Buyout expert Wilbur Ross has a bailout plan, one he’s willing to put $1 billion of his own money to back.
Besides billions of dollars in new items to make it politically palatable, which Ross calls “disgraceful,” the bill passed by the Senate Wednesday also has what Ross considers a fundamental flaw: It doesn’t make the banks put the $700 billion back into home lending.
Banks might take the money and simply apply it to their balance sheet, leaving borrowers — and especially potential home buyers — out in the cold just the same, Ross warns on CNBC.
“The banks have lost around $130 billion more capital than they raised through the write-offs of lost capital,” reducing lending capability by about $1.5 trillion, Ross says.
“So this is $700 billion of that coming back. I would have preferred some assurance that that money got redeployed into mortgages, and as far as I can tell, there is no actual linkage.”
“It may well strengthen the banks’ balance sheets, but it may not solve the mortgage crisis. I think that’s what we need to deal with,” he says.
To fix that problem, which could happen in time for the House vote on the bailout coming up, Ross proposes instead an insurance program.
“If they want an alternative to actually laying out the $700 billion, set up an insurance program where the government would guarantee one-half of a mortgage that had been reduced to the true net value of the house, after selling commissions and all that,” Ross says.
The half backed by the government could then be sold separately by the lender, freeing up liquidity. “That would allow the lenders to pay to the government, say, a 2.5 percent a year insurance fee,” Ross says.
Some houses would lose more value anyway, and Ross would cover that loss by dividing any appreciation on insured properties into three parts — a third to the government fund, a third to the lender for taking the initial hit on price, and a third to the home owner.
“By making it transferable on the first sale, it would ease the problem of borrowers getting new mortgages, and it would ease liquidity,” Ross says.
“I would back it on reinsurance, and I think a lot of other folks would as well, because the math works out,” Ross says. “Our funds would be willing to put up $1 billion for it.”
Billionaire George Soros is out shopping a similar idea, only he wants to put money directly back into the banks, not buy up bad assets and hold them hoping for a profit.
“Funds injected at the equity level are more high-powered than funds used at the balance sheet level by a minimal factor of 12,” Soros writes in the Financial Times.
“In practice, the effect would be even greater because the injection of government funds would also attract private capital,” Soros notes.
“If the funds were used in this way, the recapitalization of the banking system could be achieved with less than $500 billion of public funds,” Soros says. “The result would be more economic recovery and the chance for taxpayers to profit from the recovery.”
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