Tuesday, September 23, 2008

My bailout plan

Here's my proposed bailout plan. It has provisions to help corporations, homeowners, and mortgage holders.

For corporations that want to raise capital. Any company may value itself at 50% of its lowest market price during the past 6 months. The company may then issue new stock--thereby diluting the existing stock. The government would buy the new stock as if it were a venture capitalist investing in the company at the 50%-under-market-price valuation. No company would be required to participate. This would allow companies to keep whatever they have on their books as long as they like. All they need is additional capital.

For homeowners and mortgage holders. Homeowners and mortgage holders would agree to a reduction in the mortgage. The government would give the mortgage holder half the difference between the current appraised value and the reduced mortgage principle balance. In exchange the government would own a share of the house proportional to the difference between the appraised value and the new principle balance.

As an example, imagine a house with an appraised value of $300,000 and with a mortgage also of $300,000. The mortgage holder and the homeowner agree that (a) the mortgage principle balance would be reduced to $200,000; (b) the government would give the mortgage holder $50,000; (c) the homeowner would give the government a 1/3 interest in the house. This would leave the homeowner with a $200,000 loan, which would presumably be affordable, but with no equity. The mortgage holder would have lost $50,000 instead of $100,000. The government would have paid $50,000 for a 1/3 interest in a house that is appraised for $300,000.

And if they simply go ahead with the $700 Billion bailout, here's how I would raise the money.

A special assessment. When a home-owners association gets into trouble, it typically declares a special assessment. Well, the country is in trouble. So let's do the same thing. I don't know how much the total privately held assets in this country are, but whatever they let's do the following. For any privately held asset, deduct $1,000,000 from the asset value and then assess the remainder the percentage needed to cover the bailout costs. The assessment percentage would be the same across the board after a standard $1,000,000 deduction.

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