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Even as the U.S. Senate was passing its version of the $700 billion Wall Street bailout Wednesday, alternate approaches to solving the financial crisis continued taking shape.
The plans include the fanciful, like the viral e-mail that advocates giving a slice of the $85 billion AIG rescue to every American adult as a "We Deserve It" dividend. Other moves appeared more pragmatic, if no less criticized. On Wednesday, the Securities and Exchange Commission moved to ease accounting rules so that banks have better-looking balance sheets — better-looking enough to help them resume lending and borrowing.
That particular strategy finds a home in a bill sponsored by Rep. Peter DeFazio (D-OR). DeFazio says he draws his ideas from the savings and loan crisis of the 1980s and '90s, when Federal Deposit Insurance Corp. Chairman William Isaac worked through the troubles of thousands of banks. DeFazio's legislation calls for the FDIC, which covers ordinary bank accounts, to step in again.
Before the Senate vote, DeFazio answered questions about his proposal in an interview with NPR.
Your bill calls for the FDIC to implement a "Net Worth Certificate Program." What's that?
PETER DEFAZIO: Basically, you send in a team of bank examiners, they look at all the assets of each bank, and they determine whether this bank has any prospects of [surviving].
And then the FDIC backs the bank? Would your bill be like FDIC insurance for an entire bank?
You could say that. It's perhaps a bit more complicated.
Some people didn't like, in the White House bill, that Treasury Secretary Henry Paulson alone would get to decide which banks would live and which would die. In this case, an agency would do that.
Exactly — professionals who didn't work with the firms in a competitive manner, as when [Paulson] was head of Goldman Sachs. I mean, imagine if you were a drinking buddy of Henry Paulson, when he becomes God with $700 billion to buy what he wants, whenever he wants, at whatever terms he wants. If you're good friends, you're probably popping champagne corks. If you're someone who made him mad, you're probably like, "Oh, man, we are in trouble here."
You write that the Net Worth Certificate program "provides short-term capital without cash outlay."
Right, because the bank would be valued higher than its current market value, but it would have been done professionally. That means they suddenly have the capability of lending.
That's still tough to understand. It has to do with suspending "mark to market" accounting rules, right? Can you explain what that means?
Under current rules, a bank is only allowed to value its assets at what they could sell them for today. So if they have a portfolio of subprime loans, and 75 percent of the people in that portfolio are paying their mortgage every month, they still have to value that as a zero-value asset.
Because everyone's saying this stuff is toxic waste that no one wants to buy.
Right. And I think this is a better way of doing it, because you don't take the [toxic waste] from the banks and give it to the taxpayers, which is what Paulson wants to do. Then you have to go hire a whole bunch of people from Wall Street to evaluate these things, hire a bunch of people from Wall Street to manage these things, hire a bunch of people on Wall Street to try and someday sell these things.
If you would suspend that [mark-to-market] rule and allow the fair-market accounting .... this would free up a whole bunch of money in the system, according to Mr. Isaac.
So the bankers get a chance to look at their portfolios and decide for themselves what they think is a fair value for their assets.
Given the income stream they're providing, yes.
There's an awful lot of distrust of bankers these days. Who would watch the bankers setting down the value?
The cops at the FDIC, the bank examiners, as Mr. Isaac explains it. I said, "Boy, there's going to be a lot of banks and a lot of people doing this. Does the FDIC have the capability of doing this?" He said, "Yes, we did it with 3,000 banks, savings and loans, during the savings and loan crisis."
How much would your plan cost?
Potentially nothing, because the FDIC and their insurance would be on the hook here, and the insurance is self-funding. When they get losses, they raise the fees on all the member banks. The government would have to up-front the money, but ultimately we'd get paid back, through the insurance.
What's the near future for your bill?
I'm getting a number of Democratic co-sponsors. I worked with two Republicans to write it. There's a lot of Republican interest, but none have signed on yet. I'm not sure what's going on on their side of the aisle.
There's been a lot of talk about balancing Main Street and Wall Street. Your bill seems to be about neither one.
I'm not pretending to solve the Main Street problem. Henry Paulson certainly isn't solving the Main Street problem. I'm saying that if we borrow $700 billion and throw it at Wall Street, that isn't going to solve the Main Street problem. If we don't borrow $700 billion, and want to help people stay in their homes, establish something like a Home Owners' Loan Corp. like FDR had, if we want to build infrastructure, want to put people to work, we'll still have some borrowing capability left. If we borrow $700 billion and throw it at the big houses on Wall Street, who's going to lend us the money to fix Main Street?