Posted by WARREN MOSLER on March 30th, 2009
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.