Ten Steps To Recovery

- By Kevin Yu

Here is the possible proposal for resolving the most severe financial crisis:

First: As with the Treasury TARP plan, you need to buy illiquid/toxic assets and take them off the balance sheet of banks and financial institutions to re-liquefy them and allow new credit creation.

Second: In exchange for the purchase of illiquid assets, the government gets preferred shares in the financial institutions that allow it to participate in any future upside.

Third: Even the government injected capitals into banks, banks still need capitals to recover from losses. So we will need to inject further actual public capital in the form of preferred shares in the financial institutions.
Fourth: The existing shareholders of the banks need to take a first-tier loss to minimize the risks for the government share. Start by suspending dividend payments on common shares and possibly even existing preferred shares.

Fifth: Public and private recapitalization of financial institutions unfairly benefits unsecured creditors--all creditors except insured depositors--of such institutions. So, you also need to convert some of this unsecured debt into equity.
Sixth: After this crisis is resolved, the banking and financial system may need lower capital than before so as to avoid new asset and credit bubbles.

Seventh: As with the Resolution Trust Corporation, the assets of bankrupt banks that are allowed to fail go to the HOME for a workout (debt restructuring/reduction).

Eighth: You need a program like the Home Owners' Loan Corporation (HOLC) for debt reduction of the household sector. Households in the U.S. have too much debt than asset.

Ninth: government to avoid a situation where the recapitalization of banks and the resolution of this financial crisis lead to another credit and asset bubble.
Tenth: Start implementing a reform of the regulation and supervision of financial institutions in a world of financial globalization

Sources:

1. http://www.nytimes.com/2009/02/25/business/economy/25econ.html?_r=1&ref=business

2. http://www.forbes.com/2008/09/25/mortgage-debt-relief-oped-cx_nr_0925roubini.html

3. http://en.wikipedia.org/wiki/Financial_crisis