The McCotter Plan

Rep. Thad McCotter has put forward a plan to facilitate the recapitalization of the banking system without spending significant public dollars. (My earlier comments regarding a McCotter talk I attended a couple of days ago can be found here.)

Good luck to him. I guess we’ll probably be stuck with some version of the Paulson plan, but on the other hand, things are beginning to feel a little bit similar to the situation we had with comprehensive immigration reform: another bipartisan conspiracy against the interests of the middle class, planned behind closed doors, and nearly forced down our throats, but eventually beaten back due to a surge of populist resistance. Here’s hoping!

UPDATE, 9/25: McCotter appeared on Fox today, the video is here, and here’s a partial transcript:

I think what we need to do is shift the debate from the public bailout as the first resort, and try to find ways to incentivize a private recapitalization with a last-resort appropriate government backstop. … There are alternatives out there, that are not being allowed to be explored. … We need to be responsible about this. … The market right now is trying to correct the housing bubble. What we’re trying to is make sure that that does not exacerbate a credit crunch but instead becomes a way in which the deflationary period, which is requisite, does not impact main street, freeze up credit, and so what you have to do in our mind is change appropriate laws to incentivize private recapitalization by making the toxic asset less toxic, and leaving the government as a last resort backstop should that process not first occur…

End of update.

McCotter’s press release reads:

I was not elected to abet American socialism.

Thus, I am opposing the Bush administration’s taxpayer funded, trillion dollar Wall Street bailout; and, alternatively, proposing a pro-taxpayer, free market, private recapitalization plan for the banking system; ending financial chaos; and preventing the advent of Wall Street Socialism.

Drawn from the free-market ideas of the public and our members, this proposal is premised upon the following principle: Our prosperity is from the private sector not the public sector.

True, some will still assert the administration’s support of Wall Street’s leveraged bailout at taxpayers’ expense is the only answer to this crisis of confidence. They are dead wrong.

First, we must never punish the innocent to profit the guilty.

Secondly, a taxpayer bailout is never the first or only resort. If it is claimed to be so, the object of the bailout is already too far gone to be saved.

Thirdly, this trillion dollar taxpayer bailout will not prevent a Great Depression. It will promote a Greater Depression. [ME: whoa, is he reading or something?]

While there exist a host of other reasons, for the sake of brevity let me reiterate: The Paulson Plan is premised upon a public bailout. A better plan is premised upon private recapitalization. Thus, I oppose the Paulson Plan’s raid on the taxpayers; and I will continue fighting to ensure the Wall Street crowd who made this mess pay to clean it up.

And here’s the plan, below the jump:

(also available as a Word doc here.)

“Expedited American Recapitalization – Now” Act

(EARN Act)

  1. Expedited American Recapitalization – Now (EARN) Proceedings: A sunset bill that makes available to financial institutions a pre-packaged recapitalization (EARN) proceeding in which debt forgiveness is expedited.  (This is similar to expedited bankruptcy proceedings.  The strike warrant price will determine values.)
  2. Inducement to EARN Proceedings: To induce financial institutions to undergo EARN proceedings, future government recapitalization (if necessary) may not be offered to a financial institution which does not go through an EARN proceeding.
  3. Incentivize Private Recapitalization: If, within a limited one year window (commencing upon this legislation’s enactment into law), a person invests in (i.e., recapitalizes) a financial institution that has undergone an EARN proceeding, this investment over its lifetime is subject to a ZERO capital gains tax rate.  If, within the same one year window, a person purchases a toxic asset, this investment over its lifetime is subject to a ZERO capital gains tax rate.
  4. Government Backstop: If no private capital is forthcoming, the government can take a preferred equity stake in an EARN financial institution.  No dividends may be paid to any other investor until the taxpayers’ claim is redeemed with appropriate interest.  The government shall also hold voting rights, as determined by the percentage of its equity shares owned, in an EARN financial institution only until such time as the taxpayers’ claim is redeemed with appropriate interest.  (This addresses CEO salaries and bonuses without permanently vitiating the private sector’s setting of compensation.)
  5. Distressed Homeowner Relief: 5% of all government recapitalization invested in an EARN financial institution must be dedicated to an across-the-board reduction in the face value of “toxic” mortgages.  This will help keep people in their homes; stabilize the foreclosure crisis; and begin to stabilize and raise all homeowners’ values.
  6. Non-EARN Financial Institutions: Financial institutions choosing not to participate in an EARN proceeding, may wall off their toxic assets (as determined by the Secretary of the Treasury) which were purchased between December 2003 and August 2007.  For these toxic assets, the current mark-to-market rule will be suspended and replaced with a more accurate three year rolling average mark-to-market; and for a fee, insurance of these toxic assets can then be purchased from the federal government.  If, within the above referenced one year window a person purchases a toxic asset, this investment over its lifetime is subject to only HALF the capital gains tax rate applicable at present; if the capital gains tax changes, the toxic asset’s purchaser possesses the option, upon alienating the toxic asset, of being taxed at the capital gains rate applicable at the enactment date of this legislation into law.
  7. Market Transparency and Congressional Oversight: To ensure Market Transparency, the Secretary of the Treasury is empowered to examine any and all appropriate financial records at any time of financial institutions and individuals covered under this act; and Congress at any time may request of the Secretary of the Treasury any and all information required to protect the taxpayers’ investment incurred under this act.
  8. End “Too Big To Fail”: Make an express commitment to a future, pro-active regulatory system in which a market share cap provision is imposed upon financial institutions to prevent future taxpayer bailouts and market meltdowns due to entities deemed “too big to fail.”
  9. American Families’ Prosperity Package: Make an express commitment to further American families’ prosperity in a free market future by enacting pro-growth legislation, including, but not limited to:  an “all of the above” American energy security plan; income tax and capital gains relief; the repeal of Sarbanes-Oxley; suspend the mark-to-market rule for all financial institutions for six months and replace it with a more accurate three year rolling average mark-to-market; GSE privatization; and dollar stabilization.  (See Gingrich and RSC proposals.)
  10. Ultimate Cost to Taxpayers: ZERO!

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