I wanted to share an extract of an e-mail I sent (unsolicited I should add) to the US Treasury Department on January 22, 2009. My suggestion for cleaning up bank balance sheets:
" ... Banking, Capital market and other regulators in the US and Western Europe primarily, first remove any regulatory roadblocks to the following steps:
Banks are offered a window of a few months to, or may even be required to, spin all troubled and potentially troubled assets off at steep discounts to new publicly traded companies that are owned by their current shareholders in the same proportion as they own shares in the main banks. Shareholders do not pay anything for the shares in these spun off companies. While the assets of these companies will have little or even negative current value, the value of their shares cannot obviously reduce to below zero. The cost of administering these holding companies should be minimal and could be borne by the main banks.
These spin offs to be made retrospective to the end of the previous (Dec 2007/March 2008) financial year – allowing for accounts for the remaining operations of the banks to be restated in a manner that enables better estimation of value of the shares of the main banks without the overhang of uncertainty of further write offs. Also, the balance sheets of the remaining operations should generally provide for less onerous capital raising requirements to meet capital adequacy requirements in a time of scarcity of capital. While the losses on transfer of the toxic/troubled assets will be significant these could be amortized over a few years and investor sentiment would be mitigated somewhat by the clarity on remaining operations and the removal of the overhang.
Any recoveries from or sale of the troubled assets by the spun off companies to be distributed among shareholders. Economic recovery should also lead to some increase in value of the shares of the spun off/holding companies. ..."
As always, comments much appreciated.