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Mosler plan vs Geithner plan

Posted by WARREN MOSLER on March 30th, 2009


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The Mosler plan to better accomplish what the Geithner plan has attempted to do:

Targeted credit default insurance between the FDIC and the banks

Here’s how it works:

Any bank could apply for FDIC credit default insurance.

The bank would submit the securities it wants insured to the FDIC for approval.

The FDIC would calculate a risk adjusted cash flow value for those securities (for a fee to cover expenses).

The bank then has the option of buying credit default insurance from the FDIC at perhaps a 1% annual premium of the average balance outstanding.

The FDIC credit default insurance would cover any bank losses on those securities.

This utilizes the FDIC as the ‘bad bank’ as is its intended purpose.

The FDIC should already have the capability to assess the risk adjusted value of all bank securities, as it does that to perform its normal audit functions.

The purchase of FDIC credit default insurance eliminates all capital charges and risk considerations for the bank for those securities.


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6 Responses to “Mosler plan vs Geithner plan”

  1. Richard McRae Says:

    Warren,
    I see the Restore America plan is continuing to develop — good points, all. On oil, why not rebuild Iraqi infrastructure, turn on the pipes, and start shipping to America? Cut Saudi out of the loop and drive down prices. The World Bank estimates a $1B investment per annum would be required to restore output — the major oil producers might be eager to go in with the loss of resources in other regions (Venezuela, Russia, etc.). Iraq is #3 in reserves with a 158 reserve to production ratio.

    Cheers,
    Richard

    Reply

  2. RSJ Says:

    The FDIC is not meant to be a bad bank, but to guarantee customer deposits, not bank equity or bank bondholders.

    Moreover, if you are insuring traded securities, then banks will buy up all the junk from the market whenever its price exceeds whatever log-normal “model” the FDIC uses and get the FDIC to insure it, minting a risk free profit.

    If you are only insuring loans held by the bank, then how is the bank assuming any credit risk in making the loan? It is just minting money from algorithms, and when reality doesn’t match the algorithms, the government funds the shortfall.

    In such a scenario, there is no such thing as capital adequacy, because as long as banks follow the FDIC models, they will earn a guaranteed profit. If banks cannot be the source of risk, but government must be the source, then nationalize the banks.

    Reply

  3. warren mosler Says:

    the fdic only insures deposits at member banks.

    and functionally it is the ‘bad bank’ in the case of a member bank failure as it takes over that bank and one way or another liquidates it, etc.

    Reply

    RSJ Reply:

    Agreed — the FDIC only steps in and provides funding after bank capital and bondholders have been zeroed out.

    You are proposing something different — that the FDIC insure bank assets without zeroing out capital and bondholders first. This is completely at odds with the purpose of the FDIC, which is to protect depositors, not bank capital or bank debt.

    These all need to be in a first loss position, before any FDIC funds are deployed. The risk is that the algorithms and VAR models are incorrect — by bearing this risk, banks are entitled to pay dividends and give out bonuses, etc. You cannot allow banks to mint money by guaranteeing their assets and making sure that banks cannot lose money by using a certain algorithm.

    Reply

  4. Mario Says:

    yeah I kind of agree with RSJ here in that if the FDIC started to insure securities then banks would have a carte blanche to buy/sell certain securities knowing full well that they’d be covered regardless of what happened to the deal. I thought the FDIC insures deposits (as you state above)…NOT loans. It would be a scary day I think if the FDIC started to insure loans. Wouldn’t you agree?

    Reply

    WARREN MOSLER Reply:

    i would agree. serious moral hazard risk.

    Reply

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