AND MOST OF ALL, AMERICAN FREE MARKETS NOT SOVIET-STYLED SOCIALISM

The Palmetto Scoop’s editor and I traded barbs yesterday over the bailout. As I continued to offer soundbytes as to why the bill was full of baloney, I realized that Adam Fogle was right. This is not the time for speeches (e.g. Nancy Pelosi) or soundbytes (take your Congressional pick). This is the time for leadership (John McCain) and real solutions (Newt Gingrich and John Allison.)

So, if I were in Congress, here’s what I would do:

First, I’d turn off the soundbytes and curtail the press releases. No matter how cute they are, soundbytes are no substitute for leadership and neither is going on television only to say how dire the situation is.

Second, I would summon the best and brightest to DC. This would include former elected officials like Newt Gingrich and private sector leaders who have display good judgment like BB&T’s John Allison to testify and play an active role in devising a plan.

Third, I would keep an open mind, but insist on a solution which protects the American people, reassures both Main Street and Wall Street, and encourages investment and liquidity in the markets. This solution must continue to promote America’s free market principles and can not slouch towards anything that resembles Soviet-styled Socialism.

Here are some leading ideas and solutions that I “borrowed” from folks like John McCain, Former Speaker Newt Gingrich, BB&T’s CEO John Allison, and a friend of mine, Phil Kerpen, who is the policy director at Americans for Prosperity:

• Increase FDIC Insured deposits to $250,000. (John McCain)
• Suspend mark to market provisions (the accounting practice of valuing a financial position in an investment at its current market price) in the hopes of stopping the downward spiral in asset values and gradually replace it with a three year rolling average. (Gingrich/Allison)
• Repeal Sarbanes-Oxley, the 2002 accounting law described as “an enormous drag on small business.” (Gingrich)
• Reset the capital gains tax rate to zero. This would “match rates in China and Singapore” and encourage private capital to flood into the market picking up properties without the taxpayers being at risk. (Gingrich)
• Fund the rescue plan with tax-advantaged private funds through the creation of a market-based treasury facility for which all investments in a five-year holding period would be completely tax free. Analysts are convinced the government will make money on this deal, so let’s provide the government with free market accountability. (Kerpen)
• Provide a significant and immediate tax credit for purchasing homes. This would be a far less expensive than a bailout and would be a more effective cure for the mortgage market and financial system than the proposed “rescue” plan. (Allison)

These ideas are solutions and hopefully Congress has read John Allison’s letter, listened when Newt Gingrich addressed the National Press Club, groups like Americans for Prosperity are truly the watchdogs of the taxpayers, the conservative movement is more than a bumper sticker, yard sign, or 30 second TV ad, and John McCain has, and will always put his Country First, so let’s listen to what he has to say.

Coming up with the above ideas was not hard. It was a matter or reading, listening, and digesting the thoughts of others and coming to a consensus opinion. Frankly, it felt a lot better than just sounding off and shooting from the hip.

As Fogle and I debated the merits of the bailout yesterday, I continued on and on with my analogies. Here are a few of my favorites: 1. Likening Barney Frank’s floor speech to one of those obnoxious 2:00 AM infomercials where someone is saying, “Act Now…Just 10 easy payment of (in this case) $70 Billion,” 2. Commenting that the passage of this bill would place America on the precipice of the “slippery slope of socialism,” and 3. Surmising that “Wall Street had become the Las Vegas of the East, where firms like Washington Mutual and Wachovia were it’s casinos, and Main Street served as its roulette table.”

Sunday evening, I was on Cynthia Hardy’s radio show, “On Point” on the Big DM and was asked why politicians who are in Washington constantly talk about Washington, like it’s a fictional character like the “Dark Knight.”

The fact is, politicians and consultants, like myself, get too caught up in soundbytes and often forget about the need for solutions. Teddy Roosevelt was right: it takes courage to stand in the arena. Congressional leaders need to say more than, “Washington made this mess and I don’t trust them to fix it,” or “they broke it, we have to pay for it.” Members of Congress need to talk about the problem itself, remember that they are “Washington,” and find ways to fix it. After all, when the Dow plummets over 700 points in a day (yes, I know it has rebounded today), it is clear that we need more than laissez-fair complacency.

The Congressional Republicans, who voted against yesterday’s bailout bill understand this. As taxpayers, we should be thankful that they understand that whatever plan becomes law must first have the support of the American people and secondly must provide short and long term solutions which will in time grow the economy, support our free market beliefs, and provide a sound foundation for the financial services pillar of our economy.

Jim Pinkerton put it best yesterday when he provided the color commentary on the vote and stated, “A majority of the House of Representatives, mostly the backbenchers, voted down the single most cynical piece of legislation I have seen in my three decades in Washington. Every now and then, the people, and their representatives, rise up against systematic ripoff. Today was such a day.”

The fact is, when you cut through all the rhetoric and slice the soundbytes, the bailout bill was a “systematic ripoff” and was the equivalent of a quarterback intentionally grounding the football in lieu of pressure or an impending sack.

If you were able to get elected to Congress, you would think you would have the wherewithal to ask yourself, if you speak against a bill, refer to it as a “a crap sandwich,” the should you really vote for it?

After refusing to be labeled as another “Dr. NO,” I did some digging and found a lot of common sense in a couple places. I highly recommend reading both Newt Gingrich’s assessment, “Before DC Gets Our Money, It Owes Us Some Answers,” and that of my friend Phil Kerpen, “Rescuing the Rescue Plan.”

But first, I recommend reading a letter that I was forwarded from BB&T’s CEO John Allison to Congress, which Dave Wilson blogged about last week.

As an aside, Allison is the type of CEO that makes me proud to bank at BB&T and own a sparse number of shares in the company.

Allison noted in his 14 point observation that the panic on Wall Street is not shared by ‘sound financial institutions.’ In opposing the bailout, he warned that Congress taking the wrong action could only exasperate the problem and by rescuing Wall Street’s bad apples, we could put Main Street in harm’s way.

Thus, from the wisdom of Newt Gingrich, John Allison, and Phil Kerpen, I mixed up my own recipe for what I would do if I were in Congress. Now, I plan on sending it to a few folks on the Hill along with Mr. Allison’s letter in full.

I urge you to do two things: 1) read John Allison’s report (below) and 2) think about what you would do and send your thoughts to those representing us in Washington.

Dear Senator/Congressman/Representative:

BB&T is a $136 billion multi-state banking company. We have 1,500 branches throughout the mid-Atlantic and southeast states. While we have been impacted by the real estate markets, we continue to have healthy profitability and a strong capital position.

We think it is important that Congress hear from the well run financial institutions as most of the concerns have been focused on the problem companies. It is inappropriate that the debate is largely being shaped by the financial institutions who made very poor decisions.

Attached are the issues that we believe are relevant from the perspective of healthy banks. Your consideration of these issues is greatly appreciated.

Key Points on “Rescue” Plan From a Healthy Bank’s Perspective

1. Freddie Mac and Fannie Mae are the primary cause of the mortgage crisis. These government supported enterprises distorted normal market risk mechanisms. While individual private financial institutions have made serious mistakes, the problems in the financial system have been caused by government policies including, affordable housing (now sub-prime), combined with the market disruptions caused by the Federal Reserve holding interest rates too low and then raising interest rates too high.

2. There is no panic on Main Street and in sound financial institutions. The problems are in high-risk financial institutions and on Wall Street.

3. While all financial intermediaries are being impacted by liquidity issues, this is primarily a bailout of poorly run financial institutions. It is extremely important that the bailout not damage well run companies.

4. Corrections are not all bad. The market correction process eliminates irrational competitors. There were a number of poorly managed institutions and poorly made financial decisions during the real estate boom. It is important that any rules post “rescue” punish the poorly run institutions and not punish the well run companies.

5. A significant and immediate tax credit for purchasing homes would be a far less expensive and more effective cure for the mortgage market and financial system than the proposed “rescue” plan.

6. This is a housing value crisis. It does not make economic sense to purchase credit card loans, automobile loans, etc. The goverment should directly purchase housing assets, not real estate bonds. This would include lots and houses under construction.

7. The guaranty of money funds by the U.S. Treasury creates enormous risk for the banking industry. Banks have been paying into the FDIC insurance fund since 1933. The fund has a limit of $100,000 per client. An arbitrary, “out of the blue” guarantee of money funds creates risk for the taxpayers and significantly distorts financial markets.

8. Protecting the banking system, which is fundamentally controlled by the Federal Reserve, is an established government function. It is completely unclear why the government needs to or should bail out insurance companies, investment banks, hedge funds and foreign companies.

9. It is extremely unclear how the government will price the problem real estate assets. Priced too low, the real estate markets will be worse off than if the bail out did not exist. Priced too high, the taxpayers will take huge losses. Without a market price, how can you rationally determine value?

10. The proposed bankruptcy “cram down” will severely negatively impact mortgage markets and will damage well run institutions. This will provide an incentive for homeowners who are able to pay their mortgages, but have a loss in their house, to take bankruptcy and force losses on banks. (Banks would not have received the gains had the houses appreciated.) This will substantially increase the risk in mortgage lending and make mortgage pricing much higher in the future.

11. Fair Value accounting should be changed immediately. It does not work when there are no market prices. If we had Fair Value accounting, as interpreted today, in the early 1990’s the United States financial system would have crashed. Accounting should not drive economic activity, it should reflect it.

12. The proposed new merger accounting rules should be deferred for at least five years. The new merger accounting rules are creating uncertainty for high quality companies who might potentially purchase weaker companies.

13. The primary beneficiaries of the proposed rescue are Goldman Sachs and Morgan Stanley. The Treasury has a number of smart individuals, including Hank Paulson. However, Treasury is totally dominated by Wall Street investment bankers. They do not have knowledge of the commercial banking industry. Therefore, they can not be relied on to objectively assess all the implications of government policy on all financial intermediaries. The decision to protect the money funds is a clear example of a material lack of insight into the risk to the total financial system.

14. Arbitrary limits on executive compensation will be self defeating. With these limits, only the failing financial institutions will participate in the “rescue,” effectively making this plan a massive subsidy for incompetence. Also, how will companies attract the leadership talent to manage their business effectively with irrational compensation limits?