Bailout 14: Possible Solution

[aveenPulimi]

The culprits in this whole recession are the rating agencies. They are the only companies that haven't felt the brunt of recession and have profited. They haven't done their jobs correctly. Regulating these rating agencies would be a better choice to avoid these disasters in future.

[voutasaurus]

@khanacademy: Do you think that the US government would still have a AAA rating if they did this instead of absorbing hundreds of billions of dollars in bad assets?

[tIs4gatorbait]

Sal you aren't teaching anymore, at least in this playlist. You keep bringing things up like something that happened in Japan, Fannie Mae/Freddie Mac, "too big to fail". I don't know anything about these, as I am trying to learn something I previously knew nothing about.

[tnekkc]

The worst idea in the history of the earth, large scale collectivism, is based on the idea of being more fair.

Hitler was the only politician for the little guy. He wanted it to be more fair.

Stalin was the only politician for the little guy. He wanted it to be more fair.

Mao was the only politician for the little guy. He wanted it to be more fair.

Pol Pot was the only politician for the little guy. He wanted it to be more fair.

FDR kept the economy in the toilet, through fairness.

[tnekkc]

My God!

Make a video with text that cannot be read?

And Bill Gates and Google give you money?

Grade school kids would be made to do it over by their teacher!

[tIs4gatorbait]

@tnekkc What a stupid comment

[tnekkc]

@tIs4gatorbait

Comments are not stupid, people are.

That is why you are gator bait.

[tIs4gatorbait]

@tnekkc Wrong. Very smart people can make mistakes or say silly things but that doesn't make them entirely stupid. Sal makes mistakes on things in his videos all the time but he's not dumb because of it.

[MrAchilles1984]

This plan would lead to bankruptcy of many banks. Savings and pensions (since pension funds are invested in those banks) would be wiped out or would at least lose a big portion of their value (since they are FDIC insured). This would not only hit the wall street (which would be ok, but also the main street). However, this would be a better solution in the long run, but very painful for everybody in the short run.

[ArezList]

but isn't this could be politicized by republicans to be called "socialist"?

[davest1563]

Government intervention caused it all? who set the interest rates so low? who required loans based on race and location instead of credit score? Who set up the quasi government entities fannie and freddie to pick up the loans? More government will still cause more of the same. Yes the wall street guys screwed up but they could not have done it with out the Government doing those things first.

[enkelin32]

LOL they actually did do something similar to this, except using the existing banks (gov bought much of citibank). Most banks have now paid back the tarp but unfortunately have NOT loaned the money for investment. They still like trading their derivatives and black pools too much. That is also why we will not get much financial re regulation that we need so badly. Banks still have too much power. Power to steal everyones hard earned pension money.

[angelfed20]

i don't know. the approach would be like making the economy blow up.

I think that what the Gov did it turned up to be successful as all the major banks except citi paid out the principal plus interests

[curtisjb1983]

It's just an idea people. We will never know whether this would have worked better than what we used. We will never know if giving the money to the population would have either (people forget that we tried that with the stimulus checks). Economics is not an exact science so we can sit here and make accusations but the truth is no one can be sure what is best.

[GILLERANUSA]

1. The $700B is just TARP. Real value of monetary assistance includes, a) IR 0%, b) backstop guarantees, c) AIG bailout, d) M2market v. M2model, etc...

2. The money is spent, so it's not available to capitalize new banks.

3. The real solution would've been to give the money directly to the people in the form of big, fat checks to jump-start the multiplier effect and some common sense reforms in banking while unwinding the losers (BoA, Citi, GS, etc...) Resolution Trust-style.

[enkelin32]

@GILLERANUSA ...True about this being just TARP. Between the FED and Treasury they had already committed over 7.6 Trillion before December 2008.

[pagalmadman1]

i hav got so much stuff in my mind, i guess i need to mail u.......

also i hav an insight and few doubts....but this stupid youtube comment cant exceed 500 charachters.....

BTW, i hav been watching ur videos from the start from ur website.... and i find them really worth watching tonnes of thanks....... keep up the good job......

[pagalmadman1]

contd....

3.The old banks will defuse out instantly as all the ppl wiD their money saved in the banks will ask for their money, all existing banks will go bankrupt & so all the banks that exist will get over instantaneously, while creating 50 banks wud take time building & setting up staff etc..& popularizing them..,SUMMARY:d old banks wud fuse and new banks wudnt b ready, implies no banks at many places.

4. most people will out of shock lose trust over banks, implies no further usage of banks.

[pagalmadman1]

few loopholes in the new solution........

1. What about the people who have money saved in the banks that u hav left to die......(the old banks)

2. since nobody has money to invest as every one is scared about their future needs of money, who is going to invest in these banks?

continued in next comment........

[pagalmadman1]

i think some ppl who overvalue the property that forms the basis for CDMO's are corrupted or mayb the bank owners show that the property was low value getting the rest of the money after selling them in their pockets........

[dsws2]

"This is their book equity; this is what they say is the book value of their assets."

OOPS!

Equity = assets - liabilities.

Remember equity, the little rectangle on the lower left? It's a lot smaller than assets. The amount of nominal asset value that could be destroyed if the crisis relapses and goes to completion would be an order of magnitude greater. So would the real asset value destroyed in the course of liquidation as productive going concerns are replaced with scrap and salvage.

[trainicvideos]

Exellent Videos !!!

[andreyoso]

Hi Sal..

I personally thinks that your proposal is a good idea. However, in terms or real implementation it is a bit unrealistic.

My reason:

1. Opening a new bank might incur a huge start up cost. Besides it will be a long time lag since its inception until full operation as the new banks needs to acquire capital.

2. Most importantly, what differentiate us to the Chinese banking system then? When Banking are only used as a tool to pass the money to the public.

p.s: i really enjoy your video!

[nafizkarim]

I really like the idea in creating new banks and letting old bank declare bankruptcy- this can fix liquidity. But my only problem with this idea is that allowing old banks to become insolvent will make people who have money in the old banks take out all their savings and hide their it under their bed. Isn't this situation much worse? Do you think there is a way this new bank plan can accommodate to the fear that people may lose their checking and savings if the old banks declare bankruptcy?

[ananiasacts]

The mortgage interest tax credit could be doubled for only about 660B/yr. That would have prevented us from having to bail out the banks and brought them a lot of new business in the form of the 1/3 of homeowners that have no mortgage. That credit could be phased out entirely over a long period leaving a more equitable tax code and lower home prices. Letting the banks crash would harm lots of ordinary people via their 401Ks etc.

[emilianopickett]

The real thing Sal is forgetting is that 'too big to fail' really means that certain shareholders of certain banks are too important to lose their investments.

If the Sal/Todd plan were put into effect, many of the existing financial institutions would go belly up. But who are the shareholders--Saudi princes, congressmen, senators, etc.

This is the sad reason Sal/Todd's plan will never see the light of day.

[ryeb00]

Part of the issue that I think this solution neglects is that the systemic risk is global. Remember the hit financial markets around the world took after Lehman Bros collapsed? These Wall Street banks are in huge debt to banks around the world

[draggeddownthehole]

Yes, but those banks in Canada for instance are as guilty for trusting these toxic assets filled banks with their money. And all these countries have to do is apply the same solution home. This is a form of social credit. People would get dividends from it.

[carthfhuil]

Thank you for the obvious point about the inter-bank rate. OF COURSE LIBOR went up last fall. But like you say, it wasn't "high" in any absolute sense. That's the way markets weigh risk/reward. Duh, Ben Bernanke.

[carthfhuil]

Who are "Sal" and his B school friend? You guys both understand more about this situation than almost anyone in Washington.

I've been following this stuff since Sept., and I just cannot figure out how the bailouts are anything but a heist on the taxpayer. Let them fail. The losses are finite, but there are losses and they must be taken and recognized -- not spread around to the taxpayer.

[partner55916351]

Your plan would work better than the present course being pursued. However, one ironic twist is that the present banks are so broke that when they close down it would cost HUGE amounts of money in FDIC payouts. I believe part of what is happening now is that the government can't easily afford to close down the currently insolvent banks without massive appropriations. Implementing your plan would force these shutdowns to happen, and the payout needed for FDIC would make TARP look small.

[InturnetHaetMachine]

I had a plan of bank which is run by government. So all the profit actually goes back to building the country. Not buying mansions and yachts for the CEOs.

[RationalistWill]

You want to create more private banks that will eventually fail? Why aren't you addressing the issues that caused the collapse? It seems like you just want to start the game over again.

[intricacies]

This would be a incredible solution if the powers that be actually wanted to resolve the present crisis. Unfortunately it seems like their goal is just to steal as much money as possible from the taxpayers.

[tmsouth1]

I think you need to be the Secretary of the Treasury. Geithner doesn't speak with confidence

and some have said when he speaks the stock market drops.

[RvNYC]

Let them fail. Go into bankruptcy. With the caveat, that the new banks are forbidden by law to invest in such gee-whiz vehicles as magic-swaps. I love the idea.

[Sepero1]

Epic fail compared to your initial statements. If the government was capable of intelligent investing, we wouldn't need a free market!

Don't steal my money and turn around say, "Here it is back, I've wisely invested it for you".

Let those businesses who are failures fail.

[eyamseryath]

These videos are so incredibly helpful, particularly with someone like me who has become unenamored of the news and likes to have concise information available at hand.

I think it should be 52 banks... one for DC, one for all US island territories (Puerto Rico, US Virgin Island, etc).

[shaggydaplaya]

thats pretty much how it works in Canada, we have the 4th largest bank in the world now, after all Euro and American ones went under.

[U2BHistory]

The plan isn't addressing the underlying asset and helping to prop that up. Who cares if I have 140B to lend if the entire economy, factories, housing, construction workers, banking everything is going down. Even durable goods aren't going to be a safe investment because people aren't going to be able to afford that either. If this is the case it's going to take several years to shake out the "Smelly" stuff so people can decide what is a good asset to loan against.

[samuelthomson]

if you were going to divide the bank shares by the whole population you would probably want some kind of clause there to stop the re-sale of these shares for about 5-10 years. When russian industry was privatised during a resession in (i think) 1991, people were so desperate for cash that they re-sold their shares immediately and cheaply. The few people who could buy these shares became the current oligarchy. I imagine this isnt the intended consequence of such an offering

[fassterblade]

what happen to the youth that get injected into the labor market everyday. where are we gonna come up with there incentives/shares?

[ThatIsNotDeadWhich]

Y'all already have a reasonably functioning local banking infrastructure, that has the advantage of already having an infrastructure, already having a customer interface (and knowledge of their customers, which was the most expensive thing to re-create for SE Asian banks after the Tiger Crash), and who in many cases didn't get involved in Wall Street's scams.

But of course, the local banks didn't bribe (that many) politicians in the last election cycle, so they get shafted now.

[jerrkandiah]

The problem with this idea is that the current risky and good banks will fail for sure or fail sooner, as people transfer funds/investments from the private banks to the new government sponsored banks. Akin to a run on the Bank, for the prevailing banks. But then the problem would be repeated once again down the line if appropriate changes are not implemented. We are a Global economy but backed by a banking system that was set up to meet national needs. With lack of monitoring the con was ready.

[axemanv90]

Wrong problem. Mortgage foreclosures and illiquidity are only incidental to the problem. The problem is that nobody can valuate the MBS, so trillions of $ remain frozen. I would get the SEC a new IT system and standardize a securities registrtion database. All underwriters of MBS would be required to supply the underlying mortgage status/info to the SEC who would then tabulate and make this information public. Investors could valuate the MBS and trade them on the open market for liquidity.

[straight1straight]

Oh for goodness sake Mr. Kahn.

Creating new banks is a GREAT idea. Issuing shares is simply setting up the same failure all over again. Once you make banks businessess with share holders you need PROFIT = RISK. I suggest we need a place for Mums and Dads to put their money RISK FREE. I suggest that this can not be done in a for profit banking system. Yes, that means no interest payments. Yes that means no Growth.

awesome work. Stewart, Brisbane.

[lineinvaders]

How would you combat inflation to ensure the value of your savings was not being constantly eroded? There is a certain minimum natural level of inflation which is entrenched in the economy - this you cannot get rid of.

[mark7996]

isn't this essentially called a 'credit union'?

[mark7996]

your suggestion would not make china, japan, and europe happy.

[0PsycoDad0]

The "too big to fail" is a myth. It´s propagandized by the bond and stock holders of the respective corporations. Pour money into such companies serves to enlarge the exit window for these special interests on taxpayers expenses.

Yeah of course only CT nutters come to that conclusion.

Of course it´s also completely irrational to assume that Madoff had some backing from the SEC hence the FED itself.

[MainstreetEconomics]

Your idea has many appealing aspects. But I don't think our government can use the $700B for new banks "instead" of for the existing failing banks. The deposits in the existing banks are insured by FDIC and the feds will need to finance this.

So our government would end up financing the existing bank shortfalls AND financing new banks?

[wdflannery]

Most of us don't know what the 'financial crisis' announced really is. What data did Paulson use in his assessment? I think this subject alone is worth of a series of videos.

Second, is it really a 'credit crunch'? Seems doubtful to me, but I'd like to see the data for/against.

Japan has just announced a 27% drop in exports. Bad things are happening for sure. So far you've done a GREAT job, but I think you have just scratched the surface. Now is not the time to rest on your laurels.

[fahadkhan666]

lol @ Salman's email address

u dj for real?

been lookin for a role model for pretty long time, I guess i have a role model now !

[Lucky7wins]

Genius! much better solution than giving money to incompetent banks.

[smallbighorn]

wow, destroy the banking system and let every company who owns credit default swaps go out to. You would destroy every hedge fund in the country! My god! wait where did I hear this logic before? Oh, I know! Andrew Mellon, the man who lead the country through the great depression because he let the banks fail! Your logic is clearly unthought out, and plain wrong. Thank G-d you have no standing in the real world.

[khanacademy]

this plan does not advocate "destroying" the banking system. It advocates seeding new instituions to take up the economic role of the banks (since they are refusing to do it). The credit default swaps can be attempted to be cleared in government-run clearing house. The bottom line is that if the current banks survive but never lend (like Japan) we are in for a LONG crisis (see my appearance on CNN and the attached paper for more information).

[Lucky7wins]

smallbighorn, you are wrong. Hoover didn't let the free market work. He didn't took Mellon's advice to let the market work it out. Hoover created huge gov. projects like the Hoover Dam (710 billion adjusted for inflation). You have been fooled by the gov. and the socialists who re-wrote history.

FDR's new deal was just a continuation (an expansion) of Hoover's programs. WWII got us out of the depression not the new deal. Americans sacrificed, produced guns and rockets and saved cash.

[mackoneboy]

Not so give banks some money and let them cut fat. and new banks will change the way we use money.

[curtisjb1983]

1. Sal has much more push in this world both, explicitly and implicitly through the education he is providing than your whole entire family combined. 

2. I learned in grade school that war brought us out of the great depression. Not letting the banks fail is what keeps depressions from happening. Capital is what drives this country. Lose the ability to move capital and CAPITALism fails.

3. Unthought out? That just sounds retarded.

[Shadyhunter04]

Wow, this is actually a good idea as far as I can tell. I've never actually heard this type of out of the box thinking. If it was successful, it would solve the correction pain without hurting every day americans.

[colbyVas]

yes but you missed one big fact.the fact that this makes way too much sense.

[MariahKaze]

I saw Kahn on Cnn with Rick Sanchez. This idea made so much sense to me that I came here looking for it. It's the best idea I've heard since this whole Bail-out proposal came up. What do we have to do to get this idea before the Congress? I'm furious that they expect us to bail out people who've already shown us their characte. The AIG junket demonstrates that bail outs are just hand-outs. This, OTOH this will work. Let's get it done!

[expchrist]

"If I wanted to lend money to someone who was going to go under next week I would want at least 12-15%. That's what people were originally paying in the early eighties and they weren't talking about 'financial armageddon' back then."

Hah! Couldn't say it better myself. Sal can I please elect you to secretary of the fed? I think we need someone with fresh thinking who doesn't want to rescue all of their buddies in the finacial sector.

[whassan84]

hay sal, i just had a little question, what about the deposits in the banks going down, if they are not rescued, many will go down, as american govt is insuring the deposits, it will cost them alot,

thanks for the videos

[pjmsurf]

hi sal, what about this aspect? The govt is already on the line for the deposit liabilities. This opens a up a new topic of non-risk based insuring done by the FDIC (underfunded/capitalized FDIC).

[wmacorlando]

Brilliant!

[RonPaulForLife]

Why not eliminate start-up costs by injecting capital into existing banks. Moral hazard can be avoided by obtaining equity stakes and forcing debt-to-equity swaps as I mentioned in a previous comment.

[Misuci]

Please pay attention..he already told why. Just to repeat.... They did not ofered any shared ownership, and/or we still do not know the value of these institutes, and their shares. Please forget your political party and think.

[daejinko100]

what will happen then with JP MOrgan and others like BOfa, and wells fargo?

[Misuci]

Wellsfargo is in a good shape. BofA who knows.

[moboss83]

the more i look this video and the more i listen to this solution the more i m convincted that what this guy is proposing to America is a system that we had in Italy during Benito Mussolini`s governament: a huge bank,or a group of bank under the control and direction of the governament who acts in favour of your so loved taxpayer. You know what s this? it s fascim,socialism,socio-fascim,­comunism

[Misuci]

You are so funny. You talking about something that you dont know and the audience know little and you scared them with something that they also know little of. So you compare two unknown. An this is your prufe that Kahan is not a good guy. Sit down with your math book and come back when you think that you can point out inacuracy in his mathematical argument.

[juhapakkala]

Are you suggesting that the Fed, the Investment Banks understood what was going on?

[JesusWasNotAJew]

You're funnier.

What he is saying makes a lot more sense then giving these banks new capital.

If they do that then the homeowners loan should go bye bye and based upon the percentage of the original loan paid, either the person or the bank gets the house.

You must be one that will profit off this bailout.

[tamal]

Recapitalize (relatively) healthier banks and rest should go under. Govt should follow the simple W.Buffet model. Many PE funds will also join this kind of lucrative deal.

But still there are $60T bad assets (CDS, etc.). Deleveraging process will take 4-5 years to complete, if not 10 years. This $700B bailout plan is a complete waste of taxpayer's money.

[pongman]

Great idea Sal! I say Sal you should get this bank started. I sent this video to Congressman Wexler, lol. I hope he gets this talked about before Congress votes on the new bailout law.

[vkgoku2012]

Wallstreet is destroying itself, there shouldn't be a bailout for the greedy.

[dbullet]

link to article?

[tnguyen603]

Error:  126 B in liabilities...

[RonPaulForLife]

Doesn't this punish surviving banks by creating competitors? What about buying equity in existing banks with a mandatory debt-to-equity swap?

[Misuci]

Yes, but do not forget Wellsfargo and BofA already swallowed 2-4 thousend other banks before. Do you have any idea how many banks are in the USA ? About 5.000. So from now on the number grow with 1 %.....