Yesterday, after extensive deliberation with economists in the United States and Europe, The Epicurus Institute proposed to Congress an alternative to the Paulson Bill, which is now expected to fail once more in the House.
Both Democrats and Republicans alike who voted against the bill have become entrenched in their opposition and believe the bill to be fundamentally flawed. Economists around Europe concur, believing that buying toxic debt is not a prudent or long-term solution and simply results in a clean-sweep of Wall Street with little economic affect on credit markets, and in light of the 6.9% LIBOR rates their position seems to have solid ground. Those same economists believe that that the markets are fully capable of taking care of the bad debt on Wall Street, but that the banking industry requires capital contributions to stablize the credit crisis, deemed of paramount importance.
We’ve supported the Paulson initiative on the basis that something had to be done before a financial panic set in. Unfortunately, that panic is currently in progress as bank depositors are fleeing stable and fully solvent financial institutions on fear alone. One can see this in wide spreads on gold and the flight to T-bills, which have reached very low, indeed historically low yields.
Our alternative program, which is outlined below is a combination of investments, not bailouts or rescues. The program has the same effect of a bailout, but without risk to the taxpayers. It may not be the perfect solution, but it does create an economic stimulus on Main Street with the sole intent of establishing a new employment base. Economists at the London School of Economics calculated that the bill would create nearly 2 million jobs over a five year period.
The plan is called “Invest in America” and using Secretary Paulson’s figure of $700 Billion, it provides for investment directly into bank companies, allowing Treasury to buy up the equivalent of proven bad loans through capital investment. The investment would allow the banks to buy back the shares over a 10 year period, giving a profit to the Treasury, while also providing much needed capital to the banks. Fully recovered from their losses, banks would be free to begin lending once more. The investments would be protected by liens on bank properties and assets other than the mortgage and loan portfolios.
About 30% of the fund would be allocated to a direct investment program in America’s small to mid-sized businesses. This would spur new jobs, restore capitalization of the nation’s companies and stabilize companies presently beginning to see serious difficulties. Putting nearly $210 Billion in the American business community, at the Main Street level is an economic stimulus that will establish new businesses to replace ones already lost to this fiscal crisis. Putting people back to work would create new and more stable bank deposits and cashflow through the banks.
The proposal submitted to Congress:
A $700 Billion fund would be authorized by the Congress to the Treasury for the purposes of direct investments in the American Economy. Such investments would be structured in this manner:
1.) 35% or $245 Billion as a direct investment fund in banks and lending institutions.
a. This investment would be a purchase of preferred shares with voting rights. The purchase would be equal to and not exceed the amount of total devalued assets which must be proven to be in default by the bank.
b. Shares would be bought directly from the company, and not through brokers. The shares would also carry an option – a right of first refusal to permit the company to buy back the shares from Treasury over a 10 year period. If the company refuses, then after the 10 year period, the Treasury may begin a staged sale of shares over a period of time to be determined by market conditions at that time.
c. Shares would also hold a prime lien on bank assets, so that if the bank were to fail, the taxpayer would hold rights to tangible assets such as buildings, real property, etc. to sell, thus protecting the investment interests of the US Taxpayer.
2.) 35% or $245 Billion as an emergency fund for any liquidity crisis which may occur, subject to the same oversight specified in the revised Paulson Plan.
a. The use of such funds to be primarily an investment, not a rescue or bailout or purchase of bad assets.
b. The same rules as in Sec. 1 would apply
3.) 30% or $210 Billion as a direct investment in America’s small to mid-sized businesses.
a. This program would require that businesses provide a business plan for review and qualification.
b. Once the plan is validated through a due diligence and scoring system, the business is qualified to receive up to 60% of capital requirements from this fund, provided the company can obtain the remaining 40% from other qualified sources such as loans, private investments or personal capital.
c. The investments are protected by a lien on property, contracts or leases and require monthly financial reporting.
d. Qualified companies must pass a simple financial literacy test to ensure that the entrepreneurs or management have the knowledge and understanding to properly manage the enterprise.
e. If a business plan is not properly scored, the applicant may re-apply.
With this plan, taxpayers are fully protected from risk, and a large infusion of capital is placed directly where the money is most needed; within banks, to restore credit and liquidity, on Main Street, by investing in American businesses and by creating jobs around the nation.
Treasury may create a special class of bonds for this program, if necessary, to transfer this from taxpayer to investment based funding.
If you like this plan, please contact your Member of Congress and Senator and ask for their support for this solid, economically sound proposal.