Weiss Research, Inc.
United States Congress
Senate Banking Committee
and House Financial Services Committee
September 25, 2008
New data and analysis demonstrate that the proposal before Congress for a $700 billion financial industry bailout is too little, too late to end the massive U.S. debt crisis; and, at the same time, too much, too soon for the U.S. Government bond market where most of the funds would have to be raised.
I. Too Little, Too Late to End the Debt Crisis. Congress should
Disregard data based on the list of troubled banks maintained by the Federal Deposit Insurance Corporation (FDIC). The FDIC’s list currently has 117 institutions with $78 billion in assets. However, based on a broader analysis of recent FDIC call report data, we find that institutions at risk of failure include 1,479 FDIC member banks and 158 thrifts with total assets of $3.2 trillion, or 41 times the assets of banks on the FDIC’s list.
Think twice before providing a broad bailout for U.S. debts given the wide diversity of mortgage holders and the great magnitude of the total debts outstanding in the United States. Just-released Federal Reserve Flow of Funds data show that, beyond mortgages, there are another $20.4 trillion in private-sector consumer and corporate debts, plus $2.7 trillion in municipal securities outstanding.
Recognize that, among banks and thrifts with $5 billion or more in assets, there are 61 banks and 25 thrifts that are heavily exposed to nonperforming mortgages.
Get a better handle on the enormous build-up of derivatives held by U.S. commercial banks.
Base any legislation on (a) realistic estimates of the loan amounts already delinquent or in default, and (b) reasonable forecasts of how many more are likely to go bad in a continuing recession.
Recognize the inadequacies in already-established safety nets, such as the FDIC for bank depositors, Securities Investors Protection Corporation (SIPC) for brokerage customers, and state guarantee associations for insurance policyholders.
There should be no illusion that the $700 billion estimate proposed by the Administration will be enough to end the debt crisis. It could very well be just a drop in the bucket.
II. Too Much, Too Soon for the U.S. Bond Market. There should also be no illusion that the market for U.S. government securities can absorb the additional burden of a $700 billion bailout without putting dramatic upward pressure on U.S. interest rates.
The Office of Management and Budget (OMB) projects the 2009 federal deficit will rise to $482 billion. But adding the cost of announced and proposed bailouts, now approximately $1 trillion, it is undeniable that the federal deficit could double or triple in a short period of time, driving interest rates sharply higher and aggravating the very debt crisis that the bailout plan seeks to alleviate.
III. Policy Recommendations to Congress
1. Congress should limit and reduce the funds allocated to any bailout as much as possible, focusing primarily on our recommendation #4 below.
2. If Congress is determined to provide substantial sums to a new government agency to buy up bad private-sector debts, we recommend that the new agency pay strictly fair market value for those debts, including a substantial discount that reflects their poor liquidity.
3. Congress should clearly disclose to the public that there are significant risks in the financial system that the government is not able to address.
4. Rather than protecting imprudent institutions and speculators, Congress should protect prudent individuals and savers by strengthening existing safety nets, including the FDIC for bank deposits, SIPC for brokerage accounts and state guarantee associations that cover insurance policies.
IV. Recommendations to Savers and Investors
Regardless of what Congress decides, savers and investors should continue to invest and save prudently, seeking the safest havens for their money, such as banks with a financial strength rating of B+ or better, U.S. Treasury bills, and money market funds that invest almost exclusively in short-term U.S. Treasury securities or equivalent.