One of the biggest failures of the bailout plan that was voted down on Monday is that it failed to consider alternatives. Some alternatives I believe should be considered:
Home Purchase Income Tax Credit
Congress should approve a 10% income tax credit with a limit to create action in the market. This would cut the effective economic cost to potential home buyers without cutting the price to the seller and will largely solve the problem in the housing market. The tax credit should be available to anyone, only apply to existing inventory. In order to motivate rapid sales activity, Congress should approve a fixed amount of tax credit and make it available on a first come, first serve basis. This would encourage real estate investments by those who otherwise would not and would clear the housing inventory. It reduce risk and increase capital at banks and would increase the standard of living across the nation. To learn more, click here to read a letter of explanation from John A. Allison Chairman & CEO of BB&T.
Mark to Market Reform
Mark to Market is an accounting measure that assigns a price to a financial position based on the current market price, regardless of the price at which the position was purchased and regardless of the intent of the position. This type of accounting measure makes it very tempting and easy to commit fraud, as we saw in the in the Enron Scandal.
Example: You take out a mortgage to purchase a Home in 2006 for $175,000. In 2008, you have paid down your mortgage to $160,000. Because of declining home values, your Home is now worth – at market price – only $140,000. If your mortgage bank used “mark to market” accounting, then they could force you to immediately pay $20,000 - the difference in your mortgage balance and the “market” value of your home. When this happens to large banks, they sometimes have to come up with millions of dollars in a single day – even though their “homes” are the same ones they bought two years ago at $175,000.
Issue Net Worth Certificates
Congress could issue a “net worth certificate”, which would shore up the capital of weaker banks and give them more time to resolve their financial problems without any subsidy or cash outlay by the government. The FDIC would purchase these net worth certificates in troubled banks if they determine the bank has the potential to succeed. Banks entering the program would agree to strict oversight on items such as poor management and executive compensation. As the banks regain financial health, they would redeem the net worth certificates.
Example: This is similar to what was enacted in 1982 during the Savings and Loan crisis. Instead of giving these banks money, they would receive the “faith and backing” of the Government. This gives them the time they need to recover without spending taxpayer dollars.
Net Operating Losses
At this time, many investors have cash on the sidelines, and they are willing buyers of these financial instruments. Despite the presence of these buyers, many firms with mortgage-backed securities are not willing to sell them at such a huge loss. Allowing companies to carry-back net operating losses in tax years ending in 2007-2009 back 5 years will generate a tax refund and immediate capital. Such a carry back provides a cushion for their losses, making the firms more willing sellers.
Example: Because of the mark-to-market valuing, banks will have to sell their bundled mortgage securities at a loss. By allowing them to carry their losses over several years, we can make them more willing to sell these securities – even at a loss – freeing up financial capital.
Bank Losses on Freddie Mac and Fannie Mae Stock
Community Banks should be allowed to treat losses on their Freddie / Fannie preferred stock as ordinary losses instead of capital losses, in order to let these small-town banks receive fair and reasonable tax treatment as do other businesses. Due to the way the Treasury placed Freddie / Fannie in conservatorship, many small-town banks will be unable to offset this huge forced loss on their tax returns, damaging their ability to provide loans in those small towns.
Example: Your community bank isn’t allowed to invest in stocks on the open market. They can however, invest in entities like Freddie / Fannie, which pays your community bank a dividend. When the Government placed Freddie / Fannie in conservatorship, community banks had to write-down their losses. Because these losses are considered capital losses instead of ordinary losses, the Government’s actions will place a huge, unanticipated tax on community banks that they may not survive.
Repatriation Infusion
Currently, profits earned by U.S. firms overseas are taxed back here at home. A “repatriation infusion window” would allow these profits to be taxed at 0% if – and only if – they were invested in distressed debt for at least one year.
Two-Year Suspension of the Capital Gains
We should immediately suspend the capital gains rate from 15% for individuals and 35% for corporations. By encouraging corporations to sell unwanted assets, this provision would unleash funds and materials with which to create jobs and grow the economy. After the two-year suspension, capital gains rates would return to present levels but assets would be indexed permanently for any inflationary gains.
Schedule Fannie / Freddie for Privatization
We need to transition Fannie and Freddie over a reasonable time period to truly private companies without special government privileges and open them up to real market competition. This reform would:
1) establish common sense limits for their capital requirements and portfolio
holdings relative their size
2) focus their mission on affordable housing only, not profit making
3) require them to pay an appropriate risk-based amount for the government guarantee they enjoy
4) subject them to state and local taxes and accurate SEC filings like every other private for-profit corporation
5) ultimately provide for the phase out their GSE charters once their conservatorship has ended