The Progressively Minded "No BAILOUTS" Act

Why is "bailouts" in all caps? That's because not only did the Progressive caucus put together a comprehensive package that reforms the way things are done on Wall Street, they made an acronym out of it too. The "Bringing Accounting, Increased Liquidity, Oversight and Upholding Taxpayer Security" Act does almost everything that the original plan floated by Paulson did not.

From Congressman DeFazio (co-sponsor of the bill):

1) Require the Securities and Exchange Commission (SEC) to require an economic value standard to measure the capital of financial institutions.

This bill will require SEC to implement a rule to suspend the application of fair value accounting standards to financial institutions, which marks assets to the market value, no matter the conditions of the market. When no meaningful market exists, as is the current market for mortgage backed securities, this standard requires institutions to value assets at fire-sale prices. This creates a capital shortfall on paper. Using the economic value standard as bank examines have traditionally done will immediately correct the capital shortfalls experienced by many institutions.


2) Require the Securities and Exchange Commission to restricting naked short sells permanently

This bill will require SEC to implement a rule that blocks naked selling, selling a stock short without first borrowing the shares or ensuring the shares can be borrowed. Such practices many times harm the companies represented in the sales and hurt their efforts to raise capital. There is no economic value produced by naked short sales, but significant negative effects.


3) Require the Securities and Exchange Commission to restore the up-tick rule permanently.

This bill will require SEC to implement a rule that blocks short sales without an up-tick in the market. On September 19, 2008, the SEC approved a temporary pause of short selling in financial companies “to protect the integrity and quality of the securities market and strengthen investor confidence.” This rule prevents market crashes brought on by irrational short term market behavior.


4) “Net Worth Certificate Program”

This bill will require FDIC to implement a net worth certificate program. The FDIC would determine banks with short-term capital needs and the ability to financially recover in the foreseeable future. For those entities that qualify, the FDIC should purchase net worth certificates in these institutions. In exchange, these institutions issue promissory notes to repay the FDIC, counting the amount “borrowed” as capital on their balance sheets. This exchange provides short term capital, with not cash outlay. Interest rates on the certificates and the FDIC notes should be identical so no subsidy is necessary.

Participating banks must be subject to strict oversight by the FDIC including oversight of top executive compensation and if necessary the removal of poor management. Financial records and business plans should be subject to scrutiny while participating in the program.

In 1982, Congress approved a program, known as the Net Worth Certificate Program, that allowed banks and thrifts to apply for immediate capital assistance. From 1982 to 1993, banks with total assets of $40 billion participated in the program. The majority of these banks, 75%, required no further assistance beyond the certificate program.


5) Increase the FDIC Insurance limit from $100,000 to $250,000.

The bill will require the FDIC raise its limit to provide depositors confidence that their money is safe and help eliminate runs on banks which are destabilizing to the industry.

It may not be perfect and certainly not all-encompassing, but this is far better than what Henry Paulson put on the table with the full-backing of the President (for whatever that is worth these days). Congress should also move to rollback anything with Phil Gramm's name on it along with much of the de-regulation that the Republicans went with while they were in control from 1994-2006. I'd also love to see a tax on trades like others have suggested. A quarter ($0.25) surcharge per transaction is nothing for these people and in the end the government can raise billions of dollars a year to help undo the damage the industry has to our economy. Then break up the big banks so that the market will not have to rely on a few giant actors and give the taxpayers and homeowners a break (think foreclosures) to make up for the egregious behavior we have seen from the financial elites. The time for corporate welfare is over and we can right the wrong by giving the money they "stole" back to the people...and certainly disallow them from stealing even more, like Paulson tried to do.