money to a broken ATM. Easy Congress and the corrupt are standing in front of the ATM with there hand out. They have been there for years. One cannot fill up greed. Greed will drain America. Think $850B not a word of fixing the problem. Just fill the broken machine it will fix itself. Do you not know you are giving up so much for so little. REM; All wealth on earth will not open the gates of Heaven Please stop or go to hell it is your judgement. I’m am only a poor sinner with only the tears on my face to offer so Thank You Lord, God, Jesus, Christ, for your love and forgiveness.
Comment by Joe -
Mark,
It makes to much sense. It will never happen. It’s the government!
Nate
Comment by Nate Morrissey -
Is there anyone out there who does not understand what is happening to the stock market?
We have long realized that the market cannot stand uncertainty. The polls are showing a presidential victory for Barack Obama. Who is he? What are his basic beliefs? Where does he come from? We really do not know. Will the capitalistic society of the last one hundred and fifty years survive or will the $10 trillion dollar debt look small after four years of the Obama Administration. Uncertainty reigns and the Media is doing nothing to change that.
Comment by Bob Berry -
Another thing to do might be helping people (financial or other) who are in debt or face very tight budgets – students, senior citizens, people in job transitions. This might help people repay loans and get back-on-their feet again.
Comment by nathan -
I think that the only possible solution is to stimulate the productivity per worker, and only to whose of them are straightly related to the production (not the administrative sector) in order to increase the GDP. That could be conceding more working hours to the huge majority of workers who need to pay their bills.
Comment by Leo -
Brilliant!…Except that this is exactly what asset backed securities are. There are plenty of banks, funds, pensions that will sell you their holdings right now!
Your proposing to create an instrument out of the breakup of existing instrumetn. Maybe you should go into structured finance! Hey, it’s your blog and all and you can write what you want, but it was better when you talked about the current and previous businesses you had experience with, rather than armchair quarterback solutions. I’m somewhat relieved (and more concerned) that the proposals are coming from the Treasury/Fed, people with experience and not just politicians.
How about a post on “how I kicked my own ass to be successful?”.
Comment by MikeH -
Hi Mike,
Yes it’s a good idea. But the problem is the following.
ETF requires a market maker. That is, a sort of “book maker”, that publish a bid and an ask price for it. Who is going to do this ? The treasury ? The Fed ? May be.
I understand that part of the flows would be supllied by interest payment on the CDO, but apparently it misses the big buyers.
What about channelling part of gov taxes paid by banks (ultimate responsible of this mess)into it ?
Thank you,
Matteo.
Comment by Matteo -
Alright. As a LONGtime Cub fan, let me start by saying, I am REALLY hoping that you become the new owner soon.
Secondly, this seems like a reasonable, sensible piece of the solution. I would be interested to read about the drawbacks. Any ideas where I might find out more information about something like this?
Comment by Rob -
Good idea Mark. It needs a slight twist though. It couldn’t be an EFT (exchange traded fund), as an ETF needs to track an index (of which there couldn’t possibly be one). It would have to be a closed-end fund; or possible an open-end hedge fund (with complete transparency though). It would, therefore, simply be a distressed security hedge fund with complete transparency and no management fee. As you indicated, it would invest in these distressed securities with an eye to turning a profit for stakeholders as the market recovered. Your idea of allowing poorly managed fund assets to be bought by stakeholders is spot on. Such a mechanism would also keep the market price (if a closed-end fund) near NAV. It’s a great idea. And I think the market will go this way on its own at some point. Well-capitalized hedge funds will start to buy these distressed assets once the system frees up a bit. I would suggest that if such a government lead fund were created, they could sell the assets in the fund to “for-profit” funds rather quickly as the congestion in the market freed up; in other words, the government fund could buy assets at 20-cents on the dollar and sell to other funds eventually at, say, 30-cents on the dollar. Still attractive to the buyers and allows for a quick turnover for the “bailout” fund and a return of capital to stakeholders.
Lastly, a quick comment on “who” got us in this mess. Although there are a lot of parties at fault, I think it’s important to not lose sight of the ultimate weak-link: the American citizen who allowed greed, impatience, financial illiteracy, or whatever to convince them to take on more house, debt, etc. then they could afford. If they hadn’t stopped paying on their obligations there wouldn’t be a mess to clean up. Yes, I know there was predatory lending and moral hazard and all that. However, at the end of the day, it comes down to greed and an impatient consumer driven society that has no desire to work their way up financially as their parents did – with work over time. So it should be remembered that it wasn’t Wall Street or the government that made people go hog wild during the tech boom or the housing boom…it was greed and a lack of appreciation for what value means.
Okay, thanks for the ear and I’m done philosophizing.
All the best.
Comment by Sancus -
This has merit. Marc, we are tracking over 100 banking institutions per the Texas Ratio and have multiple real estate solutions for banks and their distressed real estate assets. I would like to discuss some opportunities with you.
214-751-8672 office direct
Comment by Cory -
What a great idea!!! Unfortunately, I can’t imagine them(House and Senate) doing anything about it. It would not be their idea and isn’t what this is all about, not rescuing the economy but who in fact “saved” us all from ruin. If for some miracle they get their heads out of their asses and adopt such an idea I’m in!!!
Comment by Sean -
Interesting approach. Of course we could create a new financial institution backed by the govt, and loaded up with toxic assets. And don’t you worry, it will implode in the next financial crisis..
Comment by Dividend Growth Investor -
What I keep hearing about the bail out plan is that it will loosen
up the credit market. Umm, correct me if I’m wrong, but isn’t that
what got us into this problem? The current bail out plan only puts
more money into the system so the financial sector can make more
loans. The solution shouldn’t be to put more people and businesses
into debt, but help people get OUT of debt! Rather than 700 billion
going to these financial institutions to buy their failing and
irresponsible bets. I would rather see it used as a fund set up
to directly help lower to middle class people by refinancing their
current mortgages to an almost zero percent (fraction of a percentage
point in order to fund it as an ongoing program). I may be wrong, but
I’ve read that there’s approximately 100 million households in the US.
Initially that fund at 700 billion would help approx 5 million
households assuming a $150,000 average mortgage. Even if you limit
the mortgages to 15 years it would drastically lower monthly payments.
There by giving consumers more spendable cash per month which would
help the economy. Every month there after as the fund recoups itself
through monthly mortgage payments it could recycle that cash to help
25,000 more households.
Comment by Adamk -
Pingback: Digito Society » Blog Archive » A Free Market Solution to the Financial Crisis
It sounds good Mark BUT their is a problem. Let’s say the Fed uses your option
and creates an ETF and does well and it starts to go up and everything is hunky dory.
But what happens if the super banks just created do more of the same as they just did and create a bunch of useless assets – can they just stick’em with the Fed? I wish I could do that: make risky investments and then sell them or trade them to the government.
Comment by Bill -
Bailing out the financiers by buying bad debt is like trying to save a sinking ship by building higher decks. The holes in the bottom need to be plugged! It should be obvious that by helping distressed Americans, duped into buying loans they couldn’t afford, pay their debts the well educated financiers would then automatically get paid too.
These politicians are dumber than the fools who borrowed too much…!
Comment by Bryant Arms -
I heard your idea on the Neil Cavuto special Saturday morning and thought it was brilliant. Too bad Cavuto didn’t give it any focus after the short segment.
The brilliance of the plan, of course, is why the politicians who have a stake in their bailout plan would never consider it. Could it still be impletemented even after Congress gets through voting on the idiotic plan? If so, I’m in for a few thousand bucks. Any investor who pays attention to the waste that goes on in Washington would probably be happy to join in.
The electorate can solve this problem long-term by voting out every single politician in both the House and the Senate and replacing each of them with someone who shows a modicum of common sense.
Comment by Mireille J. Buser -
I’d just like to point out that you have come to a solution (arguably more workable than the one the gov’t came up with), and you didn’t have to suspend your life and other life to get it done. Maybe you should rethink your position on what a leader should do when a crisis like this happens.
One more thing. This comment input box has some sort of a bug where it cuts off the test to the right. I’m using the latest build of Firefox, and I’ve never commented before, so I can’t know if its new or not.
Comment by Dave Kingston -
It seems that the key to any good solution for this crisis is going to be transparency into the investments and The Fund.
However, we all know how the gov operates and I think transparency is unlikely. 🙁
Comment by Ryan Graves -
Pingback: BailOut Solution - I’m in for at least $425k | Sekiur My Thoughts
Most Americans are deeply opposed to this bailout. But it seems like
congress is going to do it anyway, “to save us”.
If we taxpayers are going to be paying the bill, shouldn’t we see some
benefit from it too?
If they are going to spend the money, shouldn’t they spend it in the way
that helps the most people?
What $700 billion to $1 trillion could do:
Instead of giving the money directly to the banks, the gov could send checks
for $14,000 – $20,000 to every single owner occupied home in America with a
mortgage. These
checks could be made out directly to the mortgage companies. So people could
not use it to go out and buy a car or a mink coat. The checks could only be
used to pay down an existing mortgage.
The banks would be getting the full $700 billion to $1 trillion that they
want. But it would pass through our hands first. They are spending our money
on the bailout. At least let us touch it for a few seconds.
This would:
1. Rescue the banks from themselves. (they still get bailed out)
2. Rescue private investors of mortgage securities. (they still get bailed
out)
3. Give people who are 30 – 90 days late a reprieve. They will be caught up,
and gain equity. $20,000 is more than a year of payments for most people.
(this is a bonus benefit, at no additional cost)
4. Builds equity for those who are not behind, by paying down their mortgage
by $20,000. (this is a bonus benefit, at no additional cost)
5. Removes negative equity for many home owners. People who owe $200,000 on
their $180,000 homes would now be able to sell them for the $180,000 value,
without going bankrupt. (this is a bonus benefit, at no additional cost)
6. Provide a soft deflation of home prices, rather than a crash in prices.
(this is a bonus benefit, at no additional cost)
7. Grease the economy. Those who are not behind on their mortgages and
already have equity built-up in their homes, will have even more equity.
These people will be flush with cash and will spend it on cars, washers,
dryers, etc. (this is a bonus benefit, at no additional cost)
8. Expose the mortgage brokers and banks who issued fraudulent loans. If 60%
of the “customers” of a broker or bank “don’t send their checks in”, they
can be looked at for fraud. Then they can be put in jail. (this is a bonus
benefit, at no additional cost).
We would all get a giant do over, instead of just the banks. We are the ones
paying for it anyway. Why should we pay the full cost of our mortgages, and
pay for the bad ones too?
Any banks that can not make it after this massive inflow of cash, they
deserve to fail.
Comment by VR -
i would favor the etf creation, finding the right mix of private placement and public funding (<700B) and distributing shares based on your tax liability into the funds. my only fear could be that in your plan, if this really is a good buying opportunity, and assets are truly undervalued (and i like to think the govt isnt lying to us but who knows and im not a financial expert but who is really), then we may be empowering those same CEOs who are cash heavy at the expense of short term vs long term thinking. this could then turn into rewarding them twice, first on the fake upside they created and pulling all their cash out, and then scooping up everything after for dirt cheap in the wreckage.
for sure your solution is much much better than forking out 700b straight to the companies with no real mechanisms for transparency. The politicians are politicians, not financial experts. This places the responsibility on making sure the right people are doing the right job.
Comment by Adam Silverman -
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I think your ETF idea is on the right track in terms of thinking of ways to create liquidity for this market. There are a few questions to answer.
1) Who and how would the NAV (net asset value) for the ETF be determined for the shares to trade around?
The assets you propose putting in the portfolio do not have an active market where a reliable bid and offer can established at all times. So how will the assets in the portfolio be valued in realtime to determine NAV? I imagine the management fee for this ETF will be drastically higher then most because of the accounting costs that will go in to.
2) What is stopping you from buying the assets now?
I don’t understand why you need to own these assets through an ETF, one which will be complex and probably costly given the assets inside. Why not just buy the distressed assets directly and save all those fees from running an ETF?
Your idea on “Standardization” of the information about the assets is correct. Someone did come with such a repository of information, its called Bloomberg and it costs $2k a month per terminal. Clearly most people can’t or refuse to pay $2k a month, which creates that information gap among the masses of investors. Perhaps if the underlying assets are listed on an exchange where market participants will have a central place of information and can easily buy and sell without having to negotiate the contract like is currently being done in the over the counter market, liquidity will be restored to those assets.
Comment by Barry Gitarts -
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You guys on here are suckers. Sec Paulson and these rich mofo’s
have stock options that they don’t want to lose value. Hundreds of
millions invested in wall street. When these companies tank so do
the value of their stock. Bush and his inner circle of cronies all
have a lot to lose. This bailout is a scam and will never work. This
top down mentality will back fire, change comes from the bottom up.
Homeowners should’ve been given the bailout two three years ago when
things went bad. Between Freddie, Fannie, AIG, Bear we’ve bailed out
already 1 trillion and now almost another trillion. Rich people will
come up with any scheme to keep their wealth.
Comment by Chance -
See a similar plan put forth by Arthur De Vany, Ph.D., professor emeritus of economics @ UC/Irvine on his blog http://www.arthurdevany.com “Pricing Mortgage Securities When Nobody Knows Anything” which also has some traction w/the financial markets themselves (see the post) which is simple and would have in fact prevented the crisis were it already in place and will be go a long way toward preventing future ones.
If, as you say, <>
how do we get together?
You have our contact info as does somone in one of whose ventures you are already invested: Travis K——–.
Aleck Grishkevich
Managing Partner/CEO
Extremal Security Partners, LLC
Comment by Aleck Grishkevich -
it definitely sounds like a good plan. i just hope whatever happens turns out to be the best deal possible for everyone.
http://www.jdiazblog.wordpress.com
Comment by jdiaz -
Doing an ETF is one of the better ideas I’ve heard. Certainly a
better idea than what I hear coming out of Washington.
But I’m not convinced we’re facing the impending catastrophe that it’s
made out to be. It’s not the run up to the Great Depression where
when the banks failed you had nowhere else to turn. There are plenty
of other funding sources, well managed Main Street commercial banks
and S&Ls that will step in to fund loans. Let the market run its
course.
Dave
http://www.islandersoftware.com/weblog/2008/09/27/just-say-no-to-the-bailout-plan/
Comment by dwrugh -
I saw Mark on Fox News this morning, and he said short selling is no longer allowed in the market. Is this true? I thought they were only banning it for financial stocks – does it now apply to all stocks?
From MC>
Now, its a list of about 900 companies now. Not all purelly financial stocks. However, many of those stocks make up the major indexes that some are looking towards as a referendum on the Bailout. My point was that because there are no shortsellers in so many of the index stocks, the market no longer is a good reference point. It is irrelevant when it comes to judging the Bailout
Comment by WJSDC -
Have you read Atlas Shrugged?
from mc> yes
Comment by Chris -
Mark,
Saw you on Neil cavuot show this morning. I love the idea of an ETF and the transparency it provides.
I think it shoudl be called the SECURITIZED HOUSING INVESTMENT TRUST and the acronym for the ETF should be:
SHIT
😉
Comment by Hank Paulsen -
I certainly do not have the background or experience to give a qualified opinion here, but it definitely makes a lot of sense to me; the logic seems pretty flawless. Like others who have replied, I also appreciate your posts on this issue, as it has been of more use than other sources in helping me to understand the whole situation. I also agree that you should have a wider forum for broadcasting these ideas– perhaps on Dan Rather Reports? If it were part of broader coverage, I doubt anyone could question you using your network to share your ideas given your business and economic expertise; no doubt many would appreciate it, I believe.
Comment by Rebecca -
Take it one more step. If $700B is the number, or increments thereof, why not create a separate private capital investment group that buys these same bad loans the govt plans to buy, obviously at some discount 70 – 80 cents on the dollar (or lower) refinance these loans through either a lower rate, longer term, or some combination there of (obviously this would be on a loan by loan basis) to reduce the toxicity of the loans and not let the original borrower off the hook for the loan and then turn around and re-securitize them for the market. Additionally, this private capital group should gain some tax benefits from the feds as they are taking the risk off the American people. Obviously this is a 50K foot level view and the details would need to be worked out but its a lot better than Paulson and the rest of his cronies using the govt and the American people to foot the bill only to have GS and the other remaining “Wall Street” fat cats swooping in a year later to pick up these same loans/properties at an even a lower discounted rate which is what the Administration is trying to set up.
Comment by Eric S -
Medicine for greed can’t be greed. This time the solution is not financial, it is social. And it will not come from the rich, the poors will do it.
Comment by Pablo -
That is an excellent plan.
You should know better than to expect the government to negotiate
such a fair plan.
I think they like their Sudnday Night Sleepover parties wild and full of suprises that those in the know will make a fortune out of.
Ron Paul could spare us all the extroadinary financial hardship we will be facing for not listening to him years ago and today.
Comment by Clint Richardson -
Are you willing to go 50 for the good of the country or because you think you’d eventually make money on the 50?
If the investors who fund the bail out will eventually make money or at least break even, then I’m fine with the idea of my taxdollars funding the bailout. If it’s done purely to promote the common wlfare then I want some penalties paid (in the form of forfieted salaries and voidied parachutes) by the people who forced me to pay for their mistakes.
From MC>
I think if done right, and an ETF would give us the best chance of doing it right because of the transparency, then this would be a very good investment
Comment by NoGoldClub -
“Thats like handing it to Ted Stevens.”
LMAO
Comment by James Stevens -
Though I disagree with on the necessity of the bailout, I respect your views, and the fact that you are willing to sacrifice your own money. I’m sure you are well aware of this, but too many people, a $50 million check from a single individual is unimaginable. I have never written a check for more than $200 (18 yrs). Remember that, Mark. I don’t dislike you at all for that fact, I actually respect your business canny. But remember that your wealth puts you at a socioeconomic level that most humans can only dream of. 99% of your audience does not understand $50 million, so I hope you remember your audience.
From MC
And remember that when I was 18, i was right where you are. Dreaming of the future. How we handle this crisis will determine whether you have the same opportunities i had .
Comment by Joel -
Pingback: The World of Joe » Blog Archive » Mark Cuban offers up $50mil Toward Bailout Solution
For all of you people that voted for George Bush and the republicans,
do you actually think the rest of us feel sorry for you?
You complain about a failed economy, damaged 401Ks and investments,
no healthcare, a misguided war for a country that we invaded
in error. All these things are the platform for which the
Democrats run on to fix. Meanwhile you’re afraid of gay marriage
(which will never be banned with an amendment, so give it up) or
you’re the 30% of pro-lifers that want to tell the other 70%
of people how to live their lives. My suggestion is go back to
Church on Sunday and pray for forgiveness. You’re all F’ing morons.
Comment by jobie -
Great idea Mark!
Lest we all forget….
The Federal Government convinced Main Street in the 1940’s to buy
“War Bonds” for heavens sake!
That was based on a promise to pay. It was either that or start
learning German/Japanese. Our backs were up against the wall.
Even though our financial system is many times more complicated
today. Buying ETF’s is basically the same thing since the assets
are currently worth very little.
It will surprise most people just how much money there is in this
country. We have accrued a lot of wealth. It’s in the 100’s of
trillions just in the USA.
The success of this ETF program might surprise everyone. Especially
if they call it a “National Security” issue like they did at the
debate tonight.
Comment by Neil in Irving -
Definitely a preferable solution to what is proposed now. Are you sure you’d want to play the politics?
Comment by Joe "TheHairFarmer.com" Kennedy -
I have a problem with “closed door sessions.”
Why close the door?
What’s so important that selected members of congress
must be informed of that the general public, who will
be paying for this mess, must not be allowed to know?
If I thought this mess would be as easy to clean up as
purchasing ETF shares with 1/20 of my net worth, I’d
be first in line.
But I just don’t trust this administration to tell
me anything even approximately close to the truth.
Comment by Dave -
I think the main question would be what should the ETF be priced at for the initial public offering. My suggestion would be that you price the ETF based on the value of the underlying real estate assets that the mortgages are based on. A Mark to Market approach. You can value the assets initially based on the tax assessed values which would avoid the costly process of obtaining new appraials on each property.
Then if the public thinks the assets are under valued or that there is a greater likelyhood that the mortgages will be paid instead of being foreclosed the price of the ETF will rise. If not then the price will fall. Either way there is an actual value of the properties that you can base the IPO price on that will allow this proposal to succeed.
I seriously hope that Mark has contacted his congressmen with this idea because it is the best one I have seen.
Comment by michael z -
Sorry wrong link above.
http://bigpicture.typepad.com/comments/2008/09/an-alternative.html#more
Comment by George -
Mark- Love to get your thoughts on Bill King’s idea. I would think the decentralization aspect would appeal to you. I really like your thoughts on the importance of transparency and utilization of the web to achieve it.
I’ll paste the link to the blog I found them on and the full text below. Thanks and please using your celebrity to help get alternative view out on this very important issue.
http://globaleconomicanalysis.blogspot.com/2008/09/feds-fisher-says-bank-rescue-plan-would.html
Here are Bill’s starting premises:
• The US credit system is broken.
• The Paulsen-Bernanke Bailout Plan does not insure that those banks and brokers that receive bailout aid will increase lending. The reality is the market is hoarding liquidity and these banks are likely to do the same. More importantly consumer lending has been a small, often insignificant part of their business. They made money by trading and through securitization of debt.
• It is necessary to create a new system parallel with the existing dysfunctional system in order to mitigate the inevitable economic and financial damage and to facilitate, as seamless as possible, the transition to a functioning financial system or new model of credit and banking.
• The Wall Street model, securitization and extreme leverage, is obsolete.
• US financial institutions need to recapitalize.
• Hank and Ben assert that it is paramount to keep credit flowing to consumers; the bail out is a necessary adjunct.
• Paulsen and Hank’s bailout plan is tantamount to bailing out Univac, Digital Equipment, etc, in the eighties, which would’ve retarded the development of Dell, Microsoft, Intel and other nascent technology companies.
• It’s wasteful & foolish to put more money in an obsolete non-functioning system
• Big banks and brokers made most of their earnings over the past several years in trading, not consumer lending. And now their derivatives are THE problem
• If you want to get money to the consumer: the less middlemen, the better.
• Decentralization of liquidity, lending and risk is necessary to refurbish the financial system. The illiquidity of a few large banks is collapsing the system.
Basics of the King Report Bailout Plan:
• Directly recapitalize banks by the US government allocating $500B into a plan for community-type banks to increase their capital in partnership with the government.
• The government would match existing or some percentage of existing bank capital. If it would be better, a separate bank could be created. Place a limit of say $1B per bank.
• This would create $5 trillion of credit at conservative 10 to 1 leverage. This is more than the entire private mortgage market. It is a much better use of capital instead of absorbing $700B of losses with
no means to discern resultant credit creation.
• Give the banks a tax rate of 15% on consumer and commercial lending for 5 years and the right to buy out the government share of the operation at some premium.
• Only banks that meet some metric, like a Texas Ratio of 50, are eligible.
• To help the big banks, allow them to create a consumer & commercial lending facility with the 15% tax rate benefit. This should entice private equity and sovereign funds as well as Wall Street remuneration that was garnered over the past decade or so.
• Prohibit trading, especially derivatives, in consumer & Commercial lending operations. However pure hedging would be allowed.
• Immediately increase FDIC-insured bank deposits and money funds to $1 million per eligible account.
Further considerations:
• Foreign banks in the US could be included if they have respective funding from their government.
• The real estate problem is due to the fact that American incomes do NOT support current prices. Easy credit allowed them to purchase homes they couldn’t afford.
• Any solution to clear the real estate market must entail hiking income, which is very difficult, or allowing prices to drop to levels that the average American can support. This helps average Americans, not the big banks and investors stuck with overpriced mortgages.
• No bailout for the imprudent and reckless but a means to directly help Americans and procure capital from private and sovereign sources because a new financial system must be implemented.
• This is not likely to be the final model but it is a stop-gap measure that will resonate with average Americans. It’s a way to connect with Middle America because it benefits them directly and is not an exclusive Wall Street bailout.
• The cause of our current financial morass is Big Government + Big Business = Crony Capitalism + Funny Money = concentration of wealth and risk + declining US living standards.
• The solution is decentralization of the financial system, like the tech industry, which will lower systemic risk, foster competition and yield better ideas, services and companies.
Comment by George -
I think your plan relies upon the perhaps mistaken belief that there would be investors willing to purchase shares in your proposed ETF. Given the current state of the economy and the well publicized fact that the CDO’s and other mortgage backed assets are now being referred to as ‘Toxic Waste”, i think this market may be nascent or or at best minimal at the inception. While I think your theory would work in an ideal world, pragmatically speaking i think you’ve wishful thinking. Great idea though, but I wouldn’t invest in such a fund, you’d need to be pretty ballsy (this coming from an options trader).
-RG
Comment by Ryan gardiner -
Best idea I’ve heard so far. Let the market try and only use tax money if needed. Maybe that’s what Buffet was trying to encourage.
Comment by Shane K -
It may be bigger than an ETF can handle.
We are talking potentially trillions in liabilities and assets.
When market prices for assets drop 20% or more, you are talking hundreds of billions of problems (liabilites greater than market price of assets).
Fifty million divided by hundreds of billions may not be significant %.
We’ve already seen one of U.S.’s most well-to-do cough up $5 billion or so, and this $5 billion realistically might not be even close to enough without govt assistance to financial entities and economy.
Comment by nathan -
I’m in for $5,000. I think an ETF would offer superior visibility.
Comment by Avi -
I think it is a bad investment for you! You should only buy muni’s because they are historically cheap. You could also take your tax free income and create your own bank (CUBAN S&L) and loan money to people who are responsible and credit worthy. This doesn’t help our current situation with the US Banking industry but I love your enthusiasm for this great country. Not sure what the right solution for wall street….but it is always the great minds of Americans that will persevere and make it through this mess.
Comment by chuck -
These assets are going to get sold somehow, just don’t leave the taxpayers the bill. Chase bought Wamu for a fraction of its value from a year ago. Wamu Equity holders just got slammed but they should be well aware of the risk otherwise they should not be in the game. There will be deals out there.
I just hope our leaders have enough sense to set aside their political agendas and protect innocent taxpayers who do not want to play in the game from getting hurt.
This is the opening ceremony for the financial olympics. Let the games begin.
Comment by EG -
Pretty clever, but if it was viable I think Buffet would have already done it with straight cash on a smaller scale with handpicked companies.
Comment by Joe -
Pingback: Digital Disruption » Blog Archive » Fixing the Financial Markets Mess
What a great idea ! Couple of tweaks and it works.
I just sent the link to your blog to the talking heads on cnbc. hope thats ok
Comment by dan -
wtf???? House republicans want decrease of capital gain tax in
order to pass the bill???. Did they completely sold their soul
to the lobbyist or I am just imagining things. It is like hey guys
you know these guys who screwed our economy up, they kind of had a bad
year in the stockmarket. They really need a tax cut and if you plan
succeeds(democrats): these dudes will get a tax cut, plus can write
the losses of from this year. Man I love this country of ours. Or
yeh, all poor bastrads which took mortagges they couldn’t pay, good luck
to them!!! Mark get the shotgun out!!!
Comment by Tim -
Thank you for calming all the “government bailout” frenzy long enough
to show that there’s an opportunity here to make money.
If assets are underpriced, mainly due to the mark to market rule, then
there’s a buying situation for others with cash.
Comment by Daltonsbriefs -
Wow,someone really put some thought into a fix for this mess. Good luck trying to get that through those knuckleheads in Washington. When has common sense ever played into a decision there?
Comment by Scott -
I agree with Len’s idea.
Get on television.
Use your name to get this idea/plan of action out there.
Not everyone comes to this blog.
Even if it (your idea) does not come to fruition…
At least you could say, “I told you so” when the 700 billion bailout does not work.
Comment by Tina -
Mark,
Call Larry King now or whoever is on CNN tonight and get this in front of more than people that read your blog.
You have the connections to get this on main stream media NOW and make this happen.
Just Do It.
Oops, did I just offend Nike.
Comment by Len -
I think you don’t need to wait for treasury to do anything. Buffet put 5B into Goldman without any “government” plan…
The markets got us into this mess, I think there’s a good chance they could get us out. The less the government is involved, the better, if you ask me. The only way I would support a gov’t bailout in any way is if we (the people, taxpayers) get an equity stake.
Comment by Dave! -
I imagine that $50MM is not sitting down at the local credit union
and is already in the government’s hands as Treasuries. Hmmm, sell gov
bonds to but this gov created ETF?
Mark, you have already written that check to the Treasury. And I thank
you. Now please stop writing about this CRISIS of epic proportions
that will only affect those who have not been prudent with their money.
Comment by Trip -
Only problem is this shakedown of wall street just turned all the best investors in such an idea into paupers.
Still a very good workable idea, like your last.
j
Comment by staypuftman -
Having an ETF would not work, it would have to be a securitized debt solution ..
What you are talking about is essentially what the fed did in the LDC
crisis of the 1990’s … They grouped all the bad assets and sold them as “Brady Bonds”
Over 1.7 trillion dollars of these bonds have been traded.
Comment by Alex -
Hey Mark, just posted my response:
http://www.squawkingtech.com/2008/09/mark-cuban-is-in-for-50-million-im-sitting-this-one-out/
Comment by Lee Hoffman -
Mark,
You are way too smart to be wasting your efforts on a basketball team.
Why don’t you start a 3rd political party and save America. You would
have my vote.
Comment by Mike97303 -
Pingback: Squawking Tech » Blog Archive » Mark Cuban Is In For $50 Million, I’m Sitting This One Out
forget treasury… Mark Cuban for President! Is it too late as a write in candidate?
Comment by daniel2 -
Great Idea. I can contribute $1000. My other funds I have to hoard for Mavericks playoff tickets.
Comment by John Mark Parsons -
Hi Mark,
I think your idea seems sound and you definitely should try to get the ear of some government official to present it and get some traction.
Which brings me to the point I made yesterday. We are in a volatile situation and reactions and outcome of this financial crisis are evolving and changing daily (ie. Wamu). This is one more reason why no one should rush into this and try to put a quick band aid on such a complex issue. Your comments about McCain needing to drop everything to attend to this crisis clearly show you now that this was NOT the proper way to handle this. Now he and his team are tripping all over themselves trying to save face (for tonight’s debate)because of a bad political gamble. ENOUGH already.
The right way Mark is what you just did. Come up with an idea and put it out there for us common folks to look at it study it, dissect it. Everyone will digest it at their own comprehension level. I am not by far an expert on those financial matters but you do have amongst your readers some that are very capable and will give you their honest and thorough feedback. The Wall Street system, the operating mechanics and even the terminology used has become excessively complex by design: to let a few control the money and keep the rest of us (too dumb do understand) out of it. Now let’s do the reverse. Expose to the mass your best and most thinking forward idea and let’s all dig into it until we reach a consensus. You will have people empowered as they feel they were an integral part of the process. We are so much smarter than our present government think we are.
Comment by Michel Thomas -
Hey guys, I don’t want to be pessimistic, but just reading the
newspapers I think what nobody tells aloud is that the value of these
assets is close to zero for real, because the value of the assets
is tied to the price of undelrying assets(property related)
and it is not tied to the value of the property. So then the only
way out from Fed is to “kill” these assets. There are two ways
to do it: Lehman Way(which probably means that the name of your bank
is going to be FDIC)or just give banks the money and take these
assets of their hands and burn the paper. So Mark don’t waste 50 mil.
I don’t think property market will go up any time soon. Invest into
something, and preferably which generates earnings not in U.S.
dollars, just too be on the safe side. U.S. is not a capital hub
of the universe any more.
Comment by Tim -
Beautiful. So much better than $700B just vaporizing as it will if the government just hands these guys the money.
I expect that if well run the fund would likely make a good return if it is getting the initial assets at fire sale prices as it will.
You’d be perfect to run it.
-Denny
Comment by Denis -
correction- Why has the practice of naked stock sale not been talked about?
Comment by Michael -
I am just an average citizen that has been digging for information since the news came out. I have been seeing more than just mortgage issues causing this issue. Why has the practice of naked stock sale been talked about? It seems to me that shady stock plays have cause some of the loss of assets in these companies too.
Comment by Michael -
This is way too complicated for me, but you’ve sparked my interest.
Before I look up ETFs and try to figure out what your proposal is, I
agree that you should try public office; no matter how good your
ideas are, how can you get them out there?
On that note, have you ever contacted non-web media outlets (print
and TV sources) with your ideas? Maybe they can have you on.
FORTUNE has spoken with you on various issues, so maybe they’d be
willing to put this blog on their site.
Next, I want comment on someone else’s comment, and that has to do
with conflicts of itnerest. It’s a great point that we have all
overlooked: If Paulson goes back to private– maybe GS or even some
venture start-up, who knows– then he could be using his last days
in D.C. to manipulate the market according to his plans. Again, this
is NOT my idea; credit should go to the blogger who simply lised “Tom”
as his name.
So, I credit Tom with making us realize that, if Paulson really is on
the edge of resigning, we need to scrutinize his reasoning and check
for bias.
But I want to ask, do people really think Paulson’s going out? I
mean, one day we say we’re happy with what he does, and the next day
we’re upset…I think it depends on November 4th but, more
importantly, the new cabinet-hiring decisions that come as a result.
There is a chance that Treasury will be the same cree– or is that
just too improbable for me to be claiming?
Comment by the-cuban-responder -
Now that we know that the candidates read this blog, let’s see how
long it takes for one of them to promote this has his idea.
Shane
Comment by Shane -
Pingback: I Like Mark Cuban! - Chris Leckness is a Geek
Here is Aurther DeVany’s solution. He’s thinking in terms of options.
You could issue options in the ETF’s agian with the long expiration times.
Everyone will admit that nobody really knows what the mortgages or the securities derived from them are worth. The market is illiquid to an extreme. The proposed bail out makes it rational to wait to unload them to see what the seller can get later. So, the plans being discussed to reinject liquidity to the market are having the opposite effect. It is making the market go away until mortgage holders can see what the Treasury will pay for them later.
As William Goldman famously said of movies, nobody knows anything when it comes to predicting what a movie will earn when it finally reaches the market. I showed in my book, Hollywood Economics, that the way to solve the problem of unpredictable results is to set the price later when you do know. How is that done? Well, to use the movies as an example, you make contingent contracts that pay based on the revenues a movie earns after it is released. Virtually all the industry’s contracts follow this principle, which I call the Option Principle. Designing option-like contracts lets you pay when you do know.
It is easy to apply the Pay When You Know option principle to these distressed mortages and their derivatives. Let every holder of these instruments sell call options on their value. Make the options at least 5 years (preferably 10 years) before they expire so that they do not expire before there is time for a return of liquidity to the market. This would give time for the housing market to recover as well. The option would contain several strike points so that investors with different expectations, risk preferences, and current asset positions can choose to cash in at lower strike points for a quick return while others choose to wait for higher returns. At each strike point, the option would pay a percentage of the value of the asset.
The option would be designed so that the buyer earns a share of the future value of the mortgage security if it rises. The option would be of no value and would not be exercised if the value of the mortgage security fails to exceed the first, lower strike price. The homeowner also should receive a share of the future appreciation. This would give all the parties to the mortgage a share in the future appreciation. Had options of this sort been issued at the initial purchase of the home, the speculative aspect would have been properly separated from the homeowner aspect and this whole mess would not have happened. The homeowner/speculator would have sold all or some of the risk of future appreciation to the market.
So, through the use of the call options on appreciation, the security holder, the homeowner, and buyer of the option could all share in the future appreciation of the home. This creates good incentives for the homeowner to stay with the mortgage. The cash proceeds of the sale of the option would be shared by the mortgage holder and the homeowner. This gives the holder and the homeowner immediate cash which can be used to pay the mortgage and for the holder to improve the balance sheet.
This set up could also be used by the Trust if the government sets one up to acquire underperforming mortgages. In this case, the government buys the option rather than the mortgage and shares in the future increase in value when and if the market improves. Thus, a well-designed option would share the benefits of future values among the three parties at risk: the government, the mortgage holder, and the homeowner.
A simple relaxation of regulation on banks and mortgage regulation would enable this solution. Banks have to have the authority to buy options, mortgage companies have to have authority to issue options, and investors of all stripes should have the authority to buy the options.
Comment by H man -
this is similar to what the Hong Kong government did during the Asian Financial Crisis back in 1997.
Comment by Jonathan -
The problem is that some of these ‘assets’ are anything but – they are debt, and bad debt at that.
Accounting standards that are nine times as creative as the boys at Arthur ANderson ever could have hoped means that literally billions of ‘dollars’ of bad debt has been shoddily packaged, traded, and now that the music has threatened to stop playing, kept on the books as ‘assets’.
I applaud the market-based monetization scheme only to the extent that, as you mention, it’s not a government nationalized monetization scheme. But it might as well be, becfause it will just propo up bad debt longer and continue to distort market signals when all we really need is a correction that will wipe out some of these bad debts, bankrupt the institutions that engaged in them, and clean the slate.
Of course, the danger is that with highly leveraged derivatives, the risks of counterparty default are grave and kind of unpredictable. But, when a heroin junkie needs a fix, the answer is not to try a new form of junk. It will sting, but the answer is to stop taking drugs and withdrawal.
Monetizing ‘assets’ is euphemistic, in any capacity, for packaging debt, as you know. This isn’t as damaging as the current bailout plan, to be sure, but it will not ‘fix’ the problem, and as such doesn’t represent a solution. Fractional reserve banking and government manipulation of interest rates will lead to boom and bust business cycles. Period. The boom needs to bust, and anything we do to make the unsustainable boom prolonged, the worse it’s going to be.
Mr. Cuban, we agree that a market solution is not possible, but I suggest this is because government has meddled so much that there is no solution but no solution. When markets cannot accurately convey price signals, they break down. When a wrench in the machine makes the gears stop turning, remove the wrench. Don’t throw in more (perhaps smaller) wrenches of a different color.
Comment by Blake -
“I got $5 on it”
Comment by Newzworth -
Isn’t this basically a bass-ackwards Fannie/Freddie? Which, IMO, were satisfactory solutions in the first place, except that they got managed like a Big Ball of Mud.
I tell you one thing, and Mark I believe I’ve read it from you before – this whole stinking thing has more to do with the PEOPLE involved than the assets or vehicles or companies or whatever. Greedy people created greedy means to get more greed and we (the US taxpayer) got stuck with the bag of crap leftover.
So, one part of this thing has GOT to be to get those people out of there. Would somebody send them of Collins “Good to Great” from Business 101 so that they can get the right people on the bus and the wrong people off?
Comment by Chris Pike -
Mark –
I think your idea is innovative and I truly appreciate your frequent blogging about this topic. I would be very interested in you expanding on your opinion that a pure market based solution is not possible. Why not? Sure we would have higher unemployment, a plummeting stock market, more bank failures, and bad economic times. But couldn’t that happen even with the bailout? Maybe the bailout will lessen the extent of it, for a certain period of time, but doesn’t our economy (and society) in general need a fundamental correction? Don’t Americans need to learn how to live within their means and pay for goods and services with cash (instead of credit)? Don’t we need to go back to an economy that produces goods through labor rather than just more “creative financing”? Wouldn’t people like Warren Buffet and yourself find opportunities in the free market crash/correction and use those opportunities to create jobs and slowly improve the economy? I know the pain of a free market correction would be very severe, but it may happen even with any bailout, and, in the long run, wouldn’t we be better off as an economy and a society with a free market correction? Don’t we need to, at some point, worry about the value of our currency? Wouldn’t the economic Darwinism of a free market correction create a better, more efficient financial industry than moving to a socialized financial industry? I would love to hear you expand more on why a pure free market solution is out of the question. Thank you again for your attention to and blogging on this topic Mark.
Matt
Comment by Matt -
The other BIG elephant in the room is the FDIC. The 700B plan does not include funding for the FDIC which has only 40B left to save any/all deposits of the American people. JP Morgan saved them on WaMu, but the real monster is Wachovia which has over 100B of option ARMs on its books. There is no one who will save Wachovia and the FDIC is going to go bust if it has to eat the bad loans. Of course the entire 100B will not go bad but I bet 50% of it is ready to bust. The Govt will have to force Citi to merge with Wachovia or face an even bigger problem when everyone finds out that thier deposits are no longer insured up to 100k.
Comment by Tom -
The ETF is so simple. I like the idea, especially because it would
require transparency. Maybe we can excempt capital gains taxes on this
ETF to induce investor participation?
Comment by Gregory Rueda -
Mark,
Once again you come up with a brilliant, workable solution. I see politics in your future.
-Mike
Comment by MSC -
Mark,
You obviously have a good grasp on the market mechanisms that are required to get a handle on this mess. The problem is what you can’t see and Paulson can. Because he and Bernanke are not divulging their lists of assets/banks in the “high failure rate” column, we cannot know for sure what financial vehicle will work. I think the ETF is a good idea for some of the assets. Others should be bought directly b/c of their size, complexity or toxicity.
Either way, you should try to get in touch with someone in the Treasury to go over some of your ideas. Also keep in mind that Paulson will be going back to Goldman next year and he does not want something out there that is going to make it harder for GS to cheaply buy these assets back from the Govt.
Thanks,
Tom
Comment by Tom -
It sounds like a good idea, but from my understanding it seems like the problem would be pricing the etf. The problem with these bad mortgages was that the market was illequid, so they are all priced close to nothing. If an ETF traded around $1 people would flock to buy because i think most people would agree that the underlying assets have to be worth more, but i don’t know if there would be any consensus on how to price it. I could be wrong – it may be simple, but i’m sure like most people in the country (including the people who got us into the mess) i don’t think that i fully understand 100% of how these things work.
Comment by Josh -
That makes entirely too much sense. Good work!
Comment by Chris -
Brilliant. I’m in.
Comment by Eric -
Mark Cuban for Secretary of the Treasury
Comment by daniel -